The mean expected NGDP growth path is now down nearly 20% from its January 1st level, as the S&P 500 fell almost 5% last week. Treasury yields again spiked, as did expected yields in the Fed Funds futures market. There will obviously be much attention paid to the FOMC meeting this week, as has been the case since the Fed starting tightening policy early this year.
An important clue about its intentions regarding its assault on nominal growth is that expressed by Chairman Powell in his Jackson Hole speech late last month, in which he stated, “Reducing inflation is likely to require a sustained period of below-trend growth.” The mean expected NGDP growth rate is already below the long-term trend growth rate, though it’s unclear if Powell is referring to merely the trend growth rate, or the level path. I think it’s likely the former, but who knows? The Fed is purposely vague in its communications.
Also, as stated many times, since the Fed adopted an asymmetric 2% inflation target, it is, as usual, hard to know what will satisfy the FOMC in terms of current and expected inflation.
All that said, presumably the Fed is getting close to ending this tightening cycle, given that the expected mean growth path is now below the trend rate and that 5 year inflation expectations are down to just over 2% in the Fed’s preferred PCE terms. That assumes no further significant negative supply shocks of course, though those should not affect the Fed’s policy if properly ignored, at least if short-term. If only the Fed were always proper.
One can, of course, never time a bottom, so for those who’ve been keeping their powder dry, it might not be the worst time to put more money in US stocks, and even some cryptoassets, at least if one is a long-term holder.
I don’t often mention cryptoassets, but it has become increasingly clear in recent years that Bitcoin, Ethereum, and many other crytoasset prices move pretty closely with the S&P 500 and hence, expected aggregate demand. For example, Jim Bianco recently tweeted this chart:
Articles such as this one discuss the issue in more detail, claiming a roughly 0.65 correlation between Bitcoin prices and the S&P 500. Of course, cryptoassets are tremendously more volatile than many stock indexes, and past performance is not necessarily indicative of future performance. As always, this is not an investment recommendation, but just FYI.
These correlations strongly support the idea that, far from cryptoassets behaving like currencies, they behave like alternative payment methods and as providing the basis for nonpayment-related blockchain applications.
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