FOMC 2023 1101

The Federal Open Market Committee today announced nothing of substance. Its Fed funds target rate remains 5.25%%-5.50%. The balance sheet rolloff continues apace.

FOMC 20231101

The media are rife with speculation that this rate hiking cycle is done. That may be, but the Fed hasn’t told us so. Nor is it likely to even when it is, for two reasons. First because it won’t even know itself until well after the fact, and second because it probably wouldn’t tell us even if it did know, because it doesn’t want the asset markets shooting higher on speculation as to when it will begin cutting. That would represent another inflationary impulse, which could then actually make further tightening necessary which might otherwise not be.

We don’t know how this will play out, but the scenario most popular with the financial media is among the least likely … that inflation will gradually subside and come in for a smooth landing in the Fed’s target range without notable disturbance to the financial markets.

19 thoughts on “FOMC 2023 1101

  1. jk says:

    i think it’s important to pay attention to NOMINAL gdp. real gdp most recently is supposedly 4.9%. add whatever you think the inflation rate is, supposedly 3.7%. so nominal gdp is rising 8.6%. we could have a recession and still have a rising nominal rate of growth. most recessions have a 2% rate of decline, so if inflation stays at 3.7% [and i think it’s more likely to rise than fall further] we would still have nominal growth.
    non-economists, i.e. just about everybody, live in a world of nominal prices and nominal growth.
    with 8.6% nominal growth the world that isn’t wall street thinks the economy is running pretty hot.

    1. Bill Terrell says:

      Good point, JK. I’d even go a step further and say the bogey should be per capita nominal GDP. A 2% increase in GDP along with a 2% increase in population leaves everybody exactly where they started. You could just redraw lines on a map and double your GDP.

      Either way, suppose your measure of inflation is tardy, lagging by a few months to a few quarters. Then if inflation surges while your measure lags, it will result in an underadjustment in your “real” GDP calculation and produce an illusory surge in recorded “growth”.

      As it happens, this is exactly what’s been going on. So-called “real” GDP is a statistical farce.

  2. jk says:

    assuming, as both you and i do, that inflation is higher than the announced 3.7%, nominal gdp is even higher, and people who live in the world of nominal wages and prices are experiencing an economy that is even hotter. makes it hard to see a significant slowdown any time soon.

    1. Bill Terrell says:

      Right … inflation is higher than the official figures. At the moment, for two distinct reasons: 1) The ongoing understatement due to things like the use of “homeowners equivalent rent” and one-way “hedonic” adjustments, and 2) The cyclical understatement due to time lag when, as now, inflation is accelerating. The latter isn’t statistical malpractice so much as the inherently lagging response to inflation of consumer prices. It results inflation looking like “growth” in the early stages, and when inflation is decelerating, can even sometimes transiently cause CPI to overstate inflation. This then leads to weird, inexplicable surges and declines in “productivity” as “real GDP” moves ahead of and behind nominal GDP.

      The upshot is that per capita nominal GDP itself winds up being a better index of inflation than CPI, PCE, etc.

      1. Bill Terrell says:

        According to the BEA:

        “Current dollar GDP increased 8.5 percent at an annual rate, or $560.5 billion, in the third quarter to a level of $27.62 trillion. In the second quarter, GDP increased 3.8 percent, or $249.4 billion (table 1 and table 3).”

        So nominal GDP is running around 8.5%. Adjusted for population, it would still be around 8%. The 8.5% Q3 number compares to 3.8% Q2. So in the space of one calendar quarter, either employment or productivity surged multiple percent.

        Or inflation is sharply accelerating.

      2. Bill Terrell says:

        In US dollars, stocks are up 4.77% just since last week’s close … a mere four trading days. Bonds are up sharply as well. This surge in asset prices (with a Fed-is-done media narrative and weakening dollar) is presumably just what the Fed sought to avoid by holding out the possibility of still further rate hikes. It represents a new inflationary impulse entering the pipeline. If it persists, it will continue en route to consumer prices over the coming months.

        The implications of this are left as an exercise for the reader.

  3. Thrifty says:

    Jeffrey Gundlach has coined a clever phrase for an investing approach in these conditions:
    ‘T-Bill and Chill’

  4. Mega says:

    AS i see it we not hyperinflation as yet, only just “Runway” inflation……so i guess there no much to do.

    1. Bill Terrell says:

      Here in the US we’re balanced on a knife edge. The Federal Reserve insists it’s determined to get consumer inflation down into its 2% target range. Pitted against that is a fiscal policy of deficit spending without restraint.

      In a system where money is created by being lent into existence, monetary policy “works” by encouraging or discouraging borrowing. This applies to both the public and private sector. Years of easy money (2008-2022) resulted in massive borrowing across the board. The private sector is well on its way to responding to tighter policy since, but the public sector has yet to budge.

      The knife edge is whether it will finally do so or whether it will not. If it doesn’t, the private sector will bear the full brunt of tightening and the Fed will come under intense pressure to ease. The former road leads back to a sustainable regime while the latter leads to hyperinflationary catastrophe.

      John Mauldin paints a clear picture of the debt problem:

      Debt Scores

  5. jk says:

    janet’s decision to limit the amount of coupons issued and jack up the t-bills to [i think] 58% of the quarterly funding, instead of its normal 15-20%, is a form of soft yield curve control. the treasury seems to be saying it won’t let 10’s and 30’s go over 5%.
    using 30-90 day instruments as the u.s. government’s primary funding mechanism is an emerging market move, and the liquidity of such instruments – they are near-money- will contribute to further inflation.
    the fed paused its rate hikes, saying that the higher, ~5%, longer rates were doing part of its work to fight inflation. the bonds then rallied 40bps, undoing a chunk of that work. i think the dec fed meeting is live, and i wouldn’t be surprised to see the fed hike 25bps at that time.
    the bond rally increased the curve’s inversion again, and another fed raise would increase it further. i’m questioning the inversion’s value as a recession forecast given hot nominal gdp growth. the fed is fighting inflation at the short end while the treasury is feeding inflation at both ends.

    1. Bill Terrell says:

      Stanley Druckenmiller criticizes Janet Yellen for not locking in long-term interest rates, calls it ‘biggest blunder in Treasury history’

      Of course this applies not to the current market state, but that prevailing a year or three ago. In today’s much flatter yield curve environment, the case for locking in longer term is far from clear.

      I’m not too worried about the yield curve message. Before 2008, the yield curve inverted in 2006. Having inverted in 2022, it’s still valid out to 2024. An uninversion following inversion is actually the more timely indicator, and there has been notable movement in that direction. And as far as that goes, the unemployment rate is up 0.5% over the past six months and oil and copper prices are losing steam, so it’s not as if the yield curve is out there all by itself.

      That said, there is so much unprecedented in the past couple years just about every statistical relationship needs to be taken with an extra grain of salt.

      Job And Retail Sales Data: Always Good Until They Aren’t

    2. Bill Terrell says:

      This article on AP supports your skepticism about the continued prescience of the yield curve. We’ve noted this before, but Wesbury gives a particularly lucid description of why Fed rate hikes may not work like they used to. In short, rates used to be supported by scarce money whereas now they’re supported by abundant money.

      It’s not hard to imagine that pushing rates up by paying interest with newly created money might not work the same as pushing them up by making money scarce. It might at least help explain why over five hundred basis points of fed funds hikes haven’t had more success in stemming inflation.

  6. jk says:

    if we indeed get an official recession i think it is likely to have positive nominal growth, i.e. “stagflation.” sound right to you, bill?

  7. Bill Terrell says:

    More than plausible, JK. Your earlier point about emphasizing nominal data considered … no one knows what the real data are. Anything that uses government “inflation” data is suspect. Not to mention measuring GDP isn’t an exact science to begin with.

    As investors, we presumably are most interested though in asset prices. Hard data, no fudge. On that front I still think we will see a “recession” in nominal terms. For that matter we already have … stock and bond prices are well below their highs.

    1. Bill Terrell says:

      Looks bad on the day or week, but pretty good on a ten year chart. The next upside catalyst would likely be either central banks signaling renewed ease or some shock that might lead to it. As the ultimate form of money, the worse the others look the better gold looks.

    2. Finster says:

      And the corpse was dragged up, propped against the fence, and shot again.