Desperately Seeking Restrictive

An increasingly bullish outlook is on a collision course with Fed policy goals that still demand tighter financial conditions. The complications risk leading to longer hawkishness.

As in many other things in life, markets can pick up momentum and become unstoppable. That seems to be happening now.  The market, after all, can to an extent create its own reality. 

John Authers 30 januari 2023

https://englundmacro.blogspot.com/2023/01/market-versus-real-world.html

Recession? Growth Ended Up Accelerating in 2023

Economy expanded 3.1% from a year earlier due to strong consumer spending and hiring

The final three months of the year looked a lot like the soft landing Fed officials are seeking to achieve. 

Growth was strong, employers added nearly a half-million jobs and inflation cooled to an annualized 1.7% rate, below the Fed’s 2% target.

Wall Street Journal 25 January 2024

https://www.wsj.com/economy/gdp-us-economy-fourth-quarter-2023-9fc372f0

The prevailing belief is that this year will see significant falls in interest rates (helping bonds and stocks) in combination with a steady, slowly growing economy. 

Such conditions don’t happen often, which is why they’ve been tagged with the name of a fairy tale. 

Belief in Goldilocks is strong. And that’s important because the market, by betting on Goldilocks, has made it easier for such a scenario to happen. Rising prices for stocks and bonds tend to ease financial conditions. 

Judging by Bloomberg’s own measure for the US, they are now their easiest (expressed in positive territory in the chart below) in almost two years, since before Russia’s invasion of Ukraine. 

John Authers 4 januari 2024

https://englundmacro.blogspot.com/2024/01/what-are-problems-with-goldilocks.html

 

What all this means is that financial conditions are materially easier than they were just a few weeks ago, much to the chagrin /disappointment/ of the macro doom crowd.

Jared Dillian Bloomberg 4 augusti 2022

https://englundmacro.blogspot.com/2022/08/soft-landings-are-as-rare-as-sightings.html

 
 
The Fed can raise the rates that it directly controls; but it also needs broader financial conditions to tighten.

If the bond market does not oblige, then the chances rise that the Fed has to push harder, risking a financial accident in the process. 

All of this is about sentiment. At some point, it could founder on cold economic reality.

John Authers Bloomberg 4 augusti 2022

https://englundmacro.blogspot.com/2022/08/are-animal-spirits-running-into-dumb.html

 

Desperately Seeking Neutral

https://englundmacro.blogspot.com/2024/02/desperately-seeking-neutral.html