Yields rose slightly while stocks slipped slightly as markets await PCE data this week. Sales of new homes rose, but less than expected. The 2Y note is yielding 4.73% and 10Y note is yielding 4.29%. I guess we're also back to worrying about government shutdowns too.
The inflation puzzle/debate continues with two good reads over the last few days. The first by John Cochrane here. The key takeaways from Cochrane are that "If you don’t like my little fiscal theory model, we don’t have a good model of the most basic question, how higher interest rates lower inflation, without a contemporaneous fiscal tightening." and "The news is that without such contemporaneous austerity, higher interest rates don’t lower inflation at all in standard models. Intuitively, if the Fed raises interest rates, that raises interest costs on the debt. Taxes must rise or spending must fall to pay those interest costs. If not, no reduction in inflation." As for monetary policy, "all monetary policy can do is to shift inflation over time. With short term debt, a model can get only inflation below the nominal rate by producing higher inflation later. With long term debt, a model can only get inflation to go down by accepting higher inflation later. I call this “unpleasant interest rate arithmetic”" He concludes with what he considers as a better way of discussing the Fiscal Theory of the Price level: "what fiscal theory is all about. Slowly inflating away long term debt = rise in primary deficits + rise in real interest costs on the debt (or, a slow windfall to long-term bond holders = rise in primary surpluses + decline in real interest costs on the debt)."
The second article is courtesy of Barry Eichengreen here. Eichengreen's article questions whether we've learned anything from this recent inflation episode given so much disagreement on the cause of inflation and what, if any, credit the Fed deserves in bringing inflation back down. Eichengreen argues that the supply-factors only view and the Fed hasn't caused spending to slow or unemployment to rise views are "too simple", "Along with supply shocks, demand and expectations – factors that are fully within the capacity of the Fed to influence – played a role in America’s recent bout of inflation." Like Cochrane above, Eichengreen hits on the role fiscal policy has planned in this inflation, wondering how much the fiscal impulse exploding and waning accounts for the rise and decline of inflation, "perhaps fiscal policy both caused the inflation problem and solved it." He closes with crediting the Fed's communication as a factor in slowing inflation, "the credibility and communication channels of central-bank policy. The Fed signaled, beyond a doubt, that if inflation failed to come down, it was prepared to do more, even at the cost of higher unemployment."
XTOD: "Most people probably shouldn't do anything other than have index funds." ~Charlie Munger
XTOD: How do we know the nice downward inflation trend isn't because of Waller's dogged determination to remain patient with a rate cut?
XTOD: American Couple Likely Dead After Yacht Hijacked, Police Say: What We Know And Still Don’t Know https://go.forbes.com/c/3xTP
XTOD: "What's your favorite sandwich?" “The spicy chicken sandwich from Chick-fil-A.” "Wrong!" https://pbs.twimg.com/media/GHRWBXkW4AAqU8B?format=jpg&name=medium
https://x.com/bogleheads/status/1761828444814323892?s=20
https://x.com/dandolfa/status/1762217456503071154?s=20
https://x.com/Forbes/status/1762215985593889076?s=20
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