by When you pivot in basketball you have full control of the ball and the future outcomes. A pivot can be an effective tool in changing the course of your controlled direction and helping eventually score. But if you lose the ball you don’t get the opportunity to pivot. You instead have to backpedal and get back on defense to make up for your mistake. Many people these days are talking about a Fed “pivot”. This idea that they will alter their rate of change in interest rates and manage the “soft landing” they desire. But this implies that they’re in control and still moving the ball towards scoring. No. The Fed has already turned the ball over and they don’t realize it yet. And when they do they’ll have to backpedal. There will be no pivot because you can’t pivot when you’ve already
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When you pivot in basketball you have full control of the ball and the future outcomes. A pivot can be an effective tool in changing the course of your controlled direction and helping eventually score. But if you lose the ball you don’t get the opportunity to pivot. You instead have to backpedal and get back on defense to make up for your mistake.
Many people these days are talking about a Fed “pivot”. This idea that they will alter their rate of change in interest rates and manage the “soft landing” they desire. But this implies that they’re in control and still moving the ball towards scoring. No. The Fed has already turned the ball over and they don’t realize it yet. And when they do they’ll have to backpedal. There will be no pivot because you can’t pivot when you’ve already committed a turnover.
It’s crazy to be writing this article just 2 years after I repeatedly discussed the last Fed “backpedal”. In the middle of 2020 and throughout 2021 I said the Fed was way behind the curve on inflation risk and they’d have to backpedal to make up for their position (see here and here). The risk of high-ish inflation seemed so crystal clear to me. Granted, it’s gone higher than I expected and lasted longer than I expected, but COVID was the perfect recipe for higher than expected inflation.
I feel like we’re in a similarly obvious situation today. I’ve explained the math many times in the past, but the basic gist is that 7% mortgage rates at record high home prices is simply undoable for almost anyone that has to borrow. Or they have to borrow so much relative to their income that they will divert a huge amount of their disposable income away from everything else. So housing is frozen. New buyers can’t/won’t buy. And sellers don’t want to sell (because they’re locked in at lower rates). So the biggest sector of the economy freezes. And stays frozen until prices either fall materially or mortgage rates fall materially (or some combo of both).
How do you freeze the biggest sector of the economy without causing the risk of a recession or other unforeseen problems in the financial sector? The cracks are already showing and we haven’t even seen house prices fall much. If they fall more than expected those cracks will turn into big holes. To me the risks look asymmetrically skewed at this point. But the Fed hasn’t realized that they’ve turned over the ball because they’re waiting for journalists to publish stories about the turnover in tomorrow’s newspaper.
There isn’t going to be a pivot here. The Fed is going to have to backpedal again to get back on defense.
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