RE:RE:The long and variable lagThanks jay...
Was going to make a similar comment - without the math....lol
Short anecdote about Milton Friedman.
Milton was a strong proponent of devloping the skill in his students to be able to explain complex things in a short and simple way. As a sidebar it is one of the reasons I use analogies a lot. Anyway, Milt was famous on an exam to say that his students had to answer the question in less than 1000 words. From time to time, he would get one of his PHD students to take the student exams and count the words. When they got to 1000 words they were instructed to take a pair of scissors and cut out the rest of the answer and if there was another page to throw that in the garbage. Once that was completed, Milt would then mark the answer.
I have talked about the lag in past posts. What I find interesting is that the Fed says its data dependent on making its decisions about rate increases. Frankly, I don't know how you can be data dependent (ie looking at today's data to make decisions) when there are long lags between what you have done in the past and when the data reflect this fact.
Perhaps this explains why since The Fed was started in 1913 it has actually created more economic cycles and made them larger.
The other problem as I see it is that back in the days of Friedman and Mundell (ie the 60s and early 70s), the degree of QT and QE was not large. In today's world, especially what Bernanke did during and post 2008, the size of the Fed balance sheet is huge compared to the size of the US economy. So in a sense we are in uncharted waters here as to measuring the effect of changes in the Fed balance sheet in addition to raising interest rates. Given that since its founding, the Fed has generally screwed things up, this fact adds even more risk to the equation.
For the stock market, it also is data dependent and so when inflation slows down, the market celebrates (like I suspect it will today) when it is ignoring the lag and more importantly, ignoring that the Fed is still reducing its balance sheet which has the same effect as inceasing interest rates (we just don't how much this affects things cause it is new).
So the end effect of all this right now is that the market sentiment is in the greed category when it should be in the scared category. Shrewd investors will take this into account when determining their asset allocation for their investment portfolios.