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For those wondering how the Fed can possibly be so aggressive in light of the recent CPI miss, go back to Powell's Jackson Hole speech: https://www.federalrese

For those wondering how the Fed can possibly be so aggressive in light of the recent CPI miss, go back to Powell's Jackson Hole speech: https://www.federalreserve.gov/newsevents/speech/powell20220826a.htm https://www.federalreserve.gov/newsevents/speech/powell20220... It ran a total of 8 or so minutes and mentioned Paul Volcker twice: https://en.wikipedia.org/wiki/Paul_Volcker https://en.wikipedia.org/wiki/Paul_Volcker This speech is a masterpiece of clarity and focus. It said: rates are going much, much higher than you think possible. So buckle up. It's rare to get such a clear signal from the Fed. Volcker was the chair of the Fed during The Great Inflation of the 1970s and early 1980s. He's seen as a legend among those who favor responsible monetary policy because unlike his predecessors, he hiked and hiked and hiked. As the legend goes, he crushed US inflation, which lead the US out of the 70s inflationary quagmire to the prosperity of the 80s and 90s. Not so widely known is that Volcker didn't just raise, he also cut rates in mid-1980 when CPI started to cool and the US fell into recession. After the rate cuts, inflation ripped higher. And Volcker's Fed responded by jacking rates to 19%. The result is the second recession just one year after the first. Talk about a whipsaw. Not great for credibility. Valid or not, the lesson policy makers learned is this: don't give inflation one inch or you'll regret it. The economy is far stronger than it appears and you'll be back raising rates far, far too soon. This appears to be the play book Powell is drawing from now. The good news is that what the Fed does matters very little. Through the great inflation, companies continued to borrow despite double-digit interest rates. For all of 2022, bond markets have been screaming recession by causing multiple yield curve inversions. Inflation is headed lower, but it has nothing to do with the Fed and its irrelevant bank reserve manipulation schemes. The bad news is that Volcker's rate hike blitz earned the deep respect of markets. Even though the Fed has very little direct control over the US dollar or the business cycle, the vast majority of market participants believe the Fed is in the driver's seat. This is why backing down isn't an option. That credibility the Fed gained was hard won and no chair wants to risk being known as Arthur Burns.

nverno 4y ago
> The good news is that what the Fed does matters very little. I cant reconcile this statement with the previous history you've discussed.
- huijzer 4y ago
  I agree that the text above maybe was not so well put, but also I do think there is a point indeed: the Fed cannot strictly control what will happen. What I currently see everywhere still is that the psychology of buyers hasn’t changed yet. Tesla/ASML/Twilio etc are trading at ridiculous P/E ratios, house prices are still high, some people are earning money on selling their second hand electric car to a third buyer for a higher price and everyone knows that basically everything is too expensive. Once people stop looking in the rear view mirror and expect that some things might actually be cheaper next year, then that should help a lot
hnthrowaway0328 4y ago
I don't really think Powell has the political will to imitate Volcker. The election is close and I see no way Biden's government will accept an economical collapse at the end of the second term. The political resistance will be paramount, and from both sides. Maybe, just maybe, the outcome is to raise to medium-high, and then cut back to medium but stay there for long term. There will be a recession at the end of rate hiking, but once Russia and China capitulate the economy will boom again and the Federal Reserve then stand a much better position figuring things out.
- nverno 4y ago
  > The election is close and I see no way Biden's government will accept an economical collapse From what I've read, it was very damaging to Jimmy Carter's reelection, so you're probably right about this.
  - reducesuffering 4y ago
    It was, Jimmy knew this, and he still appointed Volcker to do what he had to do to protect the US economy in the long term. Contrast that to our last President that was screaming in caps on Twitter demanding that the Fed cut rates to 0%. https://twitter.com/realDonaldTrump/status/1171735691769929728 https://twitter.com/realDonaldTrump/status/11717356917699297... I don't know how one could be unashamed currently being a part of that party.
    - nverno 4y ago
      > Jimmy knew this, and he still appointed Volcker to do what he had to do to protect the US economy in the long term Right, this is probably pretty rare amongst politicians- the willingness to sacrifice their career for the greater good (or what they believe is for the greater good).
    - roflyear 4y ago
echelon 4y ago
> rates are going much, much higher than you think possible. So buckle up. It's rare to get such a clear signal from the Fed. Increase in CPI is slowing. Rate hikes are slowing. Energy isn't getting costlier. China is opening up again. A core component of these metrics is housing. If housing prices fall, what more is there left for the Fed to do? I'm cautiously optimistic. Though I acknowledge it could get much worse, the signs I'm seeing seem to point to a quick (~1 year) recovery.
tootie 4y ago
I don't think anyone is surprised by this. CPI at 7.1% is better than expectations and trending downwards but it's still way above target. That being said, rates have been near zero for so long, I don't see how they would need to raise rates to any astronomical level. Powell has been pretty clear on where he expects rates to land by end of 2023 and that's in the 5-6% range. So more raises are baked in, but the pace and intensity will continue reacting to CPI unemployment reports. Mind you that GDP is not part of the calculation. I'm also calling shenanigans across the board on the notion that "Fed will cause a recession" because it's become a pretty meaningless distinction. The definition of a recession is essentially arbitrary but typically tied to GDP which is not part of the Fed's mandate. If you want to talk pragmatism, inflation is hurting consumers while employment is still overheated. GDP contraction may as well be a rainstorm in the middle of the ocean. Looks bad, but really who cares? Inflation is hurting us now. The labor marker has barely released pent up tension let alone started to slacken. Of course they'll keep raising and everyone aside from equity investors will be better off for it.
- vkou 4y ago
  > Looks bad, but really who cares? People who will lose their jobs to the recession will care quite a bit. For most people, it's better to be employed in an inflationary environment, than unemployed and broke in a recession.
  - tootie 4y ago
    I think you missed my point. The Fed will definitely react unemployment. That's their mandate. I'm specifically saying they won't react to GDP which is what defines a recession. Unemployment hurts. Inflation hurts. GDP is just a number. That's why the Fed has to balance inflation and employment. The current situation is that employment is very, very strong and even a substantial slowdown probably won't raise unemployment to unmanageable levels.
- dragonwriter 4y ago
  > I don't think anyone is surprised by this. CPI at 7.1% is better than expectations and trending downwards but it's still way above target. If actual monthly CPI inflation had been 0 since July, the 12-month trailing number would still be high because its a 12-month trailing number; OTOH, PCE inflation is not nearly as low, even looking at the monthly numbers (not really high, except in the 12 month trailing, but not low and still noisy), so, given the Fed's preference for PCE, its easy to see why they still see the need for monetary brakes, looking at current, not jusy 12-month trailing, inflation.
stjohnswarts 4y ago
It's highly unlikely they go above 6%. This isn't the 70s, we're coming out of a pandemic and the system is still settling from an intense shock, by the end of 2023 we will be in a much better position. There is always a chance of Taiwan invasion or Russia launching a wider war, but those seem under 10% likely currently.
dragonwriter 4y ago
> For those wondering how the Fed can possibly be so aggressive in light of the recent CPI miss Well, the first thing you’d need to know about that is the Fed doesn’t use CPI, it uses PCE to measure inflation. The two are usually closely correlated, but PCE went significantly higher in the recent spike and hasn’t come back as close to normal as CPI has. https://www.stlouisfed.org/publications/regional-economist/2022/sep/making-sense-inflation-measures https://www.stlouisfed.org/publications/regional-economist/2...
- abirch 4y ago
  I'd argue that the Fed wasn't aggressive. If it were aggressive and did another 75 basis points inflation would stop and the next recession that's looming in Q1 or Q2 next year would have arrived.

nverno 4y ago

> The good news is that what the Fed does matters very little. I cant reconcile this statement with the previous history you've discussed.

huijzer 4y ago
I agree that the text above maybe was not so well put, but also I do think there is a point indeed: the Fed cannot strictly control what will happen. What I currently see everywhere still is that the psychology of buyers hasn’t changed yet. Tesla/ASML/Twilio etc are trading at ridiculous P/E ratios, house prices are still high, some people are earning money on selling their second hand electric car to a third buyer for a higher price and everyone knows that basically everything is too expensive. Once people stop looking in the rear view mirror and expect that some things might actually be cheaper next year, then that should help a lot

hnthrowaway0328 4y ago

I don't really think Powell has the political will to imitate Volcker. The election is close and I see no way Biden's government will accept an economical collapse at the end of the second term. The political resistance will be paramount, and from both sides. Maybe, just maybe, the outcome is to raise to medium-high, and then cut back to medium but stay there for long term. There will be a recession at the end of rate hiking, but once Russia and China capitulate the economy will boom again and the Federal Reserve then stand a much better position figuring things out.

nverno 4y ago
> The election is close and I see no way Biden's government will accept an economical collapse From what I've read, it was very damaging to Jimmy Carter's reelection, so you're probably right about this.
- reducesuffering 4y ago
  It was, Jimmy knew this, and he still appointed Volcker to do what he had to do to protect the US economy in the long term. Contrast that to our last President that was screaming in caps on Twitter demanding that the Fed cut rates to 0%. https://twitter.com/realDonaldTrump/status/1171735691769929728 https://twitter.com/realDonaldTrump/status/11717356917699297... I don't know how one could be unashamed currently being a part of that party.
  - nverno 4y ago
    > Jimmy knew this, and he still appointed Volcker to do what he had to do to protect the US economy in the long term Right, this is probably pretty rare amongst politicians- the willingness to sacrifice their career for the greater good (or what they believe is for the greater good).
  - roflyear 4y ago

echelon 4y ago

> rates are going much, much higher than you think possible. So buckle up. It's rare to get such a clear signal from the Fed. Increase in CPI is slowing. Rate hikes are slowing. Energy isn't getting costlier. China is opening up again. A core component of these metrics is housing. If housing prices fall, what more is there left for the Fed to do? I'm cautiously optimistic. Though I acknowledge it could get much worse, the signs I'm seeing seem to point to a quick (~1 year) recovery.

tootie 4y ago

I don't think anyone is surprised by this. CPI at 7.1% is better than expectations and trending downwards but it's still way above target. That being said, rates have been near zero for so long, I don't see how they would need to raise rates to any astronomical level. Powell has been pretty clear on where he expects rates to land by end of 2023 and that's in the 5-6% range. So more raises are baked in, but the pace and intensity will continue reacting to CPI unemployment reports. Mind you that GDP is not part of the calculation. I'm also calling shenanigans across the board on the notion that "Fed will cause a recession" because it's become a pretty meaningless distinction. The definition of a recession is essentially arbitrary but typically tied to GDP which is not part of the Fed's mandate. If you want to talk pragmatism, inflation is hurting consumers while employment is still overheated. GDP contraction may as well be a rainstorm in the middle of the ocean. Looks bad, but really who cares? Inflation is hurting us now. The labor marker has barely released pent up tension let alone started to slacken. Of course they'll keep raising and everyone aside from equity investors will be better off for it.

vkou 4y ago
> Looks bad, but really who cares? People who will lose their jobs to the recession will care quite a bit. For most people, it's better to be employed in an inflationary environment, than unemployed and broke in a recession.
- tootie 4y ago
  I think you missed my point. The Fed will definitely react unemployment. That's their mandate. I'm specifically saying they won't react to GDP which is what defines a recession. Unemployment hurts. Inflation hurts. GDP is just a number. That's why the Fed has to balance inflation and employment. The current situation is that employment is very, very strong and even a substantial slowdown probably won't raise unemployment to unmanageable levels.
dragonwriter 4y ago
> I don't think anyone is surprised by this. CPI at 7.1% is better than expectations and trending downwards but it's still way above target. If actual monthly CPI inflation had been 0 since July, the 12-month trailing number would still be high because its a 12-month trailing number; OTOH, PCE inflation is not nearly as low, even looking at the monthly numbers (not really high, except in the 12 month trailing, but not low and still noisy), so, given the Fed's preference for PCE, its easy to see why they still see the need for monetary brakes, looking at current, not jusy 12-month trailing, inflation.

stjohnswarts 4y ago

It's highly unlikely they go above 6%. This isn't the 70s, we're coming out of a pandemic and the system is still settling from an intense shock, by the end of 2023 we will be in a much better position. There is always a chance of Taiwan invasion or Russia launching a wider war, but those seem under 10% likely currently.

dragonwriter 4y ago

> For those wondering how the Fed can possibly be so aggressive in light of the recent CPI miss Well, the first thing you’d need to know about that is the Fed doesn’t use CPI, it uses PCE to measure inflation. The two are usually closely correlated, but PCE went significantly higher in the recent spike and hasn’t come back as close to normal as CPI has. https://www.stlouisfed.org/publications/regional-economist/2022/sep/making-sense-inflation-measures https://www.stlouisfed.org/publications/regional-economist/2...

abirch 4y ago
I'd argue that the Fed wasn't aggressive. If it were aggressive and did another 75 basis points inflation would stop and the next recession that's looming in Q1 or Q2 next year would have arrived.