- Posted on July 19, 2024
- by MI2 Research
“You risk the golden path if you are… as restrictive as we are now”
While the road to hell is paved with good intentions, it appears that the “golden path” to a soft landing (which by way of reminder is a “triumph of hope over experience”, if you ask Mr. Summers) is paved with rate cuts. In an interview earlier this week, the Chicago Fed president Austan Goolsbee cast another vote in favor of “adjustment cuts”, saying that “You risk the golden path if you are going to be as restrictive as we are now”. Meanwhile, Jerome Powell was quick to assure the audience during his latest interview that “today I am not going to be sending any signals, one way or the other on any particular meeting” as far as rate cuts are concerned. However, that did not prevent the Chair from referring to ol’ reliable of monetary policy, “long and variable lags”, to explain why, “if you wait until inflation gets all the way down to 2%, you’ve probably waited too long”.
However, while the potential path for rates and any forecasts thereof might have been a focus (see moderator David Rubenstein’s jokes at the end of the interview), Powell also touched on Fed independence. Though the Chair spent some time explaining that an independent central bank “does a better job getting inflation under control” and is now “accepted wisdom in all advance economies around the world”, he wasn’t shy in explaining that the US deficit is “on an unsustainable path”: “the path we’re on where we’re running… large deficits at a time of full employment and healthy growth is not a sustainable one over time”. Former CEA Chief Economist, Ernie Tedeschi backed up the Chairman on the importance of independence, arguing in an article summarizing a larger research piece that “our research indicates that a politically captured Fed could once again quickly lose control over prices during significant economic shocks.” As the discussions of Fed independence and fiscal dominance continue to smolder, we are reminded of the First Rule of Fight Club and a relative of cui bono, “Why now?”. (For an interesting look at some of the legal side of Fed independence, see here and here).
Though there’s the adage about the best-laid plans, it appears that former President Trump comes down squarely on the other side of Fed independence. During his speech at the RNC, the Republican nominee said, “I will end the devastating inflation crisis immediately, bring down interest rates, and lower the cost of energy”, his plan for the latter being “drill, baby, drill”. This statement drew a “fact check” from the WSJ’s live coverage team, which fired back with the reminder that, “Under current law,… the president has no power to directly move interest rates, an authority that rests with the Federal Reserve.” Current law, eh? Whether it was the conversations of the Fed or the grand designs of policymakers, we have unfortunately been reminded of the warning that sometimes, the primrose path isn’t the direction you may want to be heading… “Wide is the gate and broad is the road that leads to destruction”.
https://www.gocomics.com/calvinandhobbes/1995/12/17
P.S. More defaults are popping up in CRE.