75 is a done deal but a weird one.
On one hand we have negative growth and #disinflation.
On the other we have the #Fed talking as hawkish as ever with the mkt expecting it to go 75 on Wed.
What will the #Fed do, and why, in Nov and beyond?
A thread.
1/17
On one hand we have negative growth and #disinflation.
On the other we have the #Fed talking as hawkish as ever with the mkt expecting it to go 75 on Wed.
What will the #Fed do, and why, in Nov and beyond?
A thread.
1/17
Let me start by saying, regardless of the mkt expecting it, hiking 75 next week is a mistake.
Actually any hike is a mistake.
How can I say this when many have said (including the #Fed lately) that hikes need to be more aggressive in order to "kill" the #inflation?
2/17
Actually any hike is a mistake.
How can I say this when many have said (including the #Fed lately) that hikes need to be more aggressive in order to "kill" the #inflation?
2/17
Many still seem to neglect the fact that monetary policy works with a lag.
It takes time for the #Fed rate change to be absorbed through the system (transmission mechanism).
How long does it take?
Estimates range anywhere from 6M to 1.5 yrs.
#disinflation
3/17
It takes time for the #Fed rate change to be absorbed through the system (transmission mechanism).
How long does it take?
Estimates range anywhere from 6M to 1.5 yrs.
#disinflation
3/17
So far the #Fed raised FFR 4 times:
25 in Mar
50 in May
75 in Jun
75 in Jul
Even if we assume the lower end of the lag estimate, this means we haven't yet seen the impact of the 1st rate hike of 25 in Mar, let alone larger ones that followed!
#disinflation #recession
4/17
25 in Mar
50 in May
75 in Jun
75 in Jul
Even if we assume the lower end of the lag estimate, this means we haven't yet seen the impact of the 1st rate hike of 25 in Mar, let alone larger ones that followed!
#disinflation #recession
4/17
Still the lag of the MP seems to be longer than 6M, probably 1Y and possibly even longer meaning we have yet to see the economic impact of the already huge 2.25 pp hike.
In the mean time #inflation has come down from its peak in mid-June.
#disinflation #recession
5/17
In the mean time #inflation has come down from its peak in mid-June.
#disinflation #recession
5/17
How can #inflation fall when the #Fed's actions haven't even started to take any meaningful effect yet?
Although many think more hikes would kill #inflation, it actually doesn't work.
I’ve repeatedly said drivers of this #inflation are largely out of the #Fed's control.
6/17
Although many think more hikes would kill #inflation, it actually doesn't work.
I’ve repeatedly said drivers of this #inflation are largely out of the #Fed's control.
6/17
Energy/food and supply disruptions make about 75% (I would argue even more) of the #CPI according to Allianz Research .
30% is demand driven with MP already impacting 4% of #CPI meaning it only has room to impact another 26%.
7/17
30% is demand driven with MP already impacting 4% of #CPI meaning it only has room to impact another 26%.
https://twitter.com/MBjegovic/status/1567186870164914179?s=20&t=AFLWqyl_TPCjMrKjtDgBTg
7/17
Given the time lag, we are yet to see how much of the #CPI have the #Fed's hikes impacted.
It is likely they impacted the whole remaining 26% by now and probably even exceeded it.
If demand part is even less, then the #Fed has already done a great economic damage.
8/17
It is likely they impacted the whole remaining 26% by now and probably even exceeded it.
If demand part is even less, then the #Fed has already done a great economic damage.
8/17
By hiking the #Fed tightens financial conditions increasing chances of a slowdown.
In 2022, even before the hikes, the #economy started to shrink in Q1 and continued its negative trend with new hikes in Q2.
Hence #economy corrected itself without the #Fed.
9/17
In 2022, even before the hikes, the #economy started to shrink in Q1 and continued its negative trend with new hikes in Q2.
Hence #economy corrected itself without the #Fed.
9/17
The #Fed was late to the party by not starting to address the #inflation in Mar or Apr last year.
Similar like it is now still talking about hiking rates when #inflation is coming down.
Why did the #Fed hike at all if its impact on #inflation is limited?
10/17
Similar like it is now still talking about hiking rates when #inflation is coming down.
Why did the #Fed hike at all if its impact on #inflation is limited?
10/17
The #Fed cannot allow for LT #inflation expectations to become unanchored like it happened in the 1970s.
But now situation is completely different.
For more on the current #inflation expectations head here:
11/17
But now situation is completely different.
For more on the current #inflation expectations head here:
https://twitter.com/MBjegovic/status/1570806536477507584?s=20&t=LoSwgV3yL4pYv163BmSSEctUvurMCcZ1xYASujcRVoo
11/17
With #disinflation across the board it's just a matter of time (month) before it gets reflected in the #CPI.
#PCE (the #Fed's preferred #inflation measure) will likely reflect it faster.
For more on the #CPI head here:
12/17
#PCE (the #Fed's preferred #inflation measure) will likely reflect it faster.
For more on the #CPI head here:
https://twitter.com/MBjegovic/status/1569767534265507840?s=20&t=kok9BNlryLU3C2vKrxjbcA
12/17
(core) #PCE is less rent dependent and less volatile than the (core) #CPI.
With #disinflation in place we have likely seen the peak hawkishness by the #Fed.
The #Fed might be more dovish Wed by signaling smaller hikes into the year end.
13/17
With #disinflation in place we have likely seen the peak hawkishness by the #Fed.
The #Fed might be more dovish Wed by signaling smaller hikes into the year end.
13/17
As repeatedly said, Powell seems to lean dovish each time there are Q&As as opposed to just reading a prepared (hawkish) statement.
They will probably reiterate their data dependency.
So everything depends on the #CPI and #PCE.
14/17
They will probably reiterate their data dependency.
So everything depends on the #CPI and #PCE.
14/17
What will they do in Nov is a coin toss:
1) on one hand there are midterms meaning they will support the current administration, and
2) on the other #CPI still might not fall enough for them to be "sure" to pause.
There is still one thing that may help them decide...
15/17
1) on one hand there are midterms meaning they will support the current administration, and
2) on the other #CPI still might not fall enough for them to be "sure" to pause.
There is still one thing that may help them decide...
15/17
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If you like the content, please retweet to help me spread the message.
16/17
If you like the content, please retweet to help me spread the message.
16/17
If Q3 GDP is negative, NBER would need to officially declare a #recession prompting the #Fed to pause.
NBER likely won't announce it before the midterms.
Current #inflation trajectory suggests the #Fed will not be able to hike past Nov and may even need to cut in Dec/Jan
17/17
NBER likely won't announce it before the midterms.
Current #inflation trajectory suggests the #Fed will not be able to hike past Nov and may even need to cut in Dec/Jan
17/17
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