The real economy is clearly slowing. But it may not be slowing fast enough to save Team Monetary Policy. Says who? The IMF. After Hubris comes Nemesis…
The IMF’s revised forecast tells us the rate-rising fiesta risks damaging the financial system faster than it slows the Real Economy. Politely saying The Fed-only campaign has failed. We all risk calling in on that airstrike on our own positions.
“More worrisome is that the sharp [monetary] policy tightening of the past 12 months is starting to have serious side effects for the financial sector.”
The IMF is mis-using the term “side effects” given the blunt, inconsiderate nature of the interest rate instrument. When you carpet bomb a place, everything an anything is a “side effect.”
All rate-hiking campaigns are a breath-holding, damage-taking contest. The IMF forecast is just telling us rate-sensitive sectors can’t hold out much longer – banking, housing, Commercial Real Estate, auto-sales. In that, the IMF is really saying the labor market and real economy – free-market driven supply/demand stuff – aren’t cooperating with Team Monetary’s over-ambitious expectations.
To believe the warning in the IMF forecast, you have to believe that central banks will keep rates high until/as the banking system collapses. Sampson bringing the temple pillars down upon himself.
I don’t think Central Banks have the guts or political support to pull down the temple. The bond market doesn’t believe it either. Especially when 3-5 year inflation expectations are undermining Team Monetary’s inflation horror-show narrative.
12-18 months ago. Team Monetary started this campaign confident a few points of rate rises would bring the Real Economy to heel. Cue images of smug British colonial officers marching out – “a whiff of powder will teach those foolish natives a lesson.”
After 12-18 months of increasingly desperate yanking on the rates lever, the natives are not cooperating. Actually, the natives are getting uncomfortably close to the thin red line of not-so-supremely-confident-anymore officers and other ranks. See “Battle of Isandlwana” clip below – especially the lunch party scenes…
The IMF report tells us Team Monetary is in the end game. Holding the lines. Hoping for a miracle.
They may yet get lucky. A dramatic fall off in the real economy. I don’t know if we will see that. I do know that drop that must get mathematically more sudden every month that disaster fails to arrive. As the IMF notes, the financial sector can’t hold out much longer. The bond market seems the think its can hold until about year end. If the real economy isn’t really tanking by June/July…
What if that hoped-for “miracle” – an extraordinarily deep and fast recession?!? – doesn’t show up? Then the choice is to either 1). crash the financial sector (and big chunks of Commercial Real Estate and housing). 2). Declare victory and move on.
What’s your bet? 1 or 2? Am I missing a 3rd path?
I’ll leave you with a question to ponder. What it we’d pulled a “targeted or automatic tax increases” lever 12 -18 months ago instead? My guess…
- …near-immediate drop in inflation expectations.
- …relatively fast drop in measured inflation.
- …minimal disruption to financial, banking, and Real Estate markets. They still take a direct hit from tax increases, but no uncertainty-driven disruption.
- …no bailouts. Silicon Valley Bank would still be with us.
- …lower deficit. Opening up fiscal space for any downturn.
The only problem with the scenario above? “Targeted tax increases” is a very uncomfortable phrase for a lot of people who really really want to believe the Fed has the one and only magic lever. Almost as much as they want to believe their economic beliefs don’t have a political color…
FT summary of the IMF Forecast:
Pierre-Olivier Gourinchas, the IMF’s chief economist, said: “Below the surface . . . turbulence is building, and the situation is quite fragile.” “Inflation is much stickier than anticipated even a few months ago,” he said. “More worrisome is that the sharp [monetary] policy tightening of the past 12 months is starting to have serious side effects for the financial sector.”
In its twice-yearly full forecasts published on Tuesday, the IMF said the turmoil in the UK government bond market last autumn and the US banking turbulence last month showed the “significant vulnerabilities [that] exist both among banks and non-bank financial institutions”.
“Risks to the outlook are heavily skewed to the downside, with the chances of a hard landing having risen sharply,” the IMF said. Gourinchas told the Financial Times that, while the banking system was far more resilient than during the 2008 financial crisis, policymakers had to “think about what could go wrong”.
“We can all remember the long time between the failure of an individual institution, whether it was Bear Stearns or Countrywide,” he said, referring to institutions that failed more than a decade ago. “Every time, this was treated like an isolated incident, until it wasn’t.”
Battle of Isandlwana https://en.wikipedia.org/wiki/Battle_of_Isandlwana
Eleven days after the British invaded Zululand in Southern Africa, a Zulu force of some 20,000 warriors attacked a portion of the British main column consisting of about 1,800 British, colonial and native troops with approximately 350 civilians. The Zulus were equipped mainly with the traditional assegai iron spears and cow-hide shields, but also had a number of muskets and antiquated rifles.
The British and colonial troops were armed with the modern Martini–Henry breechloading rifle and two 7-pounder mountain guns deployed as field guns, as well as a Hale rocket battery. The Zulus had a vast disadvantage in weapons technology, but they greatly outnumbered the British and ultimately overwhelmed them, killing over 1,300 troops, including all those out on the forward firing line. The Zulu army suffered anywhere from 1,000 to 3,000 killed.