Whatever the models say and irrespective of the long run dot (which has at least moved up), neutral’s significantly higher in the post-pandemic world.

I’ve been on (and on and on) about the absurdity of r-star as a concept. I’ve “done my time” on that beat, so to speak. Allow me, if you will, to recycle some language from the March 9, 2024, Weekly, in which I found my muse on this particular subject.

“As a practical consideration, the neutral rate’s pretty useless,” I wrote, adding that,

The idea it’s possible to geolocate that rate and then manage policy dynamically to sustain the economy somewhere near the corresponding equilibrium, is fanciful. That rate, to the extent it exists, is at least a little bit different for every state, city, town and hamlet. Something’s always going to be out of balance somewhere. Maybe you can achieve a result that looks like balance at the aggregate, economy-wide level, maybe you can’t, but the odds of mistakes are high, and the unintended consequences could be disastrous.

So, again, I get it. I get that the whole discussion around “neutral” is in many (most) respects absurd.

However, we have to have it. The discussion I mean. Because the Fed’s not being honest, in my view anyway, about the extent to which the macro environment (not to mention the fiscal policy environment) has shifted to such an enormous degree that this otherwise pedantic, hopelessly esoteric debate actually does have some merit. Now that Donald Trump’s headed back to the White House, the discussion’s more urgent.

“So here’s the deal: The consensus call across Street econs and the buyside is for ‘sticky higher’ inflation — if not outright ‘reflation’ risks — as we move forward in light of [the] run-hot ‘red sweep’ economic policy moving forward,” Nomura’s Charlie McElligott said Thursday, noting that MAGA-nomics at least has the potential to act as “gasoline on the already ‘exceptional’ US economic fire,” and that’s to say nothing of the “day one Executive Order ‘sticker-shock’ price implications of the Trump tariff plan, alongside expectations of mass deportations, and all when the Fed has already deprioritized the price stability side of their mandate as the lesser evil.”

That latter point’s key. I mentioned it on Thursday morning while editorializing around a warm PPI release. “[Is the Fed] going to fight tooth and nail for that ‘last mile’ down to 2% inflation if it means risking a succession of negative NFP prints?” I asked, before answering: “Hell no.”

Now they’re in a tough spot, though. Because as the simple figures below — they’re just annotated BBG screecaps from Charlie — show, we’re going “wrong way” on some key inflation harbingers.

McElligott’s annotation tells the story on the left-most chart. The figures on the right are average hourly earnings (on top) and Indeed’s wage growth tracker on the bottom, which he noted “have both stabilized and are now looking to turn higher.”

Let me emphasize, because this is going to become highly relevant, very quickly: Trump’s the very last person who’s going to look inward when it comes to any rekindled inflation impulse. And he isn’t going to take “no” for an answer on rate cuts. If his policies end up fanning inflation as “discredited” economists have variously warned, he won’t concede the point, he won’t roll back the policies and he will demand easing.

Trump will be Erdogan, basically, and although Powell insists he isn’t going anywhere and that the law prevents Trump from removing him, stranger things have happened since 2016. In fact, if Trump were to somehow orchestrate Powell’s exit, it wouldn’t even make the top 20 list of strange things that’ve happened over the past eight or nine years in America.

In any case, this all speaks to the “why?” behind the latest term premium rebuild. “This has been my core view when being vocal about the Fed needing to be intellectually honest about where the neutral rate [is], which could be anywhere from 3.5% to 4.5% or higher in my eyes,” McElligott went on, before wondering if perhaps — just maybe — “we’re already there.”

I think we’re probably close, if I’m honest. I don’t see much evidence, if I see any at all, to support the notion that the US economy needs significantly lower rates, and if you throw gas on the fire via a no-cares, growth-at-any-cost fiscal agenda for — let’s face it — vanity’s sake, you’re going to make it very hard for the Fed to justify rate cuts, particularly if you’re trying to manage inflation lower at the same time.

Charlie hit on that too. “Politically, taming inflation was a huge part of the Trump election promise and mandate and the aforementioned policies on tariffs and immigration [may] risk shooting his administration in the foot in the early days,” he wrote, adding that the press is “absolutely committed to pound[ing] Trump in a scenario where his own actions contribute to a re-accelation” in price pressures.