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The Starring Role In The Powell Pause Isn't R-star

Jeffrey Snider profile picture
Jeffrey Snider

R-star is a fiction, which, like term premiums for interest rate decomposition, allows Economists to skate past reality and onto their econometric blackboards. If there was a neutral rate, which R-star (or R*) proposes to be, why would there be only one, and what good would knowing its level today do? In a dynamic world, if you figure out where neutral is today, it won't be there tomorrow.

In many ways, it is a straight-up contradiction. Take something like forward guidance. Policymakers think that monetary policy is powerful, but even so, it takes some time to work through all the hidden economic processes, the beauty of Adam Smith's invisible hand unknowable to professional and layperson alike. Thus, the central bank under expectations policy (there is no money in monetary policy these days) is forced to live in the future.

That's forward guidance.

But if monetary policy lags into the future, how then could they evaluate where monetary policy rates are in relationship to that future today? You aren't really supposed to provide an answer for that question, largely because you aren't meant to ask it.

Jay Powell, last week, triggered the "Fed pause" scenario by making a lot of that little. Should the Fed pause on interest rates, why aren't markets enthused over the prospect? After all, if "rate hikes" are the problem, then fewer of them should help.

But, as noted earlier, they aren't really the problem. And that's the problem. When Ben Bernanke, taking over for Alan Greenspan, paused in June 2006, over the next year and a few months the economy got better? No. It got worse, because it wasn't the Federal funds rate that dictated anyone's monetary direction.

In fact, by the time the Fed reversed course in September 2007, it was already too late. Way too late.

This article was written by

Jeffrey Snider profile picture
As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. Jeff joined Atlantic Capital Management, Inc., in Buffalo, NY, as an intern while completing studies at Canisius College. After graduating in 1996 with a Bachelor’s degree in Finance, Jeff took over the operations of that firm while adding to the portfolio management and stock research process. In 2000, Jeff moved to West Palm Beach to join Tom Nolan with Atlantic Capital Management of Florida, Inc. During the early part of the 2000′s he began to develop the research capability that ACM is known for. As part of the portfolio management team, Jeff was an integral part in growing ACM and building the comprehensive research/management services, and then turning that investment research into outstanding investment performance. As part of that research effort, Jeff authored and published numerous in-depth investment reports that ran contrary to established opinion. In the nearly year and a half run-up to the panic in 2008, Jeff analyzed and reported on the deteriorating state of the economy and markets. In early 2009, while conventional wisdom focused on near-perpetual gloom, his next series of reports provided insight into the formative ending process of the economic contraction and a comprehensive review of factors that were leading to the market’s resurrection. In 2012, after the merger between ACM and Alhambra Investment Partners, Jeff came on board Alhambra as Head of Global Investment Research. Currently, Jeff is published nationally at RealClearMarkets, ZeroHedge, Minyanville and Yahoo!Finance. Jeff holds a FINRA Series 65 Investment Advisor License.

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