Note to Fed, for the Sake of Market Stability, Let Alone Actually Taming Inflation, Please Stop Signaling Self-Congratulatory Rate Cuts and Triggering Stock Market Bonanzas
And Look Forward to a Truss-Like Bond Sell-Off
Good morning neoliberals.
Sorry I haven’t posted a thing in around two weeks. Much has happened that you may have appreciated my impassioned commentary on— Biden’s obscene “red line” against Israel invading Rafa, that abhorrent abstention at the UN, and these asinine calls for early elections to overthrow Netanyahu. Be assured I’m pulling my hair out too.
But as far as writing about it, I was overcome with inertia as usual. I have no excuse, because I have no life really. And my leisurely impulses got the best of me, to be blunt. Speaking of ennui and on the subject of anxious lassitude, Happy Easter! by the way.
I hope it wasn’t dreadfully boring, to endure the company of unsophisticated and shallow family members with whom you can’t discuss anything deep or serious, having to laugh at low-witted and corny jokes that aren’t funny, and being painfully unable to check your phone to read the Wall Street Journal or the Sunday Times and just waiting for the soonest opportunity to get the fuck out of there so you can repair to the company of good books or even the sensational columns in the Free Press or Unherd that I find can go well with a couple drinks in your system. — I hate holidays, and you know I don’t believe in any higher power whatsoever. But permit me the civility in these profoundly uncivil times to recite that hollow courtesy, because it’s the civilizational glue that holds us together. And decidedly not to reciprocate that awful deliberately neutral, so feelings-conscious PC euphemism, I hope you had a “nice holiday.”
In my next “Dispatches from the Contemplative Life” column as a matter of fact, I think I might mention my increasing awareness of the import of some kind of national culture regarding our Christian moral foundation, despite what I consider to be the malignant conformist mindlessness of the self-abnegating, misguided communitarian altruism at the heart of all religions, which is fundamentally corrosive to the flourishing of higher individuals and Emersonian oversouls that I think only the Greeks and Romans properly celebrated in the war-like, aristocratic, pre-Christian classical cultures whose ethics I prefer and would be at great length to assert we can still learn from. For my Jewish readers, I hope you’ve had a good Porim. And my deepest sympathy for Biden’s flagrant moral ambiguity on the matter of Israel’s existential survival as a sovereign state.
Here is a little opinion on the uncertain state of the American economy, interest rate policy, and the trajectory of inflation although it is absolutely not my favorite subject. In the spirit of banal holidays, take it as my inelegant and graceless way of saying hey… and thus reestablishing our rapport.
I. Background
Overall I have been impressed with the Fed’s determination not to cut rates before inflation is reduced to two percent and, namely (if you take Jerome Powell at his word) the labor market cracks.
However after the message the other week, neoliberal inflation hawks and pessimists like us would be advised to take heed: the Fed is concealing how little it is really doing behind a convincing mask of steely determination. Note that the last several Fed meetings have gone the same way, rates stay elevated after expected cuts but Fed officials signal cuts are on the way. And markets react exuberantly in the expectation that the Fed actually expects to deliver rate cuts sooner than it says; they just don’t want to lather anyone up.
II. How I lost Faith in the Fed
The problem is they are. It is the natural subtext of every meeting that the Fed is about to go soft, or rather is soft. And the takeaway for us is that the Fed is unwittingly manufacturing headwinds to taming inflation by sending the wrong message to zealous stock investors, fueling an unsustainable and inflationary growth rate.
Though to be sure inflation has dissipated on the Fed’s watch, at this point we can be forgiven for assuming inflation’s steady decline recently owes itself to the Fed’s consistent postponement of rate cuts. At this point maybe we can even disabuse ourselves of the illusion that it is due to the Fed’s unprecedentedly tight policy alone that inflation has been decreasing all along.
For the Fed’s elevated rates are prolonging inflation as much as they would appear to be depressing it. If the last price report showing that inflation increased in February says nothing else, it’s that the Fed still has work to do—with core inflation ticking upwards from 3 to 3.5 percent—and rate cuts are such a long way off we may as well stop discussing the prospect. Moreover it helped no one the other week when the Fed signaled that rate cuts could still be coming in 2024.
For how long are we expected to believe this? Wasn’t it in the fall that Powell said we would have cuts in the spring, and wasn’t it during the winter that he said we could have cuts by June? Should we really expect cuts by 2024 and let him fool us again as inflation stays stubbornly elevated? Maybe he should stop pontificating about rate cuts that recede ever further into being an abstract metaphor for an irresolute central bank and the overzealous financial optimism that it can’t help exciting.
III. What’s Suspending Inflation?
If inflation is decreasing despite a growing economy with unemployment at historically low levels, it has largely to do with the post-Covid expansion in the money supply coinciding with the natural lessening of consumer demand as people inevitably deplete their Covid savings and supply chains straighten themselves out. If the labor market is still extremely tight and demand though it remains on a downward trajectory is still high, it’s likely not because the Fed jacked up rates. But the Biden administration has showered billions in subsidies on the economy while workers are extracting comfortable wage gains in a tight labor market amid fat corporate profit margins. Is a soft landing inevitable, i.e. the Fed is going to pilot inflation to 2% like landing a plane in this tempest of free money?
No.
And signaling that cuts are more or less imminent while maintaining relatively high rates is just going to suspend inflation by fueling the growth that contributes to sustain it. America’s strange economic growth, the direct consequence of unwarrantedly expansionary fiscal policy since the pandemic, insofar as its widening deficits to record levels, is going to keep inflation elevated by necessity.
The Fed is raising rates higher than it has in 40 years; however, thanks to Biden, it’s also dealing with the largest peacetime deficits ever and perhaps even serious supply shocks on account of the increasingly unstable global economy in a geopolitical environment that gets more uncertain almost by the day. So there is little that the Fed can do in these circumstances besides maintaining its historically high rates. Let alone cutting them anytime soon before the unhinged government spending and these mammoth peacetime deficits are brought under control.
IV. Zero Interest Rates is Over
I’m not a monetary policy expert, and I don’t know what the Fed’s policy should be. I’m just an uncredentialed callow young generalist with hubristically strong convictions basically no job experience and only a BA in English to my name, but from what I can observe lately the Fed has no good options. And we’re not going to have a soft landing like the economy is a plane the central bank touches down on a runway, not with Biden’s dissolute climate fanatics in air traffic control. And the least we definitely can say is that the era of easy money and zero interest rates is over. It is dead. Monetary caution defines these times of big government, bigger deficits and geopolitical uncertainty. Or it ought to. You can’t drop money from helicopters on “left behind” places and car companies any less than land the economy like a plane and expect record growth, extremely low unemployment, and disinflation all at the same time.
All I wanted to say with this blog post is that if the Fed really hopes at least to keep inflation from inching or leaping back up, though, without hiking rates again or changing the benchmark interest rate, it could at least send a less rosy message to Wall Street.
— Jay