SOFTLY, SOFTLY:
Is Inflation Dead? (Cullen Roche|January 26th, 2024, Discipline Funds)
What really happened here is that plane was flying too fast in 2021. Then we hit a rough patch of air and the Fed kept flying us right through it. When they finally recognized the danger in 2022 they lifted the nose (interest rates) which caused the plane to slow and avert some of the turbulence. As of today the turbulence has moderated quite a lot, but the Fed still has the nose pitched at a suboptimal angle. They would like to bring the nose back down so we can continue along at the altitude and rate of speed we were traveling before this mess started.
This analogy is better because it highlights what success will actually entail here. Avoiding the turbulence isn’t “mission accomplished”. We want to bring the plane back to a more sustainable altitude and speed. And the only way we’ll know that that’s been accomplished is when the Fed brings the nose back down to its normal position. For the Fed that would mean bringing interest rates back down to a more sustainable level. I’ve been saying that a sustainable overnight rate is probably something in the 3-4% range. So, with the rate at 5.5% we’re still quite a ways from being able to say that the mission has been accomplished.
Don’t get me wrong. The pilots here are doing a good job. Better than I expected them to do. But we don’t want to be complacent here and declare victory when we’re still flying low and slow through a turbulent environment.