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Vital Statistics:
Stocks are lower this morning on no real news. Bonds and MBS are flat.
The upcoming week will have some important inflation data with the consumer price index and the producer price index. We will also kick off earnings season with the big banks reporting on Friday. Investors will be particularly interested in whether the banks take provisions on their commercial real estate portfolios. Interestingly, we don’t have much Fed-speak despite the fact the the quiet period for the July meeting starts next week.
The Fed Funds futures are pricing in a 92% chance of a 25 basis point hike at the July meeting. The December futures are pricing in a roughly 1-in-3 chance for another 25 basis point hike by the end of the year.
Chicago Fed President Austan Goolsbee thinks the US can avoid a recession while still defeating inflation: “What the Fed’s overriding goal right now is to get inflation down. We’re going to succeed at it and to do that without a recession would be a triumph,” Goolsbee told CNBC’s Steve Liesman during a “Squawk on the Street” interview. “That’s the golden path, and I feel like we’re on that golden path. So I hope we keep putting off the recession to forever. Let’s never have a recession again.”
This sort of thinking: that that Fed can “fine tune” the economy and override the business cycle goes back to the 1960s. Goolsbee’s professors at the University of Chicago probably taught him that this is impossible since the Fed has an information lag. Regardless, economic central planning – i.e. industrial policy – seems to be back in vogue, and with it comes the idea that the Fed can engineer away the business cycle. Color me skeptical.
Housing affordability is a big problem right now, with affordability back at the levels we saw during the ’04-’06 housing bubble. Affordability is a function of three things: house prices, mortgage rates and incomes. The most effective lever is mortgage rates, but we need the Fed out of the way. “The Fed has engineered a massive increase in interest rates in order to combat high inflation. We expect it to cut the federal-funds rate aggressively in the coming years, driving the [Federal funds] rate down from 5% currently to below 2% by 2025,” wrote economists at Morningstar. “Once the Fed wins the battle against inflation, its priority will shift to jump-starting economic growth, which will require much lower interest rates, in our view.” Morningstar predicts that interest rates will stay low long-term due to demographic trends such as an aging population and depressed fertility rates.
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