Notes on the Week Ahead

The Steady Normalization of the U.S. Labor Market

In 1787, on the last day of the Constitutional Convention, a lady asked Benjamin Franklin what form of government had been agreed to.  He famously replied, “A Republic – if you can keep it”.  He was, of course, alluding to the danger that partisanship or ill-advised policies could yet return the young country to the monarchy it had so recently escaped. 

Sizing up the angles on Fed policy

I am shockingly, comically bad at golf.  However, that doesn’t stop me from occasionally watching more gifted souls play the game. 

One of their techniques is to examine a putt from multiple perspectives.  They take a careful look at the green as they come up to mark their ball, look at the putt from the side, squat down to consider it from the opposite direction, and generally scout out the lay of the land from all angles.  For myself, since I’m generally wielding the putter playing my seventh or eighth, I don’t further test the patience of my companions with such preparations.  However, I will admit that, for the average golfer, looking at a putt from multiple angles yields useful information.

A similar rationale can be applied to monetary policy decisions.  Changes in monetary policy are among the most important drivers of stock and bond returns.  Consequently, one of the questions we are asked most frequently is where will the federal funds rate be at the end of the year?

Slow-Motion Slowdown

Across the economy, the outlook is for slower growth.  Slower growth in demand, in employment, in profits and in inflation.  Recession is by no means certain.  However, a slow-growing economy is rather like a slow-moving bicycle – the slower its moves, the easier it is to topple it over.  And so, in the spring of 2023, there is a significant risk of recession starting before the end of the year. 

Debt-Ceiling Cliff Dancing

On Ireland’s Atlantic seaboard, ten miles west of the town of Lisdoonvarna, stand the majestic Cliffs of Moher.  They are a popular tourist attraction but also a dangerous one – in the 25 years ended in 2017, 66 people tragically plunged over the cliffs to their death.

Of course, there is no reason why anyone should meet such a fate.  The long grassy path beside the cliffs is bounded by a wire fence, with frequent signs warning visitors not to cross it or to venture any closer to the cliffs.  However, inevitably a few foolishly ignore the warning and, for a few of them, it is their last bit of foolishness on this earth

When Money Stops Talking

The quantity of money was a big issue in the background of my childhood. There were no money machines or credit cards (at least in our house). So every Monday, my father would write a check for cash, usually for less than 100 pounds, and hand it to my mother for housekeeping for the week. She would then drive to the bank, cash it, put the notes in her purse and slowly dole them out as the days went by and she tried to keep a family of seven fed. Throughout the week, as she shopped and worried, she would know how much, to the penny, was left. The quantity of money was a binding constraint in her life.

The Road Back to 2% Inflation

It seems like a distant memory now, but in the decade before the pandemic, the main preoccupation of the Federal Reserve was boosting inflation, as measured by the headline personal consumption deflator, to 2%.  Inflation undershot this target in ten of the twelve years between 2008 and 2019. 

The Real Threat to Dollar Dominance

Eliud Kipchoge, the only man to ever run a marathon in under two hours, is in town for next week’s Boston Marathon. In the runup to the race, reporters will no doubt ask him about whether he is worried about any particular competitor. He will predictably reply that he is not - but that he has to focus on his own fitness and his own decisions in running the race. As with all individual sports, the keys to success or failure lie largely in the athlete’s own hands.

The Recessionary Price of a Faster Decline in Inflation

In three weeks, I will once again have the honor of running the Boston Marathon as a member of the gasping geezers division of the Dana-Farber Marathon Challenge team. A year ago, as I clambered up the Newton Hills, I resolved that, if I was ever fool enough to do this again, I’d lose a few pounds before attempting it. Admittedly, a few miles later, I made a sterner vow that I would never be fool enough to do this again, which made the first resolution seem irrelevant.

The Economic Impact of Banking Turmoil

A good set of brakes is a very comforting thing.  A gentle tap of the foot should produce a quiet and gentle deceleration, as brake pads press up against disc rotors, in a smooth but firm action.  When I drive these days, I take this technology for granted.

 

However, the vehicles I drove as a young man offered far less assurance.  There were times when applying the brakes unleashed a cacophony of shrieking, squealing and grinding noises as worn-out pads battled with rusty rotors.  The braking action would be either be frighteningly nonexistent or of a sudden, whip-lash intensity.  Of course, in those vehicles, the acceleration wasn’t great either.  However, any temptation I might have had to drive more quickly was quickly squashed by doubts about my ability to slow the car back down again when I needed to.

The Investment Implications of a Demographic Bounce

One obstacle to assessing the direction of the American economy is the difficulty in getting a handle on how many people live in this country and how fast that number is growing.  It would seem to be a very elementary problem – surely the Census Bureau provides timely data on the size of the population, as well as births, deaths and net migration?  But it does not.  So far as I know, there is no official consistent measure of any of these numbers on a monthly, (or for that matter an annual basis), going back over the decades.  Moreover, the last time the Census provided a projection of the future path of these vital statistics was back in 2017.