Wednesday's Market Minute: “Lagged Effects” Is The New “Transitory”

Today, Jerome Powell will have another chance to address the situation. The message he delivered last week was confusing as he referred to the decision of not raising rates as a "skip", only to retract his statement immediately. It's a bit unclear what to call this type of decision when you're trying to appease everyone.

When explaining why the Fed decided not to increase rates last week, Powell referred to a term that is currently popular among financial media and economists. This term suggests that we should hold off on making any decisions until we can see the delayed impacts of the past year's increased rates.

"You hear it quite often nowadays. This phrase indicates the uncertain consequences of tightening monetary policies that are not immediately apparent while the interest rates are being increased. Relying too much on this idea poses some risks, particularly if the inflation turns out to be a more significant issue than anticipated, which the FOMC's Dot Plot revealed last week."

Initially, we can anticipate that the time it takes for policies to have an effect on the economy will gradually decrease over time. This is due to the fact that we are becoming more knowledgeable about the workings of the economy and the speed at which information, goods, and services are exchanged is constantly increasing. Consequently, the impact of these "lagged" effects will be somewhat lessened during each economic cycle. Presently, this trend is particularly apparent as we are living in an age of social media that has witnessed the greatest ever stock-market participation. Unlike before, more individuals are aware of and concerned with the Federal Reserve's actions and are making investment, capital allocation, and discretionary consumption decisions based on the level of interest rates.

Furthermore, there is proof of substantial consequences that have occurred. In the previous year, the stock market plummeted and this occurred almost completely in contrast with the alteration of interest rates. Startups that weren't profitable closed down their businesses, the IPO and SPAC craze came to a halt very quickly, and not-so-strong corporations went bankrupt. The impressive housing expansion that was happening during the Covid pandemic also encountered a major setback. According to the prior principles of consecutive quarters of dropping GDP, we did experience a recession last year! Lately, local banks connected to the technological consequences have gone bankrupt.

It appears that Powell is hesitant to combat inflation as he promised last year due to concerns about the banking system. However, if he is genuinely dependent on data, there seems to be little reason to be overly fearful about the economy. The difference between interest rates on credit looks harmless, financial circumstances are the most lenient they've been in a year, and economic information is exceeding expectations at nearly the highest pace since 2021. Powell even acknowledged in the Q&A session that the housing market is gaining heat once again.

In the world we live in today, the idea of "lagged effects" may not be as significant as people make it out to be. Furthermore, there is substantial monetary proof that suggests these effects may have already occurred and ended. If the Fed chooses to offer economic relief presently, there is a risk of making a similar mistake to that of claiming something is "transitory," which could result in inflation returning and necessitating a forceful elevating campaign in the future.

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