Don't Panic! Why Rising Rates Could Be Good News

Ty (0:01)

So, what does higher rates mean for the economy today, Michael?

I've never seen so much uncertainty in 30 plus years. What do these higher rates mean in today's economy?

Michael Zuber (0:14)

Yeah, I think this is an important question because it's kind of counterintuitive to kind of the normal talk track. So, what does the mass media kind of, what are they parody? So, if you go before the Fed meeting, people were saying things like, higher rates doesn't pump oil, which is true, right? We, other people were saying, you don't hike into an oil shock, because again, the Fed doesn't create neutrons or whatever the hell oils made out of.

And, you know, there's, there was a lot of talk track that says, you know, oil, gasoline, diesel is already hurting Americans. Why do you want to hurt them again?

Ty (0:54)

Right?

Michael Zuber (0:54)

With higher rates. That was kind of the the talk track of the folks that said, you know, the Fed's doing nothing. You know, you know, in fairness, they were also saying, you know, wash was put in place because Trump wanted him there and his jobs to lower rates, not raise rates. That was kind of the negative talk track of the day. Obviously, I never believed it for a second. I was calling for a September rate hike for months, back when I was the only person. And by the end of it, 92% of people were with me. I was getting kind of crowded on the island. But I think it's a reasonable question.

Why higher rates? Because again, higher rates mean higher credit cards, and student loans, and auto loans, and things of that nature. I think most people missed the brewing problem that could have blown up Wednesday.

The bond market, the 10-year, even the two-year, had already spent a month going up.

The 10-year had broken 5 percent, right? I think it got as high as 5.04 before the Fed meeting. And the bond market was basically saying, we don't know if we can trust Kevin, right? Kevin Warsh. And I firmly believe that if they did not raise the long end, meaning the 10-year and the 30-year, would have shot higher meaningfully. The 10-year could have been 5.15, 5.2, noticeably higher. And that would have been worse for the economy. Because again, people simply don't understand that the Fed owns the overnight rate. It's the shortest possible loan on record. They don't control the 10-year, they don't control the 30-year. So in my opinion, what Kevin Warsh did on Wednesday, and it was a multi-step process, it was not tied just the quarter point. It was the 12-0 unanimous vote. Yes. It was a dot plot that was full of more rate increases. It was Kevin Warsh taking Q&A saying, the job market is solid, the economy is growing, my job is inflation. So he was frankly more hawkish than even I thought he would be, and I thought he should be pretty hawkish. So what happened? The initial reaction of the market is they took rates up slightly. But yesterday, rates went down. Because what we're seeing is the bond market is going, okay, maybe we can trust this guy. Maybe he is independent. So again, the Fed raised rates, but the long end came down. Now, obviously, we have a lot more problems to go through. Rates are up this morning.

You and I have a long list of things to get through. But I think the bond market was ready to lose it.

If Kevin Warsh proved to be a puppet on Wednesday, people don't understand. We would have been hurt worse.

The rates would have gone up, and the stock market would have crashed. That's what would have happened. People don't understand that. The market had priced in a raise, and if he did not deliver, the market would have voted and said, Kevin Warsh is a puppet, and he's not to be trusted. So he passed the test. He passed the test, frankly, in flying colors, right? 12-0 vote, another rate, and at least one more rate increase this year, and quite possibly another one next year. So I think we should all realize that Kevin Warsh did us a favor by raising the short end. Because again, the long end came in, and it just blows people mind that they don't understand that. So yeah, I think Kevin Warsh passed the test on Wednesday.

Ty (4:58)

Yeah, it's interesting. You nailed it, you called this months ago, weeks ago, several, more than, you know, probably four to six weeks, six to eight weeks, you had been talking about this.

And even if I look back six weeks ago on the show, I'm going, okay, how, and I understand. And oil, oil inflation higher for longer, that makes sense. But then even just on the Fed rate, and specifically what you were teaching, and it's all starting to make a lot of sense about the bond market, the bond vigilantes, and that the way that they react to, really it's more about certainty, that can this Fed, like you said, can he be trusted? Is this person really going to do a good job? Or is he just going to pull a bunch of levers, and like you said, just try to jumpstart, or do what the president wants, or the administration, or what's good in the short term?