A Meaningless Caution
The Wall Street Journal reports Two Fed Officials Make Case for Caution With Future Interest Rate Raises
OK, but look at their rationale and the timeframe, emphasis mine.
Fed Vice Chairwoman Lael Brainard noted how previous rate increases, together with anticipated further rate increases, will slow the economy in ways that can’t be observed yet during a speech Monday at a conference of business economists in Chicago.
“It will take time for the cumulative effect of tighter monetary policy to work through the economy and to bring inflation down,” she said. “The moderation in demand due to monetary-policy tightening is only partly realized so far.”
Earlier Monday, Chicago Fed President Charles Evans said under his current outlook for the economy, it would be appropriate for the central bank to pause rate increases at slightly more than 4.5% by next March and then to assess how the economy was reacting.
Policy Acts With a Lag
Rate hikes, cuts, QE, and QT act with a lag. And more importantly, current tightening will slow the economy in ways that can’t be observed.
Let me finish that sentence: in ways that can’t be observed until it’s too late.
Despite the lag effect, and despite the fact that inflation was already out of control, the Fed kept expanding QE all the way to March of 2022.
The only reason I can come up with for their major policy errors is the Fed announced QE would last until March of 2022, so it lasted until March of 2022.
Now the Fed seems to have latched on to 4.50 percent as it target, and the repeated message is the Fed will get there.
I am positive the Fed will have overdone things if it gets to 4.5% by March.
Fed Pivot?
Many are counting on a Fed pivot to save the stock market. But if the Fed does pivot, the likely reason would be a major credit dislocation or currency crisis.
Otherwise, the Fed seems determined to carry this through.
If so, the best we can hope out of this is a long but mild recession coupled with a stock market decline on the S&P 500 of 50 percent or so with the Nasdaq off 67 percent or more, with a housing bust that last for years.
The only saving grace in this mess is that I do not foresee a massive jump in the unemployment rate due to lingering shortages from Covid and millions of boomer retirements.
Add it up and you get a Long Period of Weak Growth, Whether or Not It’s Labeled Recession
For discussion of the stock market, please see If Unemployment Levels Remain Low, How Far Can the Stock Market Decline?
This post originated at MishTalk.Com.
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capacity, like Walter Isaacson described Albert Einstein’s ability: to hold two
thoughts in your mind simultaneously – “to be puzzled when they conflicted, and
to marvel when he could smell an underlying unity”. It’s also like Athenian
philosopher Plato — whose “first fruits of his youth infused with hard
work and love of study” said: “We seem to find that the ideal of
knowledge is irreconcilable with experience”.
Keynes wrote the term bank in his bible: “The General Theory of Employment,
Interest and Money”, it is necessary to substitute the term nonbank in order to
make Keynes’ statement correct.
incongruously (2) banks loan out the savings that are placed with them
(micro-economics).
and why this matters” –Zoltan Jakab and Michael Kumhof May 2015
banks do not act simply as intermediaries, lending out deposits that savers
place with them, and nor do they ‘multiply up’ central bank money to create new
loans and deposits. The amount of money created in the economy ultimately
depends on the monetary policy of the central bank”
George Garvy: “Experience shows that
a varying volume of money spending may be supported by a constant stock of
money and, conversely, experience also teaches us that the money supply may
change significantly while the rate of spending remains almost unchanged. Thus,
total money spending in relation to money balances—technically, “transactions
velocity”—is an important element in assessing changes in the credit situation
and in business conditions.”
Interest is the price of loan-funds [the free market’s deterministic
clearing rate]. The price of money is the reciprocal of the generalized price-level
[the FRB_NY’s “trading desks” bailiwick].
Russia, under harsh western sanctions that are set to ratchet up in December, is the biggest laggard to its quota, with its September production at 9.77 million b/d—about 1.26 million b/d below target.
Traditional buyers in sanctioning countries have cut imports from Russia. It has redirected some volumes to Asian markets including China and India but is unable to fully reroute these supplies.
Saudi Arabia, which co-chairs the OPEC+ alliance with Russia, pumped 11.02 million b/d, close to its quota and an increase of 100,000 b/d from August, supported by strong exports and ongoing high levels of crude burn.