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I am pretty into investing and for the past two years have been doing it almost solely on the basis of macro principles. Inflation in the last 6 months in the

I am pretty into investing and for the past two years have been doing it almost solely on the basis of macro principles. Inflation in the last 6 months in the US, as measured by the Fed’s CPI, has been about 2%. All the higher inflation headlines are simply comparing the CPI 12 months ago to today, but the fact of the matter is ever since June/July CPI’s annualized inflation is already at roughly 4% or lower. The Fed may not raise interest rates more than 0.5% above where they are today. If they stop there, the recession risk is IMO minimal because employment metrics are still very strong. Almost all journalists do not know or understand this, which is why a lot are hand wringing that rates may need to raise much more from where they are today (to Volcker levels) to combat inflation, because from their perspective we have raised them so much only for inflation to have gone down by a third. What they don’t realize is we are already past the inflection point, and interest rate swaps aren’t pricing in much more increases. At least in the US, IMO the risk of a recession is minimal

lamontcg 4y ago
Because unemployment is low that means that the Fed can't drop rates at all or else inflation will come back. And it is likely that if the Fed pauses rate hikes and the economy doesn't fall into recession that there will be another boom and high inflation again, which will kick off more rate hikes. This is the difference between short-term reactions of inflation to rates and long-term reactions. What the Fed needs to meet its goals is unemployment running at 6-8% so that there's slack in the labor market. Until that happens, inflation will persistently come back. That implies that the Fed must create a recession to increase unemployment before it meets its goals. And I suspect that it will be sufficient for the Fed to maintain rates at roughly where they are for 6-12 months in order to achieve a recession. We've spent way too long on cheap rates and there's too many zombie investments that require borrowing at stupidly low rates. When those loans adjust to higher rates and the borrowing costs of those entities double or triple (just like an ARM) those entities should all go under. You don't have to look past the vacancies in the malls and downtown cores of cities. my view of "everyone is probably wrong" is how much everyone is predicting a soft-landing or mild recession in the US (including the title article, which is a good gauge of the centrist position). Rates are already at a level where they should cause detonations in the US economy -- it will just take 6-12 months at these current levels (and historically recessions that followed rate hikes have happened after 6-12 months -- there are time delays in the system).
- opportune 4y ago
  Typical targets for “full employment” are around 4%. 6-8% is not only unnecessary but contrary to the Fed’s other raison d’etre (besides combatting inflation) of full employment, which includes combatting higher unemployment than is necessary. Increasing interest rates has systemic effects that take a while to propagate. We have already seen this reflected in CPI (which is also partially due to stabilizing after the supply shock of the war in Ukraine), and unemployment may get a bit worse than it is now, but the Fed absolutely will not want to increase unemployment into the ranges you mention unless absolutely necessary to combat inflation, because it’s contrary to their goals.
- hyperpape 4y ago
  You should say more about why you think 6-8% unemployment is required. From September 2014 - February 2020, unemployment was below 6% without signs of significant inflationary pressure. I'm not saying you're wrong (those periods are different from the present in a lot of ways), just that your reasoning isn't very apparent.
  - lamontcg 4y ago
    I didn't say that inflation would reappear at 5.99% unemployment. They need >6% so there's a gap between here and there. Right now we're clearly at the rail and unemployment has not budged. The jobs overhang has significantly abated, but that has been a short-term reaction to the policy changes, and it can change back on just as short of a term.
    - hyperpape 4y ago
      > I didn't say that inflation would reappear at 5.99% unemployment. I didn't say you did, just that you haven't said anything to motivate the 6-8% number. It's plausible sounding, but as far as what you've said so far, you might as well have drawn those numbers out of a hat.
      - lamontcg 4y ago
Izkata 4y ago
> If they stop there, the recession risk is IMO minimal because employment metrics are still very strong. Typically unemployment doesn't spike until months after recessions begin: https://fred.stlouisfed.org/series/UNRATE https://fred.stlouisfed.org/series/UNRATE
dragonwriter 4y ago
> Inflation in the last 6 months in the US, as measured by the Fed’s CPI There is no such thing as “the Fed’s CPI”. BLS publishes the CPI, which the Fed does not use. The Fed uses the PCE, published by the Bureau of Economic Analysis.
- opportune 4y ago
  The BLS publishes it, but the Fed looks at it and hosts it on their site in a digestible format: https://fred.stlouisfed.org/series/CPIAUCSL https://fred.stlouisfed.org/series/CPIAUCSL

lamontcg 4y ago

Because unemployment is low that means that the Fed can't drop rates at all or else inflation will come back. And it is likely that if the Fed pauses rate hikes and the economy doesn't fall into recession that there will be another boom and high inflation again, which will kick off more rate hikes. This is the difference between short-term reactions of inflation to rates and long-term reactions. What the Fed needs to meet its goals is unemployment running at 6-8% so that there's slack in the labor market. Until that happens, inflation will persistently come back. That implies that the Fed must create a recession to increase unemployment before it meets its goals. And I suspect that it will be sufficient for the Fed to maintain rates at roughly where they are for 6-12 months in order to achieve a recession. We've spent way too long on cheap rates and there's too many zombie investments that require borrowing at stupidly low rates. When those loans adjust to higher rates and the borrowing costs of those entities double or triple (just like an ARM) those entities should all go under. You don't have to look past the vacancies in the malls and downtown cores of cities. my view of "everyone is probably wrong" is how much everyone is predicting a soft-landing or mild recession in the US (including the title article, which is a good gauge of the centrist position). Rates are already at a level where they should cause detonations in the US economy -- it will just take 6-12 months at these current levels (and historically recessions that followed rate hikes have happened after 6-12 months -- there are time delays in the system).

opportune 4y ago
Typical targets for “full employment” are around 4%. 6-8% is not only unnecessary but contrary to the Fed’s other raison d’etre (besides combatting inflation) of full employment, which includes combatting higher unemployment than is necessary. Increasing interest rates has systemic effects that take a while to propagate. We have already seen this reflected in CPI (which is also partially due to stabilizing after the supply shock of the war in Ukraine), and unemployment may get a bit worse than it is now, but the Fed absolutely will not want to increase unemployment into the ranges you mention unless absolutely necessary to combat inflation, because it’s contrary to their goals.
hyperpape 4y ago
You should say more about why you think 6-8% unemployment is required. From September 2014 - February 2020, unemployment was below 6% without signs of significant inflationary pressure. I'm not saying you're wrong (those periods are different from the present in a lot of ways), just that your reasoning isn't very apparent.
- lamontcg 4y ago
  I didn't say that inflation would reappear at 5.99% unemployment. They need >6% so there's a gap between here and there. Right now we're clearly at the rail and unemployment has not budged. The jobs overhang has significantly abated, but that has been a short-term reaction to the policy changes, and it can change back on just as short of a term.
  - hyperpape 4y ago
    > I didn't say that inflation would reappear at 5.99% unemployment. I didn't say you did, just that you haven't said anything to motivate the 6-8% number. It's plausible sounding, but as far as what you've said so far, you might as well have drawn those numbers out of a hat.
    - lamontcg 4y ago

Izkata 4y ago

> If they stop there, the recession risk is IMO minimal because employment metrics are still very strong. Typically unemployment doesn't spike until months after recessions begin: https://fred.stlouisfed.org/series/UNRATE https://fred.stlouisfed.org/series/UNRATE

dragonwriter 4y ago

> Inflation in the last 6 months in the US, as measured by the Fed’s CPI There is no such thing as “the Fed’s CPI”. BLS publishes the CPI, which the Fed does not use. The Fed uses the PCE, published by the Bureau of Economic Analysis.

opportune 4y ago
The BLS publishes it, but the Fed looks at it and hosts it on their site in a digestible format: https://fred.stlouisfed.org/series/CPIAUCSL https://fred.stlouisfed.org/series/CPIAUCSL