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Wall Street Dialogues

Wall Street Dialogues

Journalist: Larry Summers, who was Secretary of the Treasury under Bill Clinton, says that there is a non-negligible probability that the FED’s next move will not be a rate cut as expected but an increase. Was the January data so bad that it was necessary to put a topic that was archived back into the discussion? Was Wall Street too quick to bet so big on rate cuts?

Gordon Gekko: If there is one trait that the January data brought, it is exaggeration. Employment, inflation, retail sales. Job creation was exuberant. Inflation was very high. In all lines: consumer, wholesale, import and export prices. I remind you of the figures: +0.3%, +0.3%, +0.8%, +0.8%.

Q: And with energy prices falling sharply.

GG: Yes. A very important detail because this way the surprise is bigger. The retail price of gasoline fell 3.3%; 0.9%, that of energy.

Q: From the point of view of monetary policy, all the information would warrant thinking about tightening the plugs.

GG: Up to here, yes. But the parade of indicators did not end there. The PMI reports were also resounding. But, in both senses. Very robust in terms of activity. Very relaxed depending on inflationary pressures.

Q.: Unlike what conventional price indices marked later.

GG: As it is. For this reason, I emphasize that the January date, if it has a dominant characteristic, is excessiveness. Up or down, but without half measures. Retail sales, for example, were destroyed.

P.: It is a winter with very harsh notes.

GG: OK. And that was known in advance. But one imagined a nominal decrease of 0.2% / 0.3% and not 0.8%. And the fact that online and distance sales also fell by 0.8% adds another seasoning: perplexity.

Q: Is Larry Summers right in opening the umbrella and once again considering the possibility of a rate hike?

GG: What probability do you assign to it? fifteen%. It’s a footnote. The January figures cover the entire spine. It’s not easy to draw conclusions like that. They are contradictory. How robust is the activity? Employment suggests an acceleration (and grew 3.3% in the fourth quarter). Retail sales cool. Consumption seemed to be eating up the scene and now it is leaving the forum. Without their contribution all greenery will perish. Of course, the data touched all the sensitive nerves. At either end of the arch.

Q: The economy may be red hot and so may inflation. Or maybe not. Maybe it’s just a measurement error.

GG: Typical for January. If the inflation data repeats itself in February, it doesn’t matter much what else I say, Summers will have been a good predictor. But the FED is not going to raise rates. He will let the long rates climb, he will not interfere, but he will not take action either.

Q: You can change the speech. At the time, in January, Thomas Barkin of the Richmond FED had said the same thing as Summers. Without having any special information to justify it, by the way. Routine.

GG: The FED can adjust the speech. But, only communication.

Q: You will continue to cling to the strategy of watching and waiting.

GG: At this point it is reasonable. She is convinced that she must wait before taking the next step. Before having to lower rates.

Q: Depending on what you see and find, you will have to lower or raise them. Or does it seem to you that the only option is a discharge?

GG: In the third quarter, when the economy grew 4.9% and had no rest, the rise in long rates (which touched 5%) put a brake on it. When Powell pivoted in December and the FED presented its dot map with three rate cuts for 2024, the drop in long rates served to head off the incipient signs of weakness. Real interest rates are very positive. And they have proven to be effective. Just because the FED waits doesn’t mean they won’t continue working. And the rise in long rates can take care of lowering the profile of financial conditions if they are too relaxed and a serious tightening is needed. Remember October.

Q: The stock market does not create drama. Did you rush to bet on lower rates?

GG: Theirs is not to see and wait, it is to anticipate. The rate cut is long overdue, and although it would be good, Wall Street apparently doesn’t need it.

Source: Ambito

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