Core CPI continues to ride along with the 2% target range, bifurcated between shelter and non-shelter prices. CPI shelter inflation is at about 3.3% over the past 12 months. The non-shelter core components are now down to 1.0% over the past 12 months.

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Inflation isn't that great of a short-term signal. After all, non-shelter inflation was at or above 2% in 2008 and 2009 while nominal GDP growth was collapsing. But, the period leading up to that, in 2006 and 2007, had a similar character - high shelter inflation and low non-shelter core inflation. Yet, when that signal appeared in 2017, it reversed in spite of Fed postures that continued to signal tightening.

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All that being said, it certainly seems as though maintaining an inverted yield curve with non-shelter inflation at 1% is clearly too hawkish. It appears as though the Fed is looking to reverse course, which is very good news. A couple of rate reductions is prudent at this point. Unfortunately, that is likely to meet the howls of those who claim a low target interest rate inflates prices in capital markets. But, it seems the FOMC has become more immune to that, which is great.

I have been suggesting that long bond positions would be profitable and expecting that an inertial Fed would create marginal buying opportunities in other assets as that opportunity played out. The long bond position is mostly finished because of the zero bound. Mid-to-long term rates aren't able to go much lower. If the Fed gets ahead of things here, maybe they will curb any pullbacks in equity markets or housing markets. I'm happy to see that tactical opportunity disappear if it means the Fed doesn't encourage unnecessary contractions. In fact, maybe that would make those opportunities even more fruitful, without waiting on a pullback, if the economic expansion is allowed to continue, chipping away at risk aversion.

But, the story remains. Inflation is very low. To the extent that real wage growth continues to disappoint, this is largely a structural supply issue that creates a transfer from tenants to real estate owners, which is measured as inflation.