The Fed’s Summary of Economic Projections (SEP) Dot Plot dialed back rate cut expectations in March 2024 compared to December of 2023.
The above chart is from the Fed’s Summary of Economic Projections for March 2024 and December of 2023.
Summary of Economic Projections March 2024 vs December 2023
Compared to December of 2023 the Fed upped its central tendency of GDP expectations, core inflation, and the expected Fed Funds Rate.
The Fed is more hawkish in March than December, although differences are only a quarter point or so. Yet, the market is reacting as if the Fed is dovish.
The S&P 500 is above the 5,200 level for the first time, and gold is up $27 to $2,187.
In one aspect the Fed is dovish. In the press conference, Powell said the Fed is discussing the end of Quantitative Tightening (QT), the opposite of Quantitative Easing (QE).
The market and gold seem to like that news. Yet, it’s hard to precisely what the market is reacting to. Perhaps it’s QT, something else, or nothing at all.
Regardless, a booming stock market and higher housing prices support consumption and inflation. Unless rents come down sharply, inflation will continue to be stronger than the Fed and the market expects.
What Will the Fed’s Interest Rate Be a Year From Now?
I asked that question in December of 2023.
Here’s the chart.
Rate Cut Probabilities on December 13, 2023 for December 2024
Target Rate Probabilities Dec 2024 as of March 20, 2024
The market has priced out slightly over one full quarter-point cut.
But note yesterday vs today. That’s another reason for a rally today.
I expect inflation will surprise to the upside. It would be most damaging if that happens after the Fed gets in a rate cut.
The Fed’s Big Problem
I keep returning to the central problem for the Fed: There Are Two Economies But Only One Interest Rate
The asset holders are going OK. Renters and those age 35 and younger are increasingly struggling.
Who’s Unhappy?
Those looking to buy a home but cannot afford the record high prices, are not faring well in this economy.
Also please note US Drops to Number #23 in the World Happiness Report
For those age 30 an younger, the US slipped to #62. Please check out the report.
Conclusions
Two completely different polls show millennials and zoomers are unhappy. And they are unhappy for the reasons I stated.
Many have concluded they will never be able to afford a house or have kids. Those who have concluded that are likely correct.
For more discussion, also see Gen Z, the Most Pessimistic Generation in History, May Decide the Election
Twenty years ago the press heralded Alan Greenspan as a financial prophet. His vague oracle like prattles were interpreted as evidence to his monetary intellect. The global mortgage crisis unveiled the blundering truth of Greenspan’s waterlogged burbles. The Fed’s mathematical dot plot, or theatrics of doves and hawks, are their updated equivalent. Their directionless Rorschach tests are deciphered by the public as financial wisdom.
While Crystal Ball gazing is the Central Bankers hobby there are some real world data they do have available.
Something as arcane as how much loan origination is occurring as well as loan default rates on previous Banking system loans.
For Powell to come out at last moment and preach a Dovish stance suggests that things are not all that wonderful within the Bank sector.
Will be sticking with a Macro view that serious stagflation is starting to grab hold in economy. A Stagflationary environment implies that Loan servicing is becoming troublesome.
Powell acts to save Banking sector. Does not mean that economic nirvana will be direct outcome of lower rates as Mr. Market keeps believing. Debt origination can also be result of stress. It is not a linear event, more debt meaning more prosperity is not assured.
Being in Cash remains a safe haven as an alternative to throwing the dice under current conditions.
The (overwhelming, comical, delusional) “dovish” interpretations of Powell’s remarks are pure fantasy…!
Is this the Street’s (pathetic) attempt to bully Powell into rate cuts?
Higher For Longer.
Higher rates are more likely than lower rates – Powell said as much in PLAIN LANGUAGE – no interpretations necessary.
If bank reserve requirement has been removed, hence banks can create theoretically unlimited amount of loans, how does QT work to tighten credit?
Link: Daniel L. Thornton, May 12, 2022:
“However, on March 26, 2020, the Board of Governors reduced the reserve requirement on checkable deposits to zero. This action ended the Fed’s ability to control M1.”
Precisely that is my point.
The FED causes FUD!
Democratic countries 63 : 74 autocratic countries. Democracy is under threat.
Since covid and Ukraine war more countries became autocratic, according to the Bertelsmann BTI report.
Elections are less free. Freedom of expression is suppressed. Laws are twisted against citizens. Gov mouth piece media. After covid it became difficult to correct restrictions. Autocratic countries are able to stand public pressure.
Taiwan, S.Korea, Costa Rica, Chile, Uruguay and the Baltic states became more democratic. Liberal democracy countries are losing to : close autocracy and autocratic countries with elections .
As long as people want support Ukraine with militarily and Palestine with free food, there will be an upward force on inflation.
Raytheon is OK with this. That’s all that really matters right guys?
YUP!
be careful tomorrow.
As long as we continue to burn the lowest hanging fruit (energy) first … and are increasingly left with only the expensive energy … inflation will march higher.
Higher costs of energy production >>> inflation.
We are steaming oil out of sand … surely that is an indication that our sources of easy and cheap energy … are in steep decline
Waller on the “Evolution of Monetary Policy” speech: “central banks were disillusioned with policy analysis that was focused on monetary aggregates”
Apparently, Waller has never heard of disintermediation. The DFIs can force a contraction in the size of the non-banks, NBFIs, & create liquidity problems in the process, by outbidding the non-banks for the public’s savings (think 2019 repo crisis).
This process is called “disintermediation” (an economist’s word for going broke). The reverse of this operation cannot exist. Transferring saved TR or TD deposits through the non-banks cannot reduce the size of the payment’s system. Deposits are simply transferred from the saver to the non-bank to the borrower, etc.
Such was the reason for Reg. Q Ceilings, interest rate differentials, between the banks and thrifts.
Interest is the price of credit. The price of money is the reciprocal of the price level.
As Dr. Daniel Thornton says: “Today “monetary policy” should be more aptly named “interest rate policy” because policymakers pay virtually no attention to money.”
See: The Mechanics of Fed Balance Sheet Normalization – FRB-STL
“The Fed has to watch how take-up at the O/N RRP facility will evolve, as a quick shift into (out of) the facility could drain (boost) reserve balances.”
I.e., Powell doesn’t know a bank from a nonbank, money from mud pie. Including MMMFs in M2 double counts the money stock.
Dr. Leland J. Pritchard, Ph.D. Economics Chicago 1933, M.S. Statistics Syracuse, Phi Beta Kappa: ““No asset has the “monetary store of purchasing power” quality unless there can be a net conversion of that asset into money. It must be possible to affect this conversion without necessitating that any present money holder reduce/liquidate his holdings”
Case in point, the O/N RRP facility. Aug, 9 WSJ:
“In their Aug 6. letter in response to our op-ed “How the Fed Is Hedging Its Inflation Bet” (Aug. 2), John Greenwood and Steve Hanke argue that the Fed’s sale of a trillion dollars of reverse repos does not in and of itself reduce the deposit liabilities of banks and money-market mutual funds, and that the money supply is unaffected. By that logic, none of the monetary tools of the Federal Reserve Bank would affect the money supply.”
Contrary to the FED’s technical staff, retail MMMFs are nonbanks.
In my 1958 Money and Banking text. “Purchases and sales between the Reserve banks and non-bank investors directly affect both bank reserves (outside money) and the money stock (inside money).”
That’s why all monetarist forecasts are wrong.
Strange that anyone pays attention to what a collection of economists might “aspirationally” wish for or think might happen in some distant future when they have such a terrible record of predicting what the forward world will look like. It is candidly almost laughable. That any of them want to send a message that they are looking to cut rates it this inflationary environment is borderline insanity and proves that the Fed cares more for an inflationary status quo. So one can readily conclude that all the Fed is really doing by keeping its curve inversion and by extension easy monetary policy is softening us up for a move towards 3.5% real becoming the new boundary rate. Lets see how the bond guys like that one. Can anyone say repricing event?
What bond guys? They don’t exist. Just another algo based pumping mechanism. There is no longer any risk or risk premium even if wwiii kicks off.
re: “when they have such a terrible record of predicting what the forward world will look like.”
Nobel Laureate Dr. Milton Friedman: “The only relevant test of the validity of a hypothesis is comparison of prediction with experience.”
There will be potentially 1.92 million people added to social security by the end of 2024. That won’t be all the retirements because people retire but wait to take social security so add another 500k to be conservative. That’s 2.5 million people leaving the labor force in 2024.
Some will “retire” from being engineers, pilots, nurses, doctors, plumbers, etc and go back to “work” as coffee shop owners, artists, photographers or bloggers that don’t really produce the same level of productivity to the economy.
Oh and these retired people will get generous welfare to spend wherever they want from the taxpayer to the tune of $120 billion per month. What could go wrong with this setup?
We all know millennials and zoomers ain’t having kids.
Link below has today’s featured labor shortage: plumbers.
link to morningbrew.com
“The report says the US will be short 550,000 plumbers by 2027, which is bad news for just about everyone except plumbers.”
You keep mentioning how much these folks will spend but in reality after retirement, despite the social security income coming in those folks are massively more likely to spend significantly less than they were while working other than on health care. I’ve seen it anectodally and in my own situation. They may, at times, spend more on travel, but compared to working years and building households and homes, my experience tells me it’s not significantly more as you imply.
However, the other shortages you metntion will occur due to leaving the workforce without their experience to backfill, but, had we not imported millions it’s a problem that would have been temporary, about 15 years, as the bulge in the hose of the baby boomers would not have have a parallel.
And those that have backfilled are not a targeted backfill but a free for all making the problem worse, not better. Unless those folks coming in from Mexico, Venezuela, Colombia, Haiti etc are doctors, nurses, engineers.
The baby boomers are peak consumption nationally, barring an outside influence, and globally in general.
Just my thoughts on the matter and your repetitive comment on the retirement of the baby boomers as if you feel social security is something they should not be receiving, which you have implied. You can be a technocrat and say the system was set up to have workers paying for retirees but to anyone with skin in the game, when I see my employers and I have already contributed a half a million, you won’t find a friend in me if you at this late date pull that rug out. I dare ya to promote touching that third rail and try to win the dog catcher race, because it’s a non-starter. The system already has reductions in benefits baked in–wanna give me odds on that occurring?
Correct on the system reductions. SS spousal benefits will drop at 1% per year before first benefit.
Social Security is NOT “generous welfare”. I paid into S.S. and I’m going to collect S.S.
Meanwhile, disabilities in the civilian labor force have risen 33% in the last 3 years.
link to fred.stlouisfed.org
You will own nothing and be happy
Or at least try to console yourself on social media.
Thanks. Too bad you cannot ask questions. Mentioned how great employment was. See your article about the employment situation. No cuts