The Waller Sea Change

It's hard to overstate the significance of the apparent tone shift from the Fed regarding the prospects for rate cuts in 2024. To be sure, so-called "insurance cuts" were always on the table and officials haven't made a secret of their prospective willingness (note the emphasis) to cut rates in the presence of lower inflation. On several occasions over the past nine or so months, officials alluded to the possibility of cuts to ensure the real policy rate doesn't increase as inflation falls --

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9 thoughts on “The Waller Sea Change

  1. Since March 17, 2022 (the date of the Fed’s first interest raise- which was 25 basis points), the Fed seems to be navigating pretty well!

    No reason not to think they will continue to do so.

  2. Once again, thanks for your persistent coverage of the vol-driven traders and CTAs. Their flows absolutely dwarf retail and pension flows and even surpass buy-back volumes by a factor of three or four.

    But people mostly seem to be obsessed with dot plots and the next quarter point change in short rates, ignoring what is driving the stock market on a weekly and even monthly basis.

    It’s “follow the money, baby!”

  3. I’m hoping that at least one Fed official has come to realize that their interest rate hikes are barely responsible for the drop in inflation. The only “success” I can see is that they helped to deflate office real estate prices, at a cost of imperiling many medium and smaller regional banks.

    Besides that: how did higher rates help push down food prices? How about “rental equivalent” prices? Healthcare costs? Education costs? Childcare costs? Eldercare costs? And even energy prices?

    A chorus of crickets seems appropriate, no?

    One reason is that their models have proven well out of date, especially when it comes to the impact of interest rates on housing prices.

    1. Even if the Fed’s rate hikes have had no effect in bringing inflation down – was it indeed all transitory? – it will be better to enter the next recession with 500 bps of rate cut potential than without, people can make a safe-ish return in HTM fixed income, various business practices/models needed to be starved of free money, and stocks look buyable away from some Megatechs. Maybe it’s the Calvinist on me, but things just feel more righteous when interest rates are not approximately zero.

      1. You sound like another Calvinist-influenced buddy who I tease about that.

        The only problem is that Main Street took the brunt of the “collateral damage” the rate hikes caused, though they weren’t a major cause of inflationary pressure.

        1. Probably exposing my myopia here, but it feels to me like this cycle of rate hikes has done less damage to Main Street than typical. Just as it has done less damage to corporates and Wall Street than typical.

          After 20+ months of rate hikes, employment is still strong, house prices ditto, household wealth ditto, consumer spending holding on, consumer credit delinquencies rising but not “high” yet, individual bankruptcies rising but still low compared to prior years, etc. Damage is mostly at the lower income levels, but more of that damage seems to be from inflation (food, services, etc) rather than rates (car loans, credit card rates, etc).

          Housing is where rates seem most arguably culpable. Rents will be pressured upward in future years by today’s rates suppressing starts, but right now there’s a record number of units coming to market, started at prior low rates. New homebuyers are suffering, but that’s a small number of households compared to existing homeowners and renters.

          Conventionally, by this point in the hiking cycle, we’d be in a recession and Main Street would be beset by layoffs, foreclosures, etc.

          Perhaps the damage is just taking longer to manifest. Caution is moving up the income scale, as seen in retailer reports. Inventory correction is taking shape, see JBL etc, and capacity correction are as well, see most of transport sector.

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