The US economy is booming (for now). what does that mean?

The US economy is booming (for now).  what does that mean?

Federal Reserve officials maintain saying That “monetary policy is constrained”, but at least a few of them are There seems to be some doubts.

They are right to be skeptical. It is at least plausible that current policy is actually closer to “neutral” thanks to continuing changes in income distribution, private sector balance sheets, and fiscal policy over the past few years. Available evidence from both the real and fiscal sides of the economy suggests that policymakers must think more seriously about how they will respond if spending continues to grow much faster than they believe is sustainable. Even if they refrain from raising short-term interest rates further, these pressures may make them equally unwilling to do so. minimum interest rates anytime soon.

The standard line among academics and central bankers is that there are “long and variable lags” that separate short-term interest rates that the Fed directly controls from financial conditions that influence consumer and business behavior; It separates changes in those financial conditions from decisions about borrowing, spending, and saving; This separates those decisions from the employment, investment and inflation outcomes we actually care about.

As it happens, the Fed only began raising short-term interest rates at the end of March 2022, and short-term interest rates did not exceed 4% until December 2022. The Fed did not begin reducing its portfolio of Treasuries and backed securities Mortgage only recently. June, it wasn’t Until last fall, the runoff reached its climax. Even now, the Fed’s holdings of securities remain much larger, relative to US national income, than at any time since before the start of the pandemic. Which could Explain why hard data on economic activity, which tends to move last, still implies strong fundamental strength (more on that below).

The problem with this argument is that financial conditions have not actually tightened. The Federal Reserve itself has indicated this in Latest financial stability reportpublished on October 20. They said stocks are expensive — especially relative to bonds — and credit spreads are tight, and that “real estate prices remain high relative to fundamentals.” The price of Bitcoin has doubled year to date, while the price of Ethereum is up almost 50%.

In other words, the slight rise in default-free discount rates was offset by a significant reduction in the risk premia available on assets relative to cash.

This helps explain why consumer and business borrowing remains roughly in line with pre-pandemic norms.

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