Good Thursday AM,

Guess the good news is the bleeding has stopped (hopefully for an extended time).

Not much news today GDP did not move, unemployment claims a bit lower than projected and Pending Home Sales drooped like a rock. Tomorrow is more important with the PCE and income numbers and the government looks like it will shut down come tomorrow night. Keep fingers crossed for a weak reports tomorrow. If the government shuts down, future data reports will likely be delayed.

A good piece from Bloomberg today worth sharing..

The rate of inflation has come down a lot over the last year, but there is a lot of debate about why. Because the unemployment rate has remained quite low, we don’t have a crisp, clean story about rate hikes slowing the economy, raising the unemployment rate, crimping demand, and causing price growth to slow.

That’s not to say there’s been no effect from the Fed, but it is a bit muddled.

One popular debate is over the degree to which there are “lags” in the impact of monetary policy. It’s been said for a long time, that rate hikes work with “long and variable lags.” But there’s another view that these days, the lags are shorter or non-existent. The thinking is that the Fed is very clear in its forward guidance, and so markets can re-price the new rate (or rate path) almost instantaneously, as policy changes, or as data affects the expected policy trajectory.

We clearly see there are some immediate aspects of monetary policy transmission. An unexpected hike, or unexpected hawkish turn, would likely show up in interest rates and the stock market right away.

So what’s the case for long lags?

On today’s episode of the Odd Lots podcast, we speak with Julia Coronado, the founder, CEO, and President of Macro Policy Perspectives. She’s in the long lags camp, and basically her argument is that monetary policy transmission works through two distinct channels: capital markets and credit. The former is fast. Markets reprice fast. Credit, she says, is different. There’s plenty of room for wiggle room in, for example, commercial real estate.

Here’s Julia:

“There’s the credit channel side where you’ve got this, you know, fixed rate financing for a couple of years, and, you’ve got time and there’s legitimate uncertainty about where we’re gonna be in a year in two years. Commercial real estate is a perfect example because they are a glass half full kind of people. And there’s been a real conversation. I talk to a lot of people in the real estate industry, there’s a real sense that if we hold on long enough, rates are gonna go back down.”

In other words, higher rates don’t force some immediate change. You can hold out hope. You can, in times of low rates, term out debt, and wait around and see how things develop. You can just be a blind optimist, whatever. So from Julia’s perspective, one risk is that the Fed sees an economy that’s still too hot, and is still in tightening mode, even before the impact from the hikes we’ve already seen fully start to hit.

Please remain safe and stay healthy, make today great!