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Originally Posted by eanzenberg
Ok but are we around 2.9% inflation today? If expected inflation remains flat till the rest of the year, what is the point of lowering rates given the risk to increased inflation? Or is your argument that because these lag so much, if rates remained constant, would the risk of a slowdown or stagflation increase?
I’m genuinely interested to understand this viewpoint. It looks like the goalposts of 2% terminal got moved up to 3%, or it looks like Powell is not actually going to lower rates 3-4 times this year. The bond market is favoring the former at this point. Or, is the argument that lowering rates this year will still yield lowered inflation into next year?
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If rates are held too long at current levels then the risk is an unnecessary recession. The lag of policy impact is a big part. Another part is that data is also lagged - so it may take time to realize a recession is in-motion. By then the remedy (cutting rates) is made even more difficult. This is because once recession takes hold, you will likely see a decline in inflation pressure. The Fed will attempt to stimulate - typically concurrent with fiscal policies. These are often poorly coordinated and (also frequently) overdone.
This starts the cycle again… overcorrection. Like a driver holding a corrective counter-steer too long and spinning out.
Personally, I expect we’ll get a minor recession. I think they are holding policy too tight for too long. Savings depletion is going to hit very soon (about 12 months behind schedule) and then the full bite of the rapid hike cycle will be felt. Some data is suggesting this already.