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The Fed is mountain climbing as earnings are falling and other people have redefined the phrase ‘pivot’ into one thing nonsensical – Funding Watch

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by Player896

So to start things off here is how the Fed would usually react to weakening economic conditions:

  1. Economic activity is weakening -> the Fed will ease financial conditions in order to minimize the economic pain
  2. The impact of rate cuts are not immediate, it will take 12-18 months for the full effects to kick in
  3. There is some suffering, but thanks to the Fed, the expected pain was lessened and we are able to return to growth

Now thanks to inflation, here is how things are going:

  1. Economic activity is weakening -> the Fed is actively tightening financial conditions in order to cause economic pain in order to manage inflation
  2. The impact of rate hikes are not immediate, it will take 12-18 months for the full effects to kick in
  3. There is considerable suffering as the Fed requires economic activity to contract in order to manage inflation
  4. Once inflation is sufficiently tamed, the Fed will cut rates so the economy can return to growth
  5. The impact of rate cuts are not immediate, it will take 12-18 months for the full effects to kick in

People are assuming that inflation is going to rapidly fall off when we don’t even have positive real rates across the entire US yield curve.

While goods inflation is rapidly abating, the recent nonfarm payrolls and ISM services heavily implies we are seeing the beginning stages of a wage-cost spiral. CPI will fall as goods disinflate, but services will support inflation.

People believe the Fed hiking 50 bps is ‘pivoting’ and have twisted rate hikes into something that is positive for the markets. ‘pivot’ is now akin to ‘transitory’ and the word is now bastardized to death.

The current economic outlook is bad. Its really bad. Analyst predictions have historically been more optimistic vs reality and this time around they all forecast a downturn. Its more likely than not their current forecasts are too optimistic and that 2023 will end up worse than many expect.

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