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

[jaichind]

One way or another the next Fed meeting the Fed fund rate is expected to go from 2.5 to 3.25.  My current guess now it will eventually hit 4-5 after that but after that most likely stop or even go back down.

Note that in the late 1970s and early 1980s the Fed Fund rate had to stay above inflation for several years before the CPI MoM momentum slowed down.  Such was the impact of the inflationary surge of the 1970s.  Still it is on the Fed to ensure that inflation head down to 2% or so and stay there so an inflation rate of above 4%-5% is not viewed as "normal"

[Person Man]

What would be the problem with more historically normal inflation(3-4%)?

[jaichind]

What would be the problem with more historically normal inflation(3-4%)?

There would be a problem for the Central Bank to not have price stability.  The Central Bank is competing against other stores of value (gold etc etc) so price stability would mean the value of a currency is stable and people would use it more than its competition.  So in theory Central Bank would want 0% inflation.  The 2% target in the USA came into place mostly due to fears of deflation and a liquidity trap.

[Person Man]

What would be the problem with more historically normal inflation(3-4%)?

There would be a problem for the Central Bank to not have price stability.  The Central Bank is competing against other stores of value (gold etc etc) so price stability would mean the value of a currency is stable and people would use it more than its competition.  So in theory Central Bank would want 0% inflation.  The 2% target in the USA came into place mostly due to fears of deflation and a liquidity trap.

How did things work with 3% inflation?

[jaichind]

Latest CPI comes in at 8.3%, higher than expected.  Non-food/oil MoM came in at 0.6% which is fairly high.  Seems inflationary pressure is still there that the Fed will need to act against.

[jaichind]

Fed swaps now have it at near 100% chance that Sept fed hike will be at least 75 BP

[jaichind]

It seems what drove up the latest inflation number is rents.  If so that is a lagging indicator since many rent contracts most recently neglected might and most likely are reflecting the rise in the rental market that took place months ago.  In that sense, these are grounds to believe that this surge might subside the next data points.  Still just to make sure I still think it is best that the Fed push rates up to 4.5% and beyond.  It can always lower them later.

[Person Man]

It seems what drove up the latest inflation number is rents.  If so that is a lagging indicator since many rent contracts most recently neglected might and most likely are reflecting the rise in the rental market that took place months ago.  In that sense, these are grounds to believe that this surge might subside the next data points.  Still just to make sure I still think it is best that the Fed push rates up to 4.5% and beyond.  It can always lower them later.

Anything higher than 4.5 will probably lead to Volknerization but 4 to 5 seems reasonable. So two more major rate hikes?

[jaichind]

What would be the problem with more historically normal inflation(3-4%)?

There would be a problem for the Central Bank to not have price stability.  The Central Bank is competing against other stores of value (gold etc etc) so price stability would mean the value of a currency is stable and people would use it more than its competition.  So in theory Central Bank would want 0% inflation.  The 2% target in the USA came into place mostly due to fears of deflation and a liquidity trap.

How did things work with 3% inflation?

Well, the higher that number is the more you are driving "forward" planned consumption since the purchasing power of the currency is falling.  Where the economy is in a liquidity trap where supply way outstrips demand this might have some good short-term effects without creating long-term problems.  If not you are just adding uncertainly in the system and lowering logical investments and risk taking.

[new_patomic]

It seems what drove up the latest inflation number is rents.  If so that is a lagging indicator since many rent contracts most recently neglected might and most likely are reflecting the rise in the rental market that took place months ago.  In that sense, these are grounds to believe that this surge might subside the next data points.  Still just to make sure I still think it is best that the Fed push rates up to 4.5% and beyond.  It can always lower them later.

There's probably still a ways to go, unfortunately. I didn't realize how behind CPI was compared to other measures of rents.

[Person Man]

What would be the problem with more historically normal inflation(3-4%)?

There would be a problem for the Central Bank to not have price stability.  The Central Bank is competing against other stores of value (gold etc etc) so price stability would mean the value of a currency is stable and people would use it more than its competition.  So in theory Central Bank would want 0% inflation.  The 2% target in the USA came into place mostly due to fears of deflation and a liquidity trap.

How did things work with 3% inflation?

Well, the higher that number is the more you are driving "forward" planned consumption since the purchasing power of the currency is falling.  Where the economy is in a liquidity trap where supply way outstrips demand this might have some good short-term effects without creating long-term problems.  If not you are just adding uncertainly in the system and lowering logical investments and risk taking.

Conversely, we don't want people eating ramen, cutting their streaming services, driving a car that breaks down every couple of months, never going on vacation, wearing clothes that have holes in them, and using furniture that smells funny just because "if we wait to buy this, we'll save $".

[jaichind]

It seems what drove up the latest inflation number is rents.  If so that is a lagging indicator since many rent contracts most recently neglected might and most likely are reflecting the rise in the rental market that took place months ago.  In that sense, these are grounds to believe that this surge might subside the next data points.  Still just to make sure I still think it is best that the Fed push rates up to 4.5% and beyond.  It can always lower them later.

There's probably still a ways to go, unfortunately. I didn't realize how behind CPI was compared to other measures of rents.

Yes.  My point is that inflation might be running at over 8% but the average person might not be "experiencing" 8% anymore due to rent component catchup.  For most people, the rental market became crazy a year ago which they experience but is only now showing up in CPI numbers.

[Person Man]

It seems what drove up the latest inflation number is rents.  If so that is a lagging indicator since many rent contracts most recently neglected might and most likely are reflecting the rise in the rental market that took place months ago.  In that sense, these are grounds to believe that this surge might subside the next data points.  Still just to make sure I still think it is best that the Fed push rates up to 4.5% and beyond.  It can always lower them later.

There's probably still a ways to go, unfortunately. I didn't realize how behind CPI was compared to other measures of rents.

Yes.  My point is that inflation might be running at over 8% but the average person might not be "experiencing" 8% anymore due to rent component catchup.  For most people, the rental market became crazy a year ago which they experience but is only now showing up in CPI numbers.

That might mean that raising interest rates too high might be unnecessary.

[jaichind]

That might mean that raising interest rates too high might be unnecessary.

Yes, it would add to the argument that the increase in Fed rates might not need to be as aggressive as what the topline numbers might suggest.

[Tintrlvr]

It seems what drove up the latest inflation number is rents.  If so that is a lagging indicator since many rent contracts most recently neglected might and most likely are reflecting the rise in the rental market that took place months ago.  In that sense, these are grounds to believe that this surge might subside the next data points.  Still just to make sure I still think it is best that the Fed push rates up to 4.5% and beyond.  It can always lower them later.

There's probably still a ways to go, unfortunately. I didn't realize how behind CPI was compared to other measures of rents.

Yes.  My point is that inflation might be running at over 8% but the average person might not be "experiencing" 8% anymore due to rent component catchup.  For most people, the rental market became crazy a year ago which they experience but is only now showing up in CPI numbers.

That might mean that raising interest rates too high might be unnecessary.

Agreed. If inflation is already really only running at 10-20 bps a month (taking into account diving gas prices but also lagging rent data), then inflation is back to a "normal" level already. That doesn't mean we should lower interest rates, but it does mean that we should consider not raising them too much more than present and perhaps even slightly lower than market expectations.

It's odd that the August report was presented as negative when it actually looks quite positive.

[Person Man]

It seems what drove up the latest inflation number is rents.  If so that is a lagging indicator since many rent contracts most recently neglected might and most likely are reflecting the rise in the rental market that took place months ago.  In that sense, these are grounds to believe that this surge might subside the next data points.  Still just to make sure I still think it is best that the Fed push rates up to 4.5% and beyond.  It can always lower them later.

There's probably still a ways to go, unfortunately. I didn't realize how behind CPI was compared to other measures of rents.

Yes.  My point is that inflation might be running at over 8% but the average person might not be "experiencing" 8% anymore due to rent component catchup.  For most people, the rental market became crazy a year ago which they experience but is only now showing up in CPI numbers.

That might mean that raising interest rates too high might be unnecessary.

Agreed. If inflation is already really only running at 10-20 bps a month (taking into account diving gas prices but also lagging rent data), then inflation is back to a "normal" level already. That doesn't mean we should lower interest rates, but it does mean that we should consider not raising them too much more than present and perhaps even slightly lower than market expectations.

It's odd that the August report was presented as negative when it actually looks quite positive.

A lot of great deals in the stock market from today, then.

[Tintrlvr]

It seems what drove up the latest inflation number is rents.  If so that is a lagging indicator since many rent contracts most recently neglected might and most likely are reflecting the rise in the rental market that took place months ago.  In that sense, these are grounds to believe that this surge might subside the next data points.  Still just to make sure I still think it is best that the Fed push rates up to 4.5% and beyond.  It can always lower them later.

There's probably still a ways to go, unfortunately. I didn't realize how behind CPI was compared to other measures of rents.

Yes.  My point is that inflation might be running at over 8% but the average person might not be "experiencing" 8% anymore due to rent component catchup.  For most people, the rental market became crazy a year ago which they experience but is only now showing up in CPI numbers.

That might mean that raising interest rates too high might be unnecessary.

Agreed. If inflation is already really only running at 10-20 bps a month (taking into account diving gas prices but also lagging rent data), then inflation is back to a "normal" level already. That doesn't mean we should lower interest rates, but it does mean that we should consider not raising them too much more than present and perhaps even slightly lower than market expectations.

It's odd that the August report was presented as negative when it actually looks quite positive.

A lot of great deals in the stock market from today, then.

I'm a buy-and-hold sort of guy. In any case I can't (easily) trade in individual stocks due to my job.

[Person Man]

It seems what drove up the latest inflation number is rents.  If so that is a lagging indicator since many rent contracts most recently neglected might and most likely are reflecting the rise in the rental market that took place months ago.  In that sense, these are grounds to believe that this surge might subside the next data points.  Still just to make sure I still think it is best that the Fed push rates up to 4.5% and beyond.  It can always lower them later.

There's probably still a ways to go, unfortunately. I didn't realize how behind CPI was compared to other measures of rents.

Yes.  My point is that inflation might be running at over 8% but the average person might not be "experiencing" 8% anymore due to rent component catchup.  For most people, the rental market became crazy a year ago which they experience but is only now showing up in CPI numbers.

That might mean that raising interest rates too high might be unnecessary.

Agreed. If inflation is already really only running at 10-20 bps a month (taking into account diving gas prices but also lagging rent data), then inflation is back to a "normal" level already. That doesn't mean we should lower interest rates, but it does mean that we should consider not raising them too much more than present and perhaps even slightly lower than market expectations.

It's odd that the August report was presented as negative when it actually looks quite positive.

A lot of great deals in the stock market from today, then.

I'm a buy-and-hold sort of guy. In any case I can't (easily) trade in individual stocks due to my job.

I'm not a day trader, either. It's just I had very aggressive positions before this fiasco and I am still buying into aggressive positions now. It's all going to be worth it. They definitely overreacted

Wholesale prices dropped 0.1% last month. Would give the link, but I am on the bank(where I work)'s computer.

[jaichind]

Fed Fund swap trading indicates that the marker expects rates to peak sometime next year at 4.5%  If such expectations ends up than that expect equity markets to fall some more from here.

[Person Man]

Fed Fund swap trading indicates that the marker expects rates to peak sometime next year at 4.5%  If such expectations ends up than that expect equity markets to fall some more from here.

Two 75s would get us to 4.

[Tintrlvr]

Fed Fund swap trading indicates that the marker expects rates to peak sometime next year at 4.5%  If such expectations ends up than that expect equity markets to fall some more from here.

Two 75s would get us to 4.

75-50-50-25 seems much more likely for getting to 450 bps. Although I wouldn't be surprised if the second 50 is 25 and then from there on whether more 25 bps increases are considered would depend on the strength of the economy at the time.

Topline inflation numbers are going to start collapsing in December as earlier large increases start being compared against, and that's going to create pressure to stop raising rates so much if at all.

[jaichind]

Really comes down to non-food/energy MoM numbers.  If that falls to 0.2% or lower then the base effects would mean the YoY CPI numbers will fall and fall quickly throughout 2023.

[jaichind]

Fed raises rates 75 bp as expected.  Powell says that a recession might be necessary to bring inflation under control.

For the first time using my inflation-adjusted yield curve (discounting the yield curve with inflation swaps at each tenor) as the curve inverted (the convention curve has been inverted for a while) although only mildly.  It does seem that a recession next year is coming.   Given how mild my my inflation-adjusted yield curve is is it possible that it will be a mild recession.

[Person Man]

Fed raises rates 75 bp as expected.  Powell says that a recession might be necessary to bring inflation under control.

For the first time using my inflation-adjusted yield curve (discounting the yield curve with inflation swaps at each tenor) as the curve inverted (the convention curve has been inverted for a while) although only mildly.  It does seem that a recession next year is coming.   Given how mild my my inflation-adjusted yield curve is is it possible that it will be a mild recession.

So basically like the recession caused by 9/11/computer bust but maybe much more broad with the same volume (there won't be a sector that is totally destroyed like commercial banking (1990)/residentials(2008)/technology(2001)..et al..)

I'm still hoping for an environment that doesn't kill most people's chances of advancing their career.

[jaichind]

My calculated 30-year inflation-adjusted yield (which discounts the 30-year treasury yield by the 30-year inflation swap) reaches 1.22% which is the highest since 2011.   It was -0.6% in early 2022.  The pre-2008 era has this metric between 1.5%-2.0%.  I think we are getting very close to the end of the adjustment transition to the pre-2008 era as far as federal borrowing costs are concerned.