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Core Inflation 2.5 Times Target Seen Clearing Way For Fed Pause
Mercifully for a Fed leadership that'd prefer to take a break from raising rates (if only to raise t
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Still seems fairly primed for further decline as COVID related and COVID gvt reactions-related issues dissipate.
Inflation is trending lower- that is disinflation. If the Fed does not want deflation they should tread carefully. So CPI is now 4% and Fed funds target is 5-5.25%. This is mildly tight- not loose. There are still problems in the banking system. Recently that problem is a funding and duration mismatch problem. If the Fed is not careful, it will morph into a credit problem. In fact that may already be happening. To avoid the idiot in the shower problem, the Fed needs to look forward and have a view on what is now happening and what is likely to happen over the next 3-6 months. The trends suggest that 5-5.25% is gradually slowing price increases. The level of the US $, yield curve, PPI, and many other metrics suggest things are slowing. The analysts pushing the Fed to continue to tighten are likely fighting the last war.
Total banks loans and leases dipped in the two weeks post-SVB, then resumed their growth which continues now. With banks growing, not shrinking, their loan book, there isn’t a credit tightness problem. Some types of borrowers may be finding the bank credit door closed. Some banks may be feeling NIM squeeze and lower profitability. None of that is the Fed’s concern.
https://fred.stlouisfed.org/graph/?g=167Al
Investors look at the Fed pausing with core CPI stalled at 2.5X the Fed’s target, the FF rate still below core CPI, asset prices rising or seemingly bottoming, consumer spending not weak, labor market historically tight . . .
The impression is of a timid Fed, a Burns in Vockler’s clothing, a Fed that won’t actually hold rates high er for longer, a Fed that is losing its ability to make the market fear it. Which is bullish for risk assets. Wilson etc can be completely right on the earnings, but if investors don’t feel fear, the multiple can inflate along with everything else.
I should amend that post. I think equity investors increasingly don’t even believe in a Fed “pause” – more are starting to think the Fed is done, full stop, so the future as far as the eye can see (for equity investors, that’s six months) is a party with the parents absent. Who cares about inflation if your time horizon is several months?