It’s a Higher-for-Longer World for Rates, and That’s OK
After another warm inflation reading, focus less on when the Fed will start cutting and more on where they will end up
By Aaron Back, The Wall Street Journal, March 13, 2024
Investors are getting used to the idea that interest rates in the U.S. could stay high for longer than they had hoped. That isn’t necessarily a bad thing…
Longer term, the debate hinges on where the so-called neutral rate falls in the current, postpandemic economy. This is the theoretical “just-right” level of interest rates where unemployment is as low as possible while keeping inflation at target levels. Many economists believe this elusive rate has moved higher after a long period following the 2008-09 financial crisis when it seemed to have permanently shifted lower. If that is the case, it would indeed mean fewer rate cuts coming from the Fed past the end of this year. But it would also imply a strong economy, with factors like demand for equipment by businesses pushing up rates…
Tuesday’s market action, with stocks rising even as rate expectations moved slightly higher, could be a sign that Wall Street is weaning itself off an addiction to low rates. That certainly would be encouraging. [end quote]
Treasury and commercial bond rates are not high by historical standards. The Fed created the addiction to zero rates in response to crises and maintained this far too long.
The asset market bubbles won’t continue inflating rapidly without free money pumping from the Fed. But the economy and stock market can normalize with a higher neutral rate as it did in the 1990s.
Wendy
Maybe. Maybe not. The thing I keep looking at is the federal debt. Because it is constantly being refinanced, and because ALL the interest due is constantly being refinanced, and because there is constantly new debt being added (the amount spent above the amount brought in as revenue), the number keeps going up. Meanwhile, GDP also keeps going up. Until recently (a few years ago), GDP growth would generally outpace the growth of the debt, so we were mostly okay. But now with the debt rising more quickly due to the constantly higher balance being refinanced, and due to the higher rates, maybe it’s not ok anymore?
The thing that gives me hope, MarkR, is we are in an environment now where we have realized that all those tax breaks to large corporations and high-wealth individuals since Reagan was a bum deal for us. This could be, needs to be, corrected. If so that certainly helps the fiscal outlook.
Exactly. The deficit is not an technical problem of economics, but rather a severe political problem, as the rich are politically extremely powerful (so Constitutionally necessary Congressional economic fiscal management is near impossible without permission from the congresscritter owners) and mostly still brainwashed by voodoo economics propaganda against even their own long term self interest.
In the supply-side period that was most of the definition.
Fiscal policy on taxation and budget outlays towards real GDP growth are fully in the equation now.
This has import because if fiscal policy spurs economic growth unemployment falls. Rates do not have to come down for GDP growth or for unemployment to fall. Marginally speaking.