What if the Fed makes no difference at all?
Random Walk at Night: Is Powell naughty or nice? What if it's both? Or Neither?
Maybe liquidity is getting tight (finally), but what if it has nothing at all to do with the Fed?
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Random Walk at Night
What if Powell makes no difference at all?
The single most important question (for people who care about such things) is: did the Fed get it right?
The good Chairman Powell indicated last week that not only was the Fed done with hiking, it might even be cutting soon. So the people want to know:
But is that the right move? Is inflation really licked? Does that mean a “booming” economy is right around the corner (or perhaps a “booming” economy is already here)? Maybe it means a recession is right around the corner?
What landing did Powell choose? Soft, hard or goldilocks?
Do we love him or hate him? How do we know?
Those are all great questions, but for tonight, Random Walk has a different question.
What if it makes no difference?
Makes no difference? What do you mean?!
What I mean is that one of the striking features of the past year is how little effect interest rates have had (or appeared to have had). They were supposed to destroy demand, but demand has not been destroyed!
Oh sure, there’s been some pretty substantial effects in real estate and the capital markets, particularly on the private side, but in terms of broader “demand destruction” higher rates just haven’t done much.
Now, some part of that—the ongoing “strength” of the Almighty Consumer, for example—we have endeavored to understand. Likewise, there are perhaps other reasons why the most proximate effects of higher rates have been blunted or delayed.
But some non-effects are just really hard to understand. Like, y’know, bank lending, credit creation, and all that stuff. The whole point of raising rates (and Quantitative Tapering) is to make lending harder.
Regardless of what happens to everyone else, you’d expect at least lending to come down, a lot.
But, look at this. Just look at it:
Lending has barely budged.
It’s basically on trend.
The money supply contracts, and the Fed delevers, but credit creation continues apace.
An historic rise in interest rates, and banks have basically been like “nah, it’s fine. No biggie.”
How is it possible?
Random Walk is still thinking about this question, and the general “weirdness” of the past year. If higher rates didn’t bring down the house, is it because the house is burning, and we just can’t tell? Or it’s just a matter of time? Or do high rates just not matter as much as we thought they did (and why)?
My thoughts are not fully-gathered, but for now, a more discrete observation.