The main source of uncertainty in the economic and capital markets outlook would seem to the progress and the coronavirus and the public health policy response to that. I don’t have much to offer there, beyond a warning that economist and macro analysts are not likely to be very helpful here.
But one does what one can. And it is probably a good idea to stick to the knitting. In this report, I assess a bit of an irony that has developed recently. Just as the consensus has swung around to a recognition that the Fed actually wants above-2% underlying inflation during the late cycle, the risks around the Fed achieving that outcome have intensified, because of the virus.
What to make of that? In my view, the value of understanding the Fed’s preference is that it will continue to predict their behavior, which will continue to lean dovish. In the viral / economic upside scenario, they may get their preferred inflation rate. In the downside scenario, expect them to be highly reactive. In either case, they will be more dovish, i.e. more pro-growth, than would otherwise be the case.
I point this out for two reasons. First, it has important implications for the economy, particularly in the upside scenario. And second, to be honest, I don’t want some Fed watcher who missed the entire past decade to say, yeah, but inflation never went above 2%! I am getting my link in place.
Also, the hawks are 31 for 31 on getting fooled by financial stability, and they will eventually go for 32. I cover that as an aside in the attached report.