Long and variable lags. Monetary policy works on long and variable lags.

Impolitely: You hike rates and wait around on something to break. You have no idea what that something’s going to be, and even less of an idea about when. That’s monetary policy.

This cycle, the lags were longer. Or at least for the economy’s “haves,” both at the household and corporate level. Well-to-do households refi’d their mortgages at record-low rates, then played the arb between three-handle home loans and five-handle money funds. Similarly, blue-chip companies termed out their debt profiles at absurdly favorable rates in 2020 and 2021, then parked the corporate cash pile in T-Bills or some equivalent.

The economy’s “have-nots” weren’t so fortunate. They never are. Fortunate. That’s part of being a “have-not.” Stuff never goes your way. The poor get poorer and injuries are everywhere and always followed by insults. The “have-nots” are low-income families, junk corporates and small businesses.

Whatever’s going on with the “haves,” the “have-nots” have probably had it. Witness the real prime rate (figure below).

That’s “the lowest rate small businesses can borrow at,” BofA’s Michael Hartnett remarked. In real terms, it’s the highest this century, at 6.5%.

“Higher-for-longer real rates are slowly and decisively hurting the US consumer and labor market,” Hartnett said, in the latest installment of his popular weekly “Flow Show” series, adding that rate cuts are “no longer a question of ‘if’ or ‘when,'” but rather a question of “will cuts work?”

He suspects the answer’s “no.” Or, actually, that if rate cuts are going to work, they need to be “big.” “Mortgage purchase apps are close to the lowest levels since 1995. So many Millennial parents are waiting years to buy a house,” he wrote. If those parents aren’t buying now, it suggests “big worries” about the jobs market.

Elevated financing costs are an albatross for small businesses. The figure above’s familiar: There’s a link between jobless claims and perceptions of credit availability among America’s smaller employers. You’re reminded that a majority of job creation happens at small businesses in America. They’re the “lifeblood” of the economy. If the relationship illustrated above holds, a surge in jobless claims is just a matter of time.

In the same note, Hartnett had a little fun at the Bank of Japan’s expense. Like everyone else, including me, he noticed the rather amusing juxtaposition between the bank’s forward guidance in the July policy statement and the updated “guidance” from deputy governor Shinichi Uchida, who spoke midweek following Monday’s historic collapse in local equities.  To wit (paraphrased):

The Bank will continue to raise the policy interest rate going forward — BoJ, July 31

The Bank will not raise its policy rates when markets are unstable. — BoJ, August 7

“Wall Street has now stopped the BoJ from hiking,” Hartnett said, adding that the Street’s next objective “appears to be bossing the Fed into big rate cuts.”

His use of the word “bossing” seemed derisive. But if Hartnett’s right to suggest that Main Street’s suffering the most from the Fed’s prolonged stay at terminal (as real rates rise mechanically with ebbing inflation) and that “big cuts” are necessary to rescue “Millennial parents” and small businesses, then isn’t the Street just doing “God’s work” by cajoling the Fed?