Wednesday, July 31, 2019

How do I know the natural rate is falling?

My previous two posts claimed that the Fed would be right to cut rates, because the natural rate is falling rapidly. Keeping rates steady would eventually cause the nominal rate to be too far above the natural rate, making monetary policy too tight. However, the natural rate isn't observable; so how can we infer what stance the Federal Reserve should take. Well, just as we learned in 08, we can look at market forecasts as a way to determine tightness. 

The TIPS spreads show weak inflation going forward, despite rapidly falling interest rates in the fed funds futures markets. This indicated that monetary policy was too tight.

Short term interest rates are too high. 10 year Treasury bonds were priced a by the market at 2%. A T-Bond shouldn't be 2.4%. The yield curve told us monetary policy was too tight.

The Fed has ways of estimated r-star when comparing it to market rates at growth, these tools told us that policy was too tight.

Low Productivity, Sluggish Immigration Policy and Trade Wars slows down global growth which puts downward pressure on the natural rate. This told us that monetary policy was too tight.

I almost ordered 10 dollar a slice Pizza while vising Universal in Florida and didn't because I'm not stupid and I didn't have the disposable cash. Money is too tight.

F.Y.I. The Fed should have slashed rates more than a quarter, but I expected a quarter and I expect one more slash. That's my prediction.

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