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Backup Plans And Alternate Realities
The outcome of the Fed's next meeting will, for all intents and purposes and assuming no additional bank failures, be decided this Wednesday. Or at least that's the boilerplate copy.
Economists expect to hear that core CPI in the US rose 0.4% in March from February, while the headline gauge is seen posting a more pedestrian 0.2% increase.
If this were a strictly "data dependent" Fed, it's hard to understand how a consensus CPI report could possibly be construed as supportive of ending the hiki
Isn’t hiking one more time and letting it ride sort of ideal? It seems like the economy can handle 5% rates if the Fed pauses and lets everyone acclimate, plus letting it run hot (maybe tepid) preserves the labor regime where wage gains are at least keeping up with inflation and possibly accretive if inflations settles under 5%. That kind of inflation would also help the federal government erode their debt burden, which I’d argue is the only way they’re capable of dealing with it. Obviously if CPI goes back to 9% that’s extremely awkward, but if possible this seems like a good place for the fed to be. I don’t really buy that they intend to get back to 2% – it seems more beneficial to let inflation hover above their target range and not blow up the labor market.
Thank you Mr. H.
You are stating clearly what is obvious to you and a good many of your readers.
Be careful out there.
Even the FED is trying not to fight the FED
I have been absent for some time and now am on my way out the door for a remote destination where i probably will not have service, but speaking of alternative realities: What are y’all think about Texas’ idea of creating their own gold backed digital currency?
I love this idea. Let’s see, they got their own power grid. This would add their own money. All they’d need is the bomb and their own army and we could just sever them from the system.
What are the current odds on “Texit,” which would probably be as favorable for them as the one across the pond.
At this point in time- almost all state/local governments have significantly underfunded pension plans.
The unfunded pension liability for Texas is equal to about $250B, which is 4 times the current annual budget for the state of Texas. No way any state would walk away from the federal government- who potentially may end up funding unfunded state/local governments pension liabilities.
https://www.federalreserve.gov/releases/z1/dataviz/pension/funding_status/chart/
Underfunded public pension plans seem like a slow burn sort of crisis, that first draws higher taxes and lower benefits before more drastic measures like enlisting the Federal govt to bail out CRE. Is there a reason to think this can won’t be kicked down the road for some years more? Abbott seems like the kind of guy who’d happily lay off public employees and raise their pension taxes.
Just so we don’t lose track here. Five percent basic rates don’t seem to be killing anyone yet, but five percent through the curve will require frequent rises in the debt ceiling or there won’t be much of a government left. And 3.5% inflation is OK by me. I’m old and I’ve got enough money to get by just fine. However, in ten years, say, 3.5% will still knock off 30% of the dollar’s purchasing power, compared to a loss of 18% with the target of 2.0% inflation. In the intermediate term, 3.5% is tolerable. But it will take away a bunch from those who can least afford it.
It’s killing the mid-size/small/regional banks. You have trillions of interest earning assets earning less (when operating/carrying cost are taken into consideration) than current Fed Funds. Banks currently are fine from a liquidity crisis perspective as long as depositors don’t panic. But bank earnings will be hit especially banks that predominantly rely on interest income. Mid/Small/Regional banks are heading into an earnings crisis. Regional bank equity will get crushed. We will see mass consolidation in the banking sector starting before the end of the year, maybe even this summer.
The question becomes how many of these banks fail prior to being bought out by a larger bank (likely a lot) and does it cause contagion to other parts of the economy (almost definitely).
Note this does not apply to Systematically Important Financial Institutions (SIFI) aka large banks. They are essentially quasi-subsidiaries of the Fed functioning as conglomerates with banking divisions.
In fact, we have a long way to go and there’s no hurry. I like the idea of a Fed that has at least one foot planted in reality. Would love a soft landing, but prefer a lasting sense of control on inflation. Sure, a pause will be nice if it’s based on evidence and reality. But the idea is to still economic impulses that may yield bad outcomes. If the governors have evidence that all will be well, then let’s pause. If they lack that conviction, impose a quarter point and take a wait and see attitude.
My thought process after reading the first paragraph:
…Wait, the next meeting isn’t until May.
…Won’t they have April’s inflation info then?
…Oh, I guess it won’t be out yet.
…But certainly there will be preliminary data they can look at.
…Of course all that information is kept secret until it’s released.
…I can understand the need for confidentiality. Maintain a level playing field and all.
…But still, isn’t it more important that the Fed have access to the most recent, up-to-date information to make the best decision possible?
And that’s when it hit me.
How sad is it that the Bureau of Labor Statistics is better at keeping secrets than the Department of Defense?
How about this for some inflation statistics! This is from a Bloomberg article that was recapped in a recent issue of “The Week”:
From 1970 to 2021, the median U.S. income increased 7.7 times, the median rent by 11 times, and the median home sales price by 18 times.
The fastest increases came in recent years, especially during the wild pandemic housing market.
From my own research- the S&P500 went up 203 times over that same time period (assuming you reinvested dividends).
Potentially, after the next FOMC meeting, the game score will be something like
– FF rate 5%
– CPI 5%
– UE 3.5%
– GDP trend 1.5%
That sniffs like stagflation-lite. At least, it doesn’t look like a win for Team Fed. Not even a draw.
Will Team Fed “want” to throw in the towel and walk off the field without a win?
If it doesn’t want to, what will “make” it head for the showers?
There may be a Big Breakage about to jump into the ring and K.O. Powell et al right through the ropes, but if the Fed doesn’t see it coming, I don’t think the mere possibility will force their hand.
I’m starting to like the idea of 1/8th point hikes after May,
Good article, knowing all this what is the investment strategy til year end?