Pro Perspectives 3/8/23

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March 8, 2023

Yesterday, the Fed Chair gave prepared remarks and did Q&A with the Senate Banking Committee. Today, he did the same for the House Financial Services Committee.

Markets are moving on the nuance of what Powell has said about the speed and ultimate stopping point for rate hikes.

Will it be another quarter point higher, than what they’ve already telegraphed? Will they get there faster?

Does it really matter?

They’ve taken the effective Fed Funds rate from roughly zero, to just over 4.5%, inside of one year. And, at this point, they’ve telegraphed a few more hikes, to reach a stopping point above 5%.

Still, after this perceived interest rate shock, the economy is running at 9% annual nominal growth (2.6% real growth, based on the Atlanta Fed’s model). And unemployment is near record lows.

Household net worth is 5% off of record levels, and 24% above pre-covid levels. Debt service, as a percent of disposable income, is at pre-covid levels, which was the lowest on record.

So, why isn’t an expected 5%+ Fed Funds rate choking off economic growth?

Because of this chart …

The tidal wave of new money (ten years worth of money supply growth, in two years) trumps the adoption of an historically normal interest rate.

That said the economy remains solid because the yield curve is inverted – not in spite of it. As long as the 10-year yield (the benchmark from which many consumer rates are set) is hanging around 4%, then consumer rates remain tolerable. And government debt service remains tolerable, too.

And no coincidence, this has been a highly manipulated market (i.e. the U.S. 10-year yield, the world’s benchmark government bond yield) by global central banks for the better part of the past fifteen years.

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