“Inflation is just like alcoholism. In both cases, when you start drinking or when you start printing too much money, the good effects come first, the bad effects only come later.”
— Milton Friedman
Friday Hangover Charts
The Fed has drained the punchbowl, and all that’s left to do is wait and find out how bad the hangover’s going to be.
It was a heck of a party, so you’d expect a heck of a headache. To try to ease the landing, Powell has generously served us some black coffee and walked us around the block.
Are we feeling better? Can we handle a few more rate hikes?
Let’s be honest: What we really want is another drink.
But things would have to get pretty bad before the Fed considers a hair-of-the-dog rate cut.
We may not need it, though. Maybe the coffee and the walk is all it will take?
Let’s check some charts to find out.
We’re sobering up quickly:
The Cleveland Fed InflationNow forecast is falling rapidly — it now sees July CPI at just 0.27% MoM, down from last week’s estimate of 0.33%. Whatever the final number, it’ll be far below June’s print of 1.3%.
Less money, less problems?
Friedman’s quantity theory of money is a little out of fashion, but charts don’t lie, right? M2 has reverted back to the norm, which suggests inflation should, too.
The first half of 2022 was about interest rates. The second half will be about earnings.
Here’s the Atlanta Fed’s first-cut estimate of Q3 GDP, hot off the press this morning — We’re so early to this one they haven’t even updated the title of the chart. But it’s Q3 they mean (not Q2), and they’re going for 2.1%. That seems to me like a perfectly Goldilocks, not-too-hot, not-too-cold kind of number.
Employment will determine how long we’ll be popping acetaminophen.
Jobless claims are still rock bottom, but earnings reports out this week suggest they’re about to turn higher. After reporting Meta’s first ever QoQ revenue decline, Zuckerberg said he expects “to get more done with fewer resources.” And Amazon’s headcount fell by 99,000 in the quarter.
Is it different this time?
Based on consumer sentiment, you’d expect unemployment to be much higher by now. But this is a different kind of cycle, so maybe we break this chart? Older people are not coming back to work and immigrants are not refilling the labor force, so slower growth and lower unemployment may just be the new normal. Risk assets would be fine with that.
Slower for longer?
Things have been sluggish ever since the Great Financial Crisis, with GDP growing at just 2.2%, vs. the longer-term trend of 3.1%. That is probably why Powell told us this week’s Fed Funds raise to 2.5% has already gotten policy back to neutral. But even just getting back to that lower trend line took quite a lot of money printing.
We know we overdid it, and we expect there’ll be a price to pay.
The latest reading of the Consumer Confidence Index released this week shows we are still feeling pretty buzzy (blue line) —but that we also expect the hangover to kick in anytime now (orange line).
But, maybe we’ll get away with it this time?
If so, we promise to never, ever be so irresponsible again.
