Wednesday, 4 March 2020

Is the Fed too loose for the real economy?

I think this chart shows the level of divergence between the real economy and the credit bubble fuelled financial economy quite well.

Normally when 3-month wage growth for job switchers is this strong vs overall wage growth, it means the labour market is tight enough for neutral Fed rates (let's say 4%) for the real economy, then with enough corporate margin compression there is a normal recession, labour pressure goes down and the Fed cuts as the recession happens.

By April I assume the Fed will be at 25-50bps, which shows how far away the neutral financial system Fed funds rate is from the real economy neutral Fed funds rate. The real economy has slowed, mainly due to the auto sector, tariff impacts and some signs of inventory liquidation, but its not in a full blown recession. 

Add on top of that a >$1tn fiscal deficit... and a wage/inflation/ investment led cycle and cyclical rebound is baked in for the second half. 


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