The elusive ‘neutral’ interest rate interest — or “r star,” as economists call it
As the Fed starts cutting, that’s making some on Wall Street nervous about a potential reacceleration of inflation.
The so-called neutral rate of interest — or “r star,” as economists call it — is the standard against which the Federal Reserve’s interest-rate policy is judged as either “tight” or “loose.”
Because the neutral rate is a theoretical concept, nobody can say for certain exactly where it lies.
Since the start of the pandemic, senior Fed officials have espoused a wider range of opinions about where they see the neutral rate.
Chief among their concerns is the possibility that the neutral rate might be higher than the Fed expects. If this turns out to be true, the central bank could inadvertently lower interest rates too aggressively, potentially contributing to another wave of inflation.
Indeed, some market-based barometers, like the spread between the 5-year Treasury note yield 3.893% and that of its inflation-protected counterpart, appear to be already picking up on these anxieties.
For now at least, these risks remain largely on the backburner as far as most investors are concerned.
If such a scenario comes to pass, the blowback would likely be felt first in the bond market.
Fed Chair Jerome Powell has acknowledged this uncertainty in the past — perhaps most memorably when, during a speech in 2023 delivered in Jackson Hole, Wyo., he said that the Fed was trying to “navigate by the stars under cloudy skies.”
Treasury yields have risen recently, with the 10-year note 4.067% recently eclipsing 4% for the first time since early August.
Joseph Adinolfin MarketWatch 15 October 2024
Powell himself has noted in previous Jackson Hole lectures. In 2018, he said that “the location of the stars have been changing significantly.”
In 2023, he used similar language: “As is often the case, we are navigating by the stars under cloudy skies.”
https://englundmacro.blogspot.com/2024/08/feds-ultimate-destination.html
US consumption data has continued to defy expectations.
A new study by the Federal Reserve puts data behind that K-shaped spending theory, showing that the recent strength in spending has been driven by middle- and high-income families.
In the two years before Covid, growth in average retail spending was roughly the same across income brackets
In the two years following the pandemic, low-income families boosted consumption much faster, helped by government stimulus programs
In the past two years, higher-earning households were the main drivers.
The Fed researchers speculate it may be because they are enjoying a wealth effect from soaring stocks and home values as well as higher interest and investment income
What happens next now that the Fed has started to cut interest rates?
Wells Fargo economists argued in a recent note that lower rates may not provide much lift for consumer spending.
At the macro level, they say, the lost interest income will likely be larger than the savings from households who will be spending less to finance their debt.
Cecile Daurat Bloomberg 15 oktober 2024
Why the bulls are running and the consumers are buying
https://englundmacro.blogspot.com/2023/06/why-bulls-are-running-and-consumers-are.html
Tillbaka till Wall Street och Stockholm 15 oktober 2024
https://englundmacro.blogspot.com/2024/10/wall-street-och-stockholm-15-oktober.html
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