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2023-07-26

Good points but soft land is inline

The Fed Should Continue Hiking Past 6%

Chip Somodevilla The target is 2% inflation over time Here is the key sentence from the June FOMC meeting statement: In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. But what is the most important part in this statement that gives the clue about future monetary policy?It's bolded - it's "over-time". The Fed aims to return inflation to 2% over time. What does it mean?It means that the Fed could decide to pause the interest rate hiking cycle with core CPI inflation still elevated at 4.8%, if the conditions are set for inflation to fall to 2% over time. This is essentially what the soft-landing crowd is expecting - the Fed will pause after the July hike to 5.35%, despite the fact that core inflation remains elevated at

The Fed Should Continue Hiking Past 6%

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But what is the most important part in this statement that gives the clue about future monetary policy?It's bolded - it's \"over-time\". The Fed aims to return inflation to 2% over time. What does it mean?It means that the Fed could decide to pause the interest rate hiking cycle with core CPI inflation still elevated at 4.8%, if the conditions are set for inflation to fall to 2% over time. This is essentially what the soft-landing crowd is expecting - the Fed will pause after the July hike to 5.35%, despite the fact that core inflation remains elevated at","content":"<html><head></head><body><h2 id=\"id_1250867344\">The target is 2% inflation over time</h2><p>Here is the key sentence from the June FOMC meeting statement:</p><blockquote>In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent <strong>over time</strong>, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.</blockquote><p>But what is the most important part in this statement that gives the clue about future monetary policy? It&#39;s bolded - it&#39;s &#34;over-time&#34;. The Fed aims to return inflation to 2% over time. What does it mean?</p><p>It means that the Fed could decide to pause the interest rate hiking cycle with core CPI inflation still elevated at 4.8%, if the conditions are set for inflation to fall to 2% over time.</p><p>This is essentially what the soft-landing crowd is expecting - the Fed will pause after the July hike to 5.35%, despite the fact that core inflation remains elevated at 4.8%. Why? Because inflation is on the way down, and it will likely fall to 2% in the near future. And, of course, the economy will avoid falling into a recession because the Fed will start cutting interest rates as inflation continues falling in 2024.</p><p>But, it also means that the Fed could continue hiking interest rates even if inflation falls faster than expected - if the conditions don&#39;t favor a stable 2% inflation over time.</p><p>The June CPI report showed that core CPI increased only by 0.2% month-over-month, and 4.8% over the last 12 months. If the core CPI continues to rise by 0.2% each month, the core CPI will be at 2.5% by July 2024, which is still above the 2% target, so you would need to have a few months with 0.1% core CPI month over month to get to 2%. That&#39;s what the soft-landing scenario is expecting.</p><p>The problem with the soft-landing scenario is that the Fed&#39;s own Inflation Nowcast expects that core CPI will rise by 0.4% in July. Obviously, the conditions for core inflation to return to 2% over time are not there yet. Thus, despite the soft June CPI report, I believe the Fed has to continue hiking.</p><p></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/2d9be1802471aab595b103c745d0b12c\" tg-width=\"640\" tg-height=\"194\"/></p><p>Cleveland Fed</p><h2 id=\"id_2676259712\">But what are the necessary conditions for inflation to return to 2% over time?</h2><p>The price is a function of supply and demand, it&#39;s a very simple economic concept. So, generally, there has to be a supply/demand balance economy wide. Specifically, there has to be an ample supply of 1) labor and 2) input materials, for production to meet the underlying demand.</p><p>The US currently has a major labor shortage with full employment (unemployment rate at 3.6%) and nearly 10M job openings. Obviously, the supply of labor is limited, which is causing wage price inflation, and translating into a service price inflation.</p><p>The Fed simply cannot stop hiking as long as there is a labor shortage, because the risk is that core inflation would continue rising over time.</p><p>So, what&#39;s causing the labor shortage? On the supply side, one of the main issues is demographics - the large segment of population (baby boomers) is exiting the labor force and retiring. Second, due to the unfolding trend of deglobalization, the US has stricter immigration policy which is slowing the labor force growth. On the demand side, and also due to deglobalization, the US is reshoring some jobs back home from China. The Fed cannot control the trends in demographics and deglobalization issues, and these structural longer-term trends. Thus, the labor market conditions will be out of balance for the foreseeable future.</p><p>The unfolding trend of deglobalization is also creating the risk for commodity price spikes, and the shortage of key input materials. These risks are even more extreme due to the fact that deglobalization is associated with geopolitical tensions, which increase the risk of cold wars, proxy wars, and direct military confrontations between the main global powers.</p><p>For example, Russia exited the Black Sea Grain Initiative agreement, which pushed the price of wheat limit up in the futures market last week. Saudi Arabia is cutting the oil supplies to boost the price of oil. China imposed export controls on two strategic raw materials that are critical to the global chipmaking industry. These events are part of the broader trend which is likely to persist in the foreseeable future.</p><p>Obviously, these are not conditions where inflation is expected to fall to 2% over time. In fact, it&#39;s reasonable to conclude that we are currently still in a high inflationary environment.</p><h2 id=\"id_2678714004\">What should the Fed do?</h2><p>The Fed only directly controls the demand side of the equation, and the supply side problems can only be countered with declining demand to restore price stability. That means a recession.</p><p>Specifically, that means that the Fed needs to keep tightening monetary policy until the unemployment rate increases. The Fed has set the target of 4.1% unemployment rate for 2023 and 4.5% for 2024.</p><p>The Fed helped invert the yield curve, which is expected to cause credit tightness, which is expected to cause less investment, and thus, higher unemployment. So, now we are in the process of waiting for the lagged effects of this monetary policy transmission to the real economy. We are waiting for the clear signs of a recession.</p><p>The Fed decided to skip hiking interest rates in June to evaluate these lagged effects, and apparently decided to continue increasing interest rates at a much slower pace. Thus, the Fed is set to increase interest rates at the July meeting, and indicated that an additional 25bpt hike might be required in fall.</p><p>The lagged effects are already evident as the Redbook weekly retail sales are turning negative year over year, as well as industrial production. The labor market is showing some cracks with the (volatile) trend of higher weekly claims, but this is still insufficient.</p><p>The Fed is actually a very powerful institution with a broad geopolitical reach. The only way to really ensure a stable inflation rate over time is to directly address the underlying trends, particularly with the respect to deglobalization.</p><p>Specifically, I think the Fed should continue hiking well past 6% to induce a deep recession in the US, which would 1) crash oil price and weaken the oil revenue dependent Russia and other adversaries, 2) seriously weaken the export dependent Chinese economy.</p><p>Thus, by overtightening, the Fed would directly address the demand side of the equation via a higher unemployment rate, and indirectly affect the supply side by inducing economic barriers to deglobalization.</p><p>This is exactly what the Fed did in 1970s and especially in the early 1980s, when it hiked well above the core PCE inflation. Here is the chart, it&#39;s obvious that the current level of Federal Funds rate (red line) is not high enough in my opinion:</p><p></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/81d60a7769c56493157af148c045b0f4\" tg-width=\"640\" tg-height=\"270\"/></p><p>FRED</p><p>Now considering the Taylor Rule for determining the appropriate level for Federal Funds rate, the different scenarios suggest that the Federal Funds rate should be somewhere between 6.5% and 7.5%.</p><p></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/d880c43218ed20ce7dde7739e111e909\" tg-width=\"640\" tg-height=\"423\"/></p><p>Atlanta Fed</p><h2 id=\"id_221054489\">What will the Fed do?</h2><p>The Fed is still behind based on the Taylor rule. We are in a high-inflationary environment characterized by a demographic time-bomb, de-globalization, a real war, a brewing war. These are the facts.</p><p>But the Fed is currently a conflicted institution in my view, where the major hawk Bullard actually quit the FOMC and the Fed, and is apparently being replaced by a dove.</p><p>The Fed has decided to take it slowly and to be data dependent, hoping that something will change over time. The Fed might be afraid of overtightening, but I think that&#39;s exactly what the Fed should do - overtighten. The Fed needs to create the conditions for inflation to return to 2% over time, no other way around it.</p><p>Alternatively, and this is becoming a baseline scenario on Wall Street, the Fed has to abandon the 2% target.</p><h2 id=\"id_3540477570\">Implications</h2><p>The stock market (SP500) has been rising since October 2022 in expectation of the Fed pivot - pause and a cut. These expectations are based on the recent memory of the 2000-2020 period, during which the US was in a low inflation environment. Actually, it was more of a disinflationary or even deflationary environment caused by globalization - abundant global labor force, cheap imports, etc.</p><p>But things have changed, we are in a high-inflationary environment now - just look at the headlines. The Fed has the mandate of 2% inflation over time, and that means the Fed will have no choice but to overtighten.</p><p>A soft-landing is a hope, and the market can run on a hope for some time. But, I believe the reality will set in. In fact, even the current earnings season for Q2 2023 has seen contracting margins, declining sales, and the third quarter of lower earnings.</p><p>The earnings projections are that earnings will start growing in Q4 2023, and over the entire 2024. That&#39;s based on a soft-landing scenario, so based on hope in my opinion. The trend of lower sales, lower margins, and lower earning is likely to continue in the foreseeable future, as the lagged effects of the recent monetary policy tightening intensify, while inflation continues to be elevated, forcing the Fed to continue to tighten the monetary policy likely past 6%.</p></body></html>","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>The Fed Should Continue Hiking Past 6%</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nThe Fed Should Continue Hiking Past 6%\n</h2>\n\n<h4 class=\"meta\">\n\n\n2023-07-26 23:26 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4619601-the-fed-should-continue-hiking-past-6-percent><strong>Seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The target is 2% inflation over timeHere is the key sentence from the June FOMC meeting statement:In determining the extent of additional policy firming that may be appropriate to return inflation to ...</p>\n\n<a href=\"https://seekingalpha.com/article/4619601-the-fed-should-continue-hiking-past-6-percent\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{".IXIC":"NASDAQ Composite",".SPX":"S&P 500 Index",".DJI":"道琼斯"},"source_url":"https://seekingalpha.com/article/4619601-the-fed-should-continue-hiking-past-6-percent","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"2354462003","content_text":"The target is 2% inflation over timeHere is the key sentence from the June FOMC meeting statement:In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.But what is the most important part in this statement that gives the clue about future monetary policy? It's bolded - it's \"over-time\". The Fed aims to return inflation to 2% over time. What does it mean?It means that the Fed could decide to pause the interest rate hiking cycle with core CPI inflation still elevated at 4.8%, if the conditions are set for inflation to fall to 2% over time.This is essentially what the soft-landing crowd is expecting - the Fed will pause after the July hike to 5.35%, despite the fact that core inflation remains elevated at 4.8%. Why? Because inflation is on the way down, and it will likely fall to 2% in the near future. And, of course, the economy will avoid falling into a recession because the Fed will start cutting interest rates as inflation continues falling in 2024.But, it also means that the Fed could continue hiking interest rates even if inflation falls faster than expected - if the conditions don't favor a stable 2% inflation over time.The June CPI report showed that core CPI increased only by 0.2% month-over-month, and 4.8% over the last 12 months. If the core CPI continues to rise by 0.2% each month, the core CPI will be at 2.5% by July 2024, which is still above the 2% target, so you would need to have a few months with 0.1% core CPI month over month to get to 2%. That's what the soft-landing scenario is expecting.The problem with the soft-landing scenario is that the Fed's own Inflation Nowcast expects that core CPI will rise by 0.4% in July. Obviously, the conditions for core inflation to return to 2% over time are not there yet. Thus, despite the soft June CPI report, I believe the Fed has to continue hiking.Cleveland FedBut what are the necessary conditions for inflation to return to 2% over time?The price is a function of supply and demand, it's a very simple economic concept. So, generally, there has to be a supply/demand balance economy wide. Specifically, there has to be an ample supply of 1) labor and 2) input materials, for production to meet the underlying demand.The US currently has a major labor shortage with full employment (unemployment rate at 3.6%) and nearly 10M job openings. Obviously, the supply of labor is limited, which is causing wage price inflation, and translating into a service price inflation.The Fed simply cannot stop hiking as long as there is a labor shortage, because the risk is that core inflation would continue rising over time.So, what's causing the labor shortage? On the supply side, one of the main issues is demographics - the large segment of population (baby boomers) is exiting the labor force and retiring. Second, due to the unfolding trend of deglobalization, the US has stricter immigration policy which is slowing the labor force growth. On the demand side, and also due to deglobalization, the US is reshoring some jobs back home from China. The Fed cannot control the trends in demographics and deglobalization issues, and these structural longer-term trends. Thus, the labor market conditions will be out of balance for the foreseeable future.The unfolding trend of deglobalization is also creating the risk for commodity price spikes, and the shortage of key input materials. These risks are even more extreme due to the fact that deglobalization is associated with geopolitical tensions, which increase the risk of cold wars, proxy wars, and direct military confrontations between the main global powers.For example, Russia exited the Black Sea Grain Initiative agreement, which pushed the price of wheat limit up in the futures market last week. Saudi Arabia is cutting the oil supplies to boost the price of oil. China imposed export controls on two strategic raw materials that are critical to the global chipmaking industry. These events are part of the broader trend which is likely to persist in the foreseeable future.Obviously, these are not conditions where inflation is expected to fall to 2% over time. In fact, it's reasonable to conclude that we are currently still in a high inflationary environment.What should the Fed do?The Fed only directly controls the demand side of the equation, and the supply side problems can only be countered with declining demand to restore price stability. That means a recession.Specifically, that means that the Fed needs to keep tightening monetary policy until the unemployment rate increases. The Fed has set the target of 4.1% unemployment rate for 2023 and 4.5% for 2024.The Fed helped invert the yield curve, which is expected to cause credit tightness, which is expected to cause less investment, and thus, higher unemployment. So, now we are in the process of waiting for the lagged effects of this monetary policy transmission to the real economy. We are waiting for the clear signs of a recession.The Fed decided to skip hiking interest rates in June to evaluate these lagged effects, and apparently decided to continue increasing interest rates at a much slower pace. Thus, the Fed is set to increase interest rates at the July meeting, and indicated that an additional 25bpt hike might be required in fall.The lagged effects are already evident as the Redbook weekly retail sales are turning negative year over year, as well as industrial production. The labor market is showing some cracks with the (volatile) trend of higher weekly claims, but this is still insufficient.The Fed is actually a very powerful institution with a broad geopolitical reach. The only way to really ensure a stable inflation rate over time is to directly address the underlying trends, particularly with the respect to deglobalization.Specifically, I think the Fed should continue hiking well past 6% to induce a deep recession in the US, which would 1) crash oil price and weaken the oil revenue dependent Russia and other adversaries, 2) seriously weaken the export dependent Chinese economy.Thus, by overtightening, the Fed would directly address the demand side of the equation via a higher unemployment rate, and indirectly affect the supply side by inducing economic barriers to deglobalization.This is exactly what the Fed did in 1970s and especially in the early 1980s, when it hiked well above the core PCE inflation. Here is the chart, it's obvious that the current level of Federal Funds rate (red line) is not high enough in my opinion:FREDNow considering the Taylor Rule for determining the appropriate level for Federal Funds rate, the different scenarios suggest that the Federal Funds rate should be somewhere between 6.5% and 7.5%.Atlanta FedWhat will the Fed do?The Fed is still behind based on the Taylor rule. We are in a high-inflationary environment characterized by a demographic time-bomb, de-globalization, a real war, a brewing war. These are the facts.But the Fed is currently a conflicted institution in my view, where the major hawk Bullard actually quit the FOMC and the Fed, and is apparently being replaced by a dove.The Fed has decided to take it slowly and to be data dependent, hoping that something will change over time. The Fed might be afraid of overtightening, but I think that's exactly what the Fed should do - overtighten. The Fed needs to create the conditions for inflation to return to 2% over time, no other way around it.Alternatively, and this is becoming a baseline scenario on Wall Street, the Fed has to abandon the 2% target.ImplicationsThe stock market (SP500) has been rising since October 2022 in expectation of the Fed pivot - pause and a cut. These expectations are based on the recent memory of the 2000-2020 period, during which the US was in a low inflation environment. Actually, it was more of a disinflationary or even deflationary environment caused by globalization - abundant global labor force, cheap imports, etc.But things have changed, we are in a high-inflationary environment now - just look at the headlines. The Fed has the mandate of 2% inflation over time, and that means the Fed will have no choice but to overtighten.A soft-landing is a hope, and the market can run on a hope for some time. But, I believe the reality will set in. In fact, even the current earnings season for Q2 2023 has seen contracting margins, declining sales, and the third quarter of lower earnings.The earnings projections are that earnings will start growing in Q4 2023, and over the entire 2024. That's based on a soft-landing scenario, so based on hope in my opinion. The trend of lower sales, lower margins, and lower earning is likely to continue in the foreseeable future, as the lagged effects of the recent monetary policy tightening intensify, while inflation continues to be elevated, forcing the Fed to continue to tighten the monetary policy likely past 6%.","news_type":1},"isVote":1,"tweetType":1,"viewCount":260,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"EN","currentLanguage":"EN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":29,"xxTargetLangEnum":"ORIG"},"commentList":[],"hasMoreComment":false,"orderType":2}