A Meaningless Caution
The Wall Street Journal reports Two Fed Officials Make Case for Caution With Future Interest Rate Raises
OK, but look at their rationale and the timeframe, emphasis mine.
Fed Vice Chairwoman Lael Brainard noted how previous rate increases, together with anticipated further rate increases, will slow the economy in ways that can’t be observed yet during a speech Monday at a conference of business economists in Chicago.
“It will take time for the cumulative effect of tighter monetary policy to work through the economy and to bring inflation down,” she said. “The moderation in demand due to monetary-policy tightening is only partly realized so far.”
Earlier Monday, Chicago Fed President Charles Evans said under his current outlook for the economy, it would be appropriate for the central bank to pause rate increases at slightly more than 4.5% by next March and then to assess how the economy was reacting.
Policy Acts With a Lag
Rate hikes, cuts, QE, and QT act with a lag. And more importantly, current tightening will slow the economy in ways that can’t be observed.
Let me finish that sentence: in ways that can’t be observed until it’s too late.
Despite the lag effect, and despite the fact that inflation was already out of control, the Fed kept expanding QE all the way to March of 2022.
The only reason I can come up with for their major policy errors is the Fed announced QE would last until March of 2022, so it lasted until March of 2022.
Now the Fed seems to have latched on to 4.50 percent as it target, and the repeated message is the Fed will get there.
I am positive the Fed will have overdone things if it gets to 4.5% by March.
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Fed Pivot?
Many are counting on a Fed pivot to save the stock market. But if the Fed does pivot, the likely reason would be a major credit dislocation or currency crisis.
Otherwise, the Fed seems determined to carry this through.
If so, the best we can hope out of this is a long but mild recession coupled with a stock market decline on the S&P 500 of 50 percent or so with the Nasdaq off 67 percent or more, with a housing bust that last for years.
The only saving grace in this mess is that I do not foresee a massive jump in the unemployment rate due to lingering shortages from Covid and millions of boomer retirements.
Add it up and you get a Long Period of Weak Growth, Whether or Not It’s Labeled Recession
For discussion of the stock market, please see If Unemployment Levels Remain Low, How Far Can the Stock Market Decline?
This post originated at MishTalk.Com.
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