Fed plans to raise rates as soon as March to cool inflation

[jaichind]

Federal Reserve Bank of Atlanta President Raphael Bostic said “everything is in play” for policy action after data showed that US inflation accelerated again to a fresh four-decade high last month.

Good.  Let's get going.  Let's get it done.

[TheDeadFlagBlues]

It seems the gas price surge plays a good part in the price surge.  I suspect part of this is lagging in terms of housing costs.  Rent prices were surging last year but they only count toward CPI when new leases are signed with a lot of them being signed this year to reflect market rent increases from last year.  Also, supply factors I am sure play a role.  Last week's labor report shows that the labor force lost 350K people.   Not good from a potential GDP point of view.  I hope Andrew Yang is watching.  When you pay people to do nothing they are more likely to choose to do nothing. 

If you don't understand the methodology generating these data, I don't recommend analyzing these data. No labor economist commented on the labor force statistics in raw numbers last week because the household survey is known to be volatile within a band. It isn't concerning if the labor force participation rate decreases by 20 or even 30 basis points in one month! In fact, if you look at the time series, labor force participation rate often moves up and down. These monthly movements are apparent even if you look at the entire history of the series...

[jaichind]

It seems the gas price surge plays a good part in the price surge.  I suspect part of this is lagging in terms of housing costs.  Rent prices were surging last year but they only count toward CPI when new leases are signed with a lot of them being signed this year to reflect market rent increases from last year.  Also, supply factors I am sure play a role.  Last week's labor report shows that the labor force lost 350K people.   Not good from a potential GDP point of view.  I hope Andrew Yang is watching.  When you pay people to do nothing they are more likely to choose to do nothing. 

If you don't understand the methodology generating these data, I don't recommend analyzing these data. No labor economist commented on the labor force statistics in raw numbers last week because the household survey is known to be volatile within a band. It isn't concerning if the labor force participation rate decreases by 20 or even 30 basis points in one month! In fact, if you look at the time series, labor force participation rate often moves up and down. These monthly movements are apparent even if you look at the entire history of the series...

That is a fair criticism although I contend historically the household survey tends to be a leading indicator of establishment surveies later to come ergo I do put some focus on them.

[jaichind]

JPM's Dimon: "Inflation Will Rise A Little Bit More Than People Think"

[jaichind]

PPI YoY came in at 11.3%

[Person Man]

JPM's Dimon: "Inflation Will Rise A Little Bit More Than People Think"

What do you mean by “a little”?

[jaichind]

JPM's Dimon: "Inflation Will Rise A Little Bit More Than People Think"

What do you mean by “a little”?

I have no idea.  I am just quoting Dimon.  He is also not clear about what "people" means.  Is that economist or the general population.  I assume he means that inflation numbers will continue to surprise on the upside for a few months.

[jaichind]

Federal Reserve Bank of St. Louis President James Bullard said the central bank may need to raise interest rates to 3.75% to 4.0% in 2022 versus the current consensus of 3.5%

[Person Man]

Federal Reserve Bank of St. Louis President James Bullard said the central bank may need to raise interest rates to 3.75% to 4.0% in 2022 versus the current consensus of 3.5%

That's probably about right.

[○∙◄☻¥tπ[╪AV┼cVê└]

A recession and double digit inflation would be a real mess.

[jaichind]

ECB raised rates 50 bp which is pretty weak in light of the inflationary surge.  In Japan where inflation is rising but still under control by with JPY crashing is coming under more pressure but refuses to consider rates increases.   The reason why they are not acting is for the same reason, just much worse, than what I wrote about the USA situation where interests rates normalization to positive real borrowing costs would have a impact on the central government budget.  Whatever the rise in interest payments USA will face is small when compared to PIGS in EU and Japan.  If and when real borrowing cost finally turns positive in PIGS and Japan the fiscal impact would be even bigger than what the USA will have to go through.   Just to show that as significant the impact on the USA fiscal future will face it will be a lot worse in Japan and PIGS.  The focus in EU is on Italy but the problem is all of PIGS and not just Italy.

[jaichind]

Reading the market commentary on the Italian-German debt spreads surge reinforces some of the ideas I put out there.  Before the inflationary surge and with expectations that Italy can continue to borrow at negative real interest rates the Italian debt spreads implied that Italy's debt as a % of GDP would fall from 155% today back down to a pre-COVID 19 level of 135% in a couple of decades as emergency spending are withdrawn.  Now with the inflationary surge which in theory should help Italy finance its debt has the market pricing in the fact that Italy will soon face positive real interest rates.  Given how much debt Italy has to refinance and roll over in the coming years the market now prices Italy's debt to GDP to fall a bit as COVID 19 spending is withdrawn then surge to 180% of GDP on the backs of crushing interest payments which in turn add to the debt.  The USA will go through a much smaller version of this but will encounter fiscal adjustment.

[It’s so Joever]

Are they f**king stupid?! I hate Jerome Powell.

[jaichind]

Long-term Inflation swaps surged on news of a 75 bp increase (vs 100 bp).  The market was expecting a bigger increase as part of the path to defeat inflation.  This decision just means the path to reduce inflation will be greater and the recession to come will be a bit later but will be bigger.

[PSOL]

There is absolutely zero reason for the Fed to hike interest rates given indicators of inflation are going down. Any more is overkill that would damage the US economy.

[Benjamin Frank]

There is absolutely zero reason for the Fed to hike interest rates given indicators of inflation are going down. Any more is overkill that would damage the US economy.

The Federal Reserve defines its mandate on these things as having inflation (CPI) in a range of 1-3%  They don't really have any discretion without altering their mandate.

Of course, arguments like you're making are similar to arguments made in the 1970s.  I appreciate the concern as their will be suffering in order to get inflation down, but it shouldn't be too difficult or take too long, and then the good times can roll with lower government deficits and sustainable higher employment.

One positive thing about this inflation from an academic perspective is that it should kill MMT as a viable economic theory for at least the next 20 years (hopefully forever.)

[jaichind]

(Bloomberg) --Former Treasury Secretary Lawrence Summers called on the Federal Reserve to deliver a clear message saying it will need to impose “restrictive” monetary policy that drives up the US unemployment rate in order to quell inflation.
“My worst fear would be that the Fed will continue to be suggesting that it can have it all in terms of low inflation, low unemployment and a healthy economy,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin.

[jaichind]

https://www.reuters.com/markets/us/two-fed-bank-boards-wanted-100-basis-point-discount-rate-rise-july-2022-08-23/

"Two Fed bank boards wanted 100-basis-point discount rate rise in July"

Good, let's get going, let's get it done.

[jaichind]

Look at treasury yields plus inflation swap numbers last couple of weeks it seems the bond market thinks the war on inflation has been half won despite a wishy-washy Fed.  Part of it is of course a recent bear market bounce which I am sure will revert to the mean soon. 

Reading bond market commentary it seems the reason for this view in the bond market is not some great confidence in Powell but more that EU-UK will take the hit for the USA.  The current inflation surge is of course driven by years of QE plus the blowback on Russian sanctions as part of the Russia-Ukraine war.  Bond market commentary seems to feel that the inflationary situation in EU-UK is hitting such a crescendo that an economic implosion not captured by current macroeconomic projections is certain to hit soon and push down overall aggregate demand in the world and drive down inflation in the USA. 

While this line of thinking has merit I think the same bond market has to take into account the risk of "lock-in" of inflationary expectations in the USA, especially with respect to consumer price and labor price pricing power much like what took place by the late 1970s.  Also, the PRC which had recent economic slowdowns due to its ill-advised COVD-19 lockdowns plus a real estate bubble bursting is certain to be expansionary in terms of fiscal and monetary policy.  I am not sure these factors are being taken into account by the bond and inflation swap markets despite the fact that their EU-UK Russian sanction blowback economic implosion theory seems more and more likely to come true.

[PSOL]

Any further interest hikes are inappropriate to solve the current inflation situation, and harmful to the economic and security interests of our people. This is an assault on working people, plain and simple.

I fail to see how a restructuring of the Fed’s balance sheet or the utilization of other policy tools isn’t in order instead of forcing a recession that would balloon up unemployment and depress wages and salaries across the board.

[jaichind]

Powell Offers Succinct Warning of `Some Pain’ Ahead.  Market falls.  Again this is just facing reality. 

[Frodo]

Those interest rate hikes aren't going to end anytime soon so long as inflation remains over 2%:

Federal Reserve Chairman Jerome Powell hints at more big interest rate hikes to prevent 'greater pain' of high inflation

[jaichind]

Looking at the previous CPI report and expected CPI report coming up it seems that the situation is getting under control.  Stripping out energy and food the CPI MoM last month was 0.3% and is expected to be 0.3% in the next report.   This is compared to the ~0.6% non-food/energy CPI MoM last few months.  It seems the big inflation spike momentum earlier in the year is slowing down.  This is a moderate version of what happened in Russia where there was a massive price spike in Feb-April but then have actually moved into deflation with negative CPI MoM.  This slowdown is taking place even though the Fed Funds rate has only moved up somewhat.

I think the reason for this is high inflation expectations by the late 1970s took very prolonged high Fed Fund rates to wipe out whereas recent inflation expectations in the 1990s-2010s period have been and stayed low.  This is helping restrain inflation.   If so then perhaps the "team transition" of 2021 might have been right.  What took place was two large inflation hammer blows in 2021 and then 2022 but both then dissipated.  What "team transition" got wrong was the scale of the spike but they might have been right all alone. To be fair we will know more over the next few months are more CPI MoM data comes in.

[Person Man]

Looking at the previous CPI report and expected CPI report coming up it seems that the situation is getting under control.  Stripping out energy and food the CPI MoM last month was 0.3% and is expected to be 0.3% in the next report.   This is compared to the ~0.6% non-food/energy CPI MoM last few months.  It seems the big inflation spike momentum earlier in the year is slowing down.  This is a moderate version of what happened in Russia where there was a massive price spike in Feb-April but then have actually moved into deflation with negative CPI MoM.  This slowdown is taking place even though the Fed Funds rate has only moved up somewhat.

I think the reason for this is high inflation expectations by the late 1970s took very prolonged high Fed Fund rates to wipe out whereas recent inflation expectations in the 1990s-2010s period have been and stayed low.  This is helping restrain inflation.   If so then perhaps the "team transition" of 2021 might have been right.  What took place was two large inflation hammer blows in 2021 and then 2022 but both then dissipated.  What "team transition" got wrong was the scale of the spike but they might have been right all alone. To be fair we will know more over the next few months are more CPI MoM data comes in.

This all collaborates that we probably need to go back to historically normal interest rates (3-5%).

[jaichind]

Looking at the previous CPI report and expected CPI report coming up it seems that the situation is getting under control.  Stripping out energy and food the CPI MoM last month was 0.3% and is expected to be 0.3% in the next report.   This is compared to the ~0.6% non-food/energy CPI MoM last few months.  It seems the big inflation spike momentum earlier in the year is slowing down.  This is a moderate version of what happened in Russia where there was a massive price spike in Feb-April but then have actually moved into deflation with negative CPI MoM.  This slowdown is taking place even though the Fed Funds rate has only moved up somewhat.

I think the reason for this is high inflation expectations by the late 1970s took very prolonged high Fed Fund rates to wipe out whereas recent inflation expectations in the 1990s-2010s period have been and stayed low.  This is helping restrain inflation.   If so then perhaps the "team transition" of 2021 might have been right.  What took place was two large inflation hammer blows in 2021 and then 2022 but both then dissipated.  What "team transition" got wrong was the scale of the spike but they might have been right all alone. To be fair we will know more over the next few months are more CPI MoM data comes in.

This all collaborates that we probably need to go back to historically normal interest rates (3-5%).

I am coming closer to that point of view.  I would need to see what the CPI MoM numbers look like.  Whereas before I was thinking we need to get to 5%-6% fed rate.  Now I think perhaps 4%-5% might be good enough if the underlying inflation exepectations momentum is what it is.