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The Opposite of Limbo — If you’ve ever played this Macro Monkey’s namesake, you understand the basic premise of the game Limbo.
In the case of the Federal Reserve, we are looking at the opposite of Limbo. Instead of “how low can you go?” we are looking at Daddy JPow and asking, “How high can rates really go?”
The Fed minutes released last week show that Fed governors are just as intrigued about the journey versus destination conversation as we are here at The Daily Peel.
No one really knows how high we are going to go.
How much cough syrup do you need to take to suppress a deep covidian chest cough? How high do rates need to go to body check inflation back under target?
I like to think that monetary policy, et ceteris paribus for the good econ students out there, should be an easy dose of hard-to-swallow medicine for the economy. All things being equal, it should have an effect on demand and basically squash any growth aspirations within the broader marketplace in short order.
But when there is excessive government spending by the world’s largest employer, it’s hard to gauge how effective Daddy JPow’s moves can really be. When Congress is alone and unafraid to spend hundreds of billions or even trillions in pork to “bring down inflation,” the blunt tools that Daddy JPow has available to him are just that: blunt and tool-y.
The Fed has a PR problem to solve. Inflation is as much of a public affairs dilemma as it is a monetary policy construct; the more the public thinks that prices are rising, the faster prices rise.
If there are any athletes in the crowd, if you cycle or run marathons, you’ve probably grasped this concept as you push out watts when you’re hitting the pavement: the faster you’re going, the faster you’ll go. It’s the same thing with inflation in the eye of the American consumer.
This recent market rally is actually bad for inflation and for the Fed’s policy stance in general. Stocks rallying and a depressed VIX tend to mean a lower 10-year yield. This incentivizes borrowing because it would appear that the cost of capital will remain low.
Increased borrowing means that more capital will continue to chase fewer goods, which is the exact opposite of Daddy JPow’s dream of bringing inflation below target in 2023.
We shall see where all of this goes, but as volatility prevails, we are further considering tightening our belts.
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