Plenty Of Pain. Still No Gain
"Fed officials won't relent on path to 4.5% and may move higher," one headline declared over the weekend.
When you read those sorts of proclamations, it's important not to lose track of where rates are now, what's almost guaranteed to be delivered in terms of hikes by the end of this year and the fact that it's nearly mid-October. You're not saying a lot when you insist the Fed "won't relent" until rates are another 150bps higher when 125bps of that is virtually assured to be delivered over the
I’m sure you have discussed this and it went over my head but why wasn’t a recession called when we had two quarters of negative growth.
The NBER doesn’t use that definition or any other definition for that matter. It’s a subjective, after-the-fact determination based on their assessment of the factors listed here: https://www.nber.org/research/business-cycle-dating/business-cycle-dating-procedure-frequently-asked-questions
The two-quarter “definition” is, for lack of a nicer way to put it, a lie. There’s no such rule at the NBER.
https://heisenbergreport.com/2022/07/28/dont-call-it-a-recession/
https://www.npr.org/2022/06/24/1107581150/recession-referees
In short, there is no strict “two quarter rule”. A committee of academics at the NBER decides whether a recession has started. They operate on a significant lag and don’t publish their thought process. They may end up saying that we are currently in a recession, or they might decide that hot nominal growth and a strong labor market mean that the recession hasn’t started yet.
No way to know, and it probably doesn’t matter.
Still the “best” preemptive NBER recession call of all time:
https://heisenbergreport.com/wp-content/uploads/2018/12/Kudlow.png
The Fed won’t slow down unless either core and headline inflation dramatically slowdown, or inflation steadily drop for 3-6 months, or we get a blowout in credit spreads in many markets indicative of a financial meltdown. Because of the lagged effect of owners equivalent rent in the inflation stats, it looks like it will take a financial meltdown via spread blowouts to slow down the fomc. So far the us mortgage market and British financial markets have hit the wall in a fashion. My best guess is there will be a complete meltdown in lower tier corporate credit. You are starting to see it now but we are not far from a complete shut down in corporate credit. That would lead to a contagion event and a pause.
I’m starting to fear a hard landing might be the best we can hope from the Fed’s race to regain credibility. A depression is now a possible outcome in my opinion, US core PCE as of now sits at 4.91% YoY, high no doubt but we must consider that this number presumably reflects not only all the pandemic related disruptions to supply-demand but also the effects of the fiscal and monetary stimulus that took place from 2020 to 2021. Consensus is monetary policy works on a lag, so the insanely fast hikes of the last 6 months won’t really be evident in our economy for another 8-14 months, how does that world look like? I have a hard time believing growth will merely slow down, the housing market and some developing economies already show severe signs of stress, add to that continuos and relentless global tightening, prohibitive costs of debt, obliterated retirement savings and a hit to corporate earnings, just as inflation overshot to the upside we could have a hard swing towards actual deflation on a global scale. War and the energy crisis are big wild cards but both can contribute to a deflationary spiral depending on how policy and populations react to a severe and sudden deterioration of quality of life in the developed world. There will be pain and no winners, except perhaps for the former president and other autocrats around the planet, a depression will provide fertile ground for their populist message and their skills at selling fear.
I agree wholeheartedly with your statement that monetary policy works on a lag (except maybe for housing and credit), so the insanely fast hikes of the last 6 months won’t really be evident in our economy for another 8-14 months.
So more than likely some external shock/event will occur that will bomb/hit/impact the monetary/financial markets like a sledgehammer. And certainly well before the Fed rates take full effect.
And inflation will then necessarily fall as a result (demand will fall off a cliff) and all agencies/central banks/governments will take credit for a job well done. While blaming external factors out of their control for the disastrous fallout.
The root cause, when historians and financial analysts look back at the over-leveraged financialized markets, will be traced back to the period of several years (from about 2007 – 2015 and from 2019-2020) when the FED chose to keep rates an insanely low levels. The availability of “cheap money” resulted in excessive government spending with no financial discipline, high risk and mal-investment in search of yield, over-leverage and negative interest rates (a concept I still do not understand)
Points HS has raised in many of his articles.
As a Canadian, the housing bubble in major metropolitan centers of Toronto and Vancouver and the huge debt piled up by our federal government were ever-present in the past several years.
in fact, on a per-capita basis, our federal government over the last several years was the champion of deficit – spending!
I’ve been struck with a thought lately about why inflation has been so sticky. My peer group (middle aged homeowners with mortgages) all refinanced in the past two years when rates were low. For me (and I know many) it was the largest raise I’ve ever gotten. My refinanced payment is 600 a month lower. That’s a massive stimulus that continues to accrue monthly. Even with inflation, I’m much better off financially.
Not only that, but I refinanced my truck loan too, saving 50/month. And again, so did a lot of my friends.
Eddie Z, this is a very interesting comment- which led me to look up the following:
Residential mortgage debt was $11.18T as of Q1, 2022 according to the Federal Reserve Bank of NY.
Residential refinanced mortgages totaled $2.8T in 2020 and $2.7T in 2021.
Assuming homeowners don’t have to sell, this might indicate higher home prices are pretty sticky.