The consensus is that the neutral rate is going to
be significantly higher, at least somewhere between 4% there
. And abouts. Do you agree? Do you
think that basically this means the FED just can't cut
rates nearly as quickly because of the lack of certainty
of what the end target is? Yeah, great
question on the, on the neutral rate. I
mean, that's really the answer to why is the
economy not crumbled with all these fed rate hikes?
Now they're reversing course obviously and starting to cut rates
. And I think the answer to that is that
the neutral rate in a hot business cycle with higher
inflation than we saw in the previous cycle is,
is much higher. So, you know, when
Fed chair Paul began this rate cutting effort, what
was he saying? He was saying our policy rate
is above all estimates that are mainstream of the neutral
policy rate. That is no longer the case with
the fed having cut rates 75 basis points in nominal
terms in real terms. It's a little more because
inflation expectations have bounced back modestly. So now the
fed has the policy rate, you know, sort
of right, in between the highest and lowest estimates
out of quote the mainstream to, to, to
uh to quote a reference fed Chair Powell. So
, you know, it's really gonna be data dependency
from here on out the fed isn't sure where the
neutral rate is. My sense is they're still at
least modestly restrictive. Uh But you're exactly right.
And, and one real simple statistic I think can
tell us why if you look at CP I inflation
from the sticky price sector core, excluding housing,
it's running about 100 basis points above the average from
the last cycle. Uh And so if you tack
down 100 basis points to the peak fed funds rate
from the last cycle that takes you into the low
to mid threes for the nominal fed funds rate.
Uh So, you know, that's below where we
are today, but it's much higher than the fed
policy rate peaked in the, in the last business
cycle. Uh So the neutral rate is higher,
fed doesn't know exactly where our star is. Uh
But they're probably now more confident that they're not above
all estimates of, of neutral. So what does
that mean for the fed in December, Michael?
Yeah, I think it means that we could be
getting close to a pause. It's really going to
depend on the the flow of data markets. Still
think that there's, you know, more of a
probability that they cut another 25 basis points. But
, you know, after that, I think things
really slowed down and it depends on the flow of
data, probably more weighted to, you know,
to these labor market reports. And we've had some
strange reports. I mean, going into the summer
it looked like the labor market was faltering into a
potential recessionary pattern. And then most recently the unemployment
rate has pulled back. Obviously, the October data
was storm distorted. So I think we're gonna need
more information. The feds gonna need to see more
data. But I, I think they could be
getting close to a pause here.