It's interesting to look back at what we were talking about a year ago. Does anyone even remember the UAW strike and how that would be inflationary? Funny that the Boeing strike isn't painted in the same light. And then go look at the September 2023 meeting (recap here). That was the first meeting following the last rate hike. We had 2Y yields around 5% (compared to 3.56% now) and the 10Y yield around 4.30% (compared to 3.52% now). At the time of that meeting, the median dot showed one more hike in 2023 and removed two cuts from 2024, effectively projecting just 50bps in cuts for all of 2024 at the time. Obviously new data changed the views as 2024 progressed, but if monetary policy didn't change, must it have been "shocks" to the economy that caused the sudden slowing? Or was it that estimates of the "long and variable lags" were wrong in 2023? Or was it the elusive r* (neutral rate) was missestimated? Supply chains? China's weakness? Or none of the above? Or some combination of the above?
I'm all in favor of the mantra "When the facts change, I change my mind." In this case the fact is the unemployment rate has moved up 40bps while the core PCE rate has moved down 90bps despite a first quarter scare. Other facts could include stocks near all-time highs (the wealth channel), credit spreads remaining tight and inflation remaining above target. Nonetheless, Governor Jefferson told me in 2023 that
"high interest rates raise the incentive to save, which in turn dampens consumer spending on interest rate-sensitive expenditures, like housing and automobiles, and slows businesses' investment in new equipment. The decrease in spending decreases the overall demand for goods and services in the economy, thereby reducing the demand/supply imbalances we have seen, and, consequently, reduce inflationary pressures. As a result, the inflation rate should fall back toward 2 percent, the FOMC's inflation rate target."
Should we assume rate cuts are going to spur more spending on housing and autos and businesses will invest more in equipment following the cut? What will that do to inflation now?
Do you really know? I don't.
People smarter than me advocate 50bps. Claudia Sahm call for a 50bp cut in an aptly titled post “Fifty”. Paul Krugman agrees. The crux of the argument is that inflation is on pace to reach target, shelter is a lagging indicator and that the labor market is weakening quickly, so why not start big as we’re obviously running very tight policy.
Other smart people, like Torsten Slok of Apollo seem to feel
differently. Take a look at some of the indicators on slide 7 of their deck. These counter arguments, which center on the possibility that the fight with inflation hasn’t definitely been won and that there is weak if any evidence that further loosening on monetary won’t risk reigniting inflation via the standard doctrine that it will increase spending, output, the wealth channel and ultimately inflation.
Either way, the market seems to be leaning a little more towards 50bps, despite Liz Warren wanting 75bps.
Anyway on the day ahead it's retail sales, industrial production and capacity utlization.
XTOD: Yet even a 50-point cut would leave the Fed funds rate 300 basis points above pre-pandemic. How can this be justified? The main answer seems to be that the economy isn't in a recession (yet). But this looks like a variant on Milton Friedman's fool in the shower — the guy who alternately freezes and scalds himself because he's too data-dependent In this case the water is getting cooler but it's still tolerable — and the Fed is waiting to adjust the taps until it turns ice-cold. Maybe it's PTSD from the unexpected inflation of 2021-22, but it's still a big mistake
XTOD: STANLEY DRUCKENMILLER JUST NOW ON RATE CUTS:
“I don’t care if they go 25 or 50, I really don’t. But I can’t help but point out that right after inflation was 9% with rates at zero they went 25bp. Where were all the Wall Street cheerleaders calling for 50 because real rates are too high? The asymmetry in their narrative is striking.”
XTOD: There is zero upside for the Fed to allow this level of dovishness in STIR, Equity multiples, corporate, mortgage, and municipal rates, weakness in USD, strength in precious metals, energy, and industrial commodities. Zero need and zero upside to ease anywhere near as priced.
XTOD: Everyone knows these long hours aren’t healthy, so why hasn’t anything changed? Are banks indifferent to employee welfare or simply inefficient? The answer is more nuanced https://on.ft.com/3MKIyNI
XTOD: AMAZON TELLS STAFF TO RETURN TO OFFICE FIVE DAYS A WEEK
*AMAZON CEO: 'HAVING FEWER MANAGERS WILL REMOVE LAYERS'
Kudos to $AMZN leadership building on recent success by getting even more fit. Flatter is faster. Leaner is better.
XTOD: As a rule, whatever you need to optimize, don't do. 2/Hint: when in a car, I take the fastest route; when walking I pick the most scenic route; when cycling I take the longest route. Allora: I avoid cars if I can and when I can.
https://x.com/paulkrugman/status/1835654652894793881
https://x.com/amitisinvesting/status/1835640695073235003
https://x.com/dampedspring/status/1835743901061091573
https://x.com/FT/status/1834547862773846219
https://x.com/altcap/status/1835743613810253867
https://x.com/nntaleb/status/1835252040101953645
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