Ok, your point is valid, but cutting rates with the current inflation backdrop is still a bit like stepping on the brake and gas simultaneously. Plus, reducing the government’s interest expense could lead to EXTRA Federal spending, negating the benefit of lower rates for both deficit and inflation control purposes.
Now the Fed would never do this, but if we insist on cutting rates here, we should still do true QT by outright selling long bonds from the balance sheet. Then you eliminate excess interest income on the short end for rich savers AND you crush risk assets with higher long-term rates (since the government is heavily weighted to short term debt, the higher interest paid on the long end is less consequential from a deficit standpoint). You hopefully get some deficit reduction, more rational risk asset valuations, and most importantly, lower inflation. If you get a recession, you could just end the QT. Instead, the Fed is already reducing fake QT (roll off), a defensive measure to protect the treasury market. They are all turned around at the moment.
I agree that rate hikes can’t fix the inflation the US currently faces because households and corporations have termed out the debt and treasury interest is enough to generate excess income for the richest people, which enables outspending those with fewer resources. But the solution is NOT to cut rates which would stimulate the economy beyond capacity, compounding the inflation problem. The most logical solution is to withdraw the fiscal. Since DC won’t cut spending, the second most logical solution is true QT, which means selling long bonds, not just roll off. This would more directly hit borrowing rates, which are pegged off the ten year, not FFR (FFR is closer to the income the rich people get from the Treasury as excess income). This approach would lead to a bear steepener in the yield curve, crush risk assets, and reduce inflation through the reverse wealth effect.
Unorthodox is good. “Common sense” needs to be challenged sometimes. Unless you have an objection, I’m going to pick this up for my next newsletter post. Thanks for the good work, I’m a big fan!
Great article! Gave me something to think about for the next few days. I’m still confused on what exactly credit and fiscal impulses are. Could you explain them or lead me in a direction somewhere that does? I’m somewhat of a new investor and don’t really understand. Thanks
Any way or ideas to quantify the impact of short term rates on credit and fiscal impulses? For example, fed funds rate of 5% = 300B/quarter fiscal impulse, 50B/quarter credit (net 350B/quarter), and 4% = 200B/quarter fiscal impulse, 100B/quarter credit (net 300B/quarter).
I would be curious to see in such a model where rates decreasing shifts back from disinflationary to inflationary. For example. 1% = 5B/quarter fiscal impulse, 500B/quarter (net 550B/quarter). Also assuming here that QT/QE, treasury issuance structure/buybacks, fiscal spending habits, SLRs are constant.
Ok, your point is valid, but cutting rates with the current inflation backdrop is still a bit like stepping on the brake and gas simultaneously. Plus, reducing the government’s interest expense could lead to EXTRA Federal spending, negating the benefit of lower rates for both deficit and inflation control purposes.
Now the Fed would never do this, but if we insist on cutting rates here, we should still do true QT by outright selling long bonds from the balance sheet. Then you eliminate excess interest income on the short end for rich savers AND you crush risk assets with higher long-term rates (since the government is heavily weighted to short term debt, the higher interest paid on the long end is less consequential from a deficit standpoint). You hopefully get some deficit reduction, more rational risk asset valuations, and most importantly, lower inflation. If you get a recession, you could just end the QT. Instead, the Fed is already reducing fake QT (roll off), a defensive measure to protect the treasury market. They are all turned around at the moment.
I agree that rate hikes can’t fix the inflation the US currently faces because households and corporations have termed out the debt and treasury interest is enough to generate excess income for the richest people, which enables outspending those with fewer resources. But the solution is NOT to cut rates which would stimulate the economy beyond capacity, compounding the inflation problem. The most logical solution is to withdraw the fiscal. Since DC won’t cut spending, the second most logical solution is true QT, which means selling long bonds, not just roll off. This would more directly hit borrowing rates, which are pegged off the ten year, not FFR (FFR is closer to the income the rich people get from the Treasury as excess income). This approach would lead to a bear steepener in the yield curve, crush risk assets, and reduce inflation through the reverse wealth effect.
Unorthodox is good. “Common sense” needs to be challenged sometimes. Unless you have an objection, I’m going to pick this up for my next newsletter post. Thanks for the good work, I’m a big fan!
Great article! Gave me something to think about for the next few days. I’m still confused on what exactly credit and fiscal impulses are. Could you explain them or lead me in a direction somewhere that does? I’m somewhat of a new investor and don’t really understand. Thanks
Any way or ideas to quantify the impact of short term rates on credit and fiscal impulses? For example, fed funds rate of 5% = 300B/quarter fiscal impulse, 50B/quarter credit (net 350B/quarter), and 4% = 200B/quarter fiscal impulse, 100B/quarter credit (net 300B/quarter).
I would be curious to see in such a model where rates decreasing shifts back from disinflationary to inflationary. For example. 1% = 5B/quarter fiscal impulse, 500B/quarter (net 550B/quarter). Also assuming here that QT/QE, treasury issuance structure/buybacks, fiscal spending habits, SLRs are constant.