Inflation updates from both the US and Europe top the macro agenda in the new week.
The figures have the potential to underscore market speculation that monetary policy is poised for a pivot in 2024, if only to prevent mechanical tightening through the real policy rate channel.
In the US, core PCE inflation likely rose 0.2% last month, economists reckon. On a YoY basis, prices probably rose 3.5%.
If the 12-month print matches estimates, it’d be the slowest pace of annual core price growth since April of 2021, when inflation took off in earnest in the US.
Obviously, this isn’t “mission accomplished.” But policymakers do need to start planning for the next stage of the fight. Part of that entails being prepared to restart hikes in the event inflation continues to percolate throughout the economy. It also means strategizing around a plan for cuts should it become apparent that the mandate asymmetry (i.e., upside risks to inflation versus downside risks for the labor market) is shifting rapidly.
While it might seem far-fetched, sitting here in late November of 2023 with core inflation lingering 1.5ppt above target and the jobs market supported, to suggest the Fed will be forced into large rate cuts in the space of just 13 months, 100bps of “insurance cuts” next year only gets you down to 4.5%. Neutral is (allegedly) 2.5%. If, for whatever reason, the bottom falls out for the jobs market or for consumer spending (or both), a Fed that fails to react fast enough could be a Fed that inadvertently runs highly restrictive policy for months while waiting on “confirmation” from data that’s reported on a lag.
“Our bias for 2024 assumes a stubborn Fed that delays normalizing yields lower until it’s too late to avoid a more material downturn in the pace of growth,” BMO’s Ian Lyngen and Ben Jeffery said. “By no means would we consider this a policy error; in fact, it’s most likely Powell’s base case scenario,” they added. “Sure, the Chair would like to stick the landing [but] at the end of the day, he’s most likely taking the approach of hope for ‘no,’ plan for ‘hard,’ landing. A prudent strategy.”
I’m not so sure about some of that. Let’s not forget: The Fed is a political institution. Yes, it’s nominally independent and yes, it generally does have unfettered operational latitude. But it’s not lost on Fed officials that a recession in 2024 could materially increase the odds of a four-times indicted Donald Trump returning to the White House.
The idea of an American “deep state” is wildly overblown — a silly caricature — but ironically, Trump’s tilting made actual dragons of some windmills. I don’t think I’m saying anything controversial to suggest Fed officials aren’t excited about the prospect of being berated publicly by a strongman again, particularly not one who appeared to style his approach to the central bank after Recep Tayyip Erdogan.
That’s certainly not to suggest the Fed is going into 2024 with an eye to use monetary policy in the service of influencing an election outcome. It is, though, to suggest that in the event the economy were to take a sudden turn for the worse, the proximity of an election with the potential to change not just the course of the republic, but to in fact alter the precepts upon which the republic was built, will be a factor in deciding how soon and how much to cut rates. After all: Not cutting rates when it’s warranted could be construed as an effort to tilt the election too. So, in a recession scenario, there’s plenty of plausible deniability.
Across the pond, inflation in the euro-area likely receded to just 2.7% in November. The data, due Thursday just prior to the PCE report in the US, will probably show core price growth in Europe ran at 3.9% this month.
Even if inflation in Europe turns up again temporarily due to YoY comps, the ECB is done raising rates. The task now for Christine Lagarde is to convince markets that cuts aren’t any semblance of imminent.
As a quick reminder: The monetary policy transmission channel in Europe has worked fairly well, particularly given the impossibility of managing disparate economies (and disparate fiscal regimes) under one monetary authority. In Europe too, though, inflation is embedded on the services side of the economy. Initially, it was an energy and food price problem. But inflation isn’t easily contained once it gets going. It doesn’t take long for it to find its way from goods to services and then into wage-setting.
Also on the docket in the US this week: A bevy of housing figures, including new home sales, updates on the national price gauges and pending home sales. Conference Board confidence is due Tuesday, the second read on Q3 GDP Wednesday and ISM manufacturing on Friday.
as far as the “deep state,” … globally I’m quite sure the right does what they accuse the left of doing…