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1844 Folsom St Boulder, CO 80302

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In the spirit of Chair Powell, below, there’s a ton of stuff going on, but nothing is happening.

The all-defining 10-year T-note is near the bottom of its six-month range, but even a technical break below would not have much effect on mortgage rates, roughly 4.75% since February. Only a clear shift in the economy or inflation will change the mortgage picture.

Politics are driving everyone batty, but at this moment above all in the last two years a good idea to put aside. We have an election in two months which may change the political outlook, so wait for it.

Discussion of impeachment is an unfortunate distraction: the founders’ system does not work well, its only two historical events were misuses, and conviction would require an extremely unlikely vote in the senate. If Mr. Trump were to leave office, probability lies in resignation forced by spreading legal entanglements. And even then Mr. Pence and Mr. Trump’s supporters in and out of government would remain in place, markets undisturbed.

Instead of all of that, adopt the Fed’s longstanding pre-election policy: the Klingon cloaking device. Seek complete and impenetrable invisibility. Enjoy the onset of fall. Football. Help with homework. Revisit politics after November 6.

More on ignoring politics: Esther George, president of the Kansas City Fed yesterday rejected any political pressure to stop raising the cost of money. “Blunt” is an inadequate description. The KC Fed covers OK, NE, WY, CO, KS, and most of MO and NM, the most conservative of Fed districts.

Some of the following is tough reading but worth the trouble, especially if you feel anxious about the economy or the Fed’s management of its duties. The KC Fed hosts an annual late-August meeting of global central bankers in Jackson Hole, Wyoming. This year’s pre-invisibility performance has been magnificent in style and content.

Chair Powell spoke this morning, his speech unusually readable. He is not an economist, and expresses his thoughts outside-looking-in, not from the pulpit to the choir. Also, he was educated by Jesuits, which shows in his avoidance of absolutes, instead looking for the center of probability and maintaining flexibility. In thoroughly Jesuit fashion he began with two questions framing the Fed’s work today:

1. With the unemployment rate well below estimates of its longer-term normal level, why isn't the FOMC tightening monetary policy more sharply to head off overheating and inflation?
2. With no clear sign of an inflation problem, why is the FOMC tightening policy at all, at the risk of choking off job growth and continued expansion?

And then began to answer, each thought confessing limits on clairvoyance:

First, the stars are sometimes far from where we perceive them to be. In particular, we now know that the level of the unemployment rate... will sometimes be a misleading indicator.... Second, the reverse also seems to be true: inflation may no longer be the first or best indicator of a tight labor market and rising pressures on resource utilization. ...In the run-up to the past two recessions, destabilizing excesses appeared mainly in financial markets rather than in inflation.

Given such uncertainty, what to do?

Finally, the literature on structural uncertainty suggests some broader insights... the well-known Brainard principle, which recommends that when you are uncertain about the effects of your actions, you should move conservatively.

As Brainard made clear, this is not a universal truth, and... two particularly important cases in which doing too little comes with higher costs than doing too much. The first case is when attempting to avoid severely adverse events such as a financial crisis. In such situations, the famous words "We will do whatever it takes" will likely be more effective than "We will take cautious steps toward doing whatever it takes." The second case is when inflation expectations threaten to become unanchored... a weak initial response could exacerbate the problem.

There you have it. The Fed will march upward to its best guess of a neutral cost of money, two or three more .25% hikes to 2.50%-2.75% and then pause. It will not go farther just because unemployment continues to fall, or even if wages rise; it would need to see current inflation spiking toward 3.00% to hike intentionally to slow the economy.

As unlikely as a rate cut may seem today, the minutes of the Fed’s August 1st meeting are unusual, even startling. Only masochists should try the whole thing, but the few paragraphs on pages 2-3 under the heading Monetary Policy Options at the Effective Lower
Bound are worth the trouble. The Fed is acutely sensitive to a return to the zero-percent trap in which it can’t cut rates farther to rescue a faltering economy, and sees “a meaningful risk sometime during the next decade.”

Unsaid in all of the good Fed work above: the thresholds for undertaking vigorous action (up or down), and the extent of vigor when the economy departs the recent Goldilocks past.

One benchmark for what NOT to do came from the respected Atlanta Fed president, Raphael Bostic: “I pledge to you I will not vote for anything that will knowingly invert the curve.” If inflation jumps or crawls out of the box, of course you’ll vote to invert. Never make promises you cant keep.

Second, unsaid in Jackson: the Fed is an independent agency but cannot act without political support. The Fed will pause next year because there is no political basis for hikes which would damage a very pleasant economy, no matter what its inflation potential.

Powell’s conclusion today: “The economy is strong. Inflation is near our 2 percent objective, and most people who want a job are finding one.”

The US 10-year T-note yield is lower than usual relative to inflation, but in global markets reasonable. Maybe 10s and mortgages will be pushed higher by the Fed’s march to neutral, but maybe not:

The US 2-year T-note has been pricing a Fed top for three months, those traders dead right as usual:

The Atlanta Fed’s GDP tracker has been the most reliable forecaster for years. However, its current reading is a too-hot outlier, other forecasts for the 3rd quarter closer to 3%-3.5%:

The ECRI has a superb track record and if anything shows a decelerating economy. However, possibly distorted by overweighting the flattening yield curve -- historically a recession precursor, but unlikely now:

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