Danielle DiMartino Booth 1-on-1 with Lacy Hunt
Please consider Danielle DiMartino Booth 1-on-1 with Lacy Hunt
The pair discuss liquidity, velocity, the Fed PUT, QT, who inflation hurts most, the stock market sectors most affected, who inflation hurts most and when recession hits.
Booth noted that housing prices are just starting to come down so headline CPI may be high into 2023.
“This is a problem the Fed created for itself,” responded Lacy. And due to the lag in rent adjustments, “the Fed is being hit by its tail.”
But Lacy went on to say “Inflation rate has clearly peaked and is heading downward.” Many will disagree with that but I believe it’s spot on.
Danielle commented that “It was intriguing to me that the assumption is that GDP would be 0.2 percent for all of 2022. Do you think they were broadcasting a message by taking the GDP down so far to where it’s almost a rounding error and yet they remain as resolute as they are. Am, I reading too much into this?”
Lacy replied “No, I don’t think you are. They did that for a purpose. They had a bad experience in June.”
Lost in this discussion is the fact that following two quarters of negative GDP, the Fed’s dot plot consensus of 0.2 percent GDP for the year is a big boost from here.
My take was that the consensus forecast was wildly optimistic. The Fed just does not want to admit recession, yet.
So, yes, I agree with Lacy, they did that for a purpose. But I see a different purpose, It’s much easier politically to keep hiking rates if you do not forecast a recession, than if you do.
That aside, Hunt was certainly correct that lovey-dovey comments to questions following the July meeting caused a stock market rally that the Fed did not want.
“Another thing they did was talk of 4.4 percent unemployment for next year which as one reporter pointed out that implied job losses would reach 1.3 million people,” noted Hunt.
He added “the Fed is clearly braced, and they want participants in the market to understand this is an important fight that has to be won, and they are going to stay the course. Of course we don’t know if they will stay the course, but currently they are on message. But it’s going to take time.”
Booth Asked Lacy the Key Question
Booth: “Can the Fed bring rates up and keep them at a high level, keep them at a plateaued level? Looking back at monetary policy we’ve never seen that happen.”
Lacy: “No. I think that the odds are for a rougher landing for the Fed. If you look at Fed tightening since the Fed was founded in 1913, about 90% of [tightening cycles] resulted in recessions.”
“The Fed can achieve a soft landing like they did in 1966 but those are pyrrhic victories that led to much more pain down the road. The likelihood of a soft landing is a low probability event. The Fed put themselves into this situation.”
There’s much more in the video, click on the above link to play it. Here’s my take on the Fed’s GDP forecast.
Examining Fed GDP Projections For 2022 and 2023
Please consider Wildly Optimistic Forecasts: Examining Fed GDP Projections For 2022 and 2023
Every Fed participant projects a soft landing scenario for 2022 and 2023.
GDP
- Purposely and wimpishly ducking recession calls, the Fed never directly projects recessions. But from where we are now, their 2022 GDP forecast goes beyond wildly optimistic and implies no recession.
- Nor does it appear there is a single recession forecast for 2023.
- What makes 2023 somewhat debatable is the fact that Fed GDP projections are 4th quarter to 4th quarter so technically there could be a 2023 short recession followed by a rebound in the second half of 2023.
- For 2022, it’s clear. The Fed sees a second half rebound, not a recession as the following chart shows.
Real GDP 2021-2022
GDP Projection Analysis (Numbers in Billions of Dollars)
- Real GDP in the 4th quarter of 2021 was 19,806
- Real GDP in the second quarter of 2022 was 19,699
- For the Fed’s 0.2 median year-over-year forecast to happen, 4th quarter GDP would need to be 19846 or higher.
- That means real GDP would need to rise by 0.90 percent in the second half. And that would match the post-Covid GDP high.
- Annualized, the Fed is projecting over 1.8 percent growth in the second half of 2022.
How likely is 1.8 percent annualized growth in the second half coupled with Fed rate hike projections given that the third quarter appears to be headed for a bust?
Dual Fed Message
So yeah. There was a message. A dual message.
- We will keep hiking.
- We will deliver a soft landing.
One thing Lacy, Danielle, and I agree on is that #2 is not going to happen.
So the Fed added to its credibility problem with those forecasts. But it is fearful of hiking while admitting recession, one I believe started in May.
This post originated at MishTalk.Com
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Mish
More of a question i cant wrap my mind around. Whats the relationship between higher interest rates and a whole lot of printed money floating around in the system. Throw in some government debt for good measure. What will the market/housing look like when the fed is finished.
Link: Daniel L. Thornton, Vice President and Economic
Adviser: Research Division, Federal Reserve Bank of St. Louis, Working Paper
Series:
“Monetary Policy: Why Money Matters and Interest Rates
Don’t”
Thornton: “the interest rate is the price of credit, not the
price of money”
Using a price mechanism, pegging rates, to ration Fed credit
is non-sense (“a price mechanism is a system by which the allocation of
resources and distribution of goods and services are made on the basis of
relative market price”).
The effect of current open market operations on interest
rates is indirect, varies widely over time, and in magnitude. What the net
expansion of money will be, as a consequence of a given change in policy rates,
nobody knows until long after the fact. The consequence is a delayed, remote,
and approximate control over the lending and money-creating capacity of the
banking system.
They with superior intelligence and logic are most effective in two conditions: when they communicate with others on their plane, both intellectual and in subject knowledge, and when they communicate with those who are ignorant yet intelligent in the critical aspect that I mentioned.
You might legitimately wonder what my point is. Here it is, Mr. Trutta: You’d be far more effective, and indeed beneficial here, if you’d sit back and ask yourself if you can do more to transmit your knowledge to those who lack it but who also have the mental capacity to acquire it. I cannot be the only one on this site who thinks so. Consider this an appeal, and maybe even an inspiration. There are many facets to teaching, one being the ability to reach down and bring others up. It’s a gift and maybe an obligation; without teachers, civilization does not advance.
You need to think about how to be a more effective teacher in a place where a bunch of people want to learn. My simple suggestion: Break your subject into segments, and don’t be afraid to write more, and more simply. The virtues of simplicity are vastly underappreciated, especially by those like yourself who are whip-smart and have deep subject knowledge. Never forget a simple truth: Write for the reader.
Bloomberg) — China’s foreign minister compared the drive for Taiwanese independence to a charging rhinoceros that must be stopped in its tracks, and blamed the US for speeding it along.
Foreign Minister Wang Yi said legislation under consideration by US lawmakers threatens the foundation of US-China ties. He said voices advocating the independence of Taiwan, which Beijing claims as its territory, have grown because of US support. He said that ties between the US and China were at a “low ebb.”
“Taiwan independence is like a highly disruptive gray rhino charging toward us that must be stopped resolutely,” Wang said in a speech at the Asia Society in New York, where he was attending the annual gathering of the UN General Assembly. “We have always worked with the greatest sincerity and effort to pursue peaceful reunification, but we will never tolerate any activity aimed at secession.”
China’s authorities have used the term “gray rhinos” in the past to refer to highly probably, high-impact financial hazards that risk being overlooked. They include shadow banking, property bubbles and local government debts.
Powell lacks perspective.
Link: George
Garvey:
Deposit Velocity
and Its Significance (stlouisfed.org)
velocity of total deposits, including time deposits, is considerably
deposits
But Powell
sums up all deposits together and claims M2 is worthless: “We have had big
growth of monetary aggregates at various times without inflation, so something
we have to unlearn.”
See
the pervasive error: “None of this would matter if the Fed acted as an
efficient savings-investment intermediary, as commercial banks are able to do,
at least in principle.” And: “This is nonsense, Spencer. It amounts to saying
that there is no such things as ‘financial intermediation,’ for what you claim
never happens is precisely what that expression refers to.” “Yes, I hold
that commercial banks are credit intermediaries and not just credit creators”
— George Selgin
XOM is the only thing I have that’s held up, and it’s getting eaten alive. Luckily I’m 90% in cash… and since that cash is earmarked for a house, it’s doing quite well.
I’ve got a couple lbs if the stuff sitting in a safe deposit box, and it’s done nothing since 2007. I think modern man may have moved in to other Shiny thingS.
That’s exactly what
Alvin Hansen’s secular stagnation theory implies (leading to an excess of
savings over real investment outlets).
As Martin Wolf, chief economics commentator at the Financial
Times, London calls it: “chronically deficient AD”.
The objectivity is twisted: “Danielle Dimartino Booth’s
in her book gets it backwards too: “Fed Up”, pg. 218 “Before the financial
crisis, accounts were insured up to the first $100,000 by the FDIC. That limit
kept enormous sums *in the shadow banking system*.
Mish, I hope you are working on a post about the forex moves today.They are absolutely breathtaking, especially the Pound.
I’ve been eyeballing tickets to London.The problem is that jet fuel is still expensive offsetting any dollar to Pound conversion.The perfect time might be in a month or two.