Insightful Word
  • Investing
  • Stock
  • Economy
  • Politics
  • Investing
  • Stock
  • Economy
  • Politics
No Result
View All Result
Insightful Word
No Result
View All Result
Home Economy

Column-Financial conditions vs real rates – is Fed policy too tight or too loose? McGeever

admin by admin
October 31, 2024
in Economy
0
Column-Financial conditions vs real rates – is Fed policy too tight or too loose? McGeever
0
SHARES
7
VIEWS
Share on FacebookShare on Twitter

By Jamie McGeever

ORLANDO, Florida (Reuters) – As if financial markets needed another factor to complicate the near-term outlook for Federal Reserve policy, the U.S. economy and asset prices, investors now have to make sense of a growing disconnect between real interest rates and financial conditions.

    In simple terms, is U.S. monetary policy too tight or too loose? Normally this would be a fairly straightforward question, but there are currently contradictory signals.

    By some measures, the Fed’s inflation-adjusted policy rate is nearing the highest level since 2007. And that’s after the jumbo-sized 50 basis point rate cut in September.

    This would suggest the Fed has plenty of scope to continue cutting rates, perhaps even by “hundreds of basis points”, as Chicago Fed President Austan Goolsbee recently suggested.

The Fed’s current policy stance also appears highly restrictive when set against estimates of ‘R-Star’ – the nebulous real rate of interest that neither accelerates nor slows growth in a world of 2% inflation – which is currently estimated to be somewhere between 0.7% and 1.2%.

    Yet many market-based measures of financial conditions tell a different story. They’re the loosest they’ve been in years by some gauges, largely due to Wall Street’s relentless rise.

    So something has got to give: either the real cost of borrowing comes down, or financial conditions tighten. Or a bit of both. Yet it’s currently unclear which force will prevail.

MIXED MESSAGES

    The U.S. economy looks to be in rude health, as evidenced by the 2.8% annualized GDP growth reported on Wednesday and the strong start to the corporate earnings season.

    Meanwhile, investor risk appetite is holding up despite rising geopolitical risk and the looming U.S. presidential election. Stock prices have climbed more than 40% over the last 12 months – a remarkable run – and U.S. corporate credit spreads are the narrowest they’ve been in 20 years.

    Yet as inflation has cooled, real borrowing costs have risen to their highest level in 17 years, and expectations of further Fed easing are steadily being pared back because of the economy’s solid performance.

    What explains this divergence?

    BNP Paribas (OTC:BNPQY) economists note that even though Fed policy is technically restrictive given today’s high real rates, what matters for the real economy is broader financial conditions. And these conditions have eased substantially over the past year.

    The economists cite Fed modeling that suggests the change in overall financial conditions over the last year could boost GDP growth by as much as 0.7 percentage points over the coming 12 months.

    That hardly sounds restrictive.

‘TAIL WAGGING THE DOG’

“It’s a very unusual environment we’re in,” says Joe Lavorgna, managing director and chief economist at SMBC Nikko Securities, who contends that these loose financial conditions are largely the result of the stock market boom. “Equities are the tail wagging the dog.”

    In other words, appreciating stocks are helping to push up asset prices broadly and making financing easier to access, creating a self-reenforcing loop that is proving difficult to break.

    This could help explain why the economy has been so resilient despite elevated interest rates, but it could also complicate the Fed’s job moving forward.

    A ‘no landing’ for the economy – i.e., strong economic growth despite elevated interest rates – could prompt a market repricing of the Fed outlook that, somewhat paradoxically, tips equities and asset prices lower. This would obviously tighten financial conditions, but perhaps more rapidly and dangerously than the central bankers would like.

    Fed Chair Jerome Powell told reporters after the rate cut on Sept. 18 that the process of shifting policy to a more neutral stance has begun. Financial conditions will play a crucial role in determining the pace and depth of the Fed’s easing cycle.

(The opinions expressed here are those of the author, a columnist for Reuters.)

This post appeared first on investing.com

Previous Post

ServiceNow stock is expensive; does it have a margin of safety?”

Next Post

US third-quarter labor costs growth smallest in more than three years

admin

admin

Next Post
US third-quarter labor costs growth smallest in more than three years

US third-quarter labor costs growth smallest in more than three years

Trending News

Saudi Arabia stocks higher at close of trade; Tadawul All Share up 0.63%

Saudi Arabia stocks higher at close of trade; Tadawul All Share up 0.63%

October 13, 2024
Fed to deliver the next rate cut in March, Goldman says

Fed to deliver the next rate cut in March, Goldman says

December 27, 2024
Demand slump in Asia redirects fuel flow to Americas West Coast, says Vortexa

Demand slump in Asia redirects fuel flow to Americas West Coast, says Vortexa

May 30, 2025
Subscribe to Insightful Word


    Recent News

    S&P 500 nears record high despite headwinds: key drivers behind the surprise rally

    S&P 500 nears record high despite headwinds: key drivers behind the surprise rally

    June 26, 2025
    Top Nasdaq 100 Index stocks of 2025 as it breaks new all-time high

    Top Nasdaq 100 Index stocks of 2025 as it breaks new all-time high

    June 26, 2025
    S&P 500 nears record high as Wall Street opens higher amid tech momentum

    S&P 500 nears record high as Wall Street opens higher amid tech momentum

    June 26, 2025
    Galaxy Digital launches $175 million fund to back DeFi and stablecoin startups

    Galaxy Digital launches $175 million fund to back DeFi and stablecoin startups

    June 26, 2025

    Recent News

    S&P 500 nears record high despite headwinds: key drivers behind the surprise rally

    S&P 500 nears record high despite headwinds: key drivers behind the surprise rally

    June 26, 2025
    Top Nasdaq 100 Index stocks of 2025 as it breaks new all-time high

    Top Nasdaq 100 Index stocks of 2025 as it breaks new all-time high

    June 26, 2025

    Latest News

    • S&P 500 nears record high despite headwinds: key drivers behind the surprise rally
    • Top Nasdaq 100 Index stocks of 2025 as it breaks new all-time high
    • S&P 500 nears record high as Wall Street opens higher amid tech momentum

    About Insightful Word

    • Contacts
    • Cookie Notice
    • Privacy Policy
    • Terms of Service
    • Trading tools
    • Contacts
    • Cookie Notice
    • Privacy Policy
    • Terms of Service
    • Trading tools

    Copyright © 2025 Insightfulword.com. All Rights Reserved.

    No Result
    View All Result
    • Investing
    • Stock
    • Economy
    • Politics

    Copyright © 2025 Insightfulword.com. All Rights Reserved.