Thoughts From The Divide: Danger to Itself

In an op-ed for MSNBC, the “former Federal Reserve economist” warned against the Fed keeping “interest rates too high for too long”, which would cause it to “fail at its job” and snatch defeat from the jaws of victory. Sahm argues that the economy is “on course” for a soft landing, but “Federal Reserve Chair Jay Powell is not flying the plane, despite the popular narrative” (which is a far kinder metaphor than Jay being a toddler in the back seat with a toy steering wheel). Sahm suggests that “giving the Fed credit means we could learn the wrong lesson”.
BY JON WEBB

Thoughts From The Divide: Danger to Itself

  • Posted on January 5, 2024
  • by MI2 Research

“… the Fed is the biggest risk to soft landing next year”

In an op-ed for MSNBC, the “former Federal Reserve economist” warned against the Fed keeping “interest rates too high for too long”, which would cause it to “fail at its job” and snatch defeat from the jaws of victory. Sahm argues that the economy is “on course” for a soft landing, but “Federal Reserve Chair Jay Powell is not flying the plane, despite the popular narrative” (which is a far kinder metaphor than Jay being a toddler in the back seat with a toy steering wheel). Sahm suggests that “giving the Fed credit means we could learn the wrong lesson”.

“Powell did not unload the docks in Los Angeles, take a second job, give vaccine shots or drill for oil. These people are the ones who brought inflation down in 2023. They are the ones flying the plane.” We agree with Ms Sahm: it’s hard to imagine Powell could miss all these obvious photo ops.

With some acknowledgement that the Fed helped staunch the bleeding by being “lender of last resort” by “opening 11 new lending facilities to stabilize markets at the start of the pandemic” and by stepping in “when Silicon Valley Bank failed”… “averting a widespread crisis in financial markets”, Sahm casts her lot with the “adjustment cuts” crowd, saying that with inflation “moving down fast toward the Fed’s target of 2%”, the longer the Fed waits to cut, the greater the burden on families or small businesses looking to borrow”. “If people have to pull back on spending and investment too much, we could end up in a recession.” Blast!

Larry Summers appears to now be drifting toward the soft landing camp too (as Sahm trumpeted on Twitter), shifting from suggesting that “soft landings represent the triumph of hope over experience” with the more optimistic “occasionally, hope may triumph over experience”, and “it looks better, more likely than 6 or 8 months ago”. Larry did, however, in the next breath, warn that there is still a risk that the market is overestimating the pullback in inflation and, consequently, the Fed’s room for easing. It’s hard to tell if Larry just wishes to have his cake and eat it, or if he genuinely believes this, but if the latter, the container shipping rate spike and ship rerouting certainly won’t help. Either way, Larry warns that the easing of financial conditions would “raise a lot of questions about price stability”.

https://www.gocomics.com/calvinandhobbes/1993/01/31

Other posts

C8 Currency Compass – The end of the implied USD equity hedge? – May 2025

BY JON WEBB
European investors now own 15% of US stocks, whilst they have reduced EURUSD and GBPUSD hedges over the past 4 years, as any risk aversion from lower US equities has driven EURUSD lower - being underhedged counterbalances US equity returns. However, this did not work last Summer and the USD has been notably weak during the recent equity sell-off (see full discussion overleaf). With this correlation reversed, we note that European investors now find themselves underhedged their US equity exposure. It has been a volatile month for FX however the USD held key levels and recovered from the lows as US trade policy has become more measured.  The longer-term risks remain for USD, as the Administration attempts to rebalance the US economy, whilst positioning is structurally long USD. Read more →

Thoughts From The Divide: Relatively Speaking

BY JON WEBB
In the second half of last year, as we continued to ponder the ever-impressive strength of the US consumer, we highlighted research on the subject of “excess” saving (which still seems a misnomer), noting JPM’s analysis that saw the consumer that had exhausted the various stimmy payments. Soon after, we discussed research from the San Francisco Fed that argued “a larger fraction of aggregate savings remains in the economy than previously expected”, thanks in part to “a comprehensive data revision”. The piece concluded that those savings would last until “the first half of 2024”. Well, while tomorrow may never truly arrive if free beer is involved (a medical concept?!), the future is now, and the SF Fed has bad news: “Pandemic Savings Are Gone”. As ever with economic research, this comes with a list of caveats, the jist of which are captured in the note accompanying the Fed’s chart below, i.e. savings are gone, relatively speaking. Read more →

A New Approach to Sector Investing

BY SCOTT DOUGLASS
Many advisors that we speak to believe that it is possible to improve client outcomes through tactical management of sector exposure, but developing the right strategy for doing so can be extremely difficult. Please see attached link to a 15-minute webinar where Craig Cmiel, Managing Director of C8 Technologies US, and Chris McHeffey, Head of US product at C8, will introduce a powerful new tool that can potentially enable advisors to deliver better returns, lower risk, or both through tactical management of sector exposures. This scientific approach might be a great addition to your toolkit. Read more →
Back to all posts →