Welcome Back to 1994!

[FXMAG]

Image Credit: Aleph Blog with help from FRED || Look at the mortgage rates fly!

Okay, you might or might not remember the last piece. But since that time, 30-year mortgage rates have risen more than 1%. Is the Fed dawdling? Maybe, but the greater threat is that they become too aggressive, and blow up the financial economy, leading us into another decade-long bout of financial repression.

As it stands right now, mortgage rates are in a self-reinforcing rising cycle, and it will not end until the Fed raises the Fed funds rate until it inverts the Treasury yield curve. But if I were on the FOMC, I would ignore inflation and the labor markets, and I would watch the financial economy to avoid blowing things up.

The FOMC won’t do this. They are wedded to ideas that no longer work, or may never have worked, like the Phillips Curve. They imagine that the macroeconomic models work, when they never do. They forget what Milton Friedman taught — that monetary policy works with long and variable lags. Instead, in tightening cycles, the FOMC acts as if there are no lags. And, in one sense, they are correct. The financial economy reacts immediately to FOMC actions. The real economy, with inflation and unemployment, may take one or two years to see the effects.

https://www.fxmag.com/forex/welcome-back-to-1994-redux