2023’s ‘Most Mispriced Tail Risk’
It's unlikely that anything Jerome Powell has to say on Wednesday, following the conclusion of this week's FOMC meeting, will dissuade markets from the idea that Fed cuts are coming in the back half of 2023.
Powell will surely hammer home a familiar list of talking points, one of which is that the "job isn't done" and the Committee intends to finish it by keeping rates in "sufficiently restrictive" territory up to and until inflation is judged to be on a sustainable path back down to the Fed's
Is that an image of a burning black swan? Or a black swan from the Inferno? Both magnificent and creepy.
I put an offer on a home today 🙂
I hope you get it!
I know I sound like a broken record, but any attempt by the Fed to bring down housing prices in the near term are ultimately self-defeating. It’ll just stretch the rubber band farther and farther back until it either breaks (i.e. they crush the broader economy) or it snaps back even harder (i.e. prices will go even higher). The only way to bring down housing prices sustainably is more supply or a reduction in the population, and the Fed can’t do either of those things.
One of these days I’m going to have to learn how to front-run the front-run of the front-run.
Funny….
My speculation is that Powell was stung by the size and duration of the inflation spike, and he is determined not to go down in history as the Fed chair who let inflation get out of control–or let it persist for too long because he lost his nerve. He probably also wants to make sure that the worst news for the economy comes in 2023, and not 2024 (an election year). I think those expecting easing in 2023 are wrong, and those starting to forecast a pause at the March meeting are giving Powell just the situation he needs: he can raise a relatively small 0.25%, and at the same time be seen as erring on the restrictive side.
What if the greatest mis-priced tail risk is that in spite of the Fed emphatically stating that they want to squash inflation/ their top priority is to provide the American people with price stability;
the Fed’s actual top priority is to allow as much inflation to occur as possible (without causing social and economic upheaval) because the Federal Reserve primarily wants to foster the efficiency of the nation’s monetary system (i.e. allow inflation to minimize the problem of too many “interest bearing USDs”).
Let’s see what the Fed does and then compare that to what the Fed says/has been saying.
The Federal Reserve was created in 1913. The USD has lost 97% of its value since 1913 – due to inflation.
The average inflation rate for the period from 1914 to 2023 was 3.16% per year. The average rate of inflation between 1980 and 2023 was 3.13% (core) and 3.02% (all-CPI).
2% is a “pipe dream”.
Maybe the Fed should slap the market upside the head with a 50 bps increase this week…
Yes definitely 50bps. Let’s just get to 5% already. Commodity prices are already increasing and if the dollar softens further then commodities, particularly oil will get more expensive. Additionally Iran appears to have enough fissile material now and makes a conflagration with Israel+Saudis against Iran more likely perhaps ??
I believe the only way to force housing to come down is to increase unemployment. People are demonstrating that they will overpay both in the price of the home and the cost to borrow that home, given that they are able to keep paying the mortgage. And this current housing bubble still feels very 2008ish to me, the prices that are being paid make no sense at all. So if the objective is to reduce housing inflation the only way the Fed can do that is to keep hiking us into a layoff filled recession.
Back then, banks would give you a 0% down, interest only loan with no proof of income. They’d even throw in a fixer upper as a housewarming gift. These days, you get a financial colonoscopy if you so much as set foot in an open house.
Academic economists are well meaning people, but in the interest of feasibility, they limit the number of moving parts in their models…They are also very coy on the subject of time horizons…As a former trader, I had to compensate for the limitations of this approach every day. I kept a lot of opinions to myself, because I couldn’t spare most of my day to arguing with the under-researched and overconfident…Thank God for the people who are explicit about their time horizon and their degree of leverage….
A friend sent along a reminder this morning:
“NEW YORK, Jan 31 (Reuters) – Federal Reserve officials believe their effort to shrink the U.S. central bank’s bond holdings is far from done, pushing back against some economists’ idea that dwindling financial sector liquidity would bring the drawdown to a close in coming months. Instead, Fed officials reckon there remains a lot of liquidity, properly measured, for them to remove as part of their push to tighten financial conditions and bring down inflation.”
It seems that we are all solely focused on the headline lending rate rather than the supply of credit.
Amen on the QT. (And M2).
Feel like this is a press conference where Powell could really use H as his press sec. Keep it short and simple. Don’t push back and don’t concede. Basically repeat the last press conference. We’re slowing the cadence to digest, assessing the incoming data, and that will determine our future decisions. We’re doing what we said we’d do and we are seeing what we hope will be contining signs of improvement with inflation. But we haven’t seen enough to change our previous guidance on our expectations of the terminal rate or its future path. See you in March and go Eagles.