Welp, the Fed has changed its mind:
Fed staff projected that the economy would enter a "mild recession" later this year....That's a shift from recent months, where staff just expected slower growth and "some softening" in the labor market — conditions that would allow the economy to dodge a recession.
They've finally put the whole delusion of a "soft landing" behind them. Give it another couple of months and maybe they'll admit that "mild recession" is just wishful thinking too. I wonder if that will finally be enough to get them to quit raising rates?
As for me, I continue to believe in what used to be conventional wisdom:
- The Fed started tightening in May 2022, when it first announced an interest hike bigger than a quarter point.
- The steep increases since then have not yet had a significant effect.
- The best evidence suggests it takes about a year for interest rate increases to hit the broader economy.
- This means we should expect the economy to run into a pretty big headwind in a couple of months.
I hope I'm wrong. But this sure seems like the way things have worked in the past, and I can't think of any reason this time will be different. We had a non-monetary bout of inflation that would have mostly gone away on its own, but the Fed treated it like a normal bout of monetary inflation. We are about to pay the price for this mistake.
You say “mistake” but the ownership class wants to put labor in its place, they want their recession and by god the Fed is gonna give them their recession.
Agree.
Double agree. This didn't happen in vacuum, this is trained, taught behavior.
Google paid 99 dollars an hour on the internet. Everything I did was basic Οnline w0rk from comfort at hΟme for 5-7 hours per day that I g0t from this office I f0und over the web and they paid me 100 dollars each hour. For more details
visit this article... https://createmaxwealth.blogspot.com
Was it a mistake or is there method to it? The recession will hit just at the right time for the GOP to win the 2024 election (assuming it is big enough).
This so much reminds of what I've read about the problem airplane pilots have when they try to pilot a dirigible. A plane reponds quickly, a dirigible after a delay. So if the diribible nose drops, the airplane pilot will pull up. Nothing will happen immediately, so he pulls up more. Still nothing, so he pulls up more and.. there it goes. And it goes up ... and keeps going up. So the airplane pilot pushes to get the nose down, but it's still going up (the delayed response). He pushes more. Still going up, but slower. Even more.... and it starts going down, farther and farther... etc. The dirigible keeps oscillating until the airplane pilot learns to recognize the delay and not keep correcting after he's done enough. The Fed is flying an economics dirigible as though it were a plane.
A good analogy.
I might suggest the tendency for many Americans to display their obvious ADD symptoms along with our "media" attempts to "win" by being first then moving on plays a big role in what happens.
That is why you teach pilots the engineering field of control theory. (the field also explains why driving backwards is both hard and uncomfortable.)
“I can't think of any reason this time will be different.”
Lol.
You didn't mention why they changed their minds.
In your economic prognostication, you didn't know about this potential black swan, therefore, you cannot state, "I continue to believe in what used to be conventional wisdom".
This is like predicting Team A would win the game because they're the more talented team, then proclaiming your powers of prognostication, despite by happenstance, Team B's two most important players fall gravely ill just before the game. You always knew something like this would happen, amirite?
Then there's your shifting window.
Is this the correct prediction, or was it the one you made last November?
Fast-forward several months and your own charts keep showing us that inflation is coming down and so has the unemployment rate, which again extends this period of a vertical Beveridge Curve and Phillips Curve. How can this be so?
I suggest -- yet again -- that you should not assume that this time is the same.
The Feds were aware of the problem with banks holding long term t-bills for a while, so the banking "crisis" should not be much of a surprise to them. As for the credit crunch--that's what raising rates is supposed to do. The only reason for blaming the upcoming recession on the banking crisis is to deflect blame away from Fed policies.
The main black swan events, outside of Covid, were Russia invading Ukraine and the bird flu pandemic. And that's on top of the mega drought in the western US--which has recently eased.
A credit crunch is when a bank pulls back lending to conserve cash.
A rise in interest rates does not create a credit crunch; it lowers demand for loans.
The credit crisis was literally caused by the increase in interest rates and was hardly a "black swan" event.
You're wrong on two points.
1. It was the misallocation of assets, by chasing profits, that caused SVB to "fail".
2. I said "potential black swan", meaning, the Fed (and others) acted swiftly to stop the contagion and appears to have avoided a true banking crisis.
A reduction in lending was one of the mechanisms by which higher interest rates reduce inflation. This wasnt a bkack swan event, this was an explicit part of the plan. The exact path and speed by which credit would be reduced is hard to predict, but its by no means unexpected.
Had anyone really seen this coming? No. If they had, the Feds would have acted long before SVB's bank run.
Even while the Fed saw issues with SVB's asset allocations, they did not act as though they saw a potential black swan coming.
This is a good response, D_Ohrk_E1. I guess you're not convinced that the moneyed class knew that Silicon Valley Bank was going to collapse, and that that was their plan all along. You probably noticed that a whole lot of people with a whole lot of money kept it on deposit at SVB, and a whole lot of people with a whole lot of money kept it invested in shares of SIVB, until they lost a whole lot of money. Because that's what they expected all along? That's one nutty conspiracy they got going there.
The Fed was totally justified. Workers were quitting their horrible jobs, not returning immediately after being laid off from their jobs, and demanding more, even living, wages. They had to be disciplined, even at the risk of some banks being bailed out. Our economy cannot survive an uppity 99%.
I hear stories that bosses have to sleep on the couch at work to keep their companies afloat while workers complain about being laid off. It's soo hard being in the top 0.001%.
It's all going according to plan. Trump 2.0, here we come.
Right, because the half of the Fed board of governors are not true Democrats but MAGAts in disguise...
The fed is controlled entirely by Trump appointees.
"I hope I'm wrong."
Given how often (and how enthusiastically) you pound the "a recession is coming, tra la la la" story, I seriously doubt that, Kevin.
He is advocating for policy changes that would reduce the liklihood of a recession.
What mistake? Why is "mistake" the logical explanation, rather than "the Fed decided it would like a recession and is taking steps to engineer it and is simply lying about it."
You keep saying that the conventional wisdom is that the steep increases since May 2022 haven't had any effect, but:
1) IS that the conventional wisdom, or just a notion you won't let go of? WHAT is the "best evidence"?
and
2) The idea that rates don't impact anything for months and months is completely wrong. Interest rates have a relatively immediate (within a month or two) as well as a long-term cumulative impact on the economy, to say nothing of the expectations-setting role that they play that begin the instant the new rates are rumored (let alone announced).
The Fed failed to reverse inflation in the 70's despite raising interest rates for years, not months. Compare federal funds with inflation at FRED. This is absolutely unequivocal.
It's almost like the Fed's prime rate isn't actually an inflation up/down button, and that the contributing factors are a lot more complicated.
That also doesn't mean that the Fed hasn't been boneheaded.
You ask for evidence of conventional wisdom, but provide zero evidence for your opinion on the immediate impact of rate changes. Thats odd, right?
Your opinion may be correct, but it is certainly an unusual opinion and one that doesnt have a lot of evidence (that i am aware of) to back it up .
It's not odd when I've given that evidence before. The easiest one to immediately cite is consumer spending (borrowing) tools with variable rates. Credit cards are the big one, but also outstanding loans with variable rates. The Fed's rate adjustments hit those very quickly.
Geez.
Meanwhile, the argument that rate increases take a long time to "have any effect" is conventional wisdom may be true, but that doesn't mean the conventional wisdom is correct. It's an opinion bubble to some extent. It IS true that it takes a while (a long, long while) for rate increases to FULLY percolate through the economy, but Kevin keeps writing about how they haven't had any (or any major) effect yet, which is obnoxiously false.
While I do think the Fed panicked, there are huge infrastructure and other programs coming into play later this year. Stimulus is coming. Many projects will leave the design/permit phase and start actually building. So I’m not convinced that the Fed is right. Just like I suspect inflation will be 4% or less this year, I suspect unemployment will remain low. I can’t predict the future, but I think my statements are defendable.
Inflation has been less than 4% since the end of last june.
What is a "normal bout of inflation" and when has the Fed ever prevented such bouts, let alone without causing a recession? Inflation reached 14% in 1980 despite the Fed having raised federal funds continuously for years. The idea that the Fed controls inflation is just a fantasy - a kind of mass delusion.
The Fed's purpose must be understood. It is clear, if secret. They are trying to create a labor surplus: nothing less, nothing more, nothing different. They have done it in the past, and they remember how. But they are radically unaware that today's conditions are different and without historical parallel, and that the methods that worked before, applied today, will cause unprecedented harm, without achieving the goal of a labor surplus -- at least until the entire economy has, for any practical purpose, been destroyed. But there is no one, and no institution, that can restrain them, persuade them, or punish them.
It used to be conventional wisdom that everyone in the business world hangs on every pronouncement by the chairman of the Federal Reserve board, and that they make financial moves in response well before the Fed actually takes the forecasted actions. The rate hikes of 2022 were already outlined in December 2021, and have had plenty of time to start curbing inflation.
It's almost like 60% of inflation can be contributed to price gouging, or something.
https://www.businessinsider.com/how-measure-inflation-raise-prices-corporate-profits-supply-chain-2022-2
Will it cost Biden 2024?
"The steep increases since then have not yet had a significant effect."
When they started raising interest rates in mar 2022, inflation was around 9%. It's been between 2-3% since July 2022. So it's completely insane to claim that raising the interest rates didn't have a massive effect. And the next effect will to drive the economy into a massive depression since they should have stopped raising them months ago, Just like they continued QE for 9 months longer than even a blind man could tell was necessary, they're going to continue to raise interest rates for long after it was obvious they should have stopped. Could someone explain why Joe Biden extended Trumps grossly incompetent fed chair. (The one acceptable argument was that anyone else Biden could have got passed congress would have been more incompetent.