Landing Gear
I don't love the narrative that says Fed policy is unduly loose based on the real funds rate. There are too many other (better) ways to make the same point.
You really need to incorporate some forward-looking measure of inflation if you want to assess the extent to which policy rates are restrictive. Unless all you're trying to do is wave a chart around in the service of galvanizing anti-Fed sentiment.
The real funds rate looked laughably easy for months, ostensibly arguing against a step-down
The U.S. imported $3.2T in 2022. If the Fed reduces the funds rate and the dollar weakens, the higher USD costs of imports may contribute to domestic inflation. If China increases its purchases of energy (e.g. oil), this may drive up domestic energy costs. I suspect that the Fed would prefer to avoid the roller coaster inflation ride of the 1970s & early 1980s.
You may not see it in corporate bond spreads, but since the SVB blowup, there has been increasing disintermediation from deposits out of the banking system. Lending by banks is falling quickly, as a result and this is what is likely to slow the economy down. With Fed funds at 5.50 and possibly higher there is little incentive for banks to expand their commercial lending or borrow to invest in UST bonds- safe spread products just are not worth investing for the banks. It has taken longer than many, including me, thought to see a slowdown. But the seeds are planted. QT is not helping matters. There is not going to be any fiscal bail out if the economy slows either- the House sure is not going to do anything to help Biden politically next year. The post pandemic effects have propped the economy up until now, but those are rapidly unspooling. So you will see lower supply disruptions, an unsteady disinflation, and possibly better real wage numbers for a little while. Then the shoes drop. Sometime very soon the happy talk will come to an end. We will be lucky to have a better second half of 2024.
Am I the only one that thinks “nobody knows anything” here. There are so many variables going in conflicting directions — dollar up, imports higher, more inflation, consumer spending should then fall, and prices fall fall from lower demand … maybe. Anyone really have all this stuff figured out? Then we’ve got PPI falling, inventories — who knows, back-to-school is three weeks away followed closely by early Black Friday, then what? This situation is, in the words of one of my favorite song-writers, the “circle game” which will leave us all chattering continually for the rest of the year to no satisfying conclusion.