The Weight Of High Interest Rates

The potency of monetary policy will weigh more heavily on activity in 2024.

I learned an important life lesson during a canoe trip through Canada as a teenager. Periodically, our group of voyageurs would have to execute a portage: taking our vessels and gear overland from one body of water to another. Those days weren’t a lot of fun: you had to place your pack and a 100 pound canoe on your shoulders, and then march for a mile or two. Upon finishing the journey, you were expected to double back to carry tents and provisions.

Being the calculating person that I am, I realized that if I took my time carrying the canoe, others would return for the tents, saving me a second trip. Unfortunately, my counselors and fellow campers had little patience for my slow-play. “If you’re a laggard, you will never be a leader!” I was told. I’ve never forgotten that advice.

In my profession, it is very important to distinguish laggards from leaders. Some indicators are the result of economic change, while others presage it. Some policy moves have an instant impact, while others take time to reach full effect.

Central bank strategy falls into the latter category. The famed economist Milton Friedman observed that monetary policy “works with long and variable lags.” Understanding the delay between action and reaction will be critical to sticking the soft landing in 2024.

Two factors have a heavy influence on the timelines associated with monetary policy. The first of these is the state of financial conditions, which gauge how easy is it to access capital, and its cost. Central banks only have indirect influence on these elements.

Financial Conditions Indices