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Make Or Break
The Fed desperately needs a break from hot US economic data.
Monday's large upside surprise in pending home sales suggested the housing market is on the verge of turning a corner, and it's not even spring yet.
As discussed here, Jerome Powell can't lose the disinflationary tailwind from housing. If that goes, it's not clear what's left. The Committee can't rely on goods deflation anymore, and considering all that's going on geopolitically, the goods side of the equation could be very volatile
Speaking of sitting on the sidelines, The Wall Street Journal has recently started running a Monday poll on some pithy subject or other. Today’s poll asked people to respond to the question of whether Wall Street should go to four-day weeks for the markets. I was shocked to see that the yeas and the nays were split 49.5 to 50.5 respectively. I guess half the folks don’t mind the idea of the sidelines so much. I expected nays to pound he yeas but they didn’t.
My God, don’t those who voted “yes” realize just how expensive setting up and running a high frequency trading operation is??
Perhaps Wall Streeters voting for three day weekends?
I see Bloomberg is starting to float the idea that the Fed is, or may soon be, done with hikes because “at their most basic level, monetary conditions are tighter than they were last year.” Referring to something we’ve discussed before, namely that Powell sees financial conditions as tighter regardless of street FCI indicies indicating looser. https://www.bloomberg.com/?sref=eCUg41rA
Another narrative trotted out to support asset prices? Right after the “the Fed might be okay with higher inflation after all” narrative? Sigh.
At the end of the day, I think inflation is what matters to the Fed. If inflation is not convincingly declining toward the Fed’s previously stated target, Powell has to turn the dials available to him. He has two dials: FF rate and QT.
He cannot move the goalposts; that is an admission that the Fed cannot, in fact, achieve price stability. He cannot leave the dials where they are; that is an admission that the Fed has reverted to trusting its inflation models.
I also think inflation is pretty much all that matters right now, simply because nothing else is causing enough pain to elbow inflation aside as Matter #1. Looking over the fully employed, house chasing, stock trading, car buying, profit reaping, US economy, where is the serious economic pain – other than inflation’s effects on those vulnerable to its corrosion? I can’t see it.
I realize this makes me sound like A Simple Man, but as Inspector Callahan said, “A man’s got to know his limitations.”