Rare Occurrences

If the Fed cuts rates in 2024 with core inflation above the unemployment rate, it’d be unusual.

The last US jobs report Fed officials saw prior to this month’s policy meeting found the jobless rate retreating to 3.7%. The day before the December FOMC decision, core inflation printed 4%.

To Fed critics, that conjuncture isn’t compatible with rate cuts or even with allusions to them, but it’s now virtually assured that the Fed will cut rates multiple times in 2024 even if the unemployment rate stays historically low and growth remains robust — contingent, of course, on additional inflation moderation, and notwithstanding John Williams’s Friday efforts to walk the market away from bets on a March cut.

It’s worth reminding ourselves that the whole idea is to engineer an inflation slowdown sufficient to warrant gradual policy normalization without damage to the labor market or growth. That’s what a soft landing is. The Fed’s effectively just forecasting success in that regard, while critics are now borderline demanding a recession seemingly out of spite. Consider this: The idea that anyone who follows monetary policy closely enough to offer real-time commentary around an FOMC decision is perturbed by 4% core inflation is manifestly absurd. If you’re spending your days sitting in front of a $30,000/year Bloomberg terminal, you’re not worried about the cost of a haircut. A lot of the hand-wringing for the Fed’s apparent pivot this week was thus disingenuous or else predicated on critics’ political leanings. Either way, it’s an example of stone throwing from a glass house vis-à-vis “credibility.”

Anyway, there are “only” (note the scare quotes) five examples in the past 90 years of the Fed cutting rates when core CPI is higher than the unemployment rate, BofA’s Michael Hartnett said, in the latest edition of his popular weekly “Flow Show” series.

I try to be charitable. God knows I try. But I’d be totally remiss not to note that braving statistical inference with a sample size of 17 is… well, brave in the first place, and flat-out brazen when five (going on six) out of 17 data points disconfirm your thesis.

You’re not going to find many drinking buddies with this pitch: “I’m rarely combative when drunk. I only instigate bar fights on 30% of weekends.”

Besides, there’s something a bit asinine about this. Core inflation is 4%. The unemployment rate was 3.9% as recently as — checks watch — two months ago. Core inflation will probably fall in 2024. At least a little bit. And the jobless rate will likely rise. Again, at least a little bit. The gap between the two is just 0.3ppt currently. They don’t have to move very far for this alleged “discrepancy” to disappear.

The figure above is just another way to visualize the scatterplot. Again: The “only” in “only five times before” doesn’t seem quite so “only” when you consider the sample size.

If you played the lottery 17 times and you won five of them, you’d be the most successful idiot in the history of the idiot tax. If you jumped off a tall building 17 times and you lived to tell about it on five occasions, you’d be a cat. If you correctly forecasted the year-end level of the S&P 500 in five out of 17 years, you wouldn’t be a chief equity strategist.

You get the idea. Also, I’m in humor mode today. And it’s funny to me that the Fed is plainly going to cut rates against the “advice” of a peanut gallery which, for a variety of reasons ranging from the wholly rational to the inexcusably groundless, insists they shouldn’t.

Goldman, which previously harbored one of the more hawkish Fed outlooks on the Street, changed its mind completely in the wake of the December dot plot and Jerome Powell’s press conference. “We now forecast three consecutive 25bps cuts in March, May and June,” the bank said.

That’s a remarkable about-face. It was just a month ago when Goldman insisted the Fed wouldn’t cut until Q4 of 2024, and even then only once, by 25bps. In their new call, Goldman suggested the Fed, based on their updated reaction function, will likely view the policy rate “as far offside” in relatively short order.