Should the Fed cut now? That is what former Fed economist Claudia Sahm says. 
Here is a Tweet that caught my eye.
What exactly is the Fed waiting on? Cut.
The consensus is that core inflation gets a 2-handle on Friday. Total has had it for a while. Powell has repeatedly said that the Fed would not wait until 2% to cut. Hello???
Hello Claudia!
Perhaps a few questions will answer your question.
- How about data?
- Is the Fed supposed to act on consensus opinion?
- Is approaching the target good enough?
- Core only?
- With housing prices and the stock market blistering?
- Doesn’t anyone ever look at asset bubbles?
- Hello???
Hello!!! Do my questions answer your questions?
Asymmetrical Policy
Failure to take asset bubbles into consideration is a huge ongoing problem.
So is asymmetrical policy of cutting at the first sign of trouble while delaying hikes until inflation is obvious to everyone.
Stoking Inflation With More Stimulus
Meanwhile, President Biden is doing everything possible he can to stoke inflation. More stimulus is on the way, including student loan forgiveness and child tax credits.
On January 19, Biden openly flaunted the Supreme Court with more inflationary as well as unconstitutional student loan forgiveness.
Wages have been soaring.
And to top it off, the Republicans agreed to more free money child tax credits.
For discussion, please see How Much Will That GOP Deal on Child Tax Credits Really Cost?
Hoot of the Day
Now we have a proposal to cut rates, not based on data, but on consensus opinion with rates above target, while asset bubbles brew, and more inflationary stimulus is in the pipeline.
Hello! What a hoot!
Reminds me of Einstein’s quote – “The difference between stupidity and genius is that genius has its limits.” Such idiots prove him right again and again.
I completely agree. Housing costs are very expensive, auto ownership (purchase, maintenance) is extremely expensive, food still costly. Globalization (low cost imports) is coming to an end. The only mitigator at present is modestly priced hydrocarbons.
If the Fed cuts aggressively now, homelessness will skyrocket.
From my perspective Mish, asset bubbles have and are continuing, to cause financial issues in the baby boomers. As I am a later edition to this club, I speak to this crowd often, and I myself have run into this trap if you will, and had to move things around to get free.
I speak of illiquid assets if you will, or assets not in demand. For the elderly (65+), or those in later years but not working still (55+), this has become quite the issue. I am speaking of my counterparts in New England, and in a higher middle class arena.
Some examples that I hear as issues for the older crowd, are “Home Poor” where the paid off home ex. is the asset, but not enough money is coming in, to satisfy the requirements for a loan against it. Another is “Co-Signed Anchor” where the grandchildren needed funds for college ex., and the Parents couldn’t help, so now the grandparents have unsecured debt they are responsible for, and not in charge of. One more is “Tied Up Funds Unavailable” where money was shoveled into a 3-year CD Ex. when things were ok, but things changed, but the financial situation doesn’t as well, as it worsens now as funds are needed, but not available.
When you consider many have a fixed income as in S/S or a Pension, and they can fluctuate, but not in a meaningful way overall and not controlled. Money tied up in a home may be crippling, as selling is perhaps the only option. This can be very scary, and heartbreaking at the same time. Being a co-signer can crush your credit if you’re not able to handle the debt, and the debtor isn’t doing so. This can strip you of your financial stability, and drive you into becoming a liability and rather quickly without liquid assets available, due to bubbles, and a diving credit score you can’t control.
My take and experience with some assets and the potential perils of some, and unforced errors of others.
Good Luck out there!
It would not surprise me if the Fed cut much less this year than most are anticipating.
Price Stability is in the Fed’s mandate. Not “symmetric” 2% inflation.
To abuse a nice economics term, the Fed’s notion of “stability” is highly elastic.
The next huge federal expenditure will be to bail out sanctuary cities and states that are ‘struggling’ to provide for recent ‘immigrants’.
For sure. And Biden will call it the protecting the border.
Off topic, but here’s a hoot of the week. A new Chinese lab created contagious virus reportedly has a 100 percent fatality rate on modified mice with human genetic features. This enhanced viral fatality feature prevents a runaway pandemic due to lab leaks while making it the ideal biological weapon for killing animals unable to leave the designated kill zone, eg Taiwan. Of course, what plays in China won’t stay in China doubtless thanks to DARPA. .
“How about data?”
2.0% IS the data. The fed has been crystal clear. Rates will be reduced if and when inflation reaches 2.0%. Until then. No rate cuts.
It’s only wall street, their media shills and the rest of the 1.0%’ers who want free money again for stock buybacks and cheap debt service.
The means-of-payment money supply rose by 100b in December, NSA. That’s enough fuel to keep the U.S. out of a recession for a few more months (based upon the distributed lag effect of money flows).
But interest is the price of credit. The price of money is the reciprocal of the price level. The FED could lower their administered rates while keeping QT operative.
Price rises are not inflation.
Price falls are not deflation.
Inflation is when credit / money supply expands faster than the economy grows.
Credit / money supply is contracting; economy is contracting in real terms ’til 2025.
China’s credit souffle is collapsing. China exports are contracting.
The development model of more loans fuelling more exports is spent.
When export dries up and credit expansion doesn’t, you get a bubble.
Credit needs somewhere to go, CCP won’t let it leave, so it goes into excess housing.
China contracting and collapsing, means trade is contracting, and Eurodollars too.
Recession is happening, layoffs are coming, cash is waiting in bonds to pounce.
Longer-term, China’s demographics mean it’s deflationary impact on prices recedes.
Disintegration of globalisation means more scarcity coming, more price rises in 2026.
What the Fed does is follow the bond market, whilst perpetuating the illusion that the Fed controls rates and the illusion that rates that they control, control inflation.
Bond market is saying rates cuts are unlikely until April-May-June window.
They need to give the illusion of good news for the Bidencrats, whilst maintaining the illusion of being in control of things they are not in control of. Layoffs increasing in Summer/Autumn give the Bidencrat PR machine a lot of work to do for November.
I’m surprised anyone still thinks money supply and inflation are related. Thanks for surprising me. How can you look at 2008 and still is a correlation?
Her views are entirely political. she is an extremely left-wing economist and desperate to have the Fed do everything it can to juice the economy in an effort to help Biden defeat Trump. her lens is so distorted at this point that nothing she says makes any sense
Banks drive asset prices simply because you can borrow a high percentage of the existing price to speculate on higher future prices. And that’s cool with banks because they can always take the asset and resell it to recoup the original loan amount. That’s much less risky than loaning some company money to build a production plant for a new product. At one time, that was well understood. The government liked lower interest rates because it made borrowing for economic growth like building factories and housing developments cheaper and easier. But they didn’t like borrowing for speculative investments in non-productive activities like buying stocks and real estate. So they used to have all kinds of regulations on buying stuff like that. I’m old enough to remember Fannie Mae wouldn’t buy mortgage loans without at least 80% down and the loan to income ratio being more than 3 to 1. Commercial banks weren’t allowed to invest in stocks, and companies absolutely couldn’t buy their own stocks.
But we went the deregulation route and got our free market instead. And now everyone’s complaining about the results.
100% agree, our policy vehicles have long since driven off the smooth pavement of a sound economy, and we are sinking into the swamp now.
BTW, should read “loan to income ratio less than 3 to 1”
Powell says the Fed is driven by data, but what if the data the Fed is using is flawed. The basis for calculating CPI has been changed multiple times by the Bureau of Labor Statistics (BLS). Go to Shadow Government Statistics (www.shadowstats.com). There you will see that if CPI was calculated the same way it was in 1990, the real rate of inflation is closer to 8%.
The BLS should actually be renamed to the economic politbureau. The numbers are pure propaganda And of course Americans are dumb enough to fall for the garbage they hear from the politicians. Period Both parties
I wonder if supply chain disruption in the Red Sea will impact prices.
3 Month T-bill is still over 5.3%, in current Fed range. The Fed follows the Market. The charts prove it.
Sahm indicator is 0.60 above nadir(-)0.37. Shortages in the o/n market persist. According to Claudia Sahm we are in a recession. According to the Hooties inflation persists. The Dow and SPX have reached a new all time high. Biden cont to inflate.
According to Bazel III let the banks drop dead. Yellen saved SF bond investors for
the last time.
I guess she’s itching to continue blowing up the debt ballon. What could possibly go wrong with that?
The real cuts wont happen till Biden is assured of re-election. The old people who vote want their CD interest first. Once he is in, interest rates will go back to zero so money isnt wasted by govt on interest payments (he will have won a second term — he will be considered by history to be a successful prez — what does Joe care at that point?) and inflation will rip.
Biden won’t be the nominee. He’ll back out before the DNC for health reasons and pardon Hunter. The DNC will name the Democrat nominee.
Will it be som new guy?
….sure….’Michel’ Obama maybe ?
If she is really a man, how did the 2 daughters of Obama get birthed?
I hear that a deal will be made where Trump Will drop out and RNC will nominate Nikk in exchange for no jail time for Trump
I hear that what you heard is a bunch of crap! Trump’s not going anywhere!
Who will it be then? Michele Obama?, Gavin Newsome?, Mickey Mouse?
It’ll be Biden vs. Trump. Unless one of them keels over!
Hey everyone, look! Another political rumor that’s not going to come true!!
The student loan forgiveness does feel bad for anyone who worked and sacrificed to pay off their debt.
And it is inflationary.
But the latest round of forgiveness is $4.9B. The military spends that in a day.
Between the two, I think university is the better investment.
Student loan forgiveness isn’t inflationary. Most aren’t paying it now, so any inflationary effects have already happened. Forcing repayment at this point is deflationary.
That’s what we call “Stability Priveldge”. Heat om your house ok? Fridge stocled? Car have gas? Free to go eat wherever you want today? Vacarion planned? Thank the DoD…
Ohhhh did I get thumbs down because I hurt feelings? Ohhhh….poor babies. Don’t forget to wipe…
Maybe some of us are pro-defense but still want to get maximum bang for our taxpayer buck. I don’t believe that $13 billion for an aircraft carrier and $8 billion for a Columbia class nuclear attack submarine is “ the price of freedom”. I want the DoD to stop wasting our money!
The Fed will cut when needed to protect their owners – the large banks. That’s the only data that actually matters.
This…..
MMM… maybe you need to read this first before stating who owns who…. You Will Borrow and You’ll Like It!(https://www.fxhedgers.com/p/you-will-borrow-and-youll-like-it?utm_campaign=post&utm_medium=web)
Once upon a time, the discount window was so tainted, a bank would jumped through the hoops to avoid going that way. After so many standard practices dumped to save the system from itself, it’s standard practice. Just another peg down the ladder. Good job FEDs.
Where is commercial real estate in the pecking order?
The rate policy should be a dynamic one. Overnight rates to borrow should be 20% more than the yield on the 1 month Treasury, with a lower limit of 2%. Overnight interest paid should be 20% lower that the yield on the 1 month Treasury, with a maximum of 5%.
For example, if the yield on the 1 month Treasury is 3.0%, the overnight borrowing rate would be 3.6%, and the overnight deposit rate would be 2.4%. There would be no more need for dot-plots or deciphering where the Fed will take rates.
That makes way too much sense.
Imagine if there was no Fed? Everyone would just be analysing the bond markets.