I continue to have arguments with close friends and colleagues about where rates are headed in the next year. And, while it's anyone's guess, I just continue to think that some investors are a little crazy/deluded to think that rates are coming down quickly.

The only way rates come down in the next year or two in a meaningful way, is if our Federal Reserve completely screwed up, the rate hikes cause a massive recession/depression, a bubble bursts, and mass job loss/deflation forces them to reverse course quickly.

Saying that rates are going to get back down to the 4-5% range in the next year or two, is essentially arguing that the Fed are completely out of their minds right now to keep rates where they are, will cause a huge economic disaster, panic, and reverse course quickly.

This is really an unreasonable argument, in my view. It's not going to happen. Even if the Federal Reserve is as dumb as some people think they are, for rates to come down, they have to self-actualize the (potential, theoretical, future) damage being done to the economy, admit defeat, panic, and rapidly reduce rates.

Guys - that is a bad bet in my opinion. The Federal Reserve are not some bunch of quacks who have no idea what they are doing. They are pretty good at their jobs. And, I bet that the Federal Reserve Board got to where they are by being confident, strong economic careerists. Even if they ARE as wrong as some of the pundits say, they aren't going to panic and undo rates overnight.

I believe that our Federal Reserve is not some bunch of idiots. They screwed up two years ago and let inflation get out of hand. They have aggressively fought that inflation with clearly effective economic policy since. They have caused economic pain, but not disaster. GDP continues to grow, employment remains high. Inflation is nearing it's target.

A far more reasonable bet is that the Fed does exactly what they say they are going to do - they raise rates another 25-50 bps. They stop. The yield curve normalizes. The current rates set in, and we continue on our merry way with a new "normal" for Federal Funds rate for the next few years, and asset values reflect the new order.

I keep getting called crazy for calling the yield curve normalizing in the next year or two, and the 10-year marching to 5%, 5.5%, and beyond. But, I think that this is the obvious, logical outcome of the current Fed Policy and believing what they are saying. In my view, it's simply going to happen. And I am planning accordingly.

Scott Trench

Podcast Guest on Show #223