I’ve spent quite a bit of time lately on the r-star discussion.

It’s important, and given the run of hot economic data in the US, it’ll likely become more immediately germane for markets in the months ahead.

As I put it last week, the debate doesn’t get enough attention, in part because it’s often couched in esoteric terms. Economists tend to present it as a kind of “inside baseball” topic that only they’re entitled to weigh in on.

Of course, economists aren’t famous for being right about matters related to economics, which means all opinions on important macro questions are welcome, including and especially those of non-economists who know a lot about markets.

One such person is Nomura’s Charlie McElligott who, on Friday, mentioned the r-star discussion, and noted that clients are increasingly prone to wondering why the Fed’s efforts to tighten financial conditions haven’t had a more demonstrable effect outside of housing.

McElligott described himself as “a pure ‘markets’ guy who is very clearly not an economist.” Again, that’s more than fine. If you polled market participants on who they’d rather hear from when it comes to macro matters, I can assure you that virtually everyone would choose a managing director in cross-asset and derivatives strategy over anyone hailing from an ivory tower.

“I do have some real thoughts on this topic,” Charlie went on, before enumerating those thoughts, which he said “make intuitive sense to me.” For what it’s worth, they make intuitive sense to me too, and as such, I think they’re worth highlighting. Find McElligott’s brief list below.

So why isn’t Fed tightening passing through to the economy?  Here are some accumulated theories:

• Call it the ‘reverse QE Trap’ (borrowing this concept from my colleague Richard Koo, but flipping it on its head), where past central bank ‘reflexive easing’ conditioning has affected the market’s interpretation of monetary policy signals (i.e., perception of the ‘Fed Put’), and even more importantly, leaving us with still extraordinarily large central bank balance sheets which act to inhibit the rate hike transmission, explain[ing] why financial conditions aren’t actually ‘tight.’ The natural / neutral rate is likely much higher than previously suspected.
• From a consumer / economic pass-through perspective, the direct government fiscal transfers to the lowest — but largest — part of the income distribution in the post-COVID response, have also acted to reduce the interest-rate sensitivity of the economy, as a lot of ‘buffer’ was accumulated.
• The additional fiscal input which has acted to neuter higher rates’ impact on the economy and help to ‘push off’ a recession is the almost wholesale high wage increases seen across labor and lower-skill in particular, with a similar impact to the aforementioned government fiscal transfers.
• Finally, home owners’ equity in real estate as a percentage of GDP is currently at all-time highs, which has been allowing boomer-to-millennial homeowners the ability to cash out massive lines of credit and help stave-off the pain of inflation and higher interest rates.