Interview w/ Atlanta Fed President Raphael Bostic

[utvolford]

The CNBC interview with Atlanta Fed President Raphael Bostic was perhaps the most clear and concise summary of the Fed viewpoint I have seen up to now.

TLDR:

- He thinks we will see a slowdown but avoid recession

- He thinks it wont be necessary to cut rates until mid next year

- They are stubbornly chasing the 2% target instead of accepting something rangebound between 2-4% (unrealistic?)

Notably he is not the only one of the Fed members who have started repeating the narrative that they plan to cut rates on the short end and that 5.25+ becomes too restrictive in real terms as headline inflation trends lower.

This interview has to be taken in context of the recent move up in long term rates and the flattening of the yield curve. I only hope they will cut sooner rather than later. We have a magical opportunity for US10Y to hang out at 5% and then cutting short rates to un-invert the yield curve before a recession hits and possibly getting that soft landing they are trying so hard for.

I am doubtful the Fed could be that nimble, though. Thoughts?

 

[gregorybnorman]

@utvolford If inflation is only a demand or credit boom problem, then stubbornly holding rates makes sense. If, as I believe, that inflation is a supply/demographic/reshoring/realignment phenomenon then rates can't do much and rates that impede investment may actually do more harm.

I think central bankers erroneously believe that inflation is a target to aim for, rather than a symptom of other economic conditions - but what do I know?

 

[fire_starter]

@gregorybnorman

I think central bankers erroneously believe that inflation is a target to aim for, rather than a symptom of other economic conditions - but what do I know?

I am not sure why because I have heard central bankers say the following as sort of a swipe at law makers and their inability to get anything done something like

"The Central Bank has one tool, interest rates and its a bludgeon not a scalpel , we do not set fiscal policy , we do not set tax rates, we do not set spending priorities , we do not set labor policy , we do not set education policy , we do not set health care policy "

In the GFC I can remember Bernanke pretty much looking at congress and saying "Well we have dropped rates to zero , that is all the central bank can do, the ball is in your court SO FOR THE LOVE OF GOD DO YOUR DAMN JOBS AND DO SOMETHING!"

Of coarse he wasn't that direct or blunt but that is what he was basically saying.

 

[gregorybnorman]

@fire_starter Yeah, that is true. Their power is limited. I'm pretty sure Powell is frustrated by the burgeoning deficits and I thought that maybe his whole higher for longer schtick was a message to the legislature and executive that their spending cannot be sustained in a higher for longer scenario.

However, he explicitly stated that he did not think the current level was problematic, and it certainly would not enter into his decision as to raise rates or not. Then again he has stated that our long term trajectory is not sustainable. Maybe he is just good at hiding his real agenda.

 

[utvolford]

@gregorybnorman

I think central bankers erroneously believe that inflation is a target to aim for, rather than a symptom of other economic conditions

That is a great way to put it.

 

[francis24]

@gregorybnorman Is there any data to believe that reshoring / friendshoring is happening? As far as I can tell, Chinese exports are just being proxied through SE Asian countries to dodge import curbs etc. Nothing has meaningfully changed after COVID, lockdowns, trade wars etc.

Demographics have not really changed in any meaningful way. What about them? Immigration will keep American demographics doing fine.

 

[gregorybnorman]

@francis24 Demographics are indeed having an impact. The millennial generation is quite large and is entering, or has recently entered, household formation years. The pressure on housing supply is evident.

There is evidence of reshoring/friendshoring. It's slow, but is occurring - and it is slow because of the inflationary stress. The overwhelming reason given for not doing more, and faster, is because companies do not have access to enough labor in the US. Reshoring is now explicitly written in to policy - a reversal of 40 years+ of offshoring.

https://www.cnn.com/2022/10/09/economy/manufacturing-jobs/index.html

 

[fire_starter]

@gregorybnorman

The pressure on housing supply is evident.

Its not just demand from Millennials it is supply too, pre 2008 GFC the USA was building 2 million new houses a year, then it dropped off a cliff and never really recovered

Yes part was the GFC and recession and oversupply , but the more I study the housing market the more I am convinced its not demand its supply , and in the USA its just too hard to build housing where people want to live . Local governments have put up all sorts of zoning restrictions making new housing in many areas all but impossible , not to get political but NIMBY's ruined the housing market . It wasn't blackrock or hedge funds , or airbnb it was your local home owners "worried" the apartment being planned 6 blocks from their home will "ruin the character of the neighborhood".

Some locations have all but outlawed affordable homes, there are some neighborhoods that require new lots to be 1/2 acres and new homes be 4000 square feet plus, because you know if a starter home gets built 3 blocks from you it will drag down your property values .

 

[colton18]

@utvolford Bostic also called for a rate pause in September... 2022.

https://www.bloomberg.com/news/arti...pause-in-september-may-make-sense-bostic-says

 

[matteus4god]

@utvolford “No recession” lol

He has to say that. But no the business cycle is still a thing. Recession is very much on the horizon.