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Near Term Market View (Sep to EOTY FY22)
- Thread starter longandshort
- Start date
So you think in two years there’s high chance for headline cpi will be between 2-6%. Fed funds rate this year will go from zero to 4% by end of the year. Unless you think average gdp growth is 3%+ for the next few years, the Fed funds rate is restrictive at the 2.5%+ range (Fed funds > real gdp growth potential). So if the Fed keeps short term rates above 4% through 2023, then that will shave off about 1.5% of gdp, which will raise the unemployment rate. This assumes that the economy isn’t already slowing down (hint: some parts, like housing and goods mfg already are).I assume you ask in 2 years not within? I meant within, but if I had to guess what it's like in 2 years...
8%
16%
35%
25%
15%
1%
In short, 4% Fed funds rate seems sufficient to drive cpi lower. What rate do you think Fed funds needs to be?
Fiscal impulse is low given how tight the balance of power in congress is (and will be even more tight post-mid terms). While fiscal policy did spur inflation, that was its purpose. Did the gov give money to people not for them to spend it? What do you think the appetite for a new massive spending bill is over the next 12-24 months given the 1) rhetoric around inflation and 2) house shift from lean left to lean right?I notice one thing missing from your assessment and the presumed "causes".
Fiscal policy. The Fed controls monetary policy. Congress and the President control fiscal policy.
It's like everyone is sitting in traffic and there's a tree across the road. Your analysis is that no one can pass because the tree is too large and heavy to be moved and it's blocking everything. What caused this? The tree falling. Except one thing...you aren't mentioning that if you walk over into the woods you will see that someone cut the tree down which caused it to fall across the road.
The Fed can do lots of stuff but they are largely reacting to trees in the road. If the fiscal policy people decide to put another trillion into the hands of the favored voters at the moment, then the Fed has another large tree to deal with. The people working to clear the trees need some help from the people putting them there in the first place.
Dunno how useful drawing trend lines are, but I would compare how far down HMI went down in other examples of Fed Funds reaching 4% or speedy hikes. Based on my analysis, HMI has a lot of room to go lower but should see the bottom around late nov - Dec.A toll booth, they have them still - and manned no less?
Meanwhile the Wells Fargo Housing Market Index (i.e. builders confidence monthly readings, above 50 positive, below nah) are signaling much more downside to go. Which trendline, if either, will it reach?
View attachment 294768
Fiscal impulse is low given how tight the balance of power in congress is (and will be even more tight post-mid terms). While fiscal policy did spur inflation, that was its purpose. Did the gov give money to people not for them to spend it? What do you think the appetite for a new massive spending bill is over the next 12-24 months given the 1) rhetoric around inflation and 2) house shift from lean left to lean right?
That balance of power in Congress has been tight while trillions have flowed out. I firmly believe that if we were not facing midterms and they thought they had the votes, you would see further large spending bills. If you have different parties controlling the House/Senate/WH, then you typically have gridlock or some decent compromises. That all presumes that our government continues to follow the law that any spending bill must initiate in the House. Many laws have been considered optional in the last few years in DC, so who knows.
I personally know a good number of business owners that were both shocked by the number and amount of PPP loans handed out. Lots of companies received funds based on payroll formulas and not actual need. They were even more shocked when the loans were completely forgiven a year later. One owner actually said to me "Biden is sending me more PPP money based on my previous application. I haven't found a way to spend the giant pile from last time and now I'm getting more". Both loans were forgiven summarily without request - he intended to pay them back and could have. Beach houses and new cars were then purchased along with lavish vacations. Sure... you could say "send it back if you don't need it" but the gov't literally gave out billions and walked away.
I'm not saying these business owners were right or wrong - but the economic impact of this has been massive, undeniable and lingers today.
I do believe they will be forced to raise above 5%, and that only in the event of the most positive scenario. It's the prolonged high inflation that I think will occur and that will force the Feds hands.
So you think in two years there’s high chance for headline cpi will be between 2-6%. Fed funds rate this year will go from zero to 4% by end of the year. Unless you think average gdp growth is 3%+ for the next few years, the Fed funds rate is restrictive at the 2.5%+ range (Fed funds > real gdp growth potential). So if the Fed keeps short term rates above 4% through 2023, then that will shave off about 1.5% of gdp, which will raise the unemployment rate. This assumes that the economy isn’t already slowing down (hint: some parts, like housing and goods mfg already are).
In short, 4% Fed funds rate seems sufficient to drive cpi lower. What rate do you think Fed funds needs to be?
I don't believe Fed can contain inflation by raising rate alone. They can't raise rate too high, due to the massive debt owned by US government. QE since 2020 added $5T, a quarter of GDP, to the economy. Inflation can't come down unless that money is drained out.
https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
what's the basis for that view? Do you think inflation is driven by fed balance sheet and not supply/demand shocks?I don't believe Fed can contain inflation by raising rate alone. They can't raise rate too high, due to the massive debt owned by US government. QE since 2020 added $5T, a quarter of GDP, to the economy. Inflation can't come down unless that money is drained out.
https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
Long term debt is priced at the prevailing rate and locked in. 30 year for instance is locked in for 30 years naturally.I don't believe Fed can contain inflation by raising rate alone. They can't raise rate too high, due to the massive debt owned by US government. QE since 2020 added $5T, a quarter of GDP, to the economy. Inflation can't come down unless that money is drained out.
https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
So rising rates only effect new debt that is financed.