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Fed Should Take A Hint From Commodities
If the global economy's holding up -- and I'll readily admit to positing a bit of a straw man there considering most observers see a slowdown -- someone forgot to tell crude. And just commodities more generally.
I don't typically spend a lot of time editorializing around the mercurial behavior of the world's most financialized commodity, but on Tuesday, Brent sank below $70.
That's a meaningful development, particularly to the extent you trouble yourself with the psychology of "round" numbers
Economy is slowing. Fomc’s chance to cut gradually left the building when they passed on the July cut. They would be really smart to cut 50 this go. If it’s overboard, just skip cutting the next meeting. Real rates are too high. Risk management suggests a 50 is correct. My last post on the subject suggested going 3/8 twice. That would work also.
I wonder, if one compiled past FOMC minutes, how often would commodity prices come up, and how often as something other than an inflation driver.
We have had a lot of good news on the inflation front, but looking forward, which is what we do…. how long will goods deflation last when shipping costs from china have skyrocketed? there’s a lag so next year downward pressure from goods prices will likely reverse. Energy prices have fallen dramatically, and while i see some more downside in the short term, next year crude is likely to be higher again. Rate cuts will only spur even higher house prices and so shelter inflation will be sticky. Population increase works both ways as well, it can ease wage growth, but there is a demand inflation element too from more people. Plus, more tariffs are coming, particularly in Trump wins. Are we really going to see sustained CPI inflation at 2%?!
One can still argue some cuts are coming to bring real rates down a bit, but, they are relative to the post-GFC vs. Pre-Covid anomaly, not versus historical norms. Some room, but not a lot. The market has kept on pricing in too many cuts and then reversing over the past couple of years and i suspect that is happening right now as well.
Nice work bringing important info to the attention of at least a few readers who probably pay little attention to commodities. Unfortunately, I doubt the Fed’s leaders are listening.