March 2024 Fed Meeting Preview

It will be interesting to see how the Fed meeting goes this week.

I’m with the market monetarists that targeting NGDP growth would be the best method for communicating monetary policy, and I think using short term interest rates to target inflation is a horrible system.

Seemingly a plurality of financial laymen and professionals seems to think that the Fed has been unsustainably stimulating the economy for years with low interest rates, and it breaks my heart, because they are always stressed about their investments, and it’s all just nonsense.

Anyway, that’s how the Fed communicates policy, so that’s how we have to talk about it.

The yield curve has flattened out significantly since the new year. (I have been tracking the portion of the curve following the nadir of expected short term rates.) The yield curve slope had been about 40 to 50 basis points in the months leading up to the Covid breakout. That period was marginally recessionary, and if Covid hadn’t arrived, I am uncertain which direction things would have gone.

The slope has been volatile since Covid, and whenever it has dipped very low, it has recovered back to the 60 basis point range. J-Pow! has been a master since Covid. Now the slope is back into what I would call recessionary territory. The Fed has been delaying its expected rate cuts.

Honestly, I think there wouldn’t be much economic difference between 3% and 5% now. Most lending is based on a curve that expects the short term rate to be near 3% relatively soon anyway. The main danger would be staying too high for too long and leaving the range of non-disruptive target levels.

I admit I have been a dove compared to Fed policy lately, and things have been fine where J-Pow! has diverted from my expectations.

I suspect that we have a lot of things going for us. A housing construction market (and probably a new automobile market) that have a lot of make-up growth yet to claim. And, a general recovery in real GDP growth coming out of the 2022 Covid/Ukraine recessionary head-fake.

I think a likely path forward is that 1Q 2024 annualized real GDP growth is going to be around 2% and inflation will be negligible, so that GDP growth will be low. The Fed might hold rates steady this month, but maybe that will give J-Pow! whatever cover he thinks he needs to lower the target rate.

When he lowers rates, mortgage rates won’t fall much, but mortgage rates don’t matter much in the macro-economy. The boring housing recovery will continue in either case at the rate that the inscrutable construction capacity allows.