Tuesday, August 21, 2018

Duy: "Bostic Throws Down the Gauntlet"

by Bill McBride on 8/21/2018 02:14:00 PM

Some more Fed Watch comments from Tim Duy: Bostic Throws Down the Gauntlet

Atlanta Federal Reserve President Raphael Bostic threw down the gauntlet today with a declaration to dissent any policy move that will invert the yield curve. He may get the chance to make good on that threat in December – his last meeting in his current rotation a voting member.

Bottom Line: My sense is that the majority of the Fed would find more reasons to ignore than embrace the signal from a 10-2 yield curve inversion. They will fall back on the basic theory that this time is different because the curve inverts at a lower level of rates than in previous inversions. If the yield curve doesn’t stop them from continuing rate hikes, what will? Certainly a clear slowdown in activity would do the trick. But that is obvious. Less obvious is the possibility that they pause after reaching their estimates of neutral even if the data remains consistent with above-trend growth. That would require something of a leap of faith by Powell & Co. that the lagged impacts of tightening had yet to materialize in a slower pace of activity.
CR Note: Currently the target range for the federal funds rate is 1.75% to 2%. With inflation running close to 2% by most measures, the real Fed Funds rate is still negative.