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Sure Sounds Like A ‘Pre-Set Course’ To Me!
I don't get bent out of shape about much. Nor do I care for pretending, even as that's my "job."
Not a lot matters. "Life's too short to sweat the small stuff," as they say, and guess what? It is all small stuff, particularly when you're an overprivileged Westerner residing in an advanced economy.
That reality makes it difficult on some days to wield my digital pen in the service of injecting life into the mercurial ups and downs of chart lines. Yes, they represent the waxing and waning of for
H: forget the fed officials… I want to know what Nick Timaros thinks ?
They are attempting to sound dovish on purpose. They realized they overstayed their welcome at 4%+ on fed funds. How do they know they are restrictive to some degree? Answer: The economy is slowing down, 3 month pce is below 2% which is their target for inflation. Unemployment is up over the last year by almost 1%, quits are down etc. This isn’t ivory tower stuff, it’s facts on the ground. Another clue is that inflation is around 2-3% depending on how you measure it and fed funds are 5%. The spread is too wide, and that is making the assumption that the economy won’t slow more. So the fomc is trying to be everyone’s friend until the next meeting. They don’t watch to cut interesting right in front of an election. If was a voting fomc member I would pray for 48 days with no credit shock or geopolitical shock. So let’s see, looks like a govt shutdown is off the table for now. Ukraine and the middle east looms, as does an east coast port strike, political election season, and China’s deflation. There are other potential shocks too. So like I said, the fomc members are left to coo like doves for now.
Watch should read want, sorry. Spell checker….
Sorry again interest rates, not interesting….
So in high school economics–a joke of a class if ever there was one–our teacher taught us that the Fed has three tools to regulate the economy.
1) The required reserve ratio
2) The overnight lending rate
3) Moral suasion
While that class wasn’t worthy of the zero effort I put into it, I remembered point #3 when Alan Greenspan dropped his “Irrational exuberance” bomb.
It would appear that moral suasion is alive and well. I owe Mrs. Henderson an apology.
To the extent that the bond market participants look at the published data and determine the daily traded yields of instruments and auction participations; they are to an extent, telegraphing the State of the Economy in the present AND in the short and hopefully mid term future. As a participant on Bloomberg Surveillance stated to the extent they are not cutting, they are infact tightening (according to the bond market). If you accept that argument then the Fed is currently in a tightening mode and behind the curve.
The Gulf War Recession started in Jul 1990.
What is our best guesstimate as to where neutral is exactly, 3-3.25% maybe?
The correct answer is that the neutral rate doesn’t exist, or to the extent it does, it’s as an aggregate of different neutral rates across sectors, varying with time in accord with changing circumstances and technology.
So 2.1783%
Obviously
Besides my teaching career I had a couple of side hustles, editorial reviewing, strategic consulting, and serving as an expert witness. In the latter area I focused on tort cases and valuations. For those calculations I had to determine an acceptable basic interest rate to use in present value calculations. There are two ways to do this problem. One can estimate cash flows and adjust them to account for expected inflation and apply a nominal rate, that accounts for estimates of future inflation. That approach requires three sets of estimates (guesses) about the future of financial flows and rates. The other approach is to simply ignore inflation entirely leaving only one set of guesses to worry about. The answers arising from the two approaches will actually be the same but only one set of guesses is arguable under cross examination. I studied historical data on the basic risk-free rate, ex-inflation and found that although there was a some movement, the basic rate stayed in a narrow range around 2.5% which I took to be a relatively stable neutral rate. This approach is coincident with the so-called “Fisher Effect’ that states that nominal interest rates reflect the nominal real rate plus the expected rate of inflation. If the real rate is 2.5% and expected inflation rate is 2.5%, then the neutral rate in my mind is currently 5%. Since FF rates are generally considered to be risk free, the new rate set by the Fed should be a good estimate of the upper bound in the current environment. In all my financial valuation work I treated 2.5% as the basic real rate and through 40 trials I was never criticized by the opposition for this choice because essentially, no one I faced in court had a better answer. The takeaway: further cuts are going to be too much.
For 20 years, since GFC, the US economy has been operating on zero or negative “real rate”. https://fred.stlouisfed.org/graph/?g=1uf5T Starting 2022, we moved very quickly back to typical pre-GFC real rates (250bp ish). Looking just at that, arguably there should be no more cuts. But if employment crumbles, there will be more cuts – regardless of what there should be. Even Vockler probably wouldn’t have driven the economy into recession just to keep inflation <3%. Maybe preferable to have “fewer more” cuts now in hopes of averting “more more” cuts later?
A few possibilities, and different Fed officials may subscribe to some or none.
We don’t know what the neutral rate is, but we know what inflation is and FF 200bp > inflation has just got to be restrictive.
We don’t know what the neutral rate is, but current FF is slowing the economy very much [somewhat] so we must be very much [somewhat] above neutral.
We are basically saying “very much pornographic” and “somewhat pornographic”, about something we recognize but can’t quite define.
We think we know what the neutral rate is, but after surviving the wreck of the Good Ship Transitory we’re not confident enough to say.
Inflation has cooled but price levels in general are high, and the unemployment rate remains at historically low levels. (The “natural” rate of unemployment for the U.S. economy was 5% not too many years ago.) The members of the FOMC should take a deep breath and try to channel their inner Volcker.
All I’m really suggesting is that if they feel compelled to go immediately out on speaking tour, they say something to the effect of, “You know, we just cut by 50bps a few days ago, we’re going to let that marinate for a week or two before we muse loudly and proudly about what’s coming next.”