A week ago I asked if market participants should take Kevin Warsh at his word when it comes to the incoming Fed chair’s emphatic assertions around the sanctity of independent monetary policy in the US.
It was a rhetorical question. The answer’s obviously “no.” No, we shouldn’t take Warsh’s word for it that Fed policy won’t be unduly influenced by The White House and Donald Trump’s overt calls for lower rates.
That’s not (necessarily) to cast aspersions. Warsh is qualified, experienced and, I think, genuinely convinced he can create and maintain some space for policy independence. The problem is, he’s wrong. As I put it during his confirmation hearing last month,
You can’t run a truly independent operation in Trump’s government. It’s impossible. More to the point: It’s anathema. This is an authoritarian system. The idea of an independent institution — any independent institution, let alone one responsible for setting the price of money — is definitionally discrepant.
Certainly, Warsh will do a better job of maintaining a veneer of credibility than, say, Kevin Hassett, but that’s a low bar.
Speaking of the “other” Kevin, Hassett on Friday made it clear what’s expected. “There are no signs that inflation is spiraling out of control [and] I believe we will see interest rate cuts this year because Warsh agrees,” he told Fox.
Hassett’s right, inflation’s not “spiraling out of control.” But I’m not sure that’s the threshold we should use when debating whether to cut interest rates at a time when US equities are hitting new record highs almost daily and one of the Fed’s own measures suggests financial conditions are already very loose.
Rather, what we should be asking is whether disinflationary momentum has stalled or whether it’s at least in jeopardy of stalling, and the answer to both of those questions is unequivocally “yes.”
The figure above, from BMO’s Ian Lyngen, shows the distance of core PCE from its trailing 12-month low along with the average of the last 15 episodes during which that measure, which is central to the Fed’s decision calculus, rose at least half a point from its local nadir.
The cycle low for core PCE was 2.6% in April of last year. We’re 0.6ppt from that currently. If history’s any guide — or, more accurately, if the arithmetic mean of past is precedent — there’s more upside.
“On average, core PCE tends to remain stubbornly elevated for years to come in instances when [it] climbs by more than 50bps off the trailing one-year low,” Lyngen remarked.
It seems reasonable to ask if the implicit threat (i.e., of a sustained upswing in core PCE now that it’s more than half a point off the cycle low) is even greater in the current environment given the tariffs and the war.
Conveniently for those demanding rate cuts, Warsh doesn’t like core PCE as much as he likes various “trimmed mean” inflation metrics which, happily, are still moving lower.
Asked last week by CNBC whether he thinks Warsh will be able to cut rates this year, Paul Tudor Jones said, “no chance.” “I’d be thinking about raising them,” he added.
Nothing being cut at my two grocery stores. I lie, eggs are down about 15% from their high. Chicken’s up and beef is up a mile.
20 dollar car washes are now $ 27
I’m old enough to think “$20 car wash” sounds ridiculous. And I’m still in my 40s.
Sadly, I’m old enough to remember when a $20 car wash included a “Simonize” wax job. I am 62.
since it takes me about 30 minutes to wash my car I am being paid $54 after tax or about $75 when I was in my peak earnings years per hour.
I use the self wash bay. A high power soap, followed by high power rinse. I bring a towel or two to partially dry the car. Depending where I go, this costs $5-$8. One place is $12, if my car is really dirty.
And, I’m not telling my age! 🙂
The oil input cost spike hasn’t even fully settled in yet.
not only is it not settled it has not even started settling. Hopfully Xi and Don see it fit to hammer out a deal on Iran. However I give that long odds.
I just wonder if Warsh will last longer than Kevin McCarthy did as SOTH…apples and oranges I know…but the timeline seems relative…
My advice to Warsh – don’t apply for any mortgages.
For the American economy it’s late stages of Jenga. Many pieces are close to going. The linchpin is rapidly deteriorating middle class discretionary income.
I am old enough to remember when the USA had a significant sized middle class. I grew up in that. I’ve been posting for years that we need policies that support and grow that portion of our population and economy. Unfortunately, the middle class seems to still be shrinking.
There’s no longer a political party that supports the middle class. Citizen United ensured that both parties are now beholden to the oligarchs. They can give lip service to the poor, but they’re beholden to the ultra wealthy to finance their political campaigns. 150 million poor people can’t match the political spending of 100 billionaires. The talking points focus on social issues, the policies focus on increasing the economic divide.
This.
………yet, with regards inflation. Always wash a car when it’s raining, it takes half the time and energy.
Someone once observed that the FED is as free as Estonia under Communism!