February 23, 2024

“The possibility that past relationships in the economy no longer hold”

Along with the release of the January Fed minutes this week, there was a deluge of Fed Speak, with Jefferson, Harker, Waller, and Cook all opining on the outlook for cuts. Most of the refrain was along the lines of Powell’s need for “confidence”, with Waller saying that he needed “to see at least another couple more months of inflation data” and Cook echoing the idea, saying that “as we gain greater confidence that disinflation is ongoing and sustainable, that changing outlook will warrant a change in the policy rate”. Harker pushed back on immediate cuts, asking for markets to “just give us a couple of meetings”, following up by saying, “I would caution anyone from looking for it right now and right away”. But while there may be some pushback on timing, that cuts are coming appears to be very much fait accompli in the mind of the Fed. Jefferson described the timetable as later this year, and his speech on Monetary Policy Cycles was, “for exposition purposes”, focused “on easing cycles and their preceding peak-rate episodes”. Nudge, nudge, wink, wink.

As to Jefferson’s conclusions, Nick Timiraos took away that PCE “is not particularly elevated” compared to previous cycles and that “cuts without growth scares are very rare” but occasionally do happen, with 1995 as an example, which “could be a template for the type of cuts envisioned in the most recent SEP”. At the risk of tooting our own horn, we recommend those interested in the dynamics of past cycles watch or listen to Julian’s recent interview with Resolve Asset Management, which can be found here. This does of course come as PPI handily beat expectationsjobless claims were below forecasts, and the NAHB survey (of a “rate-sensitive” sector) also saw Builder Confidence continue its rise.

All of that said, a comment that stuck out from the Vice Chair’s Q&A session was his assertion that “whenever you have a[n] unusual event, there’s the possibility that past relationships in the economy will no longer hold… there can be structural changes or changes in the way… certain markets operate”. A little bit of wishful thinking, and some hope that while “a rising tide lifts all boats”, the inverse won’t be true?



P.S. Though Nvidia’s stock may be on a trajectory similar to the Odysseus moon lander, the inverse of lower interest expenses and corporate tax rates could “mechanically” lead to “significantly lower profit growth and stock returns”.

P.P.S. Another inverse that may be on the radar of economic policy makers is Bernanke’s Savings Glut. While not necessarily a short-term question, what happens if some of the money stays home?