- Posted on October 3, 2024
- by MI2 Research
“the number that now seemed out of sync was the fed funds rate, which no longer needed to be as restrictive given the progress that’s been made,”
We were very sad to see that Warren Mosler has decided to take an extended break from posting on X. Mr Mosler has helped inform our views about the overall policy stance. Most of all, Mosler was right: tight monetary policy did not stop the economy, and those who bet on that lost. Fiscal was certainly a factor, although reasonable people might debate how much of a factor. But with Fed officials mostly of like mind in thinking it is time to cut rates (see quote above), the question we find ourselves asking is whether it is finally safe to bet against Mosler. Or, to put it another way, “Is the U.S. consumer tapped out?”.
Perhaps unsurprisingly, there is a lot of interest in this question, and views are surprisingly bifurcated. The consensus among bond bulls was that “The labor market is cooling, price pressures are dissipating, and U.S. consumers’ willingness to splurge is looking increasingly tapped out”. You might think where the Fed stands is obvious given the recent 50bps, but Fed actions reflect both their central forecasts and their perception of the risks, as well as the consequences of those risks. Mosler remains just as constructive, and he was not alone in focusing on the recent BEA revisions. As this rather sharp chap noticed, the BEA benchmark revisions revealed both a higher rate of growth from 2021-23 than previously estimated, but also that real disposable incomes were also revised higher and grew by 3% in the year to Q2 rather than the previously estimated 1%. That’s quite a difference! The Q2 savings rate was revised up, so arguably, there is still ammo.
Of course, those revisions are still backward-looking, even if the data was revised higher. But there is another oddity here. We seem to have Schrodinger’s Economy, seemingly strong and weak at the same time. Of course, the paradox is easy to explain: the question is, who’s economy? Equity investors are experiencing a very different economy from shoppers at Dollar General. As the CEO put it, “The majority of them state that they feel worse off financially than they were six months ago as higher prices, softer employment levels, and increased borrowing costs have negatively impacted low-income consumer sentiment.” That said, we are old enough to know that you should not form a macro view based on the economic experience of the poor.
If we are in a recession, we are in the very early stages of it, when it’s possible to support both arguments. Labour markets may be weakening, but they aren’t weak yet. And while inflation may look dead, it’s not impossible to imagine pockets of labor with pricing power. We recommend those who can find the time watch Harold’s full interview. His comments (and tatts!) were striking.
https://www.gocomics.com/calvinandhobbes/1987/06/10
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