A few days ago I wrote a post explaining a better feeling about the condition of monetary policy because of the natural rate rising along with TIPS spreads heading for target. When I investigated the cause of the accompanied market pullback, I found no obvious monetary cause. But there is still the reality that real shocks can and do cause recessions. So I can’t say it’s going to be a good year or that I feel good about the future in general.
The essence of my current green shoots of optimism has to do with little fear of supply recessions, but being horrified by demand side recessions that come either by themselves or mixed and matched with the former because there is generally no comparison between the two in length, breadth or severity. My longstanding expectation was that tight money would at the bottom of the next recession, and it is a positive thing to possibly be proven incorrect on that point – even a relief. TIPS spreads aren’t forecasting tight money all the way up to 30-yr. They say tight money is over. So I suppose that the question of whether the nightmarish chapter of persistently poor demand side management is truly over will ultimately be determined by whether the people at the Fed do surprising things in the near future. I wouldn’t bet the farm on them not doing surprising things, but TIPS market participants appear to be even more optimistic about the Powell Fed than I am at this point in time.