Working on a Ukraine rant, but noting a few “Fed” source pieces here from people more qualified than I am. They also keep looking in vain for fact-based evidence to support the dominant Fed/markets/inflation/liquidity narrative.
They don’t replace that simple, “one-factor trade” narrative with anything but complexity and nuance. But that’s kind’ve the point, no? Maybe this is why faith in the Fed is so resistant to facts? People like simple stories with no loose ends…
- Paul Krugman goes looking for evidence of the Federal Reserve’s rate changes “bringing down inflation” and comes up with…. not much. Placebo effect from talking/acting tough? Yes. Real measurable impacts in the data? No. Note that Krugman has no political angle on this – just noting that the Emperor’s New Clothes are pretty skimpy when you look at the facts…
stories about “recombobulation” — the fading away of pandemic-era distortions — driving disinflation are clearly supported by the data. Claims that Fed tightening drove it are sketchier and much more speculative.
Another claim I’ve been seeing is that inflation would be much worse right now if the Fed hadn’t raised rates. This might well be true, but it’s also something of an evasion — it’s offering a counterfactual rather than answering the question of how we’ve achieved disinflation so far.”
- This guy does a very good job of explaining why Real Interest rate effects are pretty minimal when the marginal borrower is the US Government… The government doesn’t care about real rates. So real rates don’t have much impact…
- People love to assume causation and/or correlation from “two lines on a chart” simplifications (most famously relating skirt’s hemlines to stock prices back when that was a thing)… Worth a read in full – one of the simplest explanations I’ve seen of a complex subject. Here’s a tidy summary of the fact-based case (bank reserves don’t leak ,much if at all) against the faith-based idea that “liquidity” is a one-factor trade (or even a thing).
A simple linear regression exercise tells us ‘’liquidity’’ is pretty bad at predicting stock market returns: as shown by the R2 data, in the last 15 years US liquidity only explained 3-4% (!) of the variation of SPX returns.
So, yes: both series trended up over time and plotting them on a dual-axis chart looks great but stocks go up over time because earnings grow and not because Central Banks pump ”money” in the ”system”.
Money in this case means bank reserves, and banks can’t and won’t use reserves to buy stocks – the direct relationship and simple narrative suggested by mainstream macro commentators…
…simply doesn’t exist.
