The Big Picture – May 21st, 2023

Published May 21, 2023

The Big Picture – May 21, 2023

My apologies for the hiatus, but here’s what the last few weeks have made clear: nothing. Inconsistent economic data, lingering uncertainty over small/regional banks, and a looming debt ceiling fiasco have delivered nothing but confusion and enormous swings in Treasury yields. But maybe the most confounding development has been the Fed itself as officials deliver opaque and often conflicting messages in public. Here are a couple of examples.

Last week, NY Fed President (and FOMC vice-chair) John Williams told an audience that the Fed’s “r-star” of neutral real short-term interest rates has dropped to between 0% and .50%. The r-star is a theoretical rate that when added to the Fed’s target inflation rate (2%) indicates a level of rates that is neither stimulative nor restrictive in the long run. So, what he’s indicating is that the current target level of Fed funds of ~5.0% is extremely restrictive compared to 2.5% which is the Fed’s own model of “r-star”. This is important because economists love economic models that attempt to tame messy uncertainty with chemistry-like formulas. And since this information is coming from the FOMC vice-chair, and indicates that current rates are extremely restrictive, it only serves to amplify the confusion around what the Fed is thinking.

In the same week, Dallas Fed President Lorie Logan said that she favors another rate hike in June due to continued hot inflation data. I find that a bit confusing since the Fed’s new favored inflation gauge, the “super-core” CPI (all the things in headline CPI less food, energy, and housing) slowed dramatically in April (see below). Moreover, it’s humorous that Fed officials who disregarded the inflation data in 2022 and said, “this is transient, no need to do anything”, are now saying, “we can’t do anything until the data tell us what to do!”

So, when Fed officials say “inflation”, exactly which measure are they referring to? And why are all these Fed officials running around giving conflicting opinions supported by cherry-picked metrics? Enough already! I remember the good old days when the only Fed official to speak was the Chairman and that was extremely rare. Now we have everyone at the Fed chasing cameras and microphones like a celebrity author on a book tour. Greater transparency was supposed to calm the markets, but I’m not so sure we always need to see the sausage being made and there are clearly times when healthy disagreements behind closed doors should stay there.

If you’re confused by what you read these days the markets agree, and the source of the confusion comes from people being people. Aspiring future Fed chairman smell blood and are positioning themselves politically. Career economists are defending the veracity of their beloved econometric models. And everyone is thinking about future board seats, book deals, and speaking engagements when their time at the Fed is up. We live in an age when drawing attention to oneself has gone from distasteful to essential career advice. Why should the Federal Reserve be immune to societal forces that raise “social media influencer” to the top of potential career lists? Nope, you can’t blame them, but this trend toward having FOMC meetings in front of cameras is turning “transparency” into chaos.           

With a slow-boil banking crisis, a potential (but hopefully low-probability!) U.S. debt crisis, and rising defaults on enormous levels of commercial and household debts, a festivus-inspired “airing-of-grievances” among Fed members is not helpful. They need to pick a measure, set a plan, adjust when new information demands, communicate consistently, and then shut up.

Have a great week!

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