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Runaway Growth and the Real-Rate Runaround

Real rates aren't restrictively high, no matter what some commentators keep saying.

garbage. version 2.0

JACKSON HOLE, Wyo. -- Picking through the postmeeting rubbish is nobler than contributing to it.

In that spirit this nugget stands out.

The new target for the federal funds rate, 6%, is roughly 4 percentage points higher than the nation's "core" inflation rate. That spread -- known as the real interest rate -- is at a level previously reached only when the Fed raised rates sharply to combat serious existing inflation.

Two notes here.

The nominal funds rate is still relatively low.

Take a look at the chart of the funds rate in

this piece. See how it's been hovering at pretty much the same level for about four years now? Well, it's not just an uncanny coincidence that

gross domestic product

has been growing at the same steady 4% pace over the same period.

Growth is unlikely to slow meaningfully until that horizontal line gets notably more vertical. The fact that so many people have for so long now been predicting material slowdowns against a policy rate that's remained roughly unchanged is far and away the most fascinating thing going on in the forecasting profession today.

Quit it with the real rate thing.

There are two approaches here. One is to claim that real rates are overly restrictive -- and to predict that economic growth is about to slow meaningfully as a result.

This approach is popular. Some folks have been using it for ages.

The "real" federal funds rate has been rising for well over a year, and the federal funds rate has exceeded a moving average of nominal GDP growth for most of the past 3 years. ... This is likely to cause slower U.S. economic growth.

Thus The Tool way back in August 1998.

The one small problem with this approach is that it has repeatedly proven dead wrong for years.

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The other approach is to look at all of the available evidence -- to look at the fact that labor markets keep getting tighter, to look at the fact that the pace of final demand keeps accelerating -- and draw the obvious conclusion that however high real rates might be on a historical basis, they sure as hell ain't high enough to be characterized as restrictive.

This approach is deceptively elegant: Market participants needn't know precisely how high real rates will need to get in order to show a bite mark on the economy's ass.

They need only take a quick look around and make a common-sense judgment as to whether we're there yet.

And we ain't.

Shiny Happy People (or Smokey)

Are people who seem happy really happy?

Or deep inside are they blue?

Side Dish

Economist Lawrence Kudlow tells us that markets are smarter than anybody ... and that what they've done lately signals slower growth. He tells us that money is the key to prices ... and that what it's done lately signals reduced danger.

So last year? When the curve was steepening and the money numbers were running up at bigger and bigger clips?

Why wasn't he forecasting


growth and a


price threat?

Given that the tells he cites were moving in precisely the opposite direction ... why was he forecasting the same thing then that he is now?

Listen up. This guy spits out more disingenuous thoughts in one half-hour on television than most politicos do in a lifetime on the Hill. And the calls? They make my Magic 8-Ball look like a first-rate handicapper.

Consumer spending and housing are already slowing.

That's from last August.

As for consumer spending, I'm looking for a slowdown.

That's from October.

And again yesterday he made the claim that consumption and housing were slowing -- and we should all send Lyle Gramley a bottle of bourbon for calling it ridiculous as he tried (but failed) to hold back a laugh.

Larry's also been barking for at least seven months -- if anyone has evidence that goes back further than that, please send it in -- that too-high real rates will "impose pain, suffering and austerity." And here's what he had to say ahead of the August policy

meeting last year.

So, barring an unexpectedly bad core CPI number due out this coming Tuesday, I believe the Fed should not and will not tighten policy.

The pace of final demand has somehow managed to accelerate under such a viciously "restrictive" real-rate regime. The central bank did indeed tighten in August -- incidentally, the core CPI printed a nice two-tenths that month -- and it's tightened thrice more since.

And it ain't done yet.

Look. This is the Kudlow message: American asset markets -- dollars, shares, bonds -- will always and ever trade better. There's never any real danger that they won't; trading worse just isn't part of the feasible set.

Some of the attractiveness of the message lies in its simplicity. Most of it owes to its nothing-ever-can-(or-does)-go-wrong spirit.

Isn't that something we should all embrace as fact? Isn't the Internet more important than the Fed?


It is decidedly so.

Epilogue (or The Tracks of His Tears)

Your narrator recently sat down at a blackjack table. He was surprised to see the guy to his right continually doubling down on 13s and 14s whenever the dealer had a 10 showing.

His habit so disgusted the woman sitting at the point that she cursed out loud for a few hands and finally went to seek solace elsewhere. The rest of the table fidgeted and fingered its chips every time the guy pushed his second stack toward the circle.

I glanced at my neighbor.

He was laughing loud and hearty.

He seemed most happy.

Side Dish II

Best bet?

Cruise at 2 to 1.

Jolie at 1.6 to 1.

Bening at 1.6 to 1.

American at 1.1 to 1.

Washington at 1.91 to 1.