Bloomberg has a new piece suggesting that a recession may be imminent:
…And Fed Hikes Are About to Bite Hard
“Monetary policy,” Milton Friedman famously said, “operates with long and variable lags.” One subtlety here is that the “variable” can refer not just to differences between one recession and another — but also to different parts of the economy within a single cycle.
Soft-landing optimists point out that stocks have had a good year, manufacturing is bottoming out and housing reaccelerating. The trouble is, those are the areas that have the shortest lag time from rate hikes to real-world impact.
For the parts of the economy that matter for making the recession call — above all the labor market — lags are longer, typically 18 to 24 months.
That means the full force of the Fed’s hikes — 525 basis points since early 2022 — won’t be felt until the end of this year or early 2024. When that happens, it will provide a fresh impetus for stocks and housing to turn down. It’s premature to say the economy has weathered that storm.
I agree with the final sentence (a recession is quite possible), but have some questions on the rest:
1. Why aren’t the effects of Fed rate hikes already priced into stock prices? Why does Bloomberg believe that rate hikes that have already occurred will cause stocks to decline in early 2024?
2. If rate hikes impact the economy with 18 to 24 month lags, why can’t economists forecast the business cycle? Economists have failed to forecast any of the recent US recessions.
3. On October 17, 2022, Bloomberg suggested that there was a 100% chance of recession within the next 12 months. Is that still true? If not, why cite 18 to 24 month policy lags as an excuse for why a recession has not yet occurred? Weren’t those policy lags well understood back in October 2022, when a recession was seen as certain to occur within 12 months?
4. On a somewhat different topic, why hasn’t Bloomberg put in a disclaimer correcting the truly egregious errors in this recent article on the Japanese economy? Just say “nevermind”.
I hate to be so tough on media outlets such as Bloomberg, the Financial Times, The Economist and the WSJ. I do so because the rest of the media is far worse when it comes to economic news. I’m trying to nudge our best outlets to maintain high standards.
PS. I do not believe in long and variable lags—monetary policy impacts the economy almost immediately. But then interest rates are not monetary policy.
READER COMMENTS
spencer
Oct 3 2023 at 3:29pm
It’s “old school”. The composition of the money stock has changed (see George Garvey). This has increased Vt in American Yale Professor’s truistic “equation of exchange”.
Fisher used total transactions. Friedman used GDP. But income velocity is a contrivance.
Kenneth Duda
Oct 3 2023 at 6:00pm
It really annoys me when pundits predict a future stock market downturn based on data we already have. This is such a crass violation of the EMH. My question to them is: have you fully leveraged your house to short all of these stocks that you just know must go down? Oh you haven’t? Hmm, interesting.
They’re just making stuff up and somehow tricking us into wasting our time reading it.
-Ken
Jose Pablo
Oct 5 2023 at 5:31pm
This is such a crass violation of the EMH
EMH is violated every single day. If I remember well, it was Peter Lynch who said that after joining Fidelity he witnesses almost on a daily basis, market events that “in theory” couldn’t happen.
Arbitraging away irrationalities it is not the easy task that (some) text books seem to assume it is.
Don Geddis
Oct 16 2023 at 3:03pm
EMH is not a theory that says that various “market events can’t happen”. So how could witnessing a particular market event violate the EMH? Is it possible that you don’t understand the EMH?
steve
Oct 3 2023 at 6:39pm
I think #1 is pretty common. People who claim to believe in markets dont believe markets when it interferes with their other beliefs.
Steve
marcus nunes
Oct 4 2023 at 10:28am
There are really no lags in effect of monetary policy (properly perceived)
https://marcusnunes.substack.com/p/there-are-no-lags-in-effect-of-monetary
Thomas L Hutcheson
Oct 4 2023 at 11:23am
Perfect until the Delphic Oracle tagline 🙂
“I do not believe in long and variable lags—monetary policy impacts the economy almost immediately. But then interest rates are not monetary policy.”
I’m still going to repost it on Notes.
spencer
Oct 4 2023 at 12:00pm
The distributed lag effects of money flows, the volume and velocity of money, have been mathematical constants for > 100 years.
But that doesn’t preclude current monetary policy, or other disturbing factors, from affecting AD.
My top, sell signal, for the DOW was July 21st.
Jeremy Goodridge
Oct 4 2023 at 4:14pm
“Bloomberg has a new piece suggesting that a recession may be immanent:”
I think you mean “imminent”.
Quoting from Vocabulary.com:
Imminent describes something that’s about to happen, and it’s not always good. It can be positive, like a talented musician’s imminent rise to stardom, but it’s often bad, like a sick person’s imminent death, or a city’s imminent bankruptcy:
“One official said that unless the city ‘hit the jackpot,’ bankruptcy was imminent.” (New York Times)
“At one point, some 750,000 Somalis had faced imminent starvation.” (Scientific American)
The less common word, immanent, often sneaks in where it doesn’t belong. Immanent comes from the Latin immanens for “to remain in.” It refers to a natural part of an organism or organization. When people talk about God as immanent, it means something closer to “omnipresent,” as opposed to transcendent for “unknowable.” It’s a formal word, popular with philosophers and religious people:
“God is in all; He is over all; He is both immanent and transcendent. ” (Kaufmann Kohler)
“But the naturalist sees the creative energy immanent in matter.” (John Burroughs)
Scott Sumner
Oct 4 2023 at 5:09pm
Thanks, I corrected it.
spencer
Oct 4 2023 at 5:42pm
re: “But then interest rates are not monetary policy.”
Richard Fisher, November 2, 2006: – Fed
Déjà vu: “In retrospect [because of faulty data] the real funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer than it should have been. In this case, poor data led to policy action that amplified speculative activity in housing and other markets. The point is that we need to continue to develop and work with better data.”
Thomas L Hutcheson
Oct 4 2023 at 6:59pm
But short term interest rates, specifically the EFFR, are one instrument of policy among others like QE, IOR, purchase of FE denominated assets, whatever needed to attain its targets for inflation
spencer
Oct 5 2023 at 10:37am
Sumner is right. It is base money that is the monetary policy instrument.
spencer
Oct 5 2023 at 10:48am
But using “short-term interest rate” manipulation as its monetary transmission mechanism, under an ample reserves regime, the time-frame of the FOMC’s horizon is 24 hours, rather than 24 months.
Jose Pablo
Oct 5 2023 at 5:54pm
When that happens, it will provide a fresh impetus for stocks and housing to turn down
I find it “impressive” that a journalist pays attention to the effect of rate hikes on cash-flows. Quite frequently they just “assume” that rate hikes should reduce stock prices because the hikes should increase the “discount rate” (whatever this means). Assuming the hikes are “neutral” for future cash-flows.
If the FED is right to raise rates, the hikes should have a positive impact on economic activity (making it grow in a more orderly manner and so, bigger in the future that if the FED doesn’t act). That should increase the future cash-flows (compare with a scenario in which the FED should act, and it doesn’t, leaving the economy to spiral out of control).
So, even if, very likely, Bloomberg got the impact of “needed rate hikes” on cash-flows wrong, there is an improvement on, at least, thinking about this part too.
I also find deliciously ingenuous the idea that, based on existing public information, they know something about the future that the market doesn’t know. If I just could do precisely that …
Thomas L Hutcheson
Oct 6 2023 at 10:35am
And what is the Bloomberg writer’s theory about Fed reaction function? Does the writer possess data or insight (including insight on the “long and variable lags” in response to its past instrument settings) that the Fed does not possess and so it will fail to take action needed to avoid a recession? The Fed and the writer have just come into equal possession of data and is is too late for the Fed to take action? The Fed and writer have the same data but the Fed will choose not to take action to avoid the recession?
Does the writer think the Fed is a fool, a victim, or a knave?
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