Lawyer Economics
Laugh at the Lawyer Economics!
I try to use the K.I.S.S. method (keep it simple stupid) when looking 👀 at or explaining very complicated matters so that most can understand (including myself). In my never ending quest to "guess" what the Fed is going to do as it drastically effects my businesses, I decided to create my own graph to see what has happened in 2023 (so far).
I used the following KPIs:
- 5 Yr Treasury Rate;
- 10 Yr Treasury Rate;
- Fed Rate (SOFR); and
- Inflation Rate
These data points were combined to create the line graph below (with some annotation from me). We are looking at the last 11 months of data (below).
Conclusions:
- Inflation has fallen from ~6.5% to 3.2% in 11 months (Fed target rate is 2%).
- Federal Reserve has raised SOFR 4.5% to 5.5% (100 bps in 2023 vs 400 pbs in 2022)
- While the 5 Yr and 10 Yr Treasury fluctuated between 3.5% and 4.5%, the key take away is that there was/is an inversion period (highlighted in yellow) for almost all of 2023.
- Plotting a "green" linear line on inflation, shows a trend towards the 2% goal in 23Q1 sometime (subject to a number of potential economic changes)
Historically, inflation follows an inversion period (Wallstreet prices the 10-yr return lower, than it is pricing the 5-yr return), which is followed by lowering rates. Second, we all know that most of the effects of raising/decreasing the Fed Rate takes 3-6+ months. Third, even a drop in rates will take the same amount of time to significantly impact the economy (think about turning an aircraft carrier in the other direction while moving) in a positive way. However, it should have a quicker effect on the "risk spread" attached to lender quotes right now.
I could probably go on for pages about what this chart shows (I love KPIs) and add 50+ additional KPIs to bolster the analytical conclusions; however, there is also support that we will NOT be in a recession and that rates will NOT be lowered by the Fed as quickly as some are projecting. Curious as to your thoughts.
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