Why the US Economy Won't Slow Down Anytime Soon

Summary

The video discusses the ongoing debate around interest rate hikes by the Federal Reserve. Initially, there were expectations that the rate hikes would eventually 'break something' in the economy, leading to rate cuts. However, recent data suggests a strong economy with resilient inflation, challenging the soft landing narrative. The discussants explore the possibility of a 'no landing' scenario, where the economy continues growing without a recession. They attribute this strength to government spending and increased consumer spending supported by low savings rates. As rates potentially reach higher levels, concerns arise about the financial system's ability to withstand such hikes without breaking.

Takeaways

• 🔑 The expectation was that the Fed's rate hikes would 'break' something in the economy or financial system, but this hasn't happened yet.
• 🤔 The market was pricing in rate cuts earlier this year, assuming something had broken, but strong economic data has pushed back those expectations.
• ⏳ The belief now is that rate cuts are always '60 to 90 days away' and will keep getting pushed further into the future.
• 🏦 While there are always concerns about potential issues in the financial system's 'plumbing', the Fed remains data-dependent and hasn't seen evidence of a downturn yet.
• 📈 The speaker believes inflation may have bottomed in the high 2% to low 3% range on a year-over-year basis.
• 🛫 With no signs of a 'soft landing' or recession, the economy appears to be tracking at or above its potential growth rate of around 2.5%.
• 💰 Two key drivers of higher nominal GDP growth are government deficit spending and an increased consumer propensity to spend.
• 📊 The speaker's forecast is for 3% inflation, 2.5% real GDP growth, and 5.5% nominal GDP growth, with interest rates potentially rising to 5.5%.
• ⚠️ There is a concern that if interest rates reach 5.5%, it could 'break' something in the economy or financial system.
• 🤷‍♂️ The overall sentiment is one of uncertainty about where exactly the economy is in the interest rate cycle and recovery from the pandemic.

Q & A

What was the initial assumption about the Fed's rate hikes and their potential impact?

According to the script, the initial assumption was that the Fed would hike rates until something breaks, implying that the high interest rates would eventually cause disruptions or breakdowns in some parts of the economy.

What was the market pricing in a few months back regarding rate cuts?

The script mentions that a few months back, the market was pricing in something on the order of 150 basis points of rate cuts, indicating that the market was expecting significant rate cuts from the Fed.

What is Jim Bianco's view on the potential for a soft landing or recession?

Jim Bianco believes that the idea of a soft landing or recession, as was priced in by the market earlier in January, is not happening. Instead, he suggests a scenario he calls the "no landing" scenario, where the economy remains strong without a recession.

How is Jim Bianco explaining the strength of the economy and the bottoming of inflation?

Jim Bianco attributes the strength of the economy to two main drivers: 1) Big government spending and deficit, and 2) The lower savings rate, which means people are spending more of their income, boosting consumption and supporting inflation.

What are Jim Bianco's projections for real GDP growth, inflation, and nominal GDP?

According to the script, Jim Bianco's projections are: 3% inflation, 2.5% real GDP growth, and 5.5% nominal GDP growth. He believes interest rates could ultimately go as high as 5.5% to match the nominal GDP growth rate.

What is Jim Bianco's perspective on the potential for something to break in the financial system?

While Jim Bianco acknowledges that there should always be concerns about potential problems in the financial system's plumbing or geopolitical events, he emphasizes that the Fed operates based on data dependency. Unless the data shows a clear downturn, he doesn't foresee the Fed reacting to narratives or fears of potential issues.

How does Jim Bianco view the impact of the pandemic stimulus and debt buildup on nominal GDP growth?

Jim Bianco suggests that the nominal GDP growth, which might make everyone feel good, could be driven by the debt overlay or stimulus from the federal government over the past 72 months (6 years), implying that the strong nominal GDP growth might be artificially boosted by excessive government spending.

What is the significance of the lower savings rate in contributing to economic strength and inflation?

According to Jim Bianco, the savings rate has dropped from around 6% pre-pandemic to 4% currently. This means that people are spending a higher proportion of their income (96% instead of 94%), which increases consumption and supports both economic growth and inflationary pressures.

How does Jim Bianco justify his projections for interest rates potentially reaching 5.5%?

Jim Bianco justifies the possibility of interest rates reaching 5.5% by aligning it with his nominal GDP growth projection of 5.5%. He suggests that interest rates could rise to match the nominal GDP growth rate.

What is Jim Bianco's perspective on the potential for interest rates to break something if they reach high levels like 5.5%?

Towards the end of the script, Jim Bianco acknowledges that if interest rates were to reach as high as 5.5%, as he has projected, they could potentially break something in the economy or financial system, implying that such high interest rates might not be sustainable without causing significant disruptions.