Thoughts From The Divide – Releasing the Hounds
“Strangely optimistic”
It’s business as usual for many of the economic trends we’ve been watching. Russia and Germany are having issues with gas turbines. Germany’s Commerzbank is warning of “unforeseeable consequences” beyond “severe recession” if gas supplies are cut and believe the rationing of gas will “probably be inevitable”. All sorts of supply chain issues are making themselves felt, with eggs joining the shortage ranks in Australia. Mortgage Applications saw a week-on-week rebound but are “down 16% from one year ago”. And Robinhood has joined the workforce reduction list, saying it will lay off 23% of its workforce.
However, in the world of FOMC policy, this week saw a remarkable turn. After Powell sparked optimism last week thanks to his comments that the FOMC was basically at neutral (Larry’s rejoinder here), the Fed has, with apologies to Shakespeare, denied a pivot and let slip talking heads once more! In aggregate, it appears that the barrage of speakers (with some, including Daly running multi-day gauntlets!) have been loosed explicitly to bring market expectations of Fed easing to heel. Case in point is Bullard, who said that the Fed would likely have to go to “3.75%-4% by the end of 2022”. Ex-Fed Dudley also looked to quash talk of a pivot, writing, “Don’t be confident about such an outcome”. Daly also pushed back against the idea of a pivot, saying the Fed was “nowhere near almost done”. Evans added to the chorus, saying, “We wanted to get to neutral expeditiously. We want to get a little restrictive expeditiously”. (Expeditiously!) Mester also warned against taking the foot off the tightening gas, saying “it would be inappropriate to—and actually not a good idea to cry victory too early” on bringing down inflation.
P.S. The Dallas Fed lays out a cogent argument about why we aren’t in a recession “Despite Negative GDP Growth”, while the Atlanta Fed, following research on Inflation Expectations, wondered “is this how ‘unanchoring’ begins?”
P.P.S. The Freeport LNG plant that burst in June “remains on track to return to service in early October”.