I agree completely. Unemployment is becoming the problem that they hadn't had to deal with during this entire process. If I'm Jay Powell, I am praying for a 0.1% core PCE, or strong-arming the BLS to print one. I'm just not convinced that is the future.
Let’s say they get a green light to cut in September (which they did today), then again in December (or hell even in November). We’re talking 0.75% and FFR down to 4.5%. After 15 years of 0%, and starting the year expecting SEVEN! rate cuts. Is this really going to get people hiring right & left?
I just have a hard time seeing the Fed stopping the UE snowball. When have they ever been able to?
We've had multi-trillion deficits, a boom in home prices, ATH stocks, and the most risk-on periods I can recall and yet UE is still going up. Again, I just don’t see the Fed being able to head this off. (Don’t get me started on how rate cuts remove income from MMF holders)
Hi Leonard, so the way I think the Fed Chairman is looking at it is that if Core Pce is going to slow to 2% in 6 months time along with Gdp growth say to 1.5-2%....that then puts Nominal Gdp growth somewhere in the neighborhood of 3.5 to 4%. If we take that Nominal Gdp growth rate now as prima face, then a 5.33% overnight rate is about 135 bps too restrictive on the "nominal growth metric" and lawmakers can make the argument that Powell is not doing his job "legally speaking".
He's a lawyer by DNA...and I think he just wants to get rates "off" being restrictive and then see how the economy and inflation respond. As far as the UE rate is concerned, it can slowly tick up because it seems the US now needs to create +200k jobs a month to absorb new entrants into the labour force. That pace is tough to maintain over an extended period of time.....hope that helps
I'm not sure I understand, or buy the math that gets us to 135 bps too restrictive. There may have been a day, when money growth and credit demand (pulling future demand forward) was mostly a private sector function when such a rule of thumb had merit. However, today with deficits as a % of GDP huge (and growing) what used to be "restrictive" in the past probably isn't anymore. I.E. fiscal deficits have to factor in, if not, consider if the deficit was 10% or 20% of GDP and/or going up 1, 2, 5% per year. What are your thoughts?
I agree that Powell wants to get out from being "restrictive" but I also believe his bias has long been, err on the side of "not repeating the 1970s" (the fact he even compares now to the 70s is concerning) because "we have the tools to stimulate" (they don't, congress does).
End of the day, I just don't see a FFR < 3% anytime soon without a complete calamity. CRE, corporate margins, etc just can't keep extending and pretending if that's true and eventually the reckoning comes. That pressure, plus already rising UE (read downward spiraling consumer demand) seems like the exact playbook for getting a parabolic move in UE (e.g. 1980/82, 1990, 2001, 2008).
PS The lag effects are already baked in (capex projects, construction)
Leonard, I am fully on board. if you read my note, I have been talking about how once the UR starts to rise, it gains momentum and has historically moved multiple percentage points both higher and lower. https://fxpoet.substack.com/p/not-yet-sealed-the-deal. I believe we are at that point where the next many UR's that print are going to be either higher or unchanged at best. the bigger problem is that even if he cuts back to zero, that will not restart anything other than the next leg of the asset bubble. but it will take a long time to get the economy picking up again, although inflation will do so.
10 4. I'm just amazed with how many seem to think the fed up/dn on rates is a toggle switch for the economy. I mean geez, 2 years at 5% to slow things, one cut is gonna get the UE down?!
I think my question is, and would like your take, what are some possible data points, Fed talks, earnings reports, etc that really flips the script on the "crowd's" perception of the economy. Right the consensus seems to be "slowing" BUT "still good".
I think a big part of the current "still good" is that equity markets continue to rally, today excepted. the narrative is not written by the man in the street who has been suffering with an increasing cost of living for the past four years and struggling to keep up, it is written by the analysts and investors on Wall Street who are always talking their book, which means that whatever the macro condition, stocks should go higher! to me, the catalyst that would flip the script would be one of two things; a negative NFP print next month or the month after, a very clear sign of a much weaker economy which would likely see an emergency rate cut of 50bps at least, or China moves on Taiwan because Xi realizes that as long as Biden is still prez, he is completely incapable of doing anything, and even if he is gone, Harris would be less able to make a decision. but a third front in the global war, especially one that is directly attacking TSMC, the foundry for all of NVDA's chips, would freak out the tech sector. and that would see a much more negative view of everything
Yep, agree. I like how Bill Fleckenstein put it "...the stock market is now a coincident (or lagging) vs a leading indicator".
I agree on the power of the NFP signal but I don't see a negative print happening anytime soon with the birth/death adjustments so "helpful". Ditto with jobless claims, as I think there are problems there (though that does seem to be growing). That leaves the UE rate....so maybe a big jump (2 tenths or 3 tenths) or maybe a threshold (5% say). Seems plausible, and is a "very clear sign of a much weaker economy".
As I'm thinking about it, pre-reporting (or warning) from a big name (WMT, COST, Big Tech) would also be a loud bang.
I'll leave the geopolitical stuff to others and see that as a separate (but possible) hiccup.
End of the day, I think it'll take something big and loud to jolt people into worry (reality).
I agree completely. Unemployment is becoming the problem that they hadn't had to deal with during this entire process. If I'm Jay Powell, I am praying for a 0.1% core PCE, or strong-arming the BLS to print one. I'm just not convinced that is the future.
Let’s say they get a green light to cut in September (which they did today), then again in December (or hell even in November). We’re talking 0.75% and FFR down to 4.5%. After 15 years of 0%, and starting the year expecting SEVEN! rate cuts. Is this really going to get people hiring right & left?
I just have a hard time seeing the Fed stopping the UE snowball. When have they ever been able to?
We've had multi-trillion deficits, a boom in home prices, ATH stocks, and the most risk-on periods I can recall and yet UE is still going up. Again, I just don’t see the Fed being able to head this off. (Don’t get me started on how rate cuts remove income from MMF holders)
Hi Leonard, so the way I think the Fed Chairman is looking at it is that if Core Pce is going to slow to 2% in 6 months time along with Gdp growth say to 1.5-2%....that then puts Nominal Gdp growth somewhere in the neighborhood of 3.5 to 4%. If we take that Nominal Gdp growth rate now as prima face, then a 5.33% overnight rate is about 135 bps too restrictive on the "nominal growth metric" and lawmakers can make the argument that Powell is not doing his job "legally speaking".
He's a lawyer by DNA...and I think he just wants to get rates "off" being restrictive and then see how the economy and inflation respond. As far as the UE rate is concerned, it can slowly tick up because it seems the US now needs to create +200k jobs a month to absorb new entrants into the labour force. That pace is tough to maintain over an extended period of time.....hope that helps
Thanks for the response.
I'm not sure I understand, or buy the math that gets us to 135 bps too restrictive. There may have been a day, when money growth and credit demand (pulling future demand forward) was mostly a private sector function when such a rule of thumb had merit. However, today with deficits as a % of GDP huge (and growing) what used to be "restrictive" in the past probably isn't anymore. I.E. fiscal deficits have to factor in, if not, consider if the deficit was 10% or 20% of GDP and/or going up 1, 2, 5% per year. What are your thoughts?
I agree that Powell wants to get out from being "restrictive" but I also believe his bias has long been, err on the side of "not repeating the 1970s" (the fact he even compares now to the 70s is concerning) because "we have the tools to stimulate" (they don't, congress does).
End of the day, I just don't see a FFR < 3% anytime soon without a complete calamity. CRE, corporate margins, etc just can't keep extending and pretending if that's true and eventually the reckoning comes. That pressure, plus already rising UE (read downward spiraling consumer demand) seems like the exact playbook for getting a parabolic move in UE (e.g. 1980/82, 1990, 2001, 2008).
PS The lag effects are already baked in (capex projects, construction)
Thanks again!
Leonard, I am fully on board. if you read my note, I have been talking about how once the UR starts to rise, it gains momentum and has historically moved multiple percentage points both higher and lower. https://fxpoet.substack.com/p/not-yet-sealed-the-deal. I believe we are at that point where the next many UR's that print are going to be either higher or unchanged at best. the bigger problem is that even if he cuts back to zero, that will not restart anything other than the next leg of the asset bubble. but it will take a long time to get the economy picking up again, although inflation will do so.
10 4. I'm just amazed with how many seem to think the fed up/dn on rates is a toggle switch for the economy. I mean geez, 2 years at 5% to slow things, one cut is gonna get the UE down?!
I think my question is, and would like your take, what are some possible data points, Fed talks, earnings reports, etc that really flips the script on the "crowd's" perception of the economy. Right the consensus seems to be "slowing" BUT "still good".
I think a big part of the current "still good" is that equity markets continue to rally, today excepted. the narrative is not written by the man in the street who has been suffering with an increasing cost of living for the past four years and struggling to keep up, it is written by the analysts and investors on Wall Street who are always talking their book, which means that whatever the macro condition, stocks should go higher! to me, the catalyst that would flip the script would be one of two things; a negative NFP print next month or the month after, a very clear sign of a much weaker economy which would likely see an emergency rate cut of 50bps at least, or China moves on Taiwan because Xi realizes that as long as Biden is still prez, he is completely incapable of doing anything, and even if he is gone, Harris would be less able to make a decision. but a third front in the global war, especially one that is directly attacking TSMC, the foundry for all of NVDA's chips, would freak out the tech sector. and that would see a much more negative view of everything
Yep, agree. I like how Bill Fleckenstein put it "...the stock market is now a coincident (or lagging) vs a leading indicator".
I agree on the power of the NFP signal but I don't see a negative print happening anytime soon with the birth/death adjustments so "helpful". Ditto with jobless claims, as I think there are problems there (though that does seem to be growing). That leaves the UE rate....so maybe a big jump (2 tenths or 3 tenths) or maybe a threshold (5% say). Seems plausible, and is a "very clear sign of a much weaker economy".
As I'm thinking about it, pre-reporting (or warning) from a big name (WMT, COST, Big Tech) would also be a loud bang.
I'll leave the geopolitical stuff to others and see that as a separate (but possible) hiccup.
End of the day, I think it'll take something big and loud to jolt people into worry (reality).
Cheers.
I agree, nobody wants to get off the current train and they will spin everything like it's ok regardless.