We spent a lot of the week trying to figure out is the Fed ahead of the
behind where the market's relationship, whereas the Fed compared to where it
thought it was gonna be, what its plan is.
The Fed is behind the curve. There've been six jolts to the Fed in
the last six weeks. The seasonal adjustments to the CPI took
the trend downwards in inflation during 2022 out of the data.
The inflation figures for the last several months of 2022 were revised
upwards. Further taking any sign of declining
inflation out, we got a CPI number that was very disappointing in terms of how
high the level and the core was. And that was reinforced by the P.C.
information when it came in. All the indicators for January read
Strong, suggesting that monetary policy has not yet gotten substantial traction
in slowing the fullness of the aggregate economy down.
The wage inflation numbers, as they have been revised, no
longer show the kind of reductions that we had been expecting or many had been
expecting to see. And you've seen interest straight
move to ratchet upwards with the 10 year crossing 4 and the 2 year reaching
record levels. Put all that together and I think a
reasonable assessment of where the Fed is would say that they have not been
this far behind the curve for a year or so.
Once again, the forces, the arguments made by team transitory have
unfortunately looked more like wishful thinking.
And you can see that in the evolution of rhetoric from we will
have a soft landing towards, it's possible that we will have a soft
landing. Of course, it is possible that we will
have a soft landing. But maximizing that limited prospect
depends upon realistically assessing the situation.
Once they assess the situation, realistically, if they're behind the
curve, how do they catch up? What do they do going forward?
What is the policy? Look?
They're not in the right place right now with respect to March.
I saw an estimate suggesting that markets right now are assigning a 22
percent probability to a 50 basis point move in March.
The Fed right now should have the door wide open to a 50 basis point move in
March. No need to be committed to that till we
see the next employment figures to one sees what happens in markets.
But if markets are now saying 22 percent, that means the door isn't open
to that possibility. And there's a very significant chance
that that's going to be the right thing to do.
The main reason to move slowly in monetary policy is because you want to
preserve the option of moving less far. It's looking less and less likely that
the right thing to do is to not raise rates by at least another 50 basis
points. And if that is the right thing to do,
it's best for credibility at its best for ultimate stability to make that move
more quickly. So I've been very disappointed to see
some of the speeches coming out of the Fed that have seemed to leave the march
off the table as a possible place for 50.
And I hope the senior leadership of the Fed will guide to agnosticism on the
possibility of a 50 basis point move in March, and we'll do that sometime very
soon. Larry, all clinging to the notion that
our central bank is independent from the political process in this country and
seem to want to have Jay Powell up for testimony for two days before Congress
next week. We also have a nomination to come, the
new vice chair. This politics necessarily get injected
or already people are talking about possible candidates for the vice chair
position, whether they're a hawk or a dove was something where progressives in
Congress saying, let's get a dove in there.
I guess I'd say this. I'd say that the chairman has an
important opportunity when he testifies to reset.
Expectations and to address the growing credibility problems that the Fed has.
I progressives are making a serious mistake even by their own lights.
If there is a sense that progressive political conviction is guiding the next
nomination and even more, if that's successful in getting a person
confirmed, I think there'll be very little impact on the next two or three
appointments. It took two or three decisions because
the Fed's going to want to show its independence.
The incumbents are going to want to look like they have not been pushed around.
New persons is not going to have media impact.
So you won't affect rates in the short run.
But that sign of politicization will cause issues of medium term expectation
and that will cause the back end of the curve to rise.
So ironically, that kind of political pressure is likely to put more inflation
premium into interest rates and likely to lead to higher long rates, which
means higher mortgage rates for the very people.
Progressives are trying to help. This is really a very misguided and
problematic strategy for progressives. Even if one had their judgment that
what's most important is lower rates and to stimulate the economy.
So I hope they'll back off this kind of public campaign.
Larry, on Sunday begins, the meetings of the National People's Congress over in
China is anticipating new projections for growth, as well as a new economic
team for president. Gee, what are you looking for?
You know, there are two things that people should keep in mind as they're
thinking about China. One is the importance of predictability
and stability. I think that the Chinese underestimate
the extent to which the previously respected members of the financial
community can disappear without that having collateral impact on confidence
and on the flow of capital. And if there's a sense of the
politicization of things, financial to a growing degree, I think that's something
they've got to be very careful. There's a backdrop that's maybe an under
told story, which is that which is what's happening demographically.
NIKKEI stat. Who is the leading watcher of all
things? Demographic tells us in the Washington
Post that China has half as many births last year as it did in 2016.
That is a sea change with extraordinary speed.
If the downward trend had heavily started before Covid, and in addition to
what that means for the labor force, the age structure of the population down the
road, when a population's deciding to have half as many children and have that
revolution in 6 years, it says there's some very fundamental concerns about the
future in that society.