“The Fed Is Trapped and Everyone Knows It”
We’ll start with comments on my February 10 letter, Desperately Seeking Neutral.
I talked about the Federal Reserve’s endless pursuit of the undefinable “neutral” interest rate, often using models with questionable assumptions.
It’s no wonder that economics is voodoo science based on complex math models that lack any firm, objectively set parameter values for its modeled variables.
Then, too, does anyone really believe the Fed would raise rates as the ‘24 election approaches? Instead, the Fed will be inclined to support the Administration that selected the Fed’s members by lowering rates.
How do Fed lower rates when PCE is still close to 3%, the economy is doing better than most expected, the markets literally seem to be making highs almost every other week, and unemployment is under 4%?
The Fed rate didn’t actually exceed inflation until about March of last year. So, for all the wailing, sack cloth, and gnashing of teeth, the economy has only been paying a real interest rate for 10 months since the Great Recession of ‘08,
and the “real rate” is likely close to 2% for short-term notes, and close to 0.0% for the 7-year Treasuries.
We’re not “higher for longer” at this point, more like “slightly positive for the time being.”
John Mauldin 1 March 2024
https://www.mauldineconomics.com/frontlinethoughts/when-readers-speak
Förmodligen allra viktigast för Fed och chefen Jerome Powell var att
den genomsnittliga årliga löneökningstakten saktade in till 4,3 procent,
tvärtemot en förväntan om oförändrade 4,4 procent från i januari.
Credit investors acting like the go-go days of the easy money era are back again
The most punishing interest-rate hikes since the 1980s. The high degree of uncertainty over when and how quickly central bankers will start reversing them. Yet another US lender hitting trouble barely a year after debt markets were upended by the collapse of one of the world's biggest banks.
Credit investors have shrugged all of this off and are acting like the go-go days of the easy money era are back again.
... even as the likes of Jamie Dimon of JPMorgan Chase & Co. and David Solomon of Goldman Sachs Group Inc. warn of markets racing ahead of themselves.
In credit, a risk-taking ebullience has taken hold.
The lowest-rated traded company debt is outgunning safer assets: Spreads between junk bond yields and investment-grade counterparts are tight.
“People thought the economic threat was going to be central banks causing a recession,” said Robert Tipp, chief investment strategist for PGIM Fixed Income. “They’re now seeing the economy can get by with this level of rates. There’s a lot of long-term money looking to get invested.”
Bloomberg 8 March 2024
Desperately Seeking Neutral
https://englundmacro.blogspot.com/2024/02/desperately-seeking-neutral.html
Desperately Seeking Restrictive
https://englundmacro.blogspot.com/2024/02/desperately-seeking-restrictive.html
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