Are We Asking The Wrong Inflation Questions? Again?
What if rate hikes make inflation worse?
It's a question worth asking. Not in the sense that Recep Tayyip Erdogan might ask it, of course. But rather, out of respect for history, which teaches us that what seems counterintuitive, and thereby obviously wrong, in the moment, often appears obviously correct with the benefit of hindsight.
We needn't travel too far back in time to find examples. Indeed, we needn't deviate from the subject at all. In the early months of the pandemic, COVID was assum
The reduction in housing starts has worried me about the future cost.
Yeah, I think housing is going to be one of the more stark examples of the dynamic described above. Housing needs more supply over the long-term and temporary demand destruction will only serve to stop housing starts that will take longer to put back into motion.
H-Man. Bianco Research put out a chart showing tightening cycles from 1973 coming forward. The scary part of the chart that was in every cycle, the rate of tightening was always higher than CPI. The article that used the chart noted that if that holds true for today, we have quite a ways to go before tightening ends with tightening at 2.75 and CPI over 9.
With all due respect to that guy, he and his charts get far too much attention in my opinion. What you’re describing is as simple as simple gets when it comes to charts. And the extrapolation is ludicrous. The idea that the Fed could make it to 9% (or 8% or 7%) is absurd.
When talking about inflation I am surprised that you never bring up the Baltic Dry index it know it is at crazy heights right now. It seems to me that if a manager is deciding to raise prices causing inflation that has to be part of it. Also the China tariffs is a part of it.
Rates at 3% or 5% are not high, by historical standards, or by business investment “hurdle rate” standards. It is hard to think of a bona fide operating business investment that flips from attractive to unattractive simply because cost of capital moves up 300 bp, especially with government incentives to be had. The investment decisions fragile enough to get tanked by +300 bp are the immensely long-duration ones familiar to stock “investors” paying 20 P/S and 5 PEG and real estate “investors” buying cap rates of 400 bp into a falling market – and squeezing money out of those paper “investments” and back into the real economy isn’t a bad thing. Companies looking at adding another cracker, pipeline, LNG tanker, assembly line, etc are not going to be blown off their capex course by a couple points higher rates. They might get blown off course by a recession that evaporates end demand, that’s a risk, but those decisions aren’t made based on short-term forecasts anyway. By the time the pipeline is operating, the recession of 202/23 will be in the past.
Another anecdotal data point from NYC: Out with friends tonight for a quick bite to eat in the Garment District (nothing too fancy) and there was nary a sign of demand destruction. The Fed has more work to do.
mfn – that’s a reason why the Fed might be goaded into overdoing a tightening. I recall similar situation in 2008. On the spot anecdotal oservations from many friends and colleagues living in wealthy suburbs and cities questioned increasingly ominous national stats, with comments like “I don’t see any sign of that around here.” Oops!
Your average Wall Street pundit and some Fed officials are lucky enough to live in those protected cul-de-sacs. So your call may well be proven right.
Lot of bifurcation going on. A very nice restaurant is on the ground floor of my office building. Dinner for two with a couple of cocktails, no wine = $300 type of place. Walked by yesterday and it was absolutely hopping, looked like Saturday not Wednesday.
You can see market implied futures curve for Fed Funds rate here
https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
Highest probabilities today at each Target Date:
Sep 2022 300-325
Nov 2022 325-350 tied with 350-375
Dec 2022 350-375
Feb 2023 375-400
Mar 2023 375-400
May 2023 425-450
Jun 2023 375-400
Jul 2023 375-400
You can also see progression of probabilities over past month.
Looking at Sep 2022, most probable has moved from 275-300 to 300-325 in past month
Looking at Feb 2023, most probable has moved from 325-350 to 375-400 in past month
Looking at May 2023, most probable has moved from 300-325 tied with 325-350 to 425-450 in past month
Looking at Jun 2023, most probable has moved from 300-325 to 375-400 in past month
So market still expects easing in mid 2023 but over past month whole futures curve has moved up – and for months in 2023 a good deal lot of that move was in the past day.
Good sharing, thanks. And pretty convincing counter argument above i must say.
Thanks! Very useful link.
This article makes the case why Powell and FOMC need to be “the adults in the room” while steering the fiscal ship through these precarious straits. My main (if not only) hope and confidence lies with Janet Yellen, whom I trust has Powell’s ear…
Stiglitz is right. The supply side needs the work, and it will cost money at a rising cost because companies have been dismantling supply chain mechanisms for years to pass the costs and short-term risks on to others, while watching short-term profits increase. Trouble is they also passed on their expertise, market leverage, and margin of safety as well.