This butts up against mechanical investing as far as how “hard” the signals really are based on events.
Two days ago FED says, well, inflation is healing (read: the economy isn’t running away) so we will raise rates less. Only 1/4%. Markets rejoice.
Today, new jobs report comes out. Horrors! The economy is so “too much” the talk is (I know it’s only talk as this moment) that they’ll have to go back to bigger interest rate increases to stomp down the economy. Futures dump. Opening is down. This could just be due to 2 days of overly good markets and it’s needing to level off a bit.
Why didn’t the Fed just wait till today’s jobs report before deciding on 1/4 vs 1/2% rate raise?
Yes, I would bet money on it. Even if they didn’t they know when the numbers will be released (it’s all over Yahoo finance, ha hah). Why not wait till they know the jobs numbers and react accordingly…?? Rhetorical question
It seems to me that the Fed doesn’t react to actual numbers that much at all. They react to their perception of market expectations of inflation. Inflation has been dead for six months. After a very high rate of price increases in the first half of 2022, price increases slammed to a halt in the second half of the year. If you annualize the CPI increases from July through December you get a 1.9% inflation rate. That is solidly within the Fed target. But they’re still acting as if they need to fight inflation, because they think markets and businesses are still acting based an expectation of continuing inflation. Perception is everything. Facts don’t matter. And that’s how you kill a thriving economy.
I agree.
The Fed is trying to manage those expectations such it produces a “soft landing”… Ie not a panic, waterfall selloff into a crash.
At least that’s what I see em doing.
Yeah, the common wisdom is that they’re trying to achieve a soft landing. When have they done that successfully? I think never. With inflation already dead, the only thing they can accomplish from here, at best, is a smallish recession, one in which only a few million Americans lose their jobs.
“An economic soft landing occurs when the cycle slows without a negative GDP. Soft landings are rare. Exactly how many have there been? That’s debatable. Two clear-cut instances come to mind, one in 1994, and another in 1984.”
Inflation has been dead for six months … If you annualize the CPI increases from July through December you get a 1.9% inflation rate. That is solidly within the Fed target.
I’ve read that the Fed prefers looking at the Personal Consumption Index. And for both types of inflation measures, CPI-U (seasonally-adjusted) and PCE, they often look more at Core inflation (excluding Food and Energy). Especially given the large drop in energy prices in the last six months (shown below as -29% annualized).
I see the following inflation measures for the period ending December 2022 (the first 6-month measure below, 1.9%, matches what you quoted). I’m sure folks can debate the appropriateness of using Core inflation, but the bolded numbers below might explain the Fed’s thinking.
Note: PCE monthly increases are calculated from a table of monthly increases, shown only at the precision of one decimal place, so the above 12 and 6-month totals are off from actual a little, but pretty close. Source (let me know if there’s a different source with more decimal places!): Personal Consumption Expenditures Price Index | U.S. Bureau of Economic Analysis (BEA) Click on “Interactive Data”, then click on the Table link.
