The Fed Moves Closer to Reality

And reality moves closer to the Fed. Plus: Twitter.

Dear readers,

I have notes today on the Federal Reserve and (sigh) on Twitter.

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The Fed.

Back in September, the Federal Reserve was projecting the following for the US economy in 2023: 1.2% real growth, 2.8% inflation, a 4.6% Federal Funds Rate¹, and 4.4% unemployment. 1.2% is a bit below the long-run trend for economic growth, but overall this projection was essentially for the softest of soft landings — inflation would come down pretty close to the Fed’s long-run target in a year; unemployment wouldn’t even get near 5%; and pretty soon the Fed would even be able to start cutting interest rates again, with the Fed Funds Rate expected to fall to 2.9% by 2025.

Fed economic projections come out quarterly, and the new ones, released yesterday, show a significantly more negative picture. The Fed is still calling for a soft landing, in the sense that it’s not forecasting negative economic growth, but not quite so soft as before. Now, for 2023, it expects 0.5% real growth, 3.1% inflation, a 5.1% Fed Funds Rate, and 4.6% unemployment. So compared to three months ago, the Fed’s expected output and unemployment numbers look somewhat worse, inflation somewhat higher, and the needed interest rate hikes to contain that inflation considerably greater.

Dall-E image generation for “the Federal Funds Rate”

An interesting thing about the Fed’s mood getting darker in the last three months is that over the same period, I’d say the “vibes” of economic forecasting have gotten brighter. There was a surprisingly benign inflation report this week, showing both headline and core inflation having slowed considerably. Growth in services prices appears to be cooling, which is a particularly good sign, since moderation in durable goods prices had been more than offset by elevated inflation for much of the year in the much-larger service component of the economy.

Larry Summers, who has been particularly dour on the prospects for a soft landing, sounded some uncharacteristically positive notes on Twitter after that inflation report:

Lawrence H. Summers @LHSummers

I’m encouraged by yesterday’s CPI numbers. While the decline in inflation can be explained in terms of special factors, explaining away decreases as transitory has same problems as explaining away increases. These numbers should, at the margin, influence the @federalreserve.

Lawrence H. Summers @LHSummers

I still worry about high wage growth and very tight labor markets being unsustainable. At some point the relative price of goods, like used cars, will have mean reverted. Then prices will tend to track wages. And stagflation will be a risk.

Lawrence H. Summers @LHSummers

For now though, the economy appears stronger and inflation and inflation expectations a bit lower than I would have guessed a few months ago. This is good news and a tribute to determined @federalreserve action.

As Summers notes, with its rapid rate hikes and determined language about keeping rates at an elevated level until the job is done, the Fed has had increasing success at convincing market participants that it's for real: that rates will peak higher than people thought (more like 5% than 4%) and stay there for somewhat longer. This in turn has made the Fed’s policy more effective — by more successfully influencing expectations about future interest rates, the Fed is having more effect now at cooling the economy and tempering inflation, as

Noah Smith

describes. There has also been some good news from the supply side: oil prices have continued to moderate, reducing the economic pain associated with this process of cooling demand.

The nice thing about the Fed’s new, less-rosy projections is you don’t have to squint at them to see how they can work. Compared to three months ago, we have better signs that inflation is already moderating, stronger expectations that tight monetary policy to force that moderation will continue, and less optimistic projections about what that means for growth and employment. Over the course of the fall, the bulls have gotten more realistic and the bears have seen some reasons not to be so dour, and that means expectations are converging on a landing that is, to borrow a term from Jay Powell earlier this year, “soft-ish,” while also very plausible. Personally, I’ll take it.

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On Twitter.

I’m a little bored of the most recent Twitter controversies, but I do have some brief observations to make here.

First, I just want to note how odd “The Twitter Files” — Elon Musk running and hyping an opposition-research campaign against the former management of the company he already bought — is as a business strategy. I don’t see how this can make him money. Putting the company at the center of more political controversy doesn’t sell ads, and I don’t see how confirming the fears of the fans who already love that he bought the site helps him sell subscriptions.

Some people are spinning out baroque theories of what the underlying business strategy is, but my strong feeling is that there isn’t one. I think what’s happened is that Musk has greatly overpaid for this company, he’s not running it in a way that’s likely to produce financial returns that come close to justifying the price he paid, and leaning into the idea that he is serving a great social mission (vanquishing the proprietors of the “woke mind virus” who were trying to destroy our society) helps him feel better about the unpleasant business position he’s gotten himself into.

If you’re going to lose money, it’s best to feel like you’re losing it for a cause, like so:

Elon Musk @elonmusk

The woke mind virus is either defeated or nothing else matters

As for the content of “The Twitter Files,” I don’t think it’s nothing. I think it reflects that people inside Twitter were overwhelmingly liberals with their thumbs on the scale in a liberal direction when moderating content, which is something I have said all along. I wrote on April 28 that Twitter “is biased against conservatives, which is no surprise, since the company’s employee base is overwhelmingly liberal and its most influential users also tend to be liberal.”

I also said in October that Elon Musk can’t possibly unbias Twitter, but he can re-bias it, replacing the old biases with a new set of biases from a different (and more idiosyncratic) place on the political spectrum. And that seems to be exactly what’s happening — you might like the new Twitter better or worse than the old Twitter, but Musk certainly hasn’t solved the problem of the platform being subject to the influence of management with opinions.

Another person who has noticed this is

Bari Weiss

, one of the reporters who’s been inside the company doing the “Twitter Files” reporting. She wrote today:

Musk promises that the future of Twitter will be a “level playing field” and that it will be “consistent and transparent.” He believes “the algorithm should be open-source, so people can critique it.” It sounds very good. 

But if the story of Old Twitter is about the biases and prejudices and power trips of the company’s former overlords, the question is what Musk will now do with the powerful tools they created? What does it mean when the owner of Twitter tweets that his pronouns are “Prosecute/Fauci”? 

Lots of people thought it was hilarious. Many others thought it was horrifying. It’s certainly not apolitical. Doesn’t that take us back to where we were before?

Just yesterday, news broke of Twitter banning @ElonJet, an account with half a million followers that tracked the movements of his plane. Musk justified it by saying, “Any account doxxing real-time location info of anyone will be suspended, as it is a physical safety violation,” and noted that a stalker recently climbed onto a car carrying his young son. Another answer could simply be: I own Twitter. My platform, my rules.

Much more seriously, Musk has business interests in China. Could he wind up suppressing information negative to China to please the CCP? Old Twitter was moderated by the morals and mores of one group. Now it is moderated by the morals and mores of one man. 

On some level, I think it’s good that Musk is so much more transparent than old management was about the subjectivity of moderation. Even if Musk won’t explicitly admit he came up with a new rule to ban “ElonJet” because of his personal preferences, everyone knows the score here, including his fans. But the idea that Elon’s messier, weirder and more confrontational approach to running the platform could, as Weiss describes his stated objective, “transform Twitter from a social media platform distrusted and despised by at least half the country into one widely trusted by most Americans” is just lunacy. He is making the platform more controversial and more suspicious to more people, and that has negative implications for any goals Musk might have for Twitter — financial or societal.

By the way, while I’m still on Twitter, you can also find me on Post, at this address, just in case.

Very seriously,

Josh

1. The Federal Funds Rate is the rate at which banks do very short-term lending to each other. When you hear that the Fed has “raised interest rates,” it’s the target for the Federal Funds Rate that they are raising, and they do this as part of a strategy to influence interest rates on all sorts of other borrowing — government bonds, corporate bonds, mortgages, you name it.