Will the Powell Fed move to faster-paced rate hikes?


We get some potentially market-moving data today, including construction spending (should be good on hurricane recovery), Redbook chain store sales, ISM manufacturing, auto sales and the minutes of the Dec 13 Fed policy meeting. Analysts will be searching for hawk-ishness but we shouldn't expect much from the Fed until after we get the new Chairman in February.

We wondered last year whether new Fed chairman Powell will re-direct the Fed economists to other measures of unemployment in order to justify a faster pace of hikes or maybe a slower one. If you look at U6, the unemployment measure that includes the discouraged, unemployment is a lot higher than we think. Now long comes a Bloomberg story postulating that the Phillips Curve really does work, just not on the big-picture data. Tease out various cycles, and the correlation of inflation and employment is visi-ble. The secret is to use the number of people employed as a percentage of total population.

In other words, "the pool of unemployed is not the only source of new hires. [One chart] shows "most people who start working in any given month weren't even counted as unemployed the month before. They might have been in school or the armed forces or prison or just on the sidelines, not actively seek-ing a job. This source of new hires has become increasingly important in recent years as the unemploy-ment rate has fallen." The employment-to-population ratio fell in the 2007-09 crisis and still has not re-turned to the pre-recession peak. In other words, slack remains, even if the retirng Baby Boomers throw a monkey wrench into the mix.

Obviously we don't know if the Powell Fed will do any such thing as recalibrate the measures its econo-mists use. But there's some interesting and valuable material here, even if it's not mumbo-jumboed up with math.

As for whether the new Fed will find reasons to change the pace of hikes—and the CME Fed watcher gauge has a 75% probability of a hike in March—a fresh overview of the whole economy finds some scary stuff. Sometimes what's missing is as important as what's in view. The NYT reports that Trum-pian pro-business policies were expected to boost investment and thus bank borrowing. Instead, com-mercial bank loans tanked. See the chart. It's possible that company execs were biding their time until the new tax law kicks in or other changes in the financial landscape allows for more stable long-term planning. But the drop is not healthy. GDP is strongly correlated with commercial bank lending.


On the political front, the US budget expires on Jan 19. To get a new one, Congress has to decide on immigration, the Wall, and some other contentious issues. These issues have not yet reached boiling point, but just wait. US politics can still be toxic for the dollar.

As for bitcoin, we keep getting emails encouraging us to start tracking the various cryptos. We added the NYCE bitcoin index to our MarketWatch charts, but it's not a very good index and readers want more. We may capitulate in the end, but consider that cryptos are not really "currencies." They serve no useful function except as payment mechanisms for crime (now including kidnapping) and a vehicle for speculation. We might say they can be traded using technicals alone, but technical capture market senti-ment that has some basis in fact. Cryptos have no underlying facts.

New York magazine has a series of nuggets on cryptos. A cute one outlines how to decide whether to buy: "Rate your appetite for risk on a scale of zero (lily-livered) to five (iron-stomached). Rate your FOMO on a scale of zero (comatose) to five (desperate to belong). Multiply those two numbers togeth-er, and then multiply the product by your salary minus the amount of debt you're in. Divided that figure by 10,000 and invest that much money in bitcoin. So if you make $75,000, have a low tolerance for risk (one) but a high fear of missing out (five)? Invest $37.50 and not a penny more."

Cute, but not wrong. We always joke that lotteries are a tax on the poor. Cryptos are a weight around the neck of the foolhardy and neurotic. The rational reason to make an investment is to expect a net positive outcome. Given the mindless volatility of cryptos, how can you ever have a reasonable expec-tation of a gain?



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