Quote:
Originally Posted by farmstud60
I wonder if the Fed cutting interest rates by .5% means the economy is worse than all the numbers the Biden administration is putting out there.
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In my view, it's simply too early to tell, though I believe the risk of impending slowdown/recession with rising unemployment is significantly greater than the risk of a serious inflation resurgence.
Note that economists' records of forecasting the onset of recessions is very bad, to put it mildly. Many decades ago, the late John Kenneth Galbraith quipped (and not without justification!) that economic forecasters serve the purpose of making astrologers look prescient.
The reason I think a 50-bp cut was warranted is that the Fed kept the "higher for longer" narrative well beyond what should have been it's "sell-by date."
Look at the 2-year Treasury, which I and many others consider arguably the best proxy for expectations of the Fed funds target rate, inflation, and growth. The 2-year market "looks out" further than the market for shorter-term (3-month, 6-month, etc.) paper.
And take a look at how the 2-year yield has dropped sharply over the last few months.
https://fred.stlouisfed.org/series/DGS2
About 140 bps in 5 months. (That's a lot!)
Ultimately, the Fed funds target rate must converge toward real-world market rates, lest distortions continue for so long that something busts (such as large swaths of the CRE market, for instance.)
Also, the financial system does not function well over the long term if the yield curve does not have a nice, positive slope. To get to that point, short rates need to decline to levels significantly lower than the 10-year T-note (which, of course, is the primary guidepost for 30-year fixed-rate residential mortgages).
The reason I don't think inflation is that much of a risk going forward is that the spike of a couple of years ago was quite a bit different animal from the "Great Inflation" of the 1970s-early'80s, and was primarily a function of the spending binges of 2020-2022, which poured several trillion dollars of "excess savings" directly into household bank accounts, rather than open market operations and interest rate-targeting by the Fed. Of course, one should note here that the Fed openly stated during those years that it was standing by, ready to accommodate all those spending binges by monetizing the newly accumulated debt if necessary. And the big pile of "excess savings" (estimated by JPM analysts to be close to $2.3 trillion at the peak about three years ago) has been almost completely spent down; thus there isn't much "fuel" to drive inflation higher moving forward.
Quote:
Originally Posted by txdot-guy
I expect the fed to take us down another.25 point at the next meeting.
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I agree. And, I suspect, at the December meeting as well. And the Feb 1st meeting, too, more than likely.
For anyone interested in reading more about the early 2020s inflation, I highly recommend John Cochrane's excellent book
The Fiscal theory of the Price Level. Additionally, he has occasionally written columns for the WSJ and other publications.
https://en.wikipedia.org/wiki/John_H._Cochrane
https://en.wikipedia.org/wiki/Fiscal...he_price_level
A fair bit of hilarity ensued when Paul Krugman (who does not seem to like being criticized) opened fire on Cochrane with a bunch of insults a few years back after the latter wrote a piece musing about how the Great Krugtron was so very wrong about some fundamental things. Cochrane, who apparently "gives as good as he gets," replied with (among other things) comments that instead of being a serious empirical economist, Krugman speaks and writes like a rabidly partisan opinion columnist and seems hell-bent on being "the Rush Limbaugh of the left." (Ouch!!)
