Federal Reserve Governor Lael Brainard is on the loose. Of course, when the Fed is on the loose, the it signals a tightening of liquidity, ultimately leading to economic destruction. Tim Duy has exposed it in a fairly involved article. I will try to isolate the main points of this exposure and illustrate the effects with some charts:
1. Rate hikes are not stopping anytime soon.
2. The Fed won’t pause at neutral. Brainard defines neutral:
Intuitively, I think of the nominal neutral interest rate as the level of the federal funds rate that keeps output growing around its potential rate in an environment of full employment and stable inflation.
3. There are two neutrals. Short term neutral and long term neutral, as she is quoted by Duy:
Focusing first on the “shorter-run†neutral rate, this does not stay fixed, but rather fluctuates along with important changes in economic conditions…In many circumstances, monetary policy can help keep the economy on its sustainable path at full employment by adjusting the policy rate to reflect movements in the shorter-run neutral rate. In this context, the appropriate reference for assessing the stance of monetary policy is the gap between the policy rate and the nominal shorter-run neutral rate.
Turning to the shorter-run neutral rate, although the estimates are model dependent and uncertain, we can make some general inferences about its recent evolution that are largely independent of the details of specific models. Estimates suggest the shorter-run neutral rate tends to be cyclical, falling in recessions and rising during expansions, and our current expansion appears to be no exception. [Emphasis Mine]
The Duy Chart clearly shows employment for 24 to 54 age group is rising. That must mean that the neutral rate must be rising at this time (according to Brainard). It could be a data point the Fed is tracking. Here is the labor chart:
Brainard is a hawk. Hawks fear even a little inflation. Doesn’t matter if it is overblown. Hawks are in charge of the Fed.
Duy goes on to pick apart the speech. Brainard says in the next few years, the short term neutral rate will rise higher than the long term neutral rate. Therefore he says, the Fed will choose recession over inflation. The Fed won’t care about the yield curve inversion at all.
