Lagged impact of monetary policy transmission likely continue to weigh on asset markets: Berman

We expect members of the U.S. Federal Reserve will recognize the need to soon slow the pace of rate hikes.

What all this means is that there are more economic headwinds coming and that the Fed simply does not really know how to measure the lagged impact. Here is the conundrum. The lagged effect takes quarters to years to play out while the market can have the attention span no longer than the most recent headline.

The most recent one is from Federal Reserve Governor Waller who said on the weekend that they have a “ways to go” before cutting rates. Deputy Chair Brainard is speaking as we are on air in Washington D.C. on the economic outlook. Chair Powell does not have any speeches on the calendar in the coming weeks just yet. We suspect he will about a week before the Dec. 14 meeting. 

As Milton Friedman et al have found, the economy's adjustment to changes in monetary growth is not a discrete, all-at-once event, but takes place as a distributed lag. The effects of a monetary policy action tend to begin gradually, build to a peak, and then subside. Thus, past monetary growth continues to influence gross national income long after the monetary growth occurs. An increase in the rate of monetary growth temporarily stimulates real economic activity. Once such resources as labour and capital are fully employed, or once inflation becomes generally anticipated, monetary growth produces a permanent increase in the price level. While this description of the transmission mechanism is extremely simplified it suffices for an examination of timing issues.