On the Road to Nowhere

I’m not sure where I’m going these days. Not just me – you too! Driving around from here to there, I wonder where we’re all headed. Do we really have a place to go to or is most of it just a Sunday drive type of thing? What’s so important that we fight traffic and 4-way lights, and then, turn around to where we started. Modern day living has changed so much that a lot of this busyness on the highway seems unnecessary. I mean yeah, doctors don’t make house calls anymore and pharmacists demand a full frontal ID for pickup. Most of us have to go to work physically and playing golf on an actual course requires a car, but much has changed. Groceries and meals can be delivered by DoorDash. Most games can be played virtually. Visiting relatives can be FaceTimed with much less stress. Movies are better online. Clothes, toiletries, whatever you need can be at your door thanks to Amazon within 24 hours.

See what I mean? Of course you need to have more moolah than the average bear for some of this, but I gotta say, a nice 60 minute walk or a Peloton workout should keep us fit as the proverbial fiddle and ready to watch Sunday football without driving to the game and paying 50 bucks for parking. Stay home. Enjoy life “off road.” I literally don’t know where we’re going much of the time.

How about markets? Where are they going? Much depends on the economy, inflation, and the Fed’s perception of how high and for how long their fed funds target will be.

But the fact is we need to renormalize the cost of money. Most of us would agree to this. But how high is that and for how long? Among economists, Larry Summers suggests as high as 6% for the Fed’s target funds rate but Jeremy Siegel suggests 3% to 4% is enough. As Fed chair, Powell strongly affirms we will be lifting higher from the current 4.25% to 4.5% target, but warns that the peak in rates and its duration will depend on data in the months ahead.

I suggest several clues to this conundrum. First, aside from the critical focus on US employment, global growth and financial conditions, it is important to analyze what level and pace of real interest rates have historically slowed economic growth in past cycles and led to acceptable inflationary targets.

I emphasize real as opposed to nominal yields because the Fed’s and other central banks’ dream outcome is the infrequently mentioned “r-star”  – the “neutral” level of overnight money rates net of inflation that is consistent with stable economic conditions.