A few updated observations on the Fed's thinking:
In view of the fact that the current CPI inflation rate has still not been decisively hammered down to the 2.0% target level, why did they decide on a 50-bip cut last month? After all, the long-and widely-anticipated recession keeps on not happening.
But I'm still in the camp that believes the risk of recession commencing within the next 12-18 months is higher than another inflation breakout, since headline inflation receded more or less concomitantly with the drawdown of household bank accounts following multitrillion-dollar covid relief/stimulus measures.
During the first half of 2023, there was widely expressed concern about the risks to loan portfolios of midsized regional banks by 2025, given that banks in the sub-$200-billion asset range hold the bulk of commercial real estate loans, and that many of these loans are variable-rate and would very likely shackle many property owners with unserviceable debt and banks with nonperforming loans. (More bailouts, here we come!)
Then there's what's called the "neutral interest rate," which is the subject of much debate, but which many students believe now is somewhere around 3.5% (nominal.) The policy rate is now 1.25-1.5% above that. Unless there is some really compelling reason not to do so, is there any reason that the Fed shouldn't begin the process of "normalization?"
Yes, we're not quite at the vaunted 2% "target" rate. However, I would note that even Paul Volcker, almost everyone's idea of an inflation-fighting superstar, never got the inflation rate to the 2% mark (except for the outlier year of 1986).
Of course, the decision as to whether the 50-bip cut was wise is certainly arguable, but my take on recent discussions of the issue is that the above considerations entered into Fed official's thinking over the last couple of months or so.
Quote:
Originally Posted by lustylad
How long is "transitory"? My erections are transitory. Come to think of it, didn't Keynes famously say "in the long run we're all transitory"? Or something like that.
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Keynes did indeed say that in the long run we're all ... (Well,
something. Since I'm 74, I don't like to think about it!)
As to the question of how long is transitory -- in the case of the recent inflation breakout, I suspect that although it was quite transitory compared with the "Great Inflation" of the 1970s, it may not have been as "transitory" as Ms. Yellen hoped.
My erections are quite transitory too, by the way. My primary SB is a very effective inflation-fighter in that regard. It helps, too, that (thankfully for me!) she's in the opposite tail from Ms. Yellen in the physical attractiveness distribution. Her inflation remedy is always quick and pleasant.
If you ever take Viagra and your ensuing erection lasts more than four hours and thus is not sufficiently transitory, you are urged to call your doctor, according to warnings issued by the maker in the early days.
This prompted one of the late-night comedians to say something like this:
"The warning on the package says to call your doctor if you have an erection lasting more than four hours after taking this medication. To hell with that! If I have an erection that lasts for more than four hours, I'm not calling my doctor. I'm calling
everybody!"
