“Not excited to see the stock market rallying”
Though the Declaration of Independence includes “the pursuit of Happiness” among the “unalienable Rights”, the stock market may be less than euphoric with Neel Kashkari pursuing his. After Powell’s comments last week fueled a “1,000-point market rout”, the Minneapolis Fed President was quoted from a Bloomberg interview saying he was “happy to see how Chair Powell’s Jackson Hole speech was received”. While the comments were the start of a Twitter kerfuffle, there was some further clarification from Kashkari that “People now understand the seriousness of our commitment to getting inflation back down to 2%”.
Happiness is, however, not the only Fed feelings worth watching. Also on the list are boredom and vindication. On the side of boredom, while Janet Yellen once described QT as “like watching paint dry, that this will just be something that runs quietly in the background” (quoting then President Harker in the process), recent research presented at Jackson Hole, argues the opposite. Using data on the balance sheet and banking activity, researchers found that the expansion of the balance sheet “left the financial sector more sensitive to potential liquidity shocks when the Fed started shrinking it” concluding that “if the past repeats, the shrinkage of the central bank balance sheet is not likely to be an entirely benign process”. Related, as per the Fed’s plan for reducing its balance sheet, September marks the start of the increased caps on the Fed’s balance sheet roll-off.
On the side of vindication, while not quite a straightforward victory lap, recent research from the New York Fed explains how “the inflation we are currently witnessing” is due to “a combination of supply and demand factors”. While that may seem obvious to the casual observer, the research decomposes the drivers of inflation, finding that “roughly 60 percent” of the model-based inflation is explained by “the aggregate demand shock” and roughly 40 percent is explained by “sectoral supply shocks”. How does this lead to vindication? As the note explains, “Our quantitative results clarify why some pundits were wrong to predict a transitory surge in inflation [Ed. As close to a mea culpa as we’ll get?] while others were right in predicting high inflation, but for the wrong reasons.” Note that the links in the excerpt above are from the research note itself… A rebuttal Mr. Summers? The research note concludes optimistically, “In the absence of any new energy or other shock, it is therefore possible that the ongoing easing of supply bottlenecks will cause a substantial drop in inflation in the near term.”
P.S. Energy fallout continues in Europe with a steady stream of anecdata, supply issues, and policy activity.
P.P.S. Mortgage rates recently broke back above 6% and appear, once again, to be on the up and up, which could portend further problems in the housing market.
