Inflation Slowing

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Wednesday, April 12th, 2023

Pre-market futures got what they wanted from Consumer Price Index (CPI) numbers for March this morning, and have tacked notably higher in the seconds directly following the report’s release: +0.1% CPI headline month over month was lower than the +0.2% expected and the +0.4% reported for February. (This metric had peaked at 40-year highs in June of last year at +1.3%). Stripping out volatile food and gas prices, this number reached +0.4% — in line with expectations, down from +0.5% for February.

Three weeks until the next Fed meeting…doc

Aside from core CPI year over year, all of these figures do what the rest of the economic metrics so far reported this week have done: give credence to the idea that the Fed’s interest rate policy is showing strong results, albeit delayed, and that further tightening on the Fed funds rate may not be warranted. Even last week’s Jobless Claims (which report again tomorrow morning) showed labor statistics are not quite as robust as earlier thought (although Friday’s BLS numbers were as healthy as we might have expected). Not to say today’s CPI report was definitive in this regard, but we still have three weeks of economic prints before the next Fed meeting.

As I wrote last week, if you look at the past monthly inflation numbers by summer the YoY rate will be cut in half – and that is without any more slowing.

DB2

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Yes… focus on the monthly.

All these articles look at the total of the last twelve months… and backward looking is not where the focus should be.

Monthly was 0.1%. The so-called core dropped from 0.5% to 0.4% (just under 5% annually)… but the article writers mistakingly claim the inflation rate increased due to a hiccup somewhere in the last twelve months. Overall… there is progress. Some think the Fed should suspend rate increases until we see the effects from what has already been done… some think another 0.25% is advisable.

I’m of divided view on that. But leaning toward giving it a rest for a couple months to see how things are playing out rather than being doggedly determined to tip us into a recession.

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

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@tjscott0
I very much doubt that Powell said what you state in bold. Powell and the Fed are quite careful in their wording.

Can you share a quote from a Fed statement or from Powell individually that matches your wording in bold?

I cannot find such a statement and I would be curious if you can.

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I believe the following meets your requirement. It meets mine.
“We think it’s really important that we do stick to a 2% inflation target and not consider changing it,” Powell said in his semi-annual testimony to the U.S. Senate Banking Committee.

Federal Reserve Chairman Jerome Powell told lawmakers Tuesday that policymakers may have to speed up their interest rate hikes to tame high inflation.

With prices continuing to rise at a yearly pace of 6.4%, according to government data, Powell warned that it may take time for Americans to see further relief.

“The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” Powell told the Senate Banking Committee, referring to the central bank’s target inflation level.

More articles will continue flooding out calling for the end of rate hikes.
I believe the Fed will continue to raise rates. We are, however, much closer to the end of the rate hikes than the beginning.

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Rob,

I think there is too much demand in the economy to give it a rest. The younger folks are earning and spending more than ever. Until the US is more up and ready as the major manufacturing global hub with Mexico we can not let inflation get a hold.

In fact the long end of the curve might rise to head off inflation as well.

OTOH the FED might want longer term rates to be low for the industrial build out.

I think you are incorrectly conflating two different but similar statements.

“Interest rates will rise until inflation is under control” is not the same thing as inflation at the 2% target.

Inflation will be under control (however one defines it) long before we are at a 2% YOY target.

Just a guess, but the Fed will probably declare inflation under control (and not with those specific loaded words but by their pivot) when YOY inflation is still above 4% but when the month to month accumulated yearly rate has us on pace for 2%.

Our current accumulated yearly rate is 4% (.5, .4, .1 for the 1st qtr). Two to three more months at 0.1% will put a big dent in that.

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The Fed and Powell are very nuanced in their statements about the path the Fed funds rate might take until inflation gets to 2%. The path could be continuously up (as you say), or up and then pause at a high level, or something else (because the Fed is clear that they are data-dependent in their decisions and the data changes constantly).

You wrote:

which means “continue to raise rates until inflation is 2%”.

And then provided one quote

which says nothing about continuing to raises rates, it only talks about sticking to a target,

and another quote

which says nothing about continuing to raises rates, it only mentions that getting to 2% will take some time and inflation data is noisy (bumpy).

Neither of those quotes say “continue to raise rates until inflation is 2%”.

In his last (Mar 22) press conference (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20230322.pdf), here is what Powell said about the path of rate hikes and/or 2% target.
p. 1 “…we remain strongly committed to bringing inflation back down to our 2 percent goal.” (nothing about continue to raise rates until we get there)
p. 3 “…we are strongly committed to returning inflation to our 2 percent objective.” (nothing about continue to raise rates until we get there)

In fact, Powell explicitly said, basically, the exact opposite of continue to raise rates:
p. 4. “…we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation…”

Powell explicitly said the effective opposite what you said.
(with the usual hedging, like “anticipate”, because they reserve the right to change their minds)

He further says “…instead, we now anticipate that some additional policy firming may be appropriate.” but is vague about what this means in terms of the magnitude and timing of rate hikes. This was a very purposeful statement and goes on to say that their decisions will be data dependent. They might pause indefinitely, or pause for a bit and then raise more if needed, or keep raising, or pause and lower, or whatever they feel after they put their finger to the wind.

I’m fairly certain that if Powell actually said (explicitly without all kinds of hedging and caveats) “continue to raise rates until inflation is 2%”, then

  • the financial press would be all over this
  • interest rates would be much higher than they are now
  • we would have a pretty strong recession by the time inflation actually measured 2% (PCE inflation measured trailing twelve months, which was still at 5% as of end of Feb 2023)
  • we could find a quote from the Fed and/or Powell that actually says “continue to raise rates until inflation is 2%”
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Powell has his eyes on his legacy. He wants to be remembered at Volcker II.
But without the Volcker mistake of easing rates and having to raise them again:

A month ago Elizabeth Warren raked Powell over the coals because she is worried about a recession rather than inflation. A possible political concern as the public tends to blame the party in power.
https://mishtalk.com/economics/senator-elizabeth-warren-confronts-jerome-powell-but-shes-not-worried-about-inflation

Powell has been very firm that he will break inflation regardless of the risk of inflation.
But investors either do not believe him or think he can be influenced.

January’s blowout jobs report, posted Friday morning, showed nonfarm payrolls rose by nearly three times as much as economists had been expecting.

No, the economy isn’t slowing.

No, the Fed’s big campaign of interest-rate hikes all last year hasn’t shown up yet on Main Street.

And no, there’s no reason to expect rate cuts any time soon.

Oh dear. A lot of investors just learned again, the hard way, the old rule: When someone tries to tell you something about themselves, listen.

On Wednesday afternoon Federal Reserve Chairman Jerome Powell said over and over again: We’re not done raising interest rates. We’re not finished. We’re not expecting to cut rates any time soon. Barring a complete surprise, we’re not expecting to start cutting rates this year. We would much rather raise rates too high and keep them high for too long than start cutting them a moment too soon.

When the Fed chairman says he’s going to keep rates higher for longer, who are you gonna believe: Wall Street or your own ears?

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Well… it happened in December 2018. Or are memories that short?

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He did bow to political pressure in December 2018. Many of us appear not to realize how came to a dictatorship at that time. I believe that he will be steadfast in his fight against inflation and am averaging cash back in with the possibility of a turbulent couple of years of recessionary pressures and inflationary wildfires. N

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Not investing any cash that I will need in the next several years.

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Yes he did. And methinks that memory is firmly in Powell’s mind!
This time I believe it will be different.
We’ll see.

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@tjscott0

That’s all well and good, but I am in search of a direct quote from Powell or a Fed statement and specifically I am focused on the care and nuance in what Powell actually says.

Still not seeing a direct quote that matches your post.

I agree Powell says they will break inflation and get to 2% target, but that is not the same as they will ”continue to raise rates until inflation hits 2%”.

Very different in fact in terms of the magnitude and timing of changes or no changes in Fed funds rate.

Last press conference, Powell explicitly said something very different, basically, the exact opposite of continue to raise rates:
p. 4. “…we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation…”

That’s a direct quote (with a typical hedge word of ”anticipate”, because they won’t be pinned down).

Looking for a direct quote.

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I’m not sure exactly what he said myself. However I tend to agree he will stop raising rates BEFORE we hit 2%, because the levers the Fed can pull have latency on their impact. So if they change course after inflation has fallen to 2%, it will continue to fall further because the Fed changing direction will take time before it changes impact on the economy. So they have to change directions BEFORE inflation actually falls to 2%.

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God I hope not. Volcker was the broken clock that just happened to be on the right time when inflation cooled. He was terrible.

Check out how schizoid his Fed was (most notably, going from 20%, down to 8%, and back up to 20% all in less than 9 months):

Fed Funds Rate History: Its Highs, Lows, and Charts.

DATE FED FUNDS RATE EVENT
Feb. 15 15.0% Recession began in January, Inflation at 14.2%
March 18 20.0% No notable event
May 15 11.5% Conference calls on April 29 and May 6 lowered rates
June 5 8.5% Recession ended in July
Aug. 7 10.0% The Fed raised rates; inflation at 12.9%
Sept. 16 11.0% No notable event
Oct. 13 12.0% No notable event
Nov. 21 18.0% Inflation eased to 12.6%
Dec. 5 20.0% Conference call
Dec. 29 18.0% Lowered two points
Feb. 3 20.0% Reagan took office; Volcker raised rates again
April 28 16.0% Conference call lowered rates
May 18 20.0% Recession began in July
Nov. 17 13.0% Gradually lowered rates over six months
Dec. 22 12.0% Inflation at 8.9%
March 30 15.0% Gradually raised rates three points over four months
July 15 13.0% Conference call; gradually lowered rates
Aug. 24 9.5% Gradually lowered rates
Nov. 16 9.5% Recession ended
Dec. 21 8.5% Inflation at 3.8%
May 24 8.63% Gradually raised rates over five months
Aug. 23 9.75% Raised from May to August
Oct. 4 9.38% Lowered from August to October
March 29 10.5% Raised rates again
July 17 11.0% No notable event
Aug. 21 11.5% Raised from March to August
Oct. 2 11% Began lowering again
Nov. 7 10% No notable event
Dec. 18 8.75% Lowered from September to December

I think it entirely likely that the Fed did more harm than good during his chaotic leadership.

As much as I may chide Powell et. al. for acting too slow to raise rates, they have also not over reacted by doing something silly like take them to double digits, cut them in half, then increased them by 12% again.

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Hawkin:
“Check out how schizoid his Fed was (most notably, going from 20%, down to 8%, and back up to 20% all in less than 9 months):”

The Volcker Mistake:

Volcker did screw up in the first decrease in 1979 as inflation was not broken.
The Summer of 1980 it appeared that inflation had been broken. But double digit inflation was persistent and began to rise the summer of 1981 again.

inflation
Feb 1979 9.9%
Mar 1979 10.1%
Apr 1979 10.5%
May 1979 10.9%
Jun 1979 10.9%
Jul 1979 11.3%
Aug 1979 11.8%
Sep 1979 12.2%
Oct 1979 12.1%
Nov 1979 12.6%
Dec 1979 13.3%
Jan 1980 13.9%
Mar 1980 14.8%
Apr 1980 14.7%
May 1980 14.4%
Jun 1980 14.4%
Jul 1980 13.1%
Dec 1980 12.5%
Jun 1981 9.6%
Jul 1981 10.8%
Sep 1981 11.0%
Dec 1981 8.9%
Hawkin:
I think it entirely likely that the Fed did more harm than good during his chaotic leadership.

Opinions will vary.
https://www.stlouisfed.org/publications/regional-economist/january-2005/volckers-handling-of-the-great-inflation-taught-us-muchWithout

Without his bold change in monetary policy and his determination to stick with it through several painful years, the U.S. economy would have continued its downward spiral. By reversing the misguided policies of his predecessors, Volcker set the table for the long economic expansions of the 1980s and 1990s.

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https://www.stlouisfed.org/publications/regional-economist/january-2005/volckers-handling-of-the-great-inflation-taught-us-muchWithout

:arrow_up: Bad link, plus 20 words.

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The puzzle piece never talked about Volcker’s time in history is the fiscal responses. The fiscal responses are and have to be very different today. Meaning the FED’s approach is also equally different.

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