Don’t Panic!

Published: Sun 16 January 2022
Updated: Tue 17 January 2023
By steve

In Markets.

Team Transitory rides again

Economics is an odd science. Sometimes ad hoc rationalizations seem to acquire the status of founding principles. One such principle is the idea that an inverted yield curve invariably signals a future recession. This sort of makes sense. An inverted yield curve signals that the market expects the demand for money to fall off with time, but with most commodities in steep backwardation (forward prices lower than spot prices), that’s hardly surprising and, in a way the commodities markets are more plugged in to the real economy than the money markets. Central banks can’t rig them, with programmes like quantitative easing, for a start.

Anyway, I think that Noah Smith makes a strong point in his most recent public post where he argues that, because monetary policy operates with such long and variable lags, and because the accuracy of yield curve inversion signalling recession is not what it’s cracked up to be, and because on some measures inflation is already below target, that the Fed should, in the current jargon, pivot, and stop hiking rates (or at least slow down).

The seventies were different. Oil prices went up manyfold, as producers in the Middle East nationalized production, and formed OPEC to constrict the supply of oil. Prices are high now, but oil prices haven’t moved for a year, and at some point the war in Ukraine will be resolved. China production will ramp up again, pushing up commodities, but pushing down manufactures. I wouldn’t be surprised to see persistent 4% inflation, but I’d be very surprised to see 12%, at least in a broad measure, such as the GDP deflator measure.

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