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 Thursday morning in the US.

Jerome Powell didn’t exactly go out of his way to dispense with the prospect of more than one cut during his press conference. If you ask Edwards, the data’s conducive to cuts. Before it’s too late.

“The imaginary shelter component continued to add to core inflation, but the Fed would surely have taken note that, excluding shelter, core CPI inflation actually fell in May and is running at or below 2% YoY since [Q3 2023],” he wrote Thursday.

Note that the figure above isn’t the “supercore” measure the Fed watches. Rather, the series in the chart is just core CPI stripping out shelter. The Fed’s preferred “supercore” measure is core PCE services excluding shelter.

The CPI-derived versions (there are two of them) of that aggregate both fell MoM in May as well, so Albert’s point stands regardless. “For nine months now, this key core inflation measure has hit the Fed’s 2% target, but now due to the ‘higher for longer’ mantra it has slipped into outright MoM deflation,” he wrote.

Personally, I think the better point Albert made Thursday was his argument that ULC points to disinflation. The figure below’s pretty poignant.

Simply put: Unit labor costs strongly suggest further moderation in 12-month core inflation.

“Productivity growth continues to improve, absorbing most of the rise in wages,” Edwards went on. “As night follows day, core CPI inflation tends to follow unit labor cost trends.”

Albert’s overarching message: “The Fed is not just behind the easing curve, it is now way behind it.”


 

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7 thoughts on “Fed ‘Way Behind The Easing Curve,’ Albert Edwards Says

  1. 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.

    1. 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.

        1. 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.

  2. 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.

  3. 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.

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