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Fed ‘Way Behind The Easing Curve,’ Albert Edwards Says
It's time for the Fed to cut rates. Past time, even.
So said SocGen's Albert Edwards, editorializing around the latest US inflation data a day on from the FOMC dot plot refresh which (narrowly) tipped just a single rate cut in 2024.
To be sure, markets still generally believe the Fed will cut twice this year. The dot plot split was a close call (i.e., the bar to get back to two telegraphed cuts is low) and market pricing reflected around ~45bps of easing for the year ahead of PPI data on Thurs
The ULC chart had me running to my dictionary to look up the definition of “transitory.”
The Fed is regularly mocked for focusing on inflation excluding food and energy. Imagine the derision if it were to focus on inflation “excluding shelter”. Edwards’ might be among the loudest jeers.
So his point must be that the Fed’s shelter inflation measure is wrong? But Edwards doesn’t show an alternative m. He probably knows that using asking rents (e.g. Zillow) is wrong, and despite access to all available data series, he doesn’t offer a better measure.
The maligned shelter inflation CPI YOY data is now reporting about 5-6%. Is that obviously wrong? Even in today’s over-supplied Sunbelt class A apartment market, the public REITs are still able to increase renewal rents, because it is a big hassle for people to move. Then consider markets that are under-supplied – other regions, class C and affordable apartments, and rental houses – those landlords are even more able to increase renewal rents. It seems plausible that the average American’s cost of housing is up mid-single-digit % from last year.
My guess is that shelter CPI data is the best approximation of reality we can get, save for the lag inherent from survey timing. The Fed can’t just ignore it.
Albert would tell you all about this if you asked him. He’s long (long, long) doubted those shelter gauges. Whether he’s right to doubt them is another matter, but suffice to say he can regale you all day (and night) on this subject.
Doubt is good, and OER is a dubious concept. Right now +MSD is a very plausible estimate of true housing cost inflation.
What I find more complicated still is that, either way, the Fed toolkit i.e., short term interest rates and bond buying/selling, isn’t well adapted to dealing with supply shortages.
Indeed, as H. pointed out several times, you can make the case that higher interest rates go against des-inflation in the housing market…
Again, regulations/fiscal policy seems more important there i.e., the government ought to act, not the Fed.
Maybe Edwards is correct, but the Fed probably believes in its power to overcome any economic or market deterioration. So, for now, they exercise caution about inflation (goods, services, and asset prices) and adopt a conservative approach to changes in the Fed funds rate.
This is nothing more than goal post moving. “Hey if we take away the one thing that won’t come down then inflation is already under control!” Should the Fed care about shelter inflation? Well, unless we want to see a bunch of homeless people showering at the office on their mandatory return to office days, yeah, it should matter. The Fed caused this massive shelter inflation and they should stay the course until they correct it, not remove that data point and declare a flawless victory from a jet after landing on a carrier.