Finding Neutral

August 16, 2024

Good morning, everyone. What a year. And what a pocket in time over the past few weeks. Jackson Hole: "Reassessing the Effectiveness and Transmission of Monetary Policy".?Chair Jerome Powell will pave the way for the first rate cut in years. The Fed is a hundred basis points too high. They need to steepen this curve further. Lower rates equal lower inflation. Finding neutral.?

Let's Take a Look:?

The road to Jackson Hole. Very good week of data in the United States. The relationship between growth and inflation matters. Clearly, moving in the right direction. But the overall level of prices remains high for most people. Present company included. And that will remain a drag on the US economy moving forward.?

The Fed conducts a policy review every five years. In August of 2020 we moved to inflation averaging around fears of undershooting. The timing was not good. Having markets move 20-basis points for a ".1" miss with an inflation reading equally so. We need to have scenarios, ranges, and a more holistic approach with discipline.?

We've been following central bank and the Federal Reserve policy since 1986. Over the past five years we have spent an enormous amount of time in the trenches and learned two things: 1) Zero and negative interest rate policy is bad for the economy and society 2) Central banks need to be flexible in their approach and acknowledge more how our fiscal outcomes impact equilibrium interest rates.?

NO, no President should control interest rates!?

Over the past few weeks, we encountered another example of loose monetary policy. The past five years we had the United Kingdom, the United States, and now Japan in the throws of issues around interest rate normalization. In all instances positions that accumulated and built up around artificially low and negative interest rates. Let's learn.?

Ultimately, and many will disagree, the Fed has little control over our job market. We view the central bank's mandate as controlling inflation. Maximum employment is not an interest rate endeavor. It's a private and public business initiative and ideally the two working in harmony at minimal taxpayer expense. And creating an environment which fosters the best for our society.?

The Yen carry trade is the latest example of what percolates in the deep sea. The process of normalizing interest rates was inevitable. It's very healthy. Yes, painful at times. Soon we will have upward sloping yield curves. Calibration.?

On the Ground

Head down. It remains a great environment for issuers and investors. The Fed is too high here. They need to loosen up housing. It happens with a steeper curve. And with a lower rate structure.?

Have a great weekend!