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JPow Chill…
Or so says Nick Timiraos of the Wall Street Journal.
Commonly referred to as “Fed Woj,” this boy Nick absolutely dominates the game of reporting Fed news before the news has even reached the Fed itself. It’s a modern miracle, and someone’s gotta get this guy a damn documentary or something (Nick, if you’re reading this, hmu…).
But for real, he’s one of the very, very few writers who, obviously along with myself, can actually affect policy at the Central Bank, move markets, and change the minds of Fortune 500 CEOs. Game respect game, and so for this week, he’s got me beat.
Over this past weekend, Nickyboi lit the match that got yesterday’s fire started. In his (somewhat lengthy, but that’s none of my business) piece published in the WSJ on Sunday, he basically blew the horn and gave some legitimacy to the idea that the Fed may be on course to chill tf out with rate hikes. Clearly, this got investors hyped.
Rate hikes, along with inflation, utterly decimated markets in 2022 simply by making the cost of capital higher than zero for pretty much the first time since pre-GFC. You remember it all too well, don’t you? We don’t have to beat that dead horse.
Whether or not he’s right, he’s sure onto something. We’ve seen declining inflation, aka “disinflation,” present since June of last year. Moreover, the out-of-control prices dominating the housing market seem to be on the downtrend as mortgage rates nearly hit 7.5% a few months ago, currently sitting at an average 30-year fixed of ~6.3%.
But it’s not all sunshine and rainbows just yet. The labor market has been a bigger prick in JPow’s side than that professor that still makes you wear masks to class.
But hang on a second, isn’t that exactly what we want? Cooling demand without decimating employment seems like the ideal scenario to me. Many economists have been tweaking because the U.S. economy has never gotten itself out of an inflationary spiral like last year without hurling into a recession and sending unemployment to the moon. But hey, just because it hasn’t happened doesn’t mean it can’t.
And that’s especially true in macroeconomics. Every day something that’s never happened before happens, so why not here? As pointed out by Stephen Miran, the lack of layoffs in the construction industry, in particular, appears to have been the secret to success for unemployment not skyrocketing.
As he points out, the Infrastructure and Jobs Act (IJA) has incentivized builders to hang onto to hard-to-come-by labor despite a roiling housing market in anticipation of Uncle Sam making it rain across the sector later this year. As Stephen puts it, the “race is on” between lagging home sales and a slowdown in building permits vs. a pickup in the economy and deployment of IJA funds.
The last thing to keep in mind is that monetary policy operates on a lag worse than Google Stadia. Maybe in the days of typewriters and wearing suits on planes, this was fine, but in a world drowning in real-time data, it’s easier to spot discrepancies.
It’s barely been a year since the rate hike cycle kicked off, and we’ve already beaten the sh*t out of costs like energy, housing, and other commodities while we observed a slowdown in the cost of labor in December as well. JPow, my guy, what more do you want??
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