Second, while of course it's true that nobody knows whether Fed moves so-far are to the left or right of Goldilocks or are sitting on her lap, and also true that the Fed will have to "pause" at some point, it's fair to ask whether the Fed would be prudent to believe that a still-negative real policy rate is likely at all to be sufficient to stop core inflation that, if not still accelerating, is spreading to more and more sectors.
The argument that the Fed should pause now seems to be based on an unstated assumption that 250 basis points is a bigger number in the 2022 economy than the historical graph of policy rates would suggest. This might be true. The NAR "housing affordability" index (or at least my spreadsheet recreation of it) has dropped to lows not seen since the late 1980s, when mortgage rates were substantially higher than they are today. So if we take the view that years of low interest rates have created asset bubbles, then 250 bps might be "destabilizing" (I hate that word).
But, since stock and housing prices do not add up to "the economy", a recommendation to "pause now" is akin to saying that it's enough for the Fed to burst asset bubbles, that these explosions will be powerful in their own right. Roger Farmer might make that kind of case, and, again, it might be correct.
Still, in light of history, 250 bps seem like David against core inflation's 600 bp Goliath. History (or myth) has recoded the time that David won. But is that the usual outcome?
Core PCE hangs out only 300 basis points above its target—and if you think that inflation wil be elevated for only 3 years, that is only 90 basis points for the lifespan of the ten-year… It is a substantial tightening, and we really do not know how much of a tightening is desirable...
Correct, we do not know. But if we don't know the bond market doesn't either. We can scry what the 10-year or the 5/5 "say" about long-term expectations, but all these yields can really express is confidence (or lack thereof) that the Fed will do its job. I think it's a stretch to say these yields are "telling" the Fed to pause now.
But it all comes down to how big your "substantial" really is - and what the channels of its operation are. Despite the Tableau Keynique, given the state of macro in 2022, we don't know these things.
I really wish the Treasury would let the markets tell us what the 1, 2, 3, and 7 year TIPS expectations are and even more (?) 1,2,3,5,7,and 10 year NGDP expectations. Wouldn't a zero rate security indexed to NGDP do that?
Doesn't the Fed' announcing the value of its policy instruments in advance mess up being seen as fully data determined?
First, love the "Tableau Keynique"!
Second, while of course it's true that nobody knows whether Fed moves so-far are to the left or right of Goldilocks or are sitting on her lap, and also true that the Fed will have to "pause" at some point, it's fair to ask whether the Fed would be prudent to believe that a still-negative real policy rate is likely at all to be sufficient to stop core inflation that, if not still accelerating, is spreading to more and more sectors.
The argument that the Fed should pause now seems to be based on an unstated assumption that 250 basis points is a bigger number in the 2022 economy than the historical graph of policy rates would suggest. This might be true. The NAR "housing affordability" index (or at least my spreadsheet recreation of it) has dropped to lows not seen since the late 1980s, when mortgage rates were substantially higher than they are today. So if we take the view that years of low interest rates have created asset bubbles, then 250 bps might be "destabilizing" (I hate that word).
But, since stock and housing prices do not add up to "the economy", a recommendation to "pause now" is akin to saying that it's enough for the Fed to burst asset bubbles, that these explosions will be powerful in their own right. Roger Farmer might make that kind of case, and, again, it might be correct.
Still, in light of history, 250 bps seem like David against core inflation's 600 bp Goliath. History (or myth) has recoded the time that David won. But is that the usual outcome?
Core PCE hangs out only 300 basis points above its target—and if you think that inflation wil be elevated for only 3 years, that is only 90 basis points for the lifespan of the ten-year… It is a substantial tightening, and we really do not know how much of a tightening is desirable...
Correct, we do not know. But if we don't know the bond market doesn't either. We can scry what the 10-year or the 5/5 "say" about long-term expectations, but all these yields can really express is confidence (or lack thereof) that the Fed will do its job. I think it's a stretch to say these yields are "telling" the Fed to pause now.
But it all comes down to how big your "substantial" really is - and what the channels of its operation are. Despite the Tableau Keynique, given the state of macro in 2022, we don't know these things.
(Thx for the prod to mull this stuff.)
Yes. And confidence that the Fed will do its job already gets the Fed 90% of the way through the job it has to do...
I really wish the Treasury would let the markets tell us what the 1, 2, 3, and 7 year TIPS expectations are and even more (?) 1,2,3,5,7,and 10 year NGDP expectations. Wouldn't a zero rate security indexed to NGDP do that?
Doesn't the Fed' announcing the value of its policy instruments in advance mess up being seen as fully data determined?
Yep!
I've asked Matt Yglesias to explain the politic economy of the non existence of these markets, so maybe we will soon know :)