1/
Interesting article this morning from @NickTimiraos ahead of Jackson Hole.
The premise: Long-term interest rates (may) have shifted higher post-pandemic.
Yet, the Fed has not officially acknowledged this shift. It seems this acknowledgement is coming.
Interesting article this morning from @NickTimiraos ahead of Jackson Hole.
The premise: Long-term interest rates (may) have shifted higher post-pandemic.
Yet, the Fed has not officially acknowledged this shift. It seems this acknowledgement is coming.
2/
The article discusses two ways the Fed can make this acknowledgement:
1 β The dot plot (shift median long run dot higher for the first time since 2018)
2 β R-star (more below)
Neither of these have moved post-pandemic. It seems the Fed is ready to put them back in play.
The article discusses two ways the Fed can make this acknowledgement:
1 β The dot plot (shift median long run dot higher for the first time since 2018)
2 β R-star (more below)
Neither of these have moved post-pandemic. It seems the Fed is ready to put them back in play.
3/
The dot plot is straightforward.
Each quarter, Fed officials offer their best estimate of long run interest rates.
While the median estimate has remained steady at 2.5%, progressively fewer officials are seeing rates below the median (from 8 to 3 in last yr).
The dot plot is straightforward.
Each quarter, Fed officials offer their best estimate of long run interest rates.
While the median estimate has remained steady at 2.5%, progressively fewer officials are seeing rates below the median (from 8 to 3 in last yr).
4/
The median est of LT interest rates has remained steady at 2.5% throughout the pandemic (6/2019-present).
In those 4 years, debt outstanding increased by +40% (below), the Shale Revolution died, and the govt began active efforts to re-shore industry.
The median est of LT interest rates has remained steady at 2.5% throughout the pandemic (6/2019-present).
In those 4 years, debt outstanding increased by +40% (below), the Shale Revolution died, and the govt began active efforts to re-shore industry.
5/
Itβs hard to believe that the neutral rate remained unchanged through all of this. IMO the median long-run dot will shift higher.
How will markets handle the rise?
2018 was the only time in modern history where this happened. The S&P did not like it.
Itβs hard to believe that the neutral rate remained unchanged through all of this. IMO the median long-run dot will shift higher.
How will markets handle the rise?
2018 was the only time in modern history where this happened. The S&P did not like it.
6/
R-star is the other way the Fed could communicate a rise in long-term rates.
Laubach and Williams published the most famous estimate of r*, but stopped during the pandemic.
In May, John Williams tweaked the model and resumed publishing estimates.
newyorkfed.org
R-star is the other way the Fed could communicate a rise in long-term rates.
Laubach and Williams published the most famous estimate of r*, but stopped during the pandemic.
In May, John Williams tweaked the model and resumed publishing estimates.
newyorkfed.org
7/
Interestingly, after making his adjustments, Williams concluded that r* has remained steady through the tumult of the pandemic (r* at .5%).
@3F_Research updated the original model at the beginning of the year (see thread) and r* had jumped to 2%.
Interestingly, after making his adjustments, Williams concluded that r* has remained steady through the tumult of the pandemic (r* at .5%).
@3F_Research updated the original model at the beginning of the year (see thread) and r* had jumped to 2%.
@3F_Research 8/
Our guess is that β moving forward - the LW model begins to boost r* (model likely to get tweaked again but must stay on message for now).
The median long-run dot will move higher.
And, Powell will begin incorporating these concepts into his comments.
Our guess is that β moving forward - the LW model begins to boost r* (model likely to get tweaked again but must stay on message for now).
The median long-run dot will move higher.
And, Powell will begin incorporating these concepts into his comments.
END/
In sum, the pandemic may have flipped us from a savings glut to a savings shortage almost overnight.
If so, markets have more adjustments to make (fixed income and equity).
In any event, thought-provoking article by Nick...these are my random Sunday thoughts.
In sum, the pandemic may have flipped us from a savings glut to a savings shortage almost overnight.
If so, markets have more adjustments to make (fixed income and equity).
In any event, thought-provoking article by Nick...these are my random Sunday thoughts.
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