Nov 15, 2022Liked by Peter Nayland Kust

I'm not sure pushing on a string is the right analogy. It's like being at the helm of a good-size boat. They don't respond to control inputs instantly, so inexperienced people will almost inevitably over-control them.

Mortgage rates have more than doubled from ~3% to ~7%. This will inevitably cause a decline in housing prices, which has already started, but sellers are stubborn and it will take time before the full effect is apparent. When you have a substantial decline in real estate prices, people who feel well-off now due to all the paper gains/equity they have in their homes will be less inclined to spend money. The same is true the people's 401ks take a hit via a decline in the stock markets. None of this happens instantly, but it will happen, and then the demand side of things will shrink, which will reduce pressure at least some prices.

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While the lag in effects is undeniable, the problem is that the Fed isn't factoring in that lag when implementing rate hikes.

Following your oversteering analogy, the correct move now for the Fed would be to do...nothing. Let the existing rates work through the system.

If you look at rates vs consumer price inflation after the first phase of the Volcker Recession, a very powerful argument could be made then for doing the same thing then as well--hold rates steady and let the markets rebalance. Volcker did not do that then and Powell has not yet done that now.

Frankly, doing nothing at this point is not a bad idea.

But where the pushing the string analogy comes into play is in the relative rise between the federal funds rate and the 10 year treasury yield. The Fed is increasing the Federal Funds rate but getting smaller and smaller rises in treasury yields in return--just like when you push a string, the back end moves a lot and the front end moves a little. Six months of rate hikes is more than enough time for any lag between the Federal Funds rate and Treasury yields to resolve themselves, which suggests that the more the Fed hikes the less rates will rise.

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