Thread by @tomashirstecon

The US fiscal stance is potentially necessary but by itself insufficient as an explanation for persistent econ resilience. Apparent inconsistency between the credit cycle and business cycle is a multi-causal phenomenon worthy of more nuanced commentary

Pandemic transfers buffered balance sheets of some of the most vulnerable households as hike cycle started because they had just paid down a load of revolving debt. And consumption implications are different in curtailed leverage vs disorderly deleveraging cycles.

Mortgage refi story well covered, but in effect whole swathe of middle/upper income brackets knocked out interest costs at cycle lows and now sitting pretty on the result. Corps in aggregate did something similar - though w/shorter lock-ups.

Cumulative revenue growth over the past three years have largely swamped increases in debt service costs - blunting corp delevering impulse - even if rate of change has now shifting in the other direction.

Increasingly of the view that consumer credit is largely a coincident indicator of household balance sheet health rather than a leading indicator. Has provided a lot of false signals in this cycle as default rates “normalized”.

The question that’s on my mind now is how slow (in NGDP terms) can the economy run to keep the current constellation of data (strong labor market; cooling inflation; benign financial conditions) going? And where’s the upper limit for the Fed?

For ~5.3% rates to sustain you’re going to need a nominal growth rate in excess of 6%. And even if we’re generous on the productivity side, hard to see a number like that being consistent with anywhere near 2% inflation. But ~3.5% short rate and 5% NGDP? Seems plausible…

Or, phrased differently, it’s hard to see how short rates could shift *below* ~3.5% on a world where NGDP hasn’t slowed to closer to ~4% YoY on a sustained basis.

But the above maths also suggests bar for hikes here is (justifiably in my view) being set very high by the FOMC. It’s not just a real rates logic, it’s an aggregate leverage incentive logic. That may shift over time depending on growth dynamic but holds true for now at least.

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