I have been waiting for the past 3 plus months to see what, if anything, would happen to the economy, inflation, Fed policy and life in general. So as to not keep you in undo suspense, life in general is pretty good and you should think so too. In regard to the other items listed, well... let’s just say life is unsettled and somewhat predictable at the same time. Looking at the drawing at the left, I think we are in a similar type of stalemate with little movement but lots of energy being expended.
There
has been some discussion about basic economic indicators being outdated
(Reuters article, March 12, 2024, see below). One of the classic leading economic
indicators, has always been an inverted yield curve which is predictive of a coming recession, is
thought by some to have become unreliable. They are suggesting that since the
yield curve has been continuously inverted for 2 years now a recession should
have happened. However, there have been external forces that have played havoc
with the basic economic conditions including a Fed policy that some say is
distorting the entire economic landscape. Since the 2007-2008 great recession
Fed policy has been almost continuous stimulation of the economy through
aggressive use of the Federal balance sheet (expanding money supply). Many
argue that this tremendous infusion of money has distorted many economic
indicators and caused many traditional relationships to be broken or grossly
strained. The Fed has been reducing its balance sheet holdings for many months
but the government has been spending and requiring additional funding for
various programs and regulations. The overall balance sheet is sort of being
reduced but only sort of. This may account for some of the limbo that rates
seem to be in and the uncertainty we see and feel in the economy. It’s like
stomping on the gas and mashing the brakes at the same time. The engine of the
economy is racing and roaring but are we
slowing down or going faster? It’s hard to tell. In our current case it seems
we still have some little forward movement. We are playing a different economic
game and we don’t really know the modified rules or the scoring. Does that convey
enough uncertainty because that is really what the Fed officials, governmental
leaders, talking heads and economic news forecasters are suffering, gross uncertainly.
And this uncertainty is lasting a long, long time from an economic standpoint.
Back to the original question. Has the inverted yield curve failed as a
predictive economic tool? Maybe, and maybe not. The underlying assumptions have
been modified by Fed actions and governmental spending activities and we don’t
know enough to understand the full consequences or implications.
The
second article (Reuters, April 29, 2024) suggests that “inflation and the labor
market remain resilient. …Inflation remains stubborn despite slowing late last
year after 15 months of aggressive rate hikes that the Fed halted in July. Data
on Thursday [April 25th] showed that core U.S. personal consumption
expenditures inflation rose 3.7% in the first quarter, after growing
2% in the fourth.”
Central banks are
suggesting in their comments that they hope to cut rates, relatively soon.
However, the data doesn’t support this type of action, not if central banks
want to reduce inflation. They are faced with a dual problem of strong economic
growth and persistent inflation. The fix for this is higher interest rates, not
lower rates as suggested by various central bankers. Talk of lower rates may
stimulate market participants to be more bullish with the aim to increase
growth in the stock market. I suspect the idea is to make current governments
“look good” before elections. Pres. Biden has been saying the common man is
doing so very well with the strong economic growth and high employment. The
problem is that we have had very high inflation which has destroyed the real
purchasing power of money. Yes, we are producing more but the cost to purchase
is so very much higher. People are employed but they aren’t earning enough to
afford the higher prices of things. So, yes, we are in a strong economic situation
and we can’t afford it. But then you already knew that.
The
3rd Reuters article of May 8th is interesting in a
negative sort of way. Quoting from the article,
What she said was the Fed doesn’t believe it has reached a point that inflation will return to the benchmark 2% target on its own. The economy is too hot. Quoting from the article again,
Welcome
to Fed speak. Let me see if I can dissect this a bit. Collins is trying to
avoid the comment that she doesn’t think the current Fed Funds rates will be
sufficient to bring down inflation any time soon, which is what people want, a
quicker solution. We have had almost 2 years of trying to get down to 2%
inflation and she isn’t confident they can do it soon. She says not to worry,
that the Fed is watching but that “getting inflation to 2% “will take more time
than previously thought,” with Collins noting “there is no pre-set path for
policy – it requires decisions based on a methodical, holistic assessment of
wide-ranging information.” That means they (the Fed) believe they can do it but
that current activities may not be enough based on information that they
currently don’t have but are willing to consider when they do have the
information they currently don’t have. But what that information may be that
they currently don’t have is uncertain at best. Makes perfect sense in a
non-sensical sort of way, … don’t you think. So Collins is saying don’t worry,
we know inflation is high and we are trying to get it down to 2% but we aren’t
certain that current policies will accomplish that goal. We certainly aren’t
certain how long it will take once we are more certain. If we were more certain
we certainly would have a certain answer for you, but we certainly don’t at
this time. I’m pretty certain that is certainly what she is trying to convey,
certainly.
We can worry
about the certainty or uncertainty of governmental leaders, Fed officials,
financial commentators and the general economy but that isn’t what is
important. I keep coming back to this theme again and again because it is
important and if you will allow the use of an over used word, certain. We are
certain about our relationships with family and friends and that we need to strengthen
and improve such things. We are certain we live in a good land and can enjoy
the beauties around us. We are certain that there is a God and he is aware. And
we are certain that there are people who care and are interested in us and how
we are doing. That is what is really important. We will survive this economic
situation and why would we want to spend our time worrying about something when
we can be improving ourselves and those around us and enjoy the beauties of a
new spring and summer before us. About that I am absolutely and completely
certain.
REUTERS, March 12, 2024, Inverted
yield curve no longer reliable recession flag, strategists say,
REUTERS, April 29, 2024, Inflation-wary
US rate options market cautiously prices for 2024 Fed hike,
REUTERS, May 8,2024, Fed's Collins says economy may need
to weaken to get 2% inflation, https://www.reuters.com/markets/us/feds-collins-says-economy-may-need-weaken-get-2-inflation-2024-05-08/
REUTERS, February 21, 2024, Fed worried about cutting
rates too soon, minutes of January meeting show, https://www.reuters.com/markets/us/fed-concerned-about-cutting-rates-too-soon-minutes-january-meeting-show-2024-02-21/
