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Chart from the BEA, highlights and blue captions by Mish.

There’s Still No Rush

Please consider Fed governor Chris Waller’s There’s Still No Rush speech at the Economic Club of New York, on March 27.

We made a lot of headway toward our inflation goal in 2023, and the labor market moved substantially into better balance, all while holding the unemployment rate below 4 percent for nearly two years. But the data we have received so far this year has made me uncertain about the speed of continued progress. Back in February, I noted that data on fourth quarter gross domestic product (GDP) as well as January data on job growth and inflation came in hotter than expected. I concluded then that we needed time to verify that the progress on inflation we saw in the second half of 2023 would continue, which meant there was no rush to begin cutting interest rates to normalize the stance of monetary policy.

Over the past month, additional economic data has reinforced this view. February job gains moved back up to 275,000, making the three-month average a strong 265,000, and various inflation measures have continued to come in hot. Core personal consumption expenditures (PCE) inflation jumped to 0.4 percent on a monthly basis in January, after averaging around 0.1 percent in October through December last year. And with February consumer price index (CPI) and producer price index inflation data in hand, some forecasts are predicting core PCE inflation may be revised up for January and is expected to come in at 0.3 percent for February, which we will learn about on Friday.

 Adding this new data to what we saw earlier in the year reinforces my view that there is no rush to cut the policy rate. Indeed, it tells me that it is prudent to hold this rate at its current restrictive stance perhaps for longer than previously thought to help keep inflation on a sustainable trajectory toward 2 percent.

We made a lot of headway in reducing inflation in the past year or so, although the readings in the past two months have been disappointing. Both total CPI inflation and core inflation that excludes energy and food rounded to a 0.4 percent increase for the month of February, which is obviously not progress toward our inflation goal.

In trying to judge what the underlying trend is for inflation, I tend to look at annualized core measures over 3 or 6 months. For most of a year, I watched these numbers come down more quickly than 12-month readings, telling me that we were making substantial progress. But, more recently, the 3-month core CPI, which was running at a 3.3 percent rate in December, rose to 4.2 percent in February. Six-month core CPI, which was also 3.3 percent in December, was up to 3.9 percent last month. These shorter-term inflation measures are now telling me that progress has slowed and may have stalled. But we will need more data to know that.

The FOMC uses personal consumption expenditure inflation data to measure progress toward our 2 percent goal, and we won’t get those results for February until Friday. But, as I noted at the start, based on the consumer and producer prices that we do have, estimates suggest that core PCE inflation is likely to be elevated. Though the February reading is estimated to step down from January’s, this recent pace would not represent significant progress toward 2 percent.

O.K. So what happened Friday?

Spending, Income, and Inflation Data Do Not Support Fed Interest Rate Cuts

The BEA reports real income is down, but personal spending jumped anyway. Inflation data is mostly as expected, but much higher than the Fed would like to see.

On Friday, unaware of Waller’s speech, I reported Spending, Income, and Inflation Data Do Not Support Fed Interest Rate Cuts

The Fed wants inflation at 2.0 percent. 0.3 percent per month times 12 months won’t come close to getting there.

You can twist the analysis however you want but you cannot twist the math.

Rounded to a single decimal point, the reported 0.3 PCE price index month-over-month can be in the range of 0.25 to 0.34.

The PCE price index for January was 121.906. For February, it was 122.312. That’s a monthly increase of 0.333 percent, on the high end of the range. Multiply that by 12 and you are close to 4.0 percent price inflation annually.

This does not support Fed interest rate cuts.

Rate Cut Odds for June

Chart from CME Fedwatch, annotations by Mish

Waller does not set Fed policy. It’s debatable if he influences it much at all. Powell seems determined to cut rates in June and that is what the CME odds show.

For May, the odds of a rate cut decreased to 4.2 percent.

But for June, despite relatively hot inflation data and very strong consumer spending data, the odds of a rate cut in June rose rose slightly on Friday.

Judging from the data, the move should have been in the other direction but arguably hot data was priced in.

Waller noted “some forecasts are predicting core PCE inflation may be revised up for January and is expected to come in at 0.3 percent for February, which we will learn about on Friday.“

Indeed, PCE was revised up from 0.3 percent to 0.4 percent in January. So Waller is at least paying attention to the data and the forecasts.

As I noted, the PCE monthly increase was 0.333 percent for February. Multiply that by 12 and you are close to 4.0 percent price inflation annually.

What’s the Rush?

I’ll tell you.

Everyone, including Powell is so fearful that cutting one month too late will sink the economy in recession.

It won’t. This economy is so imbalanced, a recession will happen no matter what the Fed does. And when it hits, president Biden, Elizabeth Warren, and all the Progressive cheerleaders will be screaming “I told you so.”

A friend asked me the other day how politics plays into the decisions. That’s a possible way.

Powell has indicated 2-3 cuts are coming. Warranted or not, they likely will.

However, don’t rule out a sudden collapse in jobs and a strong recession that happens sooner rather than later.

Don’t blame the Fed for failure to cut sooner when that happens. Instead, blame the Fed, Biden, and Congress for the inflationary conditions that put us where we are now.

We are sleepwalking towards recession and few realize it. But cutting too early will only exacerbate inflation and various bubbles.

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