With the Nasdaq at all-time highs, the week ahead sets up as follows with PCE on Friday as the highlight.
Tue: Fedspeak, home price index, consumer confidence, 2Y & 5Y Treasury Auctions
Wed: Beige Book, moar Fedspeak, 7Y Auction
Thur: Jobless claims, 1st revisions to 1QGDP, inventories
Fri: PCE
Friday featured Waller questioning the level of R-Star. Are you starting to feel like the Fed just goes in / talks in circles? Recent data has showed measures of expected inflation moving higher.
I thought the following summarizes the current situation quite well, courtesy of Marcus Nune's blog post titled: "Misunderstanding the Macroeconomy" which you can find here.
"The present situation can be summarized thus:
The Fed is, once again, focused on inflation and how to “manage” its “beloved” instrument, the policy interest rate.
- a permanently higher 2% price level path
- a permanently higher 5% NGDP level growth path
- the same RGDP level gowth path.
If the Fed is “true” to AIT, it will have to bring inflation below 2% for some time. This will also bring the price level to a lower level. Therein lies the danger. Looking at what happened in 2008, to bring the price level down (even if not all the way to the previous level, which, as was mentioned in the “AIT Primer” box above, is not required), the level of NGDP will have to fall. A (maybe) deep recession is the most likely outcome!
The Fed is “scambling” to understand its options. A recent speech by Governor Waller, who wants “several months of good inflation data before lowering rates” is concerned about “what is the neutral interest rate”.
To my knowledge no one has ever pinned it down, with estimates not only varying wildly, but also enclosed within very large confidence bands. As a guide to monetary policy it is quite useless! Since the economy is not anymore in a "low interest rate environment" (which was an important motivator for the change in the Fed monetary Policy framework of August 2020), the Fed is trying to guess how high should interest rates be in the "new environment". Fed talk about rstar is not the "attractor" but the "distractor"!"
I feel like I've been on a theme for a minute (see my last two FOMC recaps), or a career, about uncertainty and the desire for precision where none can be found. I came across this quote in an unusual place and one far afield from finance and economics (perhaps where people in finance and economics should spend a minute - away from finance and economics, outside of excel and DSGE models, etc.)
" Our natural inclination is to be so precise– trying always to forecast accurately what will happen next– that we look upon uncertainty as a bad thing.....we do not know what a day may bring forth...This is generally said with a sigh of sadness; it should be said as an expression of breathless expectation."
See this post from September 14, 2023 for more.
XTOD: At the beginning of the year, the market was pricing six Fed cuts this year, six ECB cuts, and five BoE cuts Today, the market is pricing two-and-a-half cuts by the ECB and the BoC, one-and-a-half cuts by the Fed and the BoE -Torsten Slok
XTOD: I think it’s about time pompous idiots who think they are the economic intelligentsia stop talking about polled consumers as a bunch of peasants who cannot be allowed into the pantheon of economic punditry for smelling like hay. Most of you farts have built careers being consistently wrong about everything. Am sure the common man knows better.
XTOD: Really interesting speech by @federalreserve Governor Chris Waller on R-star. This speech should put to bed the claim that R-star no longer relevant. Au contraire, it is very much alive and well! A short 🧵on his speech (1/n) ...Governor Waller then list the reasons he sees for why treasury yields have trended down: (4/n)
1. "The first factor is the liberalization and globalization of capital markets starting in the 1990's."
2. "The second factor causing demand for Treasury securities to grow more than supply was the large buildup of official reserves that started after the reforms that followed the 1998 financial crisis in Asia."
3. "The third factor driving prices up and yields down for Treasuries and similarly affecting r* is sovereign wealth funds."
4. "The fourth factor that is thought to have influenced Treasury yields and r* over the past couple of decades is the aging of the population in the United States and around the world."
5. "The fifth factor that increased the demand for Treasuries came from many new financial regulations implemented after the 2008 global financial crisis."
He notes these 5 factors on the treasury demand side have not and probably will not meaningfully change. What is changing and may affect R-star is on the supply side of treasuries: the expected and growing path of future primary deficits. (Sounding a little FTPLish, no?) (5/n)
XTOD: Peter Thiel: AI is bad news for people for math skills and society is going to shift in favor of people with strong verbal skills.
XTOD: Clarity comes from subtraction. Remove the noise to hear the essentials speak.
https://x.com/MikeZaccardi/status/1795052742970356043
https://x.com/INArteCarloDoss/status/1793751717630070895
https://x.com/DavidBeckworth/status/1794036773795844302
https://x.com/heykahn/status/1794699008885350598
https://x.com/GregoryMcKeown/status/1794126729956790461
Its interesting that Waller didn't mention the Fed buying trillions of treasuries as a driver of lower yields over the last decade+
ReplyDeleteAgreed, in his discussion of the "wedge...wedge between these two rates of return, causing the real 10-year yield to decline but the return on capital to be relatively constant? And what does this say about r*?" he doesn't mention QE as a factor, perhaps that's because he doesn't believe QE has an impact on "real" yields?
ReplyDeleteThat said, I posted this back on March 5th....worth a read
https://www.bis.org/publ/qtrpdf/r_qt2403b.htm, especially the section "Monetary Policy and the natural rate"