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  The Federal Reserve’s dovish policy pivot is cornering even the most steadfast Wall Street bears into changing their tune on US equities. Morgan Stanley’s Mike Wilson, who’s been one of the biggest pessimists among sell-side strategists, said Monday that the central bank’s shift last week is “a bullish outcome” for stocks.  Piper Sandler & Co.’s Michael Kantrowitz — who held the most glum S&P 500 Index outlook this year — issued a mea culpa and now says the rally can continue, and the breadth of the advance is likely to improve. Bloomberg 18 December 2023 https://www.bloomberg.com/news/articles/2023-12-18/fed-s-pivot-is-forcing-stock-market-skeptics-to-become-believers Vilket börsrally! Inte ens den gladaste av oss börsoptimister kunde ha hoppats på detta.  Klart att det kommer en rekyl, men dynamiken underskattas alltid när aktier rusar, huspriser lyfter och räntor sänks.  Rädslan att vara utanför blir drivkraften när ”Fomo” styr.  Henrik Mitelman DI ...

 A succession of senior Fed officials have now tried to damp down expectations for steep rate cuts early in the new year, summarized here by Blooomberg colleague Catarina Saraiva.  That has not reined in excitement.  The debate over Powell’s pivot is like Ebenezer Scrooge facing the spirits on Christmas Eve, and centers on spectres from the central bank’s past, with a strong element of undigested denialism.  The discussion has focused on the 1970s, when US inflation slipped out of control in a way that hasn’t happened before or since. Is it just possible that the risks of leaving rates too high for too long and taking the blame for an avoidable recession now bulk larger? Just how much is next year’s presidential election, and the growing possibility that it will return Donald Trump to power, affecting the Fed’s stance?  It’s undeniable that much of the political establishment hates the notion of a second Trump term (which is a big part of his popularity).  ...

 följdes av sänkningar året efter, när ekonomin försvagades och inflationen föll överraskande.  Nedanstående är skrivet av Bing, 2023-12-18 The Federal Reserve raised interest rates four times in 2018, with the last hike taking place on December 19th, 2018. The rate hike was a quarter of a point, bringing the federal funds rate to a range of 2.25% and 2.5% ¹. The Fed's decision to raise rates was made despite signs of economic softening in the US ¹. However, the Fed signaled a more patient approach to raising rates next year amid signs that the economy was starting to weaken ¹. The Fed's decision to raise rates was met with criticism from President Donald Trump, who urged the Fed to move cautiously "before they make another mistake" ¹. The term "Fed Pivot" refers to the Fed's change in monetary policy from raising rates to lowering rates. The Fed's pivot occurred in 2019, when it lowered interest rates three times after raising them four times in 201...

US Federal Reserve set to hold rates at 22-year high Officials are increasingly focused on downside risks facing the world’s largest economy, even as they remain alert to the threat of high inflation becoming entrenched. The bulk of the respondents think the Fed will not deliver its first rate cut until the third quarter of next year or later. https://www.ft.com/content/600bcde1-f335-4b37-af93-52fe54bddf4a

The first and most immediate is a necessary policy adjustment from reducing inflation to keeping it under control.  the second important shift in the global economy is that supply conditions are far from stable. the third shift relates to public finances. Simply put, the Fed must deal with the unwillingness of US politics to show any restraint over its budget. The US budget deficit is twice the size it was at the same stage last year Taking a wider horizon, the fourth shift is a requirement to pay more attention to India’s economic prospects.  Chris Giles Financial Times 29 August 2023 https://www.ft.com/content/85c4bd8d-84a2-4008-b86a-946c14706b2e

From those who prematurely predicted that inflation would be “transitory,” we now hear claims of vindication.  As Humpty Dumpty says to Alice: “When I use a word, it means just what I choose it to mean — neither more nor less.”  Inflation has been above target for nearly two and a half years. Whenever it returns to 2%, we’ll be told: “That’s what we meant by transitory!” I keep having to remind people that the dream of pain-free disinflation was a recurring delusion of the 1970s. The only times the Fed succeeded in bringing inflation down in that unhappy decade there were recessions: in 1970, 1974-75 and 1980. A key part of the story is obviously that President Joe Biden’s administration is providing more than $2 trillion to subsidize investment in infrastructure, green technology and microchips.  But there is also the resilience of the housing market,  illustrating how much less sensitive Americans are to rises in mortgage rates than they were 15 years ago. Despite ...

 By removing one of the largest buyers from government bond markets, the Fed’s balance sheet reduction — known as quantitative tightening — adds to the supply of debt that private investors have to absorb.  For the central bank, quantitative tightening can be a precarious path. It was forced to end its previous attempt in 2019 after the balance sheet unwinding contributed to a sharp spike in borrowing costs that spooked markets. Financial Times 11 August 2023 https://www.ft.com/content/62451148-cad1-4caa-bac6-7d78648889d6

This means that, if recent inflation had been caused by the two supply shocks of 2022, it would have initially risen above the canonical 2% target, then fallen below it as the shocks faded.  This is not the case in the United States or in the eurozone: stripping out the impact of falling energy prices, inflation continues to run at about 4-5%. Daniel Gros Project Syndicate 7 August 2023 https://www.project-syndicate.org/commentary/central-bank-asset-purchases-contribution-to-inflation-us-eurozone-by-daniel-gros-2023-08

 Wage gains exceed both their prepandemic pace and a rate economists believe lines up with low, stable inflation.  Fed officials would likely see 3.5% annual wage growth as consistent with inflation near their 2% target, assuming that worker productivity grows modestly. Wall Street Journal 4 August 2023 https://www.wsj.com/articles/jobs-report-july-today-unemployment-economy-d9af32f3 En mjuklandning ser ut att vara inom räckhåll för USA För Federal Reserve krävs bara att det till slut leder till lägre löneökningar.   Fed-hökar rynkar sannolikt på näsan åt de envisa löneökningarna, som inte sjönk som analytikerna hade hoppats på utan ökade med 0,4 procent jämfört med juni och 4,4 procent jämfört med samma period ifjol. En löneökningstakt på 4,4 procent är helt enkelt för hög för att Fed ska nå sitt inflationsmål.  De flesta ekonomer tror att ett mer hållbart tempo är ungefär en procentenhet lägre, runt 3,5 procent. Felicia Åkerman DI 4 augusti 2023 https://www.di...

 ‘There was a big government-engineered shift in wealth  from the public sector and holders of government bonds  to the private sector (i.e., households and businesses). This made the private sector relatively insensitive to the Fed’s very rapid tightening to a more normal monetary policy.‘ “As a result of this coordinated government maneuver, the household sector’s balance sheets and income statements are in good shape, while the government’s are in bad shape,”  The historical record around similar episodes rings some big alarm bells, Dalio has argued. Billionaire investor Ray Dalio, founder of hedge-fund giant Bridgewate https://www.marketwatch.com/story/a-giant-wealth-transfer-explains-why-the-economy-isnt-responding-to-fed-policy-ray-dalio-220f1233 US Homeowners Real Estate Wealth $28.7 trillion rpt trillion https://englundmacro.blogspot.com/2023/07/us-homeowners-real-estate-wealth-287.html Consumes and investors feel rich because they are rich. https://englundma...

Unless 3.6% unemployment is the new normal, the central bank has more tightening to do.   Markets are displaying increasing optimism that the US will experience a rare “soft landing,” in which inflation falls back to 2% and the economy cools without dipping into recession. If there’s no more tightening in the pipeline, then proponents of the soft-landing scenario must believe that the Fed has done enough. Yet the persistent tightness of the labor market suggests otherwise. Unfortunately, the non-accelerating inflation rate of unemployment, or NAIRU, is hard to know.  Fed officials estimate it at between 3.8% and 4.3%, down from 5.2% to 6.0% ten years earlier A hard landing might simply have been deferred, not avoided. Bill Dudley Bloomberg 1 August 2023 https://www.bloomberg.com/opinion/articles/2023-08-01/a-us-soft-landing-even-the-fed-doesn-t-believe-it   Non-Accelerating Inflation Rate of Unemployment, shortened to the unlovely acronym Nairu Englund: Non-Accelerat...

 Rosenberg sees the U.S. Federal Reserve ending its rate hikes soon — but says the economic damage has been done.  He expects U.S. businesses and consumers to cut spending, unemployment to rise, and companies and consumers to turn increasingly cautious as the U.S. economy slips into recession. And, for anyone who is convinced that the Fed will pull off an economic “soft landing,” Rosenberg has two words: Dream on. U.S. Treasury Secretary Janet Yellen says she doesn’t expect a recession. Chase JPM CEO Jamie Dimon says U.S. consumers are in good shape. What does your crystal ball say? Rosenberg: Janet Yellen is a politician. And if I were in her shoes I would be saying the exact same thing. It’s interesting to hear Jamie Dimon talk about how great a shape the U.S. consumer is in when we are seeing delinquency rates rise across virtually [the entire] gamut of the household borrowing space.  It’s equally interesting to hear Dimon talk about how great things are when the pace ...

 The economy needs time to adjust to these seismic shifts in monetary conditions, particularly given that the Fed kept rates near zero for 14 years. The Fed’s primary focus on raising short-term rates has resulted in “yield curve inversion”, a market aberration where short-term borrowing costs are actually higher than long-term rates.  If this persists, it represents an existential threat for smaller banks with profits that depend on their ability to use short-term deposits to make longer-term loans at higher rates.  In 2013, without Congressional authorisation, the Fed created an “overnight reverse repo facility” — the functional equivalent of a reserve account for non-bank intermediaries   While ONRRP was meant to be limited and temporary, it has in fact ballooned into around a $2tn facility, contributing to financial instability by draining deposits from banks. Sheila Bair FT 24 July 2023 https://www.ft.com/content/de63c1b2-a65f-479c-a916-2fee4c40fcd1 The wri...

 ‘This is what happens coming into a recession,’ ‘Everything looks fine, and suddenly it’s not.’ QT  shrinking of the Fed’s balance sheet, which swelled to almost $9 trillion during the pandemic  to about $8.3 trillion as bonds mature. As a counterweight, there’s the “wealth effect,” suggesting that households become richer as higher stock prices climb, boosting spending.  Low pandemic rates also encouraged a borrowing blitz by homeowners and corporations. Those long-term, fixed costs provide a huge buffer from the Fed’s rate hikes since 2022. Still, rising rates (blue line) and tighter financial conditions typically don’t bode well for stock portfolios, with most tightening cycles resulting in recessions (gray lines) since 1970. MarketWatch 23 July 2023 https://www.marketwatch.com/story/stocks-are-making-a-run-for-record-territory-will-the-fed-end-its-rate-hikes-anyway-31f80662 Dow looks to extend winning streak The surge reflects hopes that cooling inflation will a...

News that America’s headline rate of annual inflation fell to 3% in June has fed hopes that the Fed’s next rate rise, which is expected on July 26th, will be its last and that other central banks might relax, too.  Inflation, though lower, remains far above central banks’ 2% targets.  The fall in America’s headline rate has been driven by a one-off decline in energy prices: exclude food and energy, and prices are 4.8% higher than a year ago.  In the euro zone the figure is 5.5%, and in both economies wages are still growing far in excess of productivity growth. In other words, the rich world has some way to go before it is fully disinflated—and many economists expect the last mile to be the hardest.  Though stubborn inflation of, say, 3-4% does not grab headlines as much as recent alarming price rises, it would still be a problem for central bankers.  The Economist 22 July 2023 The world economy is still in danger (economist.com) Could America’s economy escape r...

While inflation is still above the Federal Reserve’s 2% target, it could stabilize at 3-4% over the next 12 months. What constitutes a “soft landing” remains open. As several critics have argued, the Fed is unlikely to achieve its goal of bringing down inflation to 2% by 2024 without causing a sharp increase in unemployment and drop in GDP. But a soft landing might best be defined as a gradual slowdown of output growth and employment to levels below their potential and natural rates, accompanied by a decline in inflation.  A severe recession might have enabled the Fed to achieve its stated goal of bringing down inflation to 2% this year. But if avoiding the social costs of a serious contraction means stabilizing inflation at 3-4%, with 2% as a longer-term goal, that seems like a worthwhile tradeoff. Such an outcome should be considered a soft landing. Jeffrey Frankel Project Syndicate 17 July 2023 https://www.project-syndicate.org/commentary/us-economy-soft-landing-still-possible-b...

“Claims about inflation rooted in unit labor cost arguments are trivial, tautological or unsupported by the data; they are the emperor that has no clothes,”  Preston Mui earned his doctorate in economics from the University of California, Berkeley, just last year, but he’s already making waves. This month he called out some of the biggest names in economics and policymaking in a blog post. Mui linked to two prominent Harvard economists, Lawrence Summers and Jason Furman,  and named Christine Lagarde In a June 15 news conference, Lagarde cited unit labor costs five times.   Similarly, Jerome Powell cited unit labor costs in the footnote of a 2021 speech, writing that “ultimately” a persistent rise in unit labor costs adjusted for inflation “will put upward pressure on prices.” I asked some of the people whom Mui called out for their reaction. Peter Coy NYT 17 July 2023   Mui blogg post https://www.employamerica.org/blog/unit-labor-costs-do-not-drive-inflation-the...

  A current case in point is the determination of central banks across the world to get inflation down to 2 percent. Why 2 percent?  That target emerged in large part from academic research suggesting (probably wrongly) that inflation at that rate would be more or less optimal. But that fixation has since taken on iconic status, with monetary officials insisting that failing to achieve it would fatally undermine their credibility. After all, we have a standard economic theory of why stagflation happens: High inflation can persist despite high unemployment if continuing inflation has become embedded in expectations. This was the case in 1980, but it very much wasn’t the case in 2022. That said, even I have been surprised at how much disinflation we’ve achieved at no visible cost. How did that happen? Paul Krugman NYT 14 July 2023 https://www.nytimes.com/2023/07/14/opinion/inflation-economists-soft-landing.html

  Amerikansk inflation något lägre än väntat (di.se) Inflation at 3%  Turning Point for Fed Fed hike this month still likely; may be last, economists say That’s the way markets were betting after Wednesday’s data.  Yields on short-term Treasury yields plunged, stocks rose, and the dollar was headed to the lowest in more than a year by one measure – all in anticipation that the Fed might ease up. Housing costs contributed to over 70% of the monthly advance in June, while prices for airline fares and used cars declined.  https://www.bloomberg.com/news/articles/2023-07-12/inflation-at-3-flags-end-of-emergency-turning-point-for-fed Inflation is outstripping wages in 30 countries  with an average fall in real wages of about 4 per cent across the OECD in the first quarter of 2023.  https://www.ft.com/content/017e87e2-1b43-4719-b887-708a2b460268

 Now, in the wake of the pandemic and $4.6 trillion in federal relief and stimulus spending, which was enabled by the Powell Fed expanding its balance sheet to monetarize much of the resulting new debt, year-over-year inflation was 9.1% in June 2022.  The Fed responded by raising the federal funds rates to 5.1% by May of this year — far-below peak inflation. Although home buyers, businesses and equity investors might want lower interest rates, those currently are not terribly high when measured against expected inflation. As a result, home sales and prices are in a rebound, interest-rate-sensitive tech stocks are leading a stronger U.S. stock market, and wages, according to the Atlanta Fed, are rising at 6% annually. In the months ahead, we could see temporary dips in inflation thanks to rents, but over the next few years inflation in the range of 4% is likely.  With U.S. economic growth running at less than 2%, that’s stagflation.   Peter Morici MarketWatch 11 ...