Headline payrolls worse than expected at +142K vs. 160K estimate while average hourly earnings came in at 0.4% MoM and 3.8% YoY, both stronger than expected. The unemployment rate also fell back to 4.2% as expected. Waller and Williams both indicated they are ready to cut, citing concerns about labor markets, but neither seemed quite ready to go 50bps at this upcomng meeting. Of course things could change with CPI this week, but the Fed is on blackout so we won't really know.
Friday was a tough day for stocks with major indexes down solidly lead by tech. Bonds rallied, with the 2Y down to 3.65% and the 10Y at 3.70%.
In the blogosphere, John Cochrane with one of his first post in a while, again asks whether we actually know how or if higher interest rates lower inflation. This time he hopes to explain why this is true in a simpler, more intuitive way.
In a post titled Monetary ignorance, monetary transmission, and a great time for macroeconomics he starts by discussing the standard narrative, "The Fed raises interest rates. Higher interest rates slowly lower spending, output, and hence employment over the course of several months or years. Lower output and employment slowly bring down inflation, over the course of additional months or years. So, raising interest rates lowers inflation, with a “long and variable” lag. “Monetary transmission” complications build on this basic story. They spell out channels by which higher interest rates lower different categories of spending, or how lower output and employment affect inflation." and goes onto do the following:
- That none of the standard economic models actually work like that, they either get inflation to fall immediately or they don't get falling inflation with rising interest rates alone.
- Monetarism is not a theory about how the Fed or other central banks control inflation, because they don't control the money supply. At least monetarism has the "right sign", it says higher money growth causes inflation.
- Firsherian, the Fisher equation, tries to solve the monetarist challenges by focusing on interest rates, not money, except the story it tells is that higher interest rates lead to higher inflation (in the long-run). It, like New Keynesian models, have the "wrong sign".
- Current New Keynesian models also all show that higher interest rates lead to higher inflation in the long-run (the Fisher equation is part of these models), it has the "wrong sign". Yes, sticky prices may help in the short-run, but to tell the standard story, Cochrane believes the standard current model doesn't produce the result without help from fiscal.
- "To get inflation today πt to jump down, new-Keynesian theorists assume that in addition to setting the interest rate that we see, the Fed makes a threat: If unexpected inflation doesn’t go where the Fed wants it to go, the Fed will blow up the economy with hyperinflation or hyper deflation. Adding a rule that nature abhors a hyperinflation or deflation, the Fed then “selects” one of the many possible equilibria, one of the many values for unexpected inflation. This additional “equilibrium selection policy” can give us the unexpected disinflation at time t."
- Cochrane believes that "the Fed’s interest rate target sets expected inflation, fiscal policy sets unexpected inflation. To get the decline of inflation in the left hand panel, we pair the interest rate rise with a fiscal contraction."
I'll leave it there, beause Cochrane's post is really long, maybe I'll do a part two (but maybe not), but it's an interesting read because it challenges you to try to actually understand the theories that many pundits use to describe the process by which the Fed's rate decisions determine inflation.
On the week ahead, CPI, UofM, Treasury Auctions are the highlights of the week ahead
Monday: Inventories
Tuesday: Small business optimism, 3Y Auctions
Wednesday: CPI, 10Y auction
Thursday: PPI, jobless claims, 30Y Auction
Friday: UofM
XTOD: The new PE investor in the Miami Dolphins sitting Tyreek Hill down and telling him to stop fucking around with the police because it’ll impact his fund’s IRR https://pbs.twimg.com/media/GW-LFe1WIAAx_wV?format=jpg&name=900x900
XTOD: The August jobs report wasn’t bad enough to seal a 50 bps rate cut as the Fed’s next move but wasn’t good enough to lead officials to rule it out on Friday. Officials kept their options open when they spoke on Friday, neither making an affirmative case for a larger cut nor closing the door on it. That’s making this a close call at their meeting later this month—one that in all likelihood gets decided by Powell. One option would be to conclude that softer hiring since the Fed’s last meeting, in late July, justifies the 50 bps cut. Fed officials held rates steady on July 31 but might have cut by 25 bps at that time if they had known about weak jobs numbers that were released two days later. After another so-so employment report for August, the Fed would have followed with another 25 bps in Sept.
A second option would be to cut by 25 in September, and then to signal several more cuts are likely to follow when officials produce quarterly economic projections that will be released at the meeting.
https://wsj.com/economy/jobs/jobs-report-august-unemployment-economy-b869cf39?st=mrwl4etl263o105&reflink=article_copyURL_share
XTOD: "When I was 47, I was having a difficult year for a variety of reasons and Warren [Buffett] sat me down and said look, when I was 47 I thought my life was over. Susie had left me, and I had already accomplished everything I thought was worthwhile as an investor. Berkshire, as far as I knew, was at its peak. And to my surprise, my life kept getting more and more interesting since, and most of the really important things I've done happened after I was 47 and thought my life was over." - Alice Schroeder (Buffett's biographer)
XTOD: Nassim Taleb(@nntaleb) says that LLMs deliver the most likely explanation on the web and that it is impossible to make money shooting for the most likely explanations.
https://xkmato.com/#are-llms-just-chatty-calculators https://x.com/XKMato/status/1832035882372645095/photo/1
XTOD: "Most people don't stop enough and think hard enough about their priorities and focusing on the problems that are the most worthwhile for them to try to solve. And they operate on a kind of first-come, first-serve basis when it comes to their time." — Daniel Ek, CEO of Spotify (
@eldsjal
)
https://x.com/litcapital/status/1832836504151904366
https://x.com/NickTimiraos/status/1832217409618391165
https://x.com/gfc4/status/1831409636307607663
https://x.com/nntaleb/status/1832047953797591409
https://x.com/tferriss/status/1831334364065431850
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