Op-Ed: The Fed Shouldn’t Raise Interest Rates Too Quickly*​​​

Here’s a missive to both the Federal Reserve and the financial markets: As the central bank raises interest rates, remember the tortoise, the hare and Milton Friedman. In the well-known fable, the tortoise, who was methodical, and not at all flashy but firmly focused on the endgame, defeated the hare, who was mercurial and easily distracted. Financial-market traders frequently behave like the rabbit. The Fed needs to behave more like the turtle, according to an op-ed in the Wall Street Journal. Consider that the Darwinian struggle that produces successful short-run traders places a large premium on speed. Since traders all over the world see essentially the same information at essentially the same time, the essence of success in this game is beating the other guy to the keyboard. Let the academics worry about some abstract “long run.” Acting hastily is essential to profitability. Minutes can spell the difference between riches and failure. If today’s quickest-to-the-keyboard move makes little sense according to some notion of “fundamentals,” who cares? You can always reverse course tomorrow. If you’re a skillful trader, you can make money in both directions. Profitable trading in speculative markets thrives on volatility. Overshooting is a feature, not a bug. Contrast all that with the Federal Reserve’s task in setting interest rates. Unlike good traders, good policymakers should be stately, thoughtful and always focused on the endgame. The Fed neither seeks nor thrives on volatility. It never wants to reverse direction quickly. Speed is important only in rare moments of crisis, such as when the pandemic struck in March 2020. In normal times, doing monetary policy well is more like running a marathon than a sprint. Long-run fundamentals are crucial. Traders and policy makers alike should also remember Friedman’s sage warning that monetary policy affects inflation only with “long and variable lags” — emphasis on long. If policymakers forget the long lags and grow apprehensive when higher interest rates apparently do nothing for a long while, they may be tempted to keep raising rates — thereby causing an overshoot. It takes a great deal of patience to get monetary policy right, and unfortunately, we humans aren’t a naturally patient lot, according to the op-ed. Read more.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Analysis: The Strong Dollar Is a Vote of Confidence in America​​​

U.S. price inflation is at 9.1%, and there is a fiercely strong dollar, a pair of statistics that was certainly unexpected a year ago and even now seems odd. On closer inspection, however, these numbers reflect a world in which the U.S. is still seen as a leader — in both economic growth and its ability to respond nimbly to crises, according to an analysis in the Washington Post. Many countries are currently experiencing high inflation, but markets view the U.S. as the one most interested in setting the problem straight, and relatively soon. American voters hate inflation, the Fed is taking palliative actions, and the American political system is willing to suffer a recession to bring down inflation, as it did during the late 1970s. The U.S. is not the only nation that will succeed in lowering its inflation rate by a fair amount. But the political equilibrium in the U.S. is probably the most transparent, if only because the U.S. is the country that everyone obsesses over on social media. The U.S. also has less of an energy price problem than most of Europe or Japan. That also makes the dollar a more attractive asset. Other sources of market data support pro-dollar sentiments, as five-year break-even rates — one measure of expected forthcoming inflation — have continued to fall, and they are now sitting at about 2.5%. The longer-term prospects for the U.S. are also more favorable than current commentary implies, according to the analysis. For instance, since 2009 the U.S. has had higher per-capita GDP growth rates than either Europe or Japan. The U.S. also has seen a more robust recovery from the pandemic than either Europe or Japan, or for that matter Latin America. Looking forward, markets may be expecting that the U.S. will extend its growth advantage over much of the rest of the world. Read more. 

Analysis: It’s Been a Poor Year So Far for Municipal Bonds​​​

The big perk of municipal bonds is that they are exempt from federal taxes. But that benefit comes at a cost: Their yields are usually lower than those of comparable taxable bonds, according to an analysis in the New York Times. In May, the cost briefly disappeared, as the average yields on municipal bonds pulled even with those of U.S. Treasury securities. Investors were, in effect, enjoying municipal bonds’ tax benefits free. Unfortunately, another cost loomed. Rising yields mean falling prices, as bond yields and prices move in opposite directions. So far this year, people who own municipal bond mutual funds and exchange-traded funds have seen the value of their investments sink. As of June 30, the S&P Municipal Bond Index had lost about 8.4 percent this year, with the first quarter being especially doleful. “Q1 2022 was the worst calendar quarter return for the municipal market in 40 years,” said Elizah McLaughlin, a municipal bond portfolio manager for Fidelity Investments. A variety of factors contributed to those returns, but the biggest has been the Federal Reserve’s push to raise interest rates to fight inflation, Ms. McLaughlin said. The central bank has increased the short-term interest rate it controls three times so far this year, including an unusually large increase of three-quarters of a percentage point in June. Investors have responded to municipal bond funds’ woes by fleeing. About $75 billion was pulled out of funds tracked by Morningstar through the end of June, compared with inflows of about $62 billion for the same period in 2021. Read more. 

Analysis: U.S. GDP May Fall Again in Q2. Does It Mean Recession?​​​

Between the backlogged orders from Christmas, ongoing high demand, and an improving flow of products from around the world, goods flooded into the U.S. in the first three months of this year at a record $3.4 trillion annual pace. It was good news, evidence that U.S. consumers felt flush enough to spend, and that global supply chains were healing after many months of disarray due to the pandemic. But it also caused one of the largest ever import-led hits to U.S. gross domestic product, making it seem as if the nation's economy was ailing rather than that the world was getting back to normal, according to a Reuters analysis. In calculating gross domestic product, meant as the sum of final goods and services created by U.S. companies and workers, imports are subtracted from the bottom line — and from January through March, that was enough to push the U.S. into the red with an annualized growth rate of -1.6%. That figure, driven at least in part by the vagaries of a still unpredictable supply chain, now figures into a politically sensitive debate about whether the U.S. economy is on the brink of recession. When GDP for the April through June period is released next week it may be negative again, and by one common rule of thumb two quarters of negative GDP growth would mean the U.S. is already in a recession. That remains far from the case under the more formal standards economists use, particularly because hiring, perhaps the most important touchstone, remains strong. Read more. 

U.S. Home Prices Hit Record of $416,000 in June as Sales Continued to Slide​​​

The U.S. housing market is rapidly cooling as record prices and rising mortgage rates weigh on home sales, locking out potential buyers, the Wall Street Journal reported. Slower activity in the housing market, halting a torrid stretch of sales induced by the pandemic, is another sign of a slowing economy, economists said, adding to risks of a recession. The median sales price of an existing home climbed to $416,000 in June, the National Association of Realtors said Wednesday, up 13.4% on the year and the highest since records began in 1999. At the same time, sales of previously owned homes fell for a fifth straight month, dropping 5.4% in June to an annualized rate of 5.12 million, NAR said. That was lower than the number of sales recorded in all of 2019, before the COVID-19 pandemic became widespread in the U.S. “A combination of higher prices and higher mortgage rates have clearly shifted the dynamics in the housing market,” said Lawrence Yun, NAR’s chief economist. “People who want to buy are simply priced out given the affordability challenges.” The housing market has frozen as participants adjust to the increase in mortgage rates, said Mark Zandi, chief economist at Moody’s Analytics. “Buyers can’t figure out what is the right price,” he said. “Sellers are very reluctant to give up” on the price they expected to sell for a few months ago, he said. A housing slump could deal another blow to economic growth, already hobbled by accelerating inflation. Growth contracted at a seasonally adjusted annual rate of 1.6% in the first quarter, according to the Commerce Department, and some economists expect growth to record another decline or barely advance in the April-to-June period. Read more. 

Americans Filing Jobless Claims at Highest Level in 8 Months​​​

The number of Americans applying for unemployment benefits last week rose to the highest level in more than eight months in what may be a sign that the labor market is weakening, the Associated Press reported. Applications for jobless aid for the week ending July 16 rose by 7,000 to 251,000, up from the previous week’s 244,000, the Labor Department reported today. That’s the most since Nov. 13, 2021, when 265,000 Americans applied for benefits. Analysts surveyed by the data firm FactSet expected the number to come in at 242,000. First-time applications generally reflect layoffs. The four-week average for claims, which smooths out some of the week-to-week volatility, rose by 4,500 from the previous week, to 240,500. The total number of Americans collecting jobless benefits for the week ending July 9 rose by 51,000 from the previous week, to 1,384,000. That figure has been near 50-year lows for months. Earlier this month, the Labor Department reported that employers added 372,000 jobs in June, a surprisingly robust gain and similar to the pace of the previous two months. Economists had expected job growth to slow sharply last month given the broader signs of economic weakness. The unemployment rate remained 3.6% for a fourth straight month, matching a near-50-year low that was reached before the pandemic struck in early 2020. Read more. 

Coming Tsunami of Commercial Real Estate Restructurings, Supply Chain Disruptions, Cryptocurrency and More to Be Discussed at ABI's 2022 Mid-Atlantic Bankruptcy Workshop​​​

Join ABI on Maryland’s Eastern Shore for family-friendly fun and networking in a relaxed atmosphere at the 2022 Mid-Atlantic Bankruptcy Workshop, being held Aug. 4-6, 2022. Our host hotel, the Four-Diamond Hyatt Regency Chesapeake Bay, is situated on 342 acres along the picturesque Choptank River and is an easy drive from Washington, D.C., Baltimore, Philadelphia and Wilmington, Del. Earn up to 8 hours of CLE/CPE credit, including 1.5 hours of ethics, from a stellar faculty of regional professionals and judges on business-, consumer- and skills-focused topics. Register today!

USTP Seeking Applicants Interested in Serving as Subchapter V Trustees​​​

The U.S. Trustee Program is seeking resumes from persons wishing to be considered for inclusion in a pool of trustees who may be appointed on a case-by-case basis to administer cases filed under the Small Business Reorganization Act of 2019 (subchapter V), according to a release from the U.S. Department of Justice. Those with business, managerial, consulting, mediation and operational experience are encouraged to apply. The appointment is for cases filed in the U.S. Bankruptcy Court for the Western District of Michigan. Subchapter V trustees may receive compensation and reimbursement for expenses in each case in which they serve, pursuant to court order under 11 U.S.C. § 330. Trustees are not federal government employees. For additional information, qualification requirements and application procedures, click here.

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