Media Notes

Well, it’s 2024 the year of dragon. Here in the U.S., it’s the year of rate cuts. Or is it recession? Or maybe it’s the year of the soft-landing. Some market participants even think it could be the year of accelerating inflation and, potentially, higher interest rates.

Apollo’s Torsten Slok sees a rebound in the housing market pushing up shelter prices, which he says could cause inflation to reaccelerate or at least remain sticky above the Fed’s 2 percent target. That could mean fewer cuts than the market is currently pricing in. Another view holds that the rate hikes themselves could cause inflation to reaccelerate, leading the Fed to pursue further tightening so that we actually finish 2024 with rates around current levels or maybe even a tad higher. Listen here for that (provocative) analysis.

I’m going to be on Bloomberg TV at 3:30 pm (ET) today, where I expect to talk about the economic and policy outlook for 2024. The main purpose of today’s appearance, though, is to talk about some of the arguments I made in this recent Financial Times interview.

Producers will often ask for “talking points” so that the show’s hosts know what you’d like to get across in the short time you have to communicate with an audience. I thought I’d share with you what I sent to them this morning.

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Here are some of the main points I tried to make in the FT interview:

• There were always alternative—and better—ways to deal with the inflationary pressures we experienced (globally) in the last few years

• Most—not all—central banks turned to the blunt instrument of rate hikes (some with QT thrown in)

• Many people are willing to credit the Federal Reserve with turning the dials almost perfectly (after initially “falling behind the curve”) so that the US might enjoy the much-coveted “soft-landing” everyone is talking about

• That is not my view

• The rate hikes have done little to quell inflation

• Inflation has fallen—globally—for the same reason(s) inflation rose (globally) in the first place, namely the supply shocks (which came in waves) abated with the passage of time

• Take a look at Japan, a country that struggled—and failed—for the better part of three decades to get inflation up to 2 percent. The Bank of Japan has done QE, Yield curve Control, Negative Interest Rate Policy (NIRP) etc., and they could not get inflation above 2 percent until COVID came along. Then inflation rose like it did everywhere. But the BOJ, unlike pretty much everyone else, didn’t try to fight it by raising interest rates. They were smart enough to see that rate hikes would not work well, and they didn’t want to risk a policy mistake that would undermine progress in the real economy. They have shown the world that inflation was in fact transitory. It has come crashing down in Japan without the need for monetary policy tightening. 

• Meanwhile, we flatlined a few banks here in the US, everyone is worried about commercial (esp office) real estate, a lot of climate-related investment projects are being cancelled because they don’t pencil out at higher interest rates, housing inventory is a way down, etc. We need to be building capacity because that is the key to getting a better match between supply and demand without causing a recession. 

• The market is supposed to deliver goods & services to meet consumer demand. And here we are using interest rates to stifle demand instead of doing everything we can to boost supply in critical sectors. 

• Worse, we think raising interest rates is the Fed’s way of stepping on the brake pedal, but the rate hikes can actually speed the economy up (overall) which means the Fed could end up making inflation worse. How?

1. Interest rates are a cost for millions of firms that borrow to finance their operations. When rates increase, firms with pricing power will try to pass those costs on just like they would if they faced rising wages, shipping, materials, or other costs. 

2. The federal government is a net payer of interest, so the rate hikes force the Treasury to pay out hundreds of billions of dollars in additional interest income each year. That income can be spent just like any other income, but the interest payments go mostly to people who already have money in direct proportion to how much they have. So the Fed is running a regressive form of fiscal stimulus!

3. Tighter credit impedes business investment, which the economy needs in order to expand and keep costs down. With less capacity and higher costs, inflation could get worse (or stay stickier). 

• I am a Minskyian at heart, which means that tightening cycles do scare me! Eventually, rate hikes can (and usually do) cause problems, as borrowers with cash-flow commitments eventually run into trouble repaying or rolling over their debt. If and when the distress becomes sufficiently acute, it’s game over for Team Soft Landing. 

There’s a lot more in the FT interview, including why I think the current conversation about the “national debt” is so misguided. But this is probably more than enough for a short segment. 

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And, if you’re interested, here’s a 5-minute interview I did for NPR’s Morning Edition after the US “debt” hit $34 trillion.