The Wrecking Ball
Currently, data which suggests the US economy is picking up momentum (as opposed to losing it) is bad news. Yes, recession fears are rampant, which means evidence of a rapid downshift wouldn't be welcome either, but the Fed is very keen on demonstrating fortitude in the inflation fight. Between the new dot plot and accompanying economic projections, it's obvious the Committee intends to engineer a material slowdown. Jerome Powell is clear on that, even if he feels bad about it. The problem for
12 thoughts on “The Wrecking Ball”
Base case is a medium recession in 3 to 6 months in my view. Many leading indicators are flashing red. Hard to say what fomc will do though.
Profits tallied by U.S.-based global multinationals have been extraordinary, the best ever. They can fall some without doing much damage to the enterprises in question. A strong dollar is in the best interests of the U.S. consumer and an excellent argument in support of the greenback as the world’s reserve currency — something every American benefits from and should want to see continue.
No. Just, no. It’s not that simple. At all. If this kind of dollar strength continues — i.e., inexorable, and driven by higher real rates, and Fed hikes — it will collapse entire markets and entire economies. That will boomerang back on the US. Which is why, eventually, if it doesn’t abate, the Fed and Treasury will have to do something to put the brakes on it.
A rock and a hard place, for sure. That said, it would be a huge mistake, imo. for the Fed to abandon it’s rate-hiking anti-inflation campaign at home to prop up EM. The alternative probably looks a lot like the response to the GFC — swap lines, coordinated currency interventions, price controls in certain cases.
In the past, the ivory tower academics at the Fed have displayed a shocking lack of understanding about how their policies impact other nations and, even worse, US business.
This FX move is not only impacting some small EM nations, it’s hammering the rest of the world. Major and minor nations alike.
To what end? Will higher rates boost grain and oilseed supplies? Will it increase the supply of diesel fuel used by farmers & truckers?
The risk/reward balance is horribly skewed to the risk side.
As H reminds, the rate of change is often more important than the overall amount. Has the Fed forgotten this. Inflation behaves like an ocean freighter and they don’t turn on a dime. It feels like they have talked themselves into panic mode. If that’s the case, they will definitely overshoot the mark. Inflation is a global issue as was the pandemic that caused it. The Fed ignores this at the world’s peril.
In 1993, I read Trading for a Living, by Dr. Alexander Elder. He said the most neglected question in investing and trading is What is my time horizon?..It’s still rarely discussed. I would add that when someing fairly big happens, the less discussed it is the more important it is…Another question is leverage….This is directly related to the Fed. These people are human, they’re embarrassed and their goal is reputational maintainance…….
I just heard that Wells Fargo and Chase will no longer underwrite HELOC (second lien) on residential real estate. That tells you what two large mortgage lenders think about residential real estate prices and it represents true credit tightening. If this keeps up, 4% could be the top for funds or maybe lower.
Haven’t seen this, but this is a good comment assuming it’s true.
My memory may be a bit foggy at my age but it seems that the Fed spent at least the second decade of this century trying to tune the economy to reach a target of 2% annual inflation, something I thought was stupid because systematic inflation, even at a low rate degrades asset values. A decade at 2% takes value down by 18%. Anyway, that’s somewhat moot because they didn’t manage to hit their “goal.” Now for a perfect storm of reasons we have to tamp down high inflation. If I have a leaky pipe and I call a plumber who comes to fix it and is unsuccessful, why should I hire the same guy to fix his mistake. The Fed couldn’t make inflation go up. What makes us believe they can make it go down? Anyway, it seems to me that the rhetoric surrounding our current strategy sounds more like this is all about Powell earning Street cred (pun intended) rather than solving our collective problem.
Current events seem incongruous. The housing market is getting blasted, not a surprise, but unemployment is still low and the economy in general seems strong. There is still an apparent labor shortage. If we can beat on the economy with a huge hammer without a crushing result maybe the hammer we’re using isn’t the answer. Again, what’s all this about, channeling Volcker or stabilizing our economy?
Is there any chance the Fed lays off the rate-hike gas pedal just a little–to let’s say 0.5%–at their next meeting, just a few weeks before the mid-term elections? Not for economic reasons of course, but strictly for political ones.
Sorry, the next meeting would be just a few days before the elections.