I yet another effort to understand where are going with the FED and their so-called NEUTRAL RATE, FRA hosted a podcast with Darius Dale of 42 Macro. It entertains themes familiar to readers of NOTES FROM UNDERGROUND as yield curves and currencies provide the backdrop for a great part of the analysis. We also discussed the next vote of the FOMC to see if the newest GOVERNORS finally find their voice and begin elevating their research into policy. Lisa Cook and Philip Jefferson are well known labor economists that Professor Jason Furman called the most dovish appointees in decades, and yet we have not heard a discouraging word from the FED neophytes.
The sounds of Bullard, Daly and Evans are growing stale as they were the ones pushing QE and lower for longer rates that proved the undoing of the worst forecast ever: transitory inflation. I wonder if Powell’s ridiculous statement on the NEUTRAL fed funds rate being 2.25%-2.5% stemmed from some quiet dissension from the new sitting GOVERNORS. On Tuesday, there was a rapid rise in yields in the short end of the curve as San Francisco Fed President Mary Daly et al expounded on the need for more aggressive tightening to curb inflation.
I also posit that the rise in rates may have been in response to a note published Monday night by Zoltan Pozsar, titled War and Interest Rates. The piece covers our favorite topic: global political economy. It is worth reading at least twice. A key takeaway is that Pozsar maintains that we need to take Powell at his word about his will to fight inflation and that the “risk of the FED hiking to 5or 6% is very real, and ditto the risk of rates cresting there despite economic and asset price pain.” If Pozsar is correct … well, do the math.