Its like when I watch Artosis or Tasteless give a prediction during an SC2 tournament and immediately be wrong. "caster's curse" i think its called.
Inflation in the last 6 months in the US, as measured by the Fed’s CPI, has been about 2%. All the higher inflation headlines are simply comparing the CPI 12 months ago to today, but the fact of the matter is ever since June/July CPI’s annualized inflation is already at roughly 4% or lower. The Fed may not raise interest rates more than 0.5% above where they are today. If they stop there, the recession risk is IMO minimal because employment metrics are still very strong.
Almost all journalists do not know or understand this, which is why a lot are hand wringing that rates may need to raise much more from where they are today (to Volcker levels) to combat inflation, because from their perspective we have raised them so much only for inflation to have gone down by a third. What they don’t realize is we are already past the inflection point, and interest rate swaps aren’t pricing in much more increases. At least in the US, IMO the risk of a recession is minimal
What the Fed needs to meet its goals is unemployment running at 6-8% so that there's slack in the labor market. Until that happens, inflation will persistently come back. That implies that the Fed must create a recession to increase unemployment before it meets its goals.
And I suspect that it will be sufficient for the Fed to maintain rates at roughly where they are for 6-12 months in order to achieve a recession. We've spent way too long on cheap rates and there's too many zombie investments that require borrowing at stupidly low rates. When those loans adjust to higher rates and the borrowing costs of those entities double or triple (just like an ARM) those entities should all go under. You don't have to look past the vacancies in the malls and downtown cores of cities.
my view of "everyone is probably wrong" is how much everyone is predicting a soft-landing or mild recession in the US (including the title article, which is a good gauge of the centrist position). Rates are already at a level where they should cause detonations in the US economy -- it will just take 6-12 months at these current levels (and historically recessions that followed rate hikes have happened after 6-12 months -- there are time delays in the system).
Increasing interest rates has systemic effects that take a while to propagate. We have already seen this reflected in CPI (which is also partially due to stabilizing after the supply shock of the war in Ukraine), and unemployment may get a bit worse than it is now, but the Fed absolutely will not want to increase unemployment into the ranges you mention unless absolutely necessary to combat inflation, because it’s contrary to their goals.
I'm not saying you're wrong (those periods are different from the present in a lot of ways), just that your reasoning isn't very apparent.
They need >6% so there's a gap between here and there. Right now we're clearly at the rail and unemployment has not budged. The jobs overhang has significantly abated, but that has been a short-term reaction to the policy changes, and it can change back on just as short of a term.
I didn't say you did, just that you haven't said anything to motivate the 6-8% number. It's plausible sounding, but as far as what you've said so far, you might as well have drawn those numbers out of a hat.
The 8% number is motivated by the fact that the economy is highly nonlinear and the Fed really doesn't control how bad the next recession is going to be. It could, of course, be even worse.
I'd also argue that "inflation death cycle" packs a lot of negative political assumptions into it. And the "death spiral" economists were typically worried about decades ago was the deflationary death spiral of savings gluts causing deflation causing more savings.
And my assertion is that "the Fed conquering inflation" cannot be read off of the CPI numbers for the past 6 months. We're still at what the Fed would call "full employment" and inflation is lurking and all we've seen is a short term abatement in inflation. If the economy revvs up again, then in the short term the curve will be the same and inflation will reappear.
For the Fed to consider the job done the curve needs to move so that the economy can rev up again without inflation reappearing. That will only happen if there's more slack in unemployment numbers. If we are at 6-8% unemployment then it will take time for the unemployment rate to fall back down to 3.5% and for inflation to reappear. By creating more unemployment you shift the curve so that the economy can run hot for awhile and grow while keeping wage inflation down. So shifting that curve is what the Fed's actual goal is, they're looking beyond what last months inflation numbers were (and they look not only beyond the y-o-y headline inflation numbers but they look beyond the m-o-m inflation numbers). They want to shift the curve, and the way to shift the curve is to have more slack in the jobs markets, which is economist-speak for a higher unemployment rate.
They also will very likely overshoot whatever target they think they have, they don't have a magic wand to control the economy. They mostly just detonate a few bombs in the economy and they don't know how much dry powder is waiting to go off in secondary explosions. Or the way this is usually phrased, "when the tide goes out we find out who was swimming naked".
And there's a tension here in HN between the oft stated belief that a decade of low rates has led to all kinds of malinvestment, and the belief that we're due for a soft-landing kind of recession. One of those I think has to be incorrect. And looking at the vacancy rates in downtown cores, etc I'm pretty sure the soft-landing story is going to be the wrong one. There are a lot of entities surviving on persistently low short rates, and they're going to go under once their loans adjust. The strict capitalists will celebrate this as bad investments going under and getting flushed, but that comes with pain, just like it was painful in 2008.
Recent inflation was driven primarily by two things significant increase in energy costs. Just like in the the 70s large oil spikes will drive large inflation as the cost of everything requires energy.
Second was sever supply constraints due to lack of labor due to Covid (either people out side, plants running minimally, or older people retiring, or deaths). Labor force participation rates dropped 2% world wide 3% in the use. Overall labor force participation has been slowly decreasing over time (due to countries moving up the development index), but that was roughly a decade worth of gradual reduction that just dropped overnight due to Covid. Supply became severly constrained for the same number of people. Increasing unemployment will only make the situation worse.
Look at world labor force participation rate [1], it still hasn't recovered raising unemployment will only make it worse. Or look at US which dropped almost 3%.
What needs to happen is that needs to recover. It started recovering slightly but still not back to the level it needs to be. That's what will fix inflation, increasing production of goods and services, not restricting them more.
What will increase labor force participation? Increasing wages. For almost-retirees, those with deciding whether to work or not wages aren't sufficient to incent them to do so. Raising wages would bring people back into the labor force (without causing inflation in real terms). Capital is taking such a large portion of the gains of productivity in high productivity countries that wages aren't drawing in people to work. Increase the wages and that will fix itself. That started to happen and the economy started rebalancing, and then govts began stepping in to halt it. As a result the are pushing us towards lower production with supply shortages (more or less stagflation).
1. https://data.worldbank.org/indicator/SL.TLF.CACT.ZS 2. https://www.bls.gov/charts/employment-situation/civilian-lab...
https://www.atlantafed.org/chcs/wage-growth-tracker [ click the "wage level" button ]
And there has been a historically low number of job seekers per job opening:
https://www.bls.gov/charts/job-openings-and-labor-turnover/u...
And the US unemployment rate has been running at historically low levels of 3.5-3.7%:
https://fred.stlouisfed.org/series/UNRATE/
I guarantee you that the top graph there of how wage growth is running is what is most concerning the Fed when they talk about inflation.
We had commodities inflation during the last oil spike around 2010-2014 and the Fed didn't care about that. They know that commodities inflation acts as a tax and a natural brake on the economy and is cyclical in nature, so they didn't act. It didn't show up in wage growth.
We have both acting together right now, but it is the wage growth portion that the Fed is reacting to.
And here's a good short reaction article to Jerome Powell's comments earlier this month:
https://nymag.com/intelligencer/2022/12/jerome-powell-needs-...
Particularly focus on:
> “We’ve made less progress than expected on inflation,” Powell said.
compared to:
> The Labor Department’s consumer price index shows that, on average, prices have risen just 0.2 percent during the last five months — a stark turnaround from the high of 1.3 percent in June
The Fed is not as trivially stupid as the portrayal of the person who can't get past the y-o-y inflation headlines. They understand that CPI inflation is down. Oil and gas prices are back down. Why are they still yapping about less progress than expected keeping inflation under control? They're not pants-on-head stupid. Their definition of inflation encompasses wage growth (and I'd argue that in fact that is the definition of inflation that they are MOST concerned about) and isn't any of the CPI numbers.
And you can read this concern directly from Powell's remarks:
> Despite the slowdown in growth, the labor market remains extremely tight, with the unemployment rate near a 50-year low, job vacancies still very high, and wage growth elevated. Job gains have been robust, with employment rising by an average of 272,000 jobs per month over the last three months. Although job vacancies have moved below their highs and the pace of job gains has slowed from earlier in the year, the labor market continues to be out of balance, with demand substantially exceeding the supply of available workers. The labor force participation rate is little changed since the beginning of the year > [...] > The third piece, which is something like 55 percent of the index, PCE core inflation index, is non-housing-related core services. And that’s really a function of the labor market, largely. The biggest cost, by far, in that sector is labor. And we do see a very, very strong labor market, one where we haven’t seen much softening, where job growth is very high, where wages are very high. Vacancies are quite elevated, and, really, there’s an imbalance in the labor market between supply and demand. So that part of it, which is the biggest part, is likely to take a substantial period to get down. > The other—you know, the goods inflation has turned pretty quickly now after not turning at all for a year and a half. Now it seems to be turning. But there’s an expectation, really, that the services inflation will not move down so quickly, so that we’ll have to stay at it, so that we may have to raise rates higher to get to where we want to go. And that’s really why we are writing down those high rates and why we’re expecting that they’ll have to remain high for a time.
https://www.federalreserve.gov/mediacenter/files/FOMCprescon...
Typically unemployment doesn't spike until months after recessions begin: https://fred.stlouisfed.org/series/UNRATE
There is no such thing as “the Fed’s CPI”.
BLS publishes the CPI, which the Fed does not use.
The Fed uses the PCE, published by the Bureau of Economic Analysis.
Appealing to your sense of whether predictions are correct is a conversation starter at best. We can track forecasts and see how accurate they are.
Anyway, here are two IMF working papers:
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...
Secretly I hope his kids see his achievements and one decides to take the mantle later down the line. It'd be a first in history, a second-generation GSL caster.
I hope things get better, but I think you'd be mad to plan for global growth this year.
Like what countries exactly? They can't even hold the ground they conquered in the previous months in Ukraine. Armenia already asked Russia's help and they refused - it was effectively a fatal blow to CSTO and has far-reaching consequences to the way Russia is perceived among its current and former allies.
And if the GP says that they don't have the military strength to pull that off, well, they don't. But they don't have the military strength to defeat Ukraine, and yet the fighting goes on, in complete defiance of sanity. No, Russia can't (successfully) invade either place. That doesn't mean he won't try. If I were Finland or Poland, I'd be preparing hard right now.
On the other hand, in Finland and Poland there is no similar plan A, only total war with NATO. It is not impossible, but from the geopolitical POV it makes no sense at all.
Because the West is throwing lots of resources at that. Should that resolve crumble, that could change.
> Armenia already asked Russia’s help and they refused - it was effectively a fatal blow to CSTO and has far-reaching consequences to the way Russia is perceived among its current and former allies.
Should the West shift to a more containment-oriented policy, the beyond-Ukraine danger is largely to CSTO countries. (Yes, they are nominal allies, but so was Afghanistan.)
And Russia has backed themselves into a corner, diplomatically. Not even the other CIS members have enthusiasm for Putin. So this idiot, who started this desperate for a legacy, only has a prison sentence for war crimes or a nuclear firework party in his future.
It is right to mock Russia's decisions, it's right to point out how pathetic their war has been, but it isn't right to claim they have no power to affect others near to them.
To fight on territory which isn't recognized as Armenian by everyone else. A reminder that Russian peacekeeping unit is at the Armenian-Karabakh border, not Karabakh-Azeri.
China is building bases around the South China Sea, pushing borders back, commandeering fishing rights, making a claim on Taiwan and their territories, and pushing very close to US naval support in the area. What has the West done?
We're paralysed by our inability to build stuff, and our unwillingness to go against the electorate and actually stop them buying all the Chinese tat that they do. Our reliance on their mineral mining and processing means cutting them out means far worse than a recession in the short term. It would take two decades to even come close to replacing China and at an unimaginable construction cost because much of the world doesn't even make its own steel any more. And China has links, they own significant portions of Africa's mining rights.
China are untouchable and their military and their nukes have nothing to do with it. China has real power. If you ever want to imagine the end of the world, imagine what happens if we can't buy cheap shit from China and follow the thread through to a conclusion.
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But why would they help Russia? That's probably a better avenue of thought. Russia has crazy territory, and resources without the real means to explore of extract.
Russia could make it worth their while.
The latest developments already complicated the getting cheap shit from China part.
Look at the Kurds, Afghanistan, Yugoslavia, Iraq, Iran, Korea, Vietnam, Yemen, Palestine, Egypt, Pakistan, Central America, South America, Africa. Look at the IMF. People like Fred Hampton, MLK, murdered by the West.
> If you ever want to imagine the end of the world, imagine what happens if we can't buy cheap shit from China and follow the thread through to a conclusion.
The west should stop exploiting all the poorer countries. Capitalism sucks. If the west can’t live without exploiting other people, the west doesn’t deserve comfy lives.
Although I agree with your sentiment in general, I don't like when people lump Yugoslavia with the rest. The West didn't start that war, it effectively ended it. They did what they failed to do in Rwanda.
You could say 'it's not their job, if people like killing each other let them kill themselves.' But it wasn't so. There were aggressors and there were victims. There is something sinister in watching people die when crying for your help just because you don't want to get involved. So while cases like Iraq and Afghanistan are clear-cut - these were just acts of bloody aggression fueled by feelings of revenge - Yugoslavia (and a few others on your list) are not.
No, Russia can demonstrably not hold much territory in other countries. But Finland, Poland, and the Baltic states would be foolish not to recognize that Putin desperately wants them back under his thumb, and is willing to go to obviously irrational lengths to attempt to fulfill his desires, however unrealistic.
Plus, he still has nukes, at least some of which are almost certainly still functional.
The CSTO is mainly just Russia and they've demonstrated they're incapable of providing military aid to their members. However, Russia getting allied with Iran and China and their puppet North Korea is a problem.
I really wish the US defeats Russia again, like it happened with the USSR, but that's just wishful thinking. We are tired of Germany and France doing business as usual with Russia. Poland basically has zero trust in the EU handling Russia, that's why they arm themselves to the teeth. The others need to look at Poland and get their act together.
Something to do with 3 quarters of negative growth
You can see on this graph that the rule-of-thumb didn't hold right at the beginning of the graph in 1947 when no recession was declared, nor in 2008 when it started with a single quarter, or even 2001 when it started with a positive quarter: https://fred.stlouisfed.org/series/A191RL1Q225SBEA
Sure, I mean, we might only be ~4 years from a recession (see 1966). It's true that, as recession is defined roughly as the period of decline from an economic peak, they usually start during a period of low unemployment, but that doesn't mean low unemployment signals being in a recession. Most low unemployment periods are outside of recessions.
> It generally doesn’t spike until months after recessions begin
Every recession shown on that chart either begins simultaneously with or after sustained unemployment increases, I don’t see any where it lags significantly.
There are several places where the low unemployment plateau before a recession is extended, and even a couple where an apparent low plateau is followed by another drop and another plateau.
1948, 1953, 1960, 1974, 1980, 2001, and 2008 all fit what I said.
1957, 1970, 1981, and kind-of 1990 are the exceptions.
As for the extended low unemployment... If you ignore the covid anomaly (as most people seem to since it wasn't a natural market reaction but caused by lockdowns), we're at the same 3 years of the previous maximum duration.
I'm not talking about using the unemployment rate as a leading indicator, which is what you're describing here.
The unemployment part can't indicate current state either because it usually doesn't spike until months afterwards. We can easily be in a recession with unemployment still being low.
Yes, it can. Nonfarm payroll employment--along with GDP--is one of the key measures used by the NBER in their determination of whether or not we're in a recession, so it is by definition a current indicator. You are stating that it's not a sufficient indicator in determining a recession, which is correct, but that's not what I was saying anyway. Unemployment is absolutely a relevant measure here, and you are wrong.
But in this case the Fed is quite clearly aiming to orchestrate a spike in the unemployment rate, and pretty much all of history is pointing towards the current macro setup ending with recession.
By and large people tend to be overly optimistic that this time is different re economic cycles and monetary policy.
E.g. Wall Street analysts predicted 10% earnings growth in 2008, and ended up being -70%.
While this might be technically true in the sense that they're trying to fight inflation by tightening monetary policy, and that has the effect of slowing economic activity and driving up unemployment, I dislike the framing because it implies that the fed wants to high unemployment as some sort of end goal, as if they have some sort of diabolical agenda to oppress workers or whatever.
The Fed has to do this because they vastly overstimulated. It was entirely avoidable if responsible policy had been pursued
The people who make it into a bleeding heart kind of issue are largely misguided, and don’t understand the distinction between real and nominal. Real wages have been declining at the fastest pace in history yet they point to nominal numbers like its some victory
Rate of CPI change is declining on a MoM basis due to one time fiscal headwinds/supply normalization. The demand side has not been addressed at all, with nominal GDP growth close to 10% YoY and the tightest labor market in history along very high wage growth numbers.
If the Fed doesn’t raise unemployment before loosening policy, CPI will rebound due to the level of labor market tightness and wage growth.
It’s possible the Fed will use declining headline CPI to justify pivoting prior to rise in unemployment, but this will almost certainly turn out to be a mistake and require even higher rates a year or two out.
If the Fed pivots before actually triggering a solid softening in the economy, all assets will rally and labor market will retighten.
They made exactly this mistake many times in the 70s and 80s. The only way out at this point is to keep policy tight until a recession event kicks off
They are throwing darts in the dark.
God bless them, it's a hard job and someone should probably be looking into it, but never kid yourself about what their predictions are actually capable of.
The goal is to motivate it but also to prevent it from running away.
The principles of the economy are quite clear. If people have incentive to do something, they will. If you alter incentives, you alter behavior, everything stems from that.
The problem with making predictions is that the macro economy has billions of variables which obviously all cannot be realistically modeled. That doesn’t invalidate the validity of theory. Economic theory works just the same as physics if you were able to observe and model every value accurately. Most physics problems deal with far fewer variables and can be simulated and replicated quite easily.
In this case its easy to predict because Powell has indicated for all intents and purposes that he will create a recession. And if he wants to, he 100% has the power to do it regardless of any other variable.
From now on, every recession can be blamed on journalists that refused to publish its prediction