The US isn’t in a recession, Jim Bullard told CNBC Wednesday. The labor market, he said, is “so strong.”
Fed officials are engaged in an all-hands-on-deck public relations campaign aimed at achieving three goals. First, they need to underscore their commitment to bringing down inflation. Second, they’re keen to dispense with the notion that the economy is already in a downturn. Third (and this is a largely unspoken goal) they’re anxious to discourage risk assets, and particularly stocks, from extending a recent rally which has helped ease financial conditions at cross purposes with the Committee’s tightening efforts.
Bullard, who, amusingly, was actually on set with Joe Kernen, reiterated his support for front-loading rate hikes, an approach he said “enhances” policymakers’ inflation-fighting credentials. He wants “convincing” evidence that inflation is receding.
As a reminder, there’s no such evidence yet. There are lower commodity prices and favorable readings on PMI price gauges (figure below). And there are comforting declines in measures of inflation expectations, both market-based and consumer-derived. But there’s no hard evidence yet of realized inflation moderating.
“We’re going to have to see convincing evidence across the board of headline and other measures of core inflation all coming down convincingly before we’ll be able to feel like we’re doing enough,” Bullard remarked.
When it comes to forecasting inflation, simple extrapolation may not work. Inflation isn’t a random walk. It trends. That’s due, in part anyway, to psychology and the knock-on effects of expectations across the economy. More worrying, the potential for additional geopolitical shocks and climate “events” may mean never corralling inflation again, where “never” means never.
If that latter point sounds far-fetched or hyperbolic, I’d submit we’re running out of natural resources, we’re not cooperating on the path to sustainable energy (and even if we were, we waited so long that it’s doomed to be a haphazard affair conducive to extreme commodity price volatility) and the longer-term structural factors that kept inflation subdued for four decades were dislodged by the pandemic and the war in Ukraine. Macro volatility may be here to stay.
For his part, Bullard is confident. The Fed, he insisted, will get inflation back to 2% over time. “We’re going to follow the data very carefully and I think we will get it right,” he said, on the way to suggesting the US economy will “have a reasonably good third quarter.”
Again: Officials can “think” whatever they want to think, but it’s possible that “getting it right” may no longer be… well, possible.
As for rates, Bullard said the Fed should get to 3.75% to 4% this year. We’re not “a long way from neutral” anymore (to channel Powell’s infamous communications faux pas), but, as Bullard put it Wednesday, “we’ve still got some ways to go to get to restrictive monetary policy.”
What Bullard said about the state of the economy is currently correct. The problem is the labor market is at best a coincident indicator and often is a lagging metric. He is well aware I am sure of this fact, but the FOMC is focused on fighting inflation- problem is that a large part of that is supply induced as well as from fiscal stimulus that has waned (stock vs. flow). I fear a recession is in the cards for early 2023 or even late 2022. The FOMC can probably only control about 1/3 or 3% of the inflation out there, the other 6% they cannot control and have to wait for supply to adjust and for the stimmy to wear off. So to get inflation down to 2% they have to get the non-supply, non-fiscal demand factors that they can control to -5%. That is usually leads to a serious recession or depression. I hope they stop stop soon before it is too late.
I agree with your assessment of the potential consequences of the Fed’s actions, and the impacts that may result from focusing on inflation variables that cannot be directly controlled. Labor is, indeed, a lagging metric. I expect hiring and employment to weaken modestly. I believe earnings can maintain relative stability in Q3 and Q4, but not gangbusters, depending upon the posture of the Fed.
I do not want to see the Fed shooting blindly in the dark. Bernanke wasn’t perfect, but he generally inspired confidence with his knowledge, calculation, and reasoning, which I miss right now. I would very much like to see Powell demonstrate command and control, supported by thoughtful and clear judgement. As I have lacked confidence in his leadership, I can only resort to crossing my fingers and hoping for the best.
“we’re not cooperating on the path to sustainable energy”
Thanks to the morons who politicize anything from an emerging technology to a global pandemic just to further their own political power mongering.
I came home after a peaceful day enjoying picture-perfect Maine weather up in Harpswell.
I turned on the TV to catch up with the chatter and found the detestable Joe Kernen hosting the Fast Money show. Joe kept referring to Bullard’s long appearance. But it was interesting to hear him recount that when he asked Bullard if a “compromise inflation of say 4%” would be sufficient for the Fed. Kernen reported that Bullard insisted the hard target was 2%.
The vol-driven AI models parsed that to be a reason to buy shares. OK….
Bump.
It looks to me like almost all the SP500 movements YTD, including the latest rally, have been the multiple responding to long yields (overlay SPY with inverted 10Y yield).
It’s not been a response to 2022 earnings estimates, which have hardly moved, or to 2023 estimates, which have moved only lightly, both largely ignoring the weakening economic indicators (leading and coincident).
Long yields appear to be responding more to inflation breakevens and/or future growth expectations, than to Fed hikes at the short end, hence the growing inversion.
So there is perhaps a dynamic where Fed hikes push down inflation expectations and growth expectations, thereby pushing down long yields, thereby lifting stock multiples, and thus stock prices. In addition to all the CTA, vol, gamma stuff, and short-covering/chasing, of course, but I think of those as fairly short term drivers.
Implicit in this behavior is that the “recession” will leave SP500 earnings only lightly touched, which means the softest of soft landings.
I can’t imagine most investors actually think the Fed can hike FF to 4% or so without causing a recession, or that most investors think the Fed can pull off a feather-soft landing.
So I think at the core of all this, I think, is investors are indeed betting on inflation declining rather quickly.
Either that, or we actually think that SP500 earnings will sail through a recession largely unscathed.