For the Treasury market, Powell’s speech was a nothingburger. A Sep rate cut has been priced in since the Aug 2 jobs report.
By Wolf Richter for WOLF STREET.
Powell re-confirmed at his Jackson Hole speech on Friday that rate cuts are coming but didn’t mention “September.” He said, “The time has come for policy to adjust. The direction of travel is clear…”
But “the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
Powell presented a balanced message. There was no panic. The two sides of the Fed’s dual mandate (low inflation and full employment) have come roughly into balance.
The Fed has been talking about rate cuts since its December 2023 meeting when it put three rate cuts on the table for 2024, which markets instantly turned this into six rate cuts. Now it’s August 2024, and we’re still waiting for our rate cuts. But we’re getting closer.
At its September meeting, after nine months of wait-and-see, the Fed is likely to cut. That has become increasingly clear recently, including in the FOMC minutes of the July meeting, released on Wednesday, where “September” cropped up in terms of markets expecting a cut in “September,” and there was nothing in the minutes to dissuade markets from it.
Powell pointed out that inflation has dropped a lot. Policy rates have not dropped at all since July 2023 and are high compared to inflation – “restrictive” came up three times in his speech. The upside risk of inflation heading higher from here has diminished. His “confidence has grown that inflation is on a sustainable path back to 2%.” Inflation is just much less of an issue than it had been.
The labor market has cooled from its red-hot pace, and risks to employment have risen, etc. etc., and “we do not seek or welcome further cooling in labor market conditions,” he said.
But no panic: “So far, rising unemployment has not been the result of elevated layoffs, as is typically the case in an economic downturn. Rather, the increase mainly reflects a substantial increase in the supply of workers [from the huge wave of immigration] and a slowdown from the previously frantic pace of hiring.”
“With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market,” he said.
So no panic. Gradualism. If the economy plays out that way, a series of 25-basis point cuts.
If the labor market suddenly tanks, the Fed would step in with bigger cuts: “The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions.”
Everyone will be looking for inspiration at the August jobs report, to be released on September 6 – whether nonfarm job creation will bounce back from its moderate pace in July, which was likely the effects of Hurricane Beryl that hit Texas during the survey reference period. If nonfarm job creation bounces, rate-cut gradualism will prevail. If it tanks and turns negative – meaning the first job losses – then, bigger cuts.
Before the September meeting, there will also be a PCE price index report for July (which won’t be a big surprise, given that we’ve already had the July CPI report) and a CPI report for August.
The Fed will likely “look through” a bad CPI report for August. If inflation accelerates further month-to-month from the month-to-month acceleration in July, combined with a strong bounce of nonfarm jobs in August, then the Fed can decide to “look through” that acceleration of inflation, as it had “looked through” the spike of inflation in early 2021. With regards to the 2021 episode, Powell said, “it can be appropriate for central banks to look through a temporary rise in inflation.” So this time around, if the CPI report is bad, the Fed will likely cut anyway in September, perhaps with some dissenting votes.
Markets are already lining up a bunch of rate cuts. The federal funds futures market on Friday saw a 77% probability of at least 200 basis points in cuts by the end of 2025, which would be 8 cuts of 25 basis points spread over 11 meetings, similar to December 2023, when they expected 150 basis points in cuts spread over 8 meetings in 2024.
But this rate-cut trajectory might not happen as envisioned because of the inflationary effects of the economic and fiscal policies to be sought by whoever ends up in the White House – that’s what the president of the Peterson Institute for International Economics, Adam Posen, told MarketWatch.
There is a good chance that the inflationary policies promised by both candidates – on top of the current fiscal fiasco – will reignite inflation, and then the Fed has the next problem on its hands and end up having to deal with it.
Powell’s speech focused too much on the short-term and gave no thought of what will happen in six months, Posen told MarketWatch. This was a mistake, he said.
“My view is that if Harris becomes president, it is 60% to 65% likely that you won’t see the cuts” the market envisions, Posen said. “If Trump gets in, I put it at 80%-90% they are going to be hiking a year from now.”
There’s never a dull moment in economics. The WSJ lamented that “the candidates haven’t just demoted economic principles this year; they’ve jettisoned them altogether. It’s as if they wanted to flip the bird at the economic establishment.”
Glenn Hubbard, who chaired President George W. Bush’s Council of Economic Advisers, told the WSJ: “Doesn’t anyone listen to economists anymore?” That was a rhetorical question. “Economists don’t seem very involved in either campaign or in internal decisions in recent administrations,” he said.
Meanwhile in the Treasury market…
The big moves were triggered after the August 2 jobs report. Since then, yields have ticked up a hair, and Powell’s speech didn’t change much since the Treasury market had already priced in a September rate cut, and further rate cuts in the future.
The six-month Treasury yield, which is an indicator of market expectations of Fed policy rates over the next several months, ticked down 4 basis points on Friday to 4.92%, back where it had been on Wednesday, but above the post-jobs-report plunge to 4.88% on August 2.
Note that the six-month yield falsely started pricing in rate cuts in early 2024 that didn’t come. In April-May, it rose again to the no-rate-cut scenario within its six-month window.
The one-year Treasury yield, which looks into the future through mid-2025 ended on Friday where it had been on Wednesday, at 4.36%, and up from the August 2 low of 4.33%. It’s beginning to price in four rate cuts in the early portion of its one-year window.
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I wonder if you can read into the rate cut expectations in a Harris vs Trump presidency. Does this mean investors think the economy will tank under Trump (tariffs) and require injections? Or is there a perception he’s more pro-business than Harris, and will push for more cuts (not that should influence things). Would love to understand the rationale there.
RTGDFA
I saw your point about each candidate having inflationary policies, I don’t understand how Posen could assess one candidate as leading to less cuts than WS desires and the other leading to rate hikes. If I’m understanding him correctly, a H presidency would be better for inflation than a T presidency. It seems to me that they are both going to drive ungodly amounts of spending to their favored causes. I’ll find the MW article and see if he goes into detail on why a Dem presidency would be less inflationary than a Repub.
JS,
The MarketWatch article is linked in the text. That’s all it says. You can click on it and see.
1. There is a difference in the time frame: “if Harris becomes president, it is 60% to 65% likely that you won’t see the cuts” the market envisions,” Posen said without mentioning when. But “If Trump gets in, I put it at 80%-90% they are going to be hiking a year from now.” So buy August.
So those two statements are not entirely comparable.
2. They both advocate for tax cuts and extra spending, just in different directions. What Trump has on his list that Harris doesn’t are more tariffs. So that would add to costs of goods not only because the additional taxes on goods, but also because it will likely keep imports from competing on price with US producers, such as Chinese-made EVs competing with US-made vehicles. I think Trump is right, we need to raise taxes, and tariffs are a good way of doing it. But it will likely increase prices, not just once but over the longer term due to reduced competition.
Anything is a guess right now on how a new president will affect the economy because presidential candidates make a lot of promises that many times do not come true.
In regards to tariffs. Biden, while running against Trump in 2020, said tariffs were the wrong way to attack China. Biden, once in office did not rescind any of the Trump tariffs but instead doubled down and increased the tariffs. ( I guess they were a good idea?)
It will not matter who is elected, tariffs are the new normal in the economic warfare we have with China.
“Does this mean investors think the economy will tank under Trump..”
The S&P 500 is 35 points (or 0.6%) away from the all time high. 40% higher (give or take) where it was when the overnight rate was 0%. The investors stopped thinking long time ago.
🤣❤️
Andy someone has to use all this free money for something.
Why not shovel it into a business’s furnace?
I think it’s going way higher, however the investors may spook and mass pull out. You gotta ride that wave until they come back 🌊 🏄
Great article that described the current situation accurately.
The Fed will cut rates from 5.25-5.5 to 5 to 5.25. 25 bpt. I agree with the FOMC that perhaps it’s time too explore the effects of a reduction in interest rates while asset prices are fully inflated.
It will definitely reduce the income of the fixed income sector.
Facts! 💯
Facts … the SP500 rose much more under Trump than it has under Biden. Then, if you adjust for inflation, under Trump, the SP500 rose 3x what it rose under Biden.
FACT. The casino on Wall Street is not the economy.
I have no way of guessing which way the dice are going to roll.
SocalJim,
Are these alternative facts? Check your sources.
S&P 500 values:
Nov 2016 : 2160
Nov 2020: 3300 A 1140 point increase under Trump
Aug 2024: 5600 A 2300 point increase under Biden.
The S&P 500 increased twice as much under the current President with 2 more months to go.
Don’t listen to whoever you were quoting for the S&P500 ever again. :-)
“Facts, maam, just the facts.” – Badge 714, Joe Friday.
And, if you think you’ve got the S & P figured correctly, SocalJim, try Stan Freeburg’s, “St. George and the Dragonet.”
BobE, presidents are inaugurated Jan 20ish, not November. Redo your math.
BobE, here are the corrected numbers.
Jan 20, 2017 2263
Jan 20, 2021 3800
Current 5600
Return Under Trump = (3800-2263)/2263 = 68% with no inflation
Under Biden, (5600-3800)/3700 = 47% with 20% inflation, which is more like 27%.
Market was much stronger under Trump.
Socaljm,
The answer is the same. 2 months did not make any difference.
The current administration had twice as much increase in the S&P 500.
It’s simple math. Do not use your sources ever again.
SoCalJm,
Ok, I see that you are calculating % instead of absolute values.
It’s fair but a little misleading since the denominator distorts the %.
For instance:
Jan 2009 : 850
Jan 2013: 1500
(1500-850)/850 = 76%
Whoever was elected President in 2008 did better than both of the Presidents we are discussing?
Without any fiscal restraint by Congress I dont expect any Sept rate cuts. Entitlement reform is the ticking time bomb.
Politicians of both parties got too used to free money.
without
If it is ticking there is a lot of time on the clock. Entitlement reform is a political minefield and of course others ways to solve fiscal issues but obviously all of those minefields as well. Get elected, spend and punt it down the road is only likely outcome.
“a lot of time on the clock”
What makes you say that?
Maybe 20 years ago the catastrophe was 25 years away.
20 years later, the catastrophe is, amazingly, 5 years away.
Interest rate cuts before an election is a clockwork thing.
Perhaps the problem is that money was free. Just saying.
You don’t expect a rate cut after he just told you he’s going to? Or was it because no ‘pinky swear’?
God, I was going to make a joke wondering if that guy who was going to offer me 2 to 1 odds against a cut was still around. I was thinking now I’d have to offer him odds, which obviously I would.
Maybe Powell needs to hire a sky writer.
Of course if you are arguing that there SHOUDN’T shouldn’t be a rate cut, that is a perfectly reasonable position.
We’re getting rate cuts, AND we’re getting a continued lack of fiscal restraint. I can’t fathom why you would think the two are mutually exclusive.
Wall Street, professional economists, and FOMC policymakers are well aware that the rising unemployment rate is caused by high immigration & survey data quirks, not layoffs – as Powell mentioned in his speech yesterday.
Most other macroeconomic data points remain extremely strong, including GDP (~3% annual rate last qtr), consumer spending (retail sales +1% last month), which begs the question of whether the upcoming easing is motivated by genuine concern for the labor market, or FOMC policymakers’ desire to please Wall Street & pad their own investment portfolios – especially now that inflation has slowed enough to give them political cover to do it.
The average FOMC policymaker has a net worth above $5 million and owns S&P 500 index funds, US Treasuries (both of which benefit from monetary easing) and other asset classes. Powell is on the upper end relative to his colleagues, worth over $50 million.
I’m conflicted on that. On one hand I don’t want the financial future of the country run by people rigging the system in their favor. But I also wouldn’t want a highly educated person late in their career who wasn’t able to amass enough net worth to prove they actually know how to make sound financial decisions either.
@JS
Were you aware multiple FOMC members got caught trading their portfolios for their own financial benefit in 2020-21? At least one of them, Robert Kaplan, resigned in shame. The public outcry led the Federal Reserve to implement some mild ethics rules against personal trading, but ultimately make little difference because central bank pivots & policy shifts last far longer than the 45 days’ advance notice they’re now required to give before any securities buying & selling.
Were you aware that FOMC policymakers spin through the revolving door to work for Wall Street after their terms expire & their names fall out of the news cycle? Former lifelong academics Ben Bernanke & Richard Clarida became PIMCO managing directors. Janet Yellen made some $20 million in honoraria giving speeches to Wall Street banks. Robert Kaplan, the guy caught trading, was recently hired by Goldman Sachs.
I don’t believe for a second the Federal Reserve works for the benefit of ordinary Americans.
It’s working to keep the labor market strong and inflation relatively low.
They hiked to 5.5% and kept rates there for 14 months, that’s far higher and longer than anyone had predicted. And they still haven’t cut, in case you haven’t noticed.
Do your believing in Church.
You do know they meet in Jackson Hole right?
I think houses there are generally in the tens of millions of dollars.
The message the fed sends is clear. We love the people but the rich pay the bills.
I have a bachelor’s degree (which I have never used). I long ago chose a job in the trades, and I live rurally, where you just don’t make as much money. I’m fine with that – can’t compete with high income power couples, can’t amass a large fortune. But…I’d highly trust the educated and disciplined rural folk, who know how to get by and do many things that are self-supporting and supplemental (lessening the need for huge nest-eggs) with financial decision making over insulated highly educated economists and lawyers that run our country – especially rural business owners I know. We need people that will put the long-term needs of the country over fattening the already well-off wealth of the upper classes. Of course, this will never happen in our economy, but distrust for the elites is very much justified. It’s not healthy to have a whole class of people that consume so much, earn so much and waste so much driving the bus on our nation’s economy. I’m not at burn it all down, but I’m closer to this than maintaining the status quo. That’s my rant.
Oh another trades post.
There’s a funny post going on Reddit.
“They say get a job in the trades”
Results: Boss abuses you, Sudden early death highly likely, start your own business!…and get stiffed by clients on the bill.
Sufferinsucatash is right for references the false promises of being in the trades by people who never worked in the trades, but Digger Dave is still right about all the things that really matter in a more general sense that applies to a larger percentage of the population. Being in the trades is no cakewalk, take it from a cupcake.
I worked in the trades. Its a good way to end up around drunken redneck idiots that spend all their money on a ragged out pickup truck and booze. If you want to live in a trailer park and deal with the braindead then the trades are an awesome place to go.
I left because being paid 12 dollars an hour to wear full leathers welding galvanized steel in the sun in 100 degree weather and 90% humidity is a miserable way to live. Of course if you complain about being broke despite working 70-80 hours a week, “u juss got dem soff hands boi.” Its a competition amongst those troglodytes about who can be treated the worse by their job/boss and still grovel at managements feet.
Now i work in trucking which is just as bad but i make 120k/yr to live my in total isolation working 70 hours a week. Of course, i spent several years working 70 hour weeks and struggling to break 50k dollars. If i wasnt willing to go homeless and live in the truck for months on end working everyday I would have never made it to the job im at now. And the thing about any trucking job that pays over 70-80k/yr is youll be fired on the spot for any slight mistake. Potentially blackballed from any decent job due to the wonderful DAC report.
Stay the hell out of the trades unless you have a weak mind and a strong back.
I’d still advocate for a job in a trade. Never said it was a walk in the park or a replacement for the lack of civic and financial education. People in all walks of life are bad at money management. I’ll take the guys that piss it away on lifted pickups over high income white collars that live an even more consumptive lifestyle and think that 7 figure homes on tiny lots in suburbia exempt them from criticism. Only one cohort has the survival skills to sustain themselves if we have a major crash. Nothing is without risk. What good is having a body if you avoid using it for 70 years?
Digger Dave, you’re perpetuating a stereotypical myth: the city mouse vs. the rural mouse and how the rural mouse can deal with reality while the city one is in la la land.
I worked in the trades. There were some tradesmen who had a ton of talent, most did not. Some were pretty thoughtful, curious and downright philosophical, in spite of being carpenters, masonry guys and some electricians, many were conformists who were fundamentally good ole’ boy wannabes and could barely count the correct change they’d get in return for handing a cashier their bi-weekly paychecks. Some were probably excellent parents; some should have had forced vasectomies.
Taught public school for several years, in rural areas. Some of the farming families were doing their best but followed completely primitive ways of rearing their children and not gonna spare the rod. In extremely rural settings (hillbillies and proud of it folk), where it was hard to even understand what young teen males were saying, coming from families busted up early in marriage or without marriage… those kids were effectively doomed and would be forced to work for shit wages wherever they landed. And if they knocked a gal up, well, that’s her problem.
Don’t give me that meat and potatoes b.s. and country folk wholesome crap. Some of these guys are all about getting laid and drunk and do not give a rats ass about anything other than peer acceptance, least of all, some sort of adult responsibility. Others, are straight-shooters, God-fearing, flag waving, glad they can vote for a Republican guys who want to remove the meager social safety net benefits they’re likely to garner.
I quit teaching, felt I didn’t want to sacrifice my time on the planet to be a martyr, trying to fix the unfixable. But the mythical decency of the Lake Wobegon fly-over-country residents is about 30% right and 30% wrong and the rest… unaffiliated.
I concur with the above. Truthfully, economic freedom, security, specialized knowledge and differed rewards are the true name of the game in American society.
I’ve climbed the ladder on both sides and I wouldn’t want to be in the trades again.
“There were some tradesmen who had a ton of talent, most did not. Some were pretty thoughtful, curious and downright philosophical, in spite of being carpenters, masonry guys and some electricians,…”
Yes, those guys exist and are some of the better people a person could probably ever meet and they earn their money.
“many were conformists who were fundamentally good ole’ boy wannabes…”
Yes, a lot of people in the trades just like that, and they define a lot of the culture since they are usually a majority.
“and could barely count the correct change they’d get in return for handing a cashier their bi-weekly paychecks.”
So I’m guessing you weren’t a plumber or electrician or carpenter…..anything that had to at least use a tape measure or do layouts. A lot of guys in the trades can do more math than most people these days. Even a lot of college kids can’t do math in their head anymore, they are not used to doing math without a calculator. A lot of people can’t work with fractions in their head.
“Some were probably excellent parents; some should have had forced vasectomies.”
There are bad parents everywhere you look in this country. People in the trades work a lot and the job can be very demanding. Considering the state of parenting and the culture of families in this country, I’d say people in the trades don’t seem much worse if any than the average of the population.
So I mostly agree with the things you say about the trades. As far as rural areas, I can’t say that you’re wrong. The thing is, the cities and even the suburbs across the country have degeneracy to write about in the style that you did for rural areas.
Guys wanting sex and drinking………..that’s just a rural thing.
Kids coming from families that don’t have a lot of money or have parents with problems……….only in the sticks.
Young people without a hookup in life ending up in low wage jobs………..only happens in rural places.
So the trades was no good.
Being a teacher was no good.
I’m glad you found work as a banker, no point in being a martyr.
Or working at target or the grocery store.
I honestly feel you on the things your saying so that last thing was more of an ironic joke and not too serious. The reality is that work sucks and it’s nice to be born with a silver spoon, preferably in the mouth already.
Cities have been turning degenerate at quite a fast pace. A lot of suburbs are soulless. Your writing reminds me of the guy from the original matrix movie who is bitter and sets up a meeting with the Smiths and tells them in the meeting that he will help them and work for them as long as they promise to get his body back in a pod and him back in the matrix simulation because he hates what he came to know as his day to day reality. Still, I don’t really disagree with all the sentiment, just not really the direction i would go with it. You should come drink with me in my storage unit. Maybe you can convince me to get back in the matrix. I want to enjoy eating McDonald’s again and filling out paperwork.
It’s all American, whether it’s a Tesla or turbo diesel. Home builder or app builder. HVAC tech or biotech. There have always been city folk and rural folk so why all the divisiveness now? We either come together as a country or just devolve.
Jackson Y
“The average FOMC policymaker has a net worth above $5 million and owns S&P 500 index funds…”
Net worth so what? There are people here with greater net worth.
Policy rates are well above inflation rates, inflation has cooled a lot, and the labor market has normalized. The Fed is losing backing for keeping rates this high. It makes sense to take rates down a few notches, and if inflation re-ignites, there will be more backing for wait-and-see or even rate hikes.
why does the fed need backing to do anything? it’s supposed to be independent. it didn’t have backing to do qe for 10 years, but so it did.
May be Wolf meant “backing” as in backing of the members of the Fed…
The Fed answers to Congress. Congress could for example change the Fed’s mandate. Powell has to show up regularly before Congress and give testimony. So the Federal Reserve Board, which Powell chairs, is “independent” in the sense of being an independent government agency, but it’s not in a vacuum, and all agencies have to answer to Congress. Congress was all for QE and low rates. Congress loves free money, makes buying votes a lot cheaper 🤣
ha ha, understood, but if the fed is going to only be independent to the extent that the congressional wall street complex allows, that means that the 2% inflation target is really 3-5%, as it’ll run very hot during vote buying sprees.
the bond market just hasn’t learned it yet.
Behind every move is a crowd of beneficiaries (yes, many are of the non-rich masses) receiving something.
Congress will never agree on changing the mandates. There was some talk of that during the 2021-22 inflation spike, but nothing came out of it.
Republicans wanted to drop the unemployment mandate, leaving inflation as the sole objective – this would be in line with the ECB & other central banks. But Democrats didn’t want it.
Democrats wanted to add racial equity, climate change, and social justice to the Federal Reserve’s objectives. Republicans didn’t want them.
Despite Wall Street clamoring for the Federal Reserve to move the goal posts and permit a higher inflation target, there was minimal support among politicians except for far-left progressives – it would have been political suicide in 2021-22.
And the Federal Reserve has likely already stretched the price stability objective as far as they could, using the PCE index as their benchmark instead of CPI (which tends to run at least 0.5% higher) and allowing for “temporary overshoots above the 2% target” during recessions per their 2020 framework.
The two mandates will remain as is for the foreseeable future.
Seeing as there is no real detriment to employment, gdp is strong, consumer spending is strong, why lower rates at all? You have 3% gdp at 5.5%, what will gdp be at 4%? Why not hold until there’s some sign of weakness? I don’t mean like recession just an actual sign this is not the new neutral rate that is needed to offset our inept politicians massive govt spending
One might have asked on he way up )toward inflation), why hike rates at all? Some few actually said that around here (in the “transitory” interval). But instead what I mostly heard was massive contempt from a chorus of Monday morning quarterbacks unloaded on the Fed for being late. So I imagine the Fed is trying not to be late?
If inflation decreases to 2 percent and stays there stably, what should be the interest rate of the central banks (Fed and BCE) to be neutral?
+1% to +2% (That is inflation + ). This as to have a price tag on risk. One of the reasons for the bonkers distortions and the desperate run on junk was/is that at 0% (or close to in the case of the Fed and below that for the ECB) risk could/would not get priced into rent rates.
I’d even advocate at keeping it around 5% or higher (That is +3% or more above the target 2% inflation) as to have a buffer in case things go badly but that is (as Wolf mentioned) politically untenable. And possibly economically impossible seeing that there is a decent chance the markets cannot handle even a 3% rate after years of rates hovering around 0% without some serious corrections that freak out the people holding onto that paper wealth.
Who Cares,
👍
“Congress loves free money, makes buying votes a lot cheaper” Yep!
A $5 million NW doesn’t indicate anything. That is not suspicious for people engaged in policy making.
Powell, being an insider and only worth $50 million, is not really impressive. He is in his early 70s. Actually, I think it more indicative he may have some integrity.
I’ll be worth a quarter of that at his age and I am: honest and financially unsophisticated (retarded).
I think wallstreetbets uses the word Regarded 😉
Are you my neighbor from across the street?
I suggest that all macro-economic data points will remain strong, long after the market thinks otherwise.
The first estimate is issued three months after the measurement.
A market asset price retraction is not predictable nor is the magnitude of the economic retrenchment that, inevitably, is the cause of the decline in asset prices.
Thank you Wolf for always being ready to stand and deliver no matter the calendar day is. Great info for me to keep my wits about me as we head into the next 6-weeks “and Beyond!” …and too thank for that great quote from WSJ: “Doesn’t anyone listen to economists anymore?”
&^)
All the Best
Yes (!) – thanks Wolf for reviewing & summarizing Powell’s remarks.
Thanks for your sober & unbiased analysis – mixed in with your much needed sense of humor…
These reports are why I regularly & gladly donate to your work & efforts…
Keep up the great work Wolf!! :)
“Doesn’t anyone listen to economists anymore?”
So which economists are you going to listen to? The Krugman cabal or the Sowell clique? Most politicians will listen to which ever economist that tells them what they want to hear.
Grass – …most ordinary folks will, as well…
may we all find a better day.
Wolf,
Based on your article https://wolfstreet.com/2024/08/13/services-ppi-core-ppi-yoy-were-pushed-down-by-extreme-base-effect-thatll-flip-next-month-for-rest-of-2024/
I’m expecting a much greater chance of severe disappointment on Sep 11th (and Oct and Nov) when the next round of inflation numbers come out which is 1 week before the Sep Fed decision. Even if they cut 25 pts on 9/18, everyone will start to realize these cuts will be moving at a slower pace. And while the politicians don’t care, the fed will put the break on cuts when they see all the govt stimulus.
Did I misunderstand your article on 8/13?
You understood the article correctly.
I expect CPI month-to-month to accelerate for August, as it already did for July, and as I mentioned in this article, I expect the Fed to “look through” that acceleration as “temporary” — and they may be right, and they may not be right.
The tenor of Powell’s speech was: no panic and gradualism, unless the labor market tanks. I expect the Aug jobs report to bounce back. So maybe a Sep and Dec cut of 25 basis points each, and similar next year.
We’ll get more info before and after the Sep meeting. And yes, there may be some disappointment out there with that pace.
The inflationary fiscal and economic policies proposed by both presidential candidates (they’re different, but they’re both inflationary) are a big upside risk to inflation. Those policies would be on top of the inflationary policies of the current White House that the next Presidents inherits. This could be messy, in terms of inflation.
I’m curious about the euphemistic term “look through”.
Does it mean “ignore the facts and go ahead and do what one wants to do, id est carry on a politically expedient, but harmful action?
That could be an option. But inflation is a strange creature. For example, a spike in energy costs can cause inflation to spike, and then plunge again as the energy price spike collapses. This is what happened in 2008. By mid-2008, CPI had spiked to over 5% as a result of an energy price spike (WTI briefly hit $150), and then the price of oil collapsed, and CPI plunged and was negative a year later (-2%). The Fed decided to “look through” that price spike, and that made sense.
In late 2020 and through 2021, it was a very bad idea to look through spiking inflation – and by January 2022, I called the Fed “the most reckless Fed ever.” (you can google, LOL). But then the Fed at first gradually and then strongly adjusted its policy.
Man power bills are ridiculous here in NC now.
I feel like I’m paying double.
“Man power bills are ridiculous here in NC now.
I feel like I’m paying double.”
You are, but Weimar Boy Powell will “look through” that in order to preserve the wealth of his buddies. His inflation entrenchment operation has been a wild success.
If PPI will be bigger because of the base effect, everyone should understand the reason. At least I hope so.
The current market seems like a Heaviside unstable disequilibrium that will resolve, eventually.
The asset prices are at the same level as they were during the full bloom of the monetarist experiment, prescribing zero pct interest rate policy as the cure for a disease that didn’t exist, except the obvious one, greed.
I’m talking about the discrepancy between the asking price for assets and the offering price. Like an earthquake forcing equilibrium or the kinder, gentler, the most expensive option, QE.
The market will equilibrate.
Homes, stocks, etc.
The Federal Reserve’s communication has been confusing & muddled, at least to me, this year.
Presumably there’s a certain number of “guaranteed” rate cuts simply for disinflation & normalization even if the economy holds up, and a certain number of cuts reserved as backup ammunition only for a more serious downturn.
The Federal Reserve can either aim for the highest possible rate that doesn’t cause recession, or the lowest possible rate that doesn’t reignite inflation.
Between the maximum & minimum is probably at least 1 to 2% difference in rates. Which end is the FOMC aiming for? Nobody knows. Powell doesn’t give much insight into the dove vs. hawk inner dynamics on the committee.
In many countries their FEDS are almost not communicating at all nor they care.
Well, I think that there has to be a recession in order to reset the industrial structure, out with the old in with the new.
Recessions are not inherently malignant. In fact, sometimes, it is the only way to determine the necessary paradigms that define our future. It sure as hell isn’t some silicon valley surveillance as they run out of new ideas and have turned too an authoritarian police to make they’re economic projections.
Yeah… the Dot Plot thing really undermines the Fed’s communication strategy. For two December’s in a row it has been WILDLY inaccurate and Powell (and others) in December 2023 had to “walk it back” with later signals to the markets… which largely didn’t want to hear that from them.
The Fed needs to jettison its doctrine of constant forward guidance. It’s hugely counterproductive, it has mired the Fed in policy errors that it otherwise could have nimbly corrected, and it belongs on the ash heap of history (along with QE in anything short of a nuclear holocaust).
(along with QE in anything short of a nuclear holocaust).
ROFL…
Seems very plausible at least 3 cuts this year as the market has that baked in and the effects of rate cuts take time to show up in the monthly numbers. Predicting what happens based on who gets elected feels like MarketWatch clickbait and if it does or does not play out there will just be more clickbait created. 3+ cuts might get the housing market moving by Spring but anyone’s guess how they will play out and who will benefit.
They will keep inflating until we are all homeless.
Who are “they” and “we” as plenty of people on this site bought many houses especially during the great recession for cash and reaping the rewards. Without creating judgment what is a healthy society to do with respect to sheltering people within it? Studies have shown that many people do this simply because they are not comfortable they will have income in their later years, which is a fear for many. While home ownership has remained relatively steady for sometime, outright owner(no mortgage) is 3rd lowest among developed nations. The American dream is to have an affordable 30 year mortgage!
no, the american dream is to have an affordable house. the 30 year mortgage makes homes unaffordable, not the other way around, as it drove prices up.
Franz G,
Was utilizing sarcasm, perhaps ineffectively. Even with mortgages we still rank 18th out of 29 in ownership according to OECD 2022 report. We are really only 3rd because the 1st and 2nd ones have long mortgages but huge deductions and in some cases interest only. Interesting report. I don’t compare to home ownership in ‘developing” countries as not really a good comparison but usually much much higher.
Why do you have a problem with everything I say? If you don’t understand what I was saying, I really can’t help you.
The rat is an intelligent, social and emotional creature that deserves respect and compassion.
The Powell show is a flop. As much would have been accomplished, possibly more, if Powell had stayed home and done nothing.
5.25 to 5.50, that’s a low bar, now he’s going to inch back a few points and the economy will miraculously recover because of this?
The ginormous US economy turns with a flip of Powells flipper.
“5.25 to 5.50, that’s a low bar,”
That’s ridiculous. The Fed has the highest rates of any developed economy. And they’re substantially above all inflation metrics we have. CRE has totally blown up and is in a deep depression. The housing market has frozen. Thankfully, they’re not a big part of the economy. So there are real consequences. Those rates are not nothing.
Overall, the economy is still doing amazingly well despite those rates — that much we can say. And that’s a good thing because you don’t want 10 million people losing their jobs.
Franz I think blackrock figured it out.
See people used to be able to live in their houses and pay the mortgage.
Blackrock thought, “hey not so fast! These people get a leg up!”
Now to save for a house you have to live and rent from blackrock.
Problem solved! 😉
HT
“The rat is an intelligent, social and emotional creature that deserves respect and compassion.”
Save your sarcasm. Looks like you have enough problems with your own comments. 😂🤣😂
Seems like US economy is ran more on momentum, emotions and jaw flapping than anything.
A point up… a point down…is but music played to calm or excite the beast.
If the rates can’t be raised higher than a 5.50 without damage…. than that means our goose is just about cooked….nice and plump…. everything is at capacity…jobs, housing, market. (Actually seems like a good place to be?).
But still if Powell had done nothing inflation would have came down by itself, it had ran it’s course, Powell standing tall with his teeth in his mouth produced little to nothing.
“If the rates can’t be raised higher than a 5.50 without damage…”
BS. No one said that. But there was no NEED to because inflation was coming down, and has come down a lot with 5.5% rates, which was the purpose.
Your conclusion, based on a foundation of BS, is also BS.
Desert Rat,
This is an area for discourse. I will ensure I don’t respond to your future comments since clearly it agitates you.
Thank you. Meaningful and relevant discourse is always welcome from commenters and doesn’t agitate me.
We could have bought the S$P, currently selling for ~5300. a year ago for 3300.
Had we had the tools, the foundation of why we educate our young.
Inflation is a weapon of mass destruction for most people.
I 2nd the thank you… I learn more reading Wolf’s excellent data driven analysis and opinion.. and NO politics… then anywhere else. While economics has it’s emotional elements when all is said and done it’s in the numbers :)
“The Fed will likely “look through” a bad CPI report for August”
Of course they will. They are hellbent on destroying the middle class. I’ve had it. What happened to these interest rates are normal? What happened to 2% inflation target? Well, it’s not 2%. Services are no where close to 2%. They can use the bullsht excuse all they want about their concern about the labor market. It’s a crock of sht. I’m on board with anyone who will attempt to end the Fed. I don’t recognize this corrupt country anymore and don’t care what happens to it.
In the US, middle class is thrown around generically enough, mostly used by politicians, to capture most voters. Admittedly there are various definitions but to my knowledge nothing that is used that has any real meaning, and if one did, what would it be and why would the middle class be more or less important than the “lower” classes, which really isn’t used as everyone wants to see themselves as middle class or aspiring to that. I prefer more simple definitions like working class and ruling class with obvious distinctions within those.
Fair enough, but not really important in what I was trying to convey. You knew what I meant. Many in the lower classes get welfare and other subsidies. Middle class gets very little except a tax bill, so there’s that. When you write your comments, you are free to use the words you prefer.
Desert Rat
“They are hellbent on destroying the middle class.”
So, 65% of households are homeowners, and that’s a big part of the middle class, and they HUGELY benefited from the Fed’s 0% and QE.
A big portion of American households own between some and a lot of stocks, including in their 401k, via stock compensation plans, in brokerage accounts (how do you think all these huge brokers make their living?), and indirectly such as in their pensions. That’s a big part of the middle class. They HUGELY benefited from the Fed’s policies.
But the Fed’s policies through 2021 have hurt other people, particularly fixed income investors, savers, and retirees living off fixed incomes.
Your “middleclass” thingy is just dumb BS. It’s not the middleclass the Fed hurt — a big part of them hugely benefited including homeowners.
It’s specific groups that the Fed damaged — and they’re not all middle class.
Inflation saps the purchasing power of assets across the board, so asset holders got hit. So they hope that their asset prices rise to keep up with inflation, and some have and some haven’t.
Inflation saps the purchasing power of wages. So workers hope that their wages rise faster than inflation. That was not the case in 2021 and through mid-2022, and workers fell behind. But then wages started going up faster than inflation, and they continue to go up faster than inflation, and workers are catching up.
“But the Fed’s policies through 2021 have hurt other people, particularly fixed income investors, savers…”
Wolf, how do higher rates hurt savers?
“through 2021” = 2008 through 2021 = 0% and QE.
Desert Rat, prior to WW2, home ownership was below 50%. Prior to the creation of the FED, Home ownership was below 40%.
So it looks like the Fed and the policies and banking regulations for mortgages has probably been a huge success in increasing home ownership?
prior to the 1930s , you could really only get a loan for 5 years
“But the Fed’s policies through 2021 have hurt other people, particularly fixed income investors, savers, and retirees living off fixed incomes.”
And half of 2022.
And their policies from 2025 forward appear poised to do the same again.
“And their policies from 2025 forward appear poised to do the same again.”
That’s wishful thinking on your part. Not happening.
It’s exactly the opposite of wishful thinking, Wolf. It’s dread.
I hope I’m wrong.
Weren’t you one of the hardy souls here who also “dreaded” the resumption of 0% and QE after the bank failures in March 2023? Instead we got more rate hikes and lots more QT (ongoing). Things have changed. Now we have inflation, and the old method of QE and 0% created lots of problems (including with the banks, LOL) that have since then come out of the woodwork.
“Weren’t you one of the hardy souls here who also “dreaded” the resumption of 0% and QE after the bank failures in March 2023?”
No. You’ve got me mixed up with some other hardy soul or souls.
And before you ask, I also was not one of the hardy souls who insisted that the BTFP, enacted at the same time as the regrettable uninsured-depositor bailout, *was* QE. I remember there being a whole lot of those hardy souls here and elsewhere, lol.
Thanks for straightening me out. I need to replace my memory with AI.
Will the middle class not destroyed by technology?
Can a small business owner compete with Online shopping? Will administrative jobs not impacted by AI? And so on?
In the past many middle-class jobs have been added to make decisions closer to working lines. Software (coded rules) is reducing this demand and in parallel creating more higher-paid jobs in technology.
In my limited view, we are living in times where the middle class is splitting up into many lower-paid jobs and a few higher-paid jobs
But you don’t need conspiracy to explain that. It has happened in history multiple times.
The best use of “AI” (software coded rules) that I found was to filter out all emails from other AI directly into the trash basket. Huge time saver.
Sounds like an application of I, not AI.
DR:
As one who used to discuss extensively the definition of ”middle class” as part of curricula, etc., IMO that term IS and always has been somewhat ambiguous and consequently frequently at least misleading and likely intentionally.
While it is amusing and entertaining to consider the usage in Gilbert & Sullivan’s light opera, ”.. bow bow you lower middle classes ..”, that too is meant to justify the continuing degradations of working folks as opposed to the leisure classes, similar to today.
Others have used the distinction between ”lower middle class” and ”upper middle classes” as strictly a financial differentiation, including the term ” genteel poverty” to describe the former…
Good luck trying to make anything clear using ill defined buzz words that may and certainly are understood very differently today by different folx, especially between those getting all their news on their phone and us older folx who still actually read books and Wolf’s Wonder.
The point of my comment should have been quite obvious to someone who isn’t a concrete thinker. The fixation on middle class instead of the point of my message is astounding. If the books you read lead you to fixate on something so irrelevant to the article above and unimportant in a comment section, you can keep your books. Just because you read a book, doesn’t make it fact. Get over yourself.
Stick with the classics – bourgeoisie and intelligentsia. And then there are upper echelons of the leasure class, like commenters on this site for example.
andy, Vintage VNvet, Desert Rat, you will be amused and enlightened by reading, Theory of the Leisure Class, by T. Veblen. (I’ve recommended it before, so forgive the repetition.)
Kinda argues the case that the Buddha was making.
I think that as we get older, and move closer to “the light”, it correlates quite well to the amount of testosterone in our system.
Unlike Wolf (and I am very hesitant to characterize his position), I don’t believe the Fed has all that much to do with the inflation most of us have to deal with. Their manipulation of interest rates do effect inflation in assets like stocks, bonds and real estate, and Bernanke loudly stated that goal (wealth effect) when he started QE. Certainly housing price inflation effects us. But that can be attenuated better by statutory regulation to inhibit flipping and speculation than by such a blunt instrument like interest rates. The current bout of inflation that we do have to deal with is a direct result of the world’s reaction to COVID shutdowns (market dislocations) and the resulting media efforts to inform the population that they should expect inflation, and so they did and businesses took advantage of that. Finally, the Fed does serve a mission-critical function: to be the lender of last resort to over-leveraged, partial reserve banks. Without which, the world would be in constant fluctuations of euphoria and depression as it was prior to the creation of the federal reserve.
I agree, Kent, with most of what you wrote. But, “…and the resulting media efforts to inform the population that they should expect inflation…” is something I do not recall. If anything, people were fearful of an economic collapse and were not “looking through” the pandemic expecting anything, inflation included.
The media hype about inflation came after the reopening of the economy. The lack of chips for autos caused supply to crash and prices to jump. Similar things happened with all products that had supply chain issues. Once this started, the media began talking about it almost everyday (and some continue to do so). This media hype caused people to expect inflation, and companies with no supply chain issues jumped on the price increase band wagon just because they knew the general population was expecting them to.
Kent,
Your comment gets the “stupid comment of the year” award. Kudos.
How does Mexico sound? Interest rates > 10%, female presisdent, you can live in a nice pueblo sipping some good tequila and enjoying some goat birria with other ex-pats. You could rant about the awful Fed while you watch thousands of people pass through your place of living on their way to the U.S. to seek a better life. Have fun!
An estimated 1.6 million Americans live in Mexico, a number which has been steadily increasing. Towns in Baja California are filled with US and Canadian families. Residents of some Mexico City neighborhoods are complaining that rents are increasing due to the newcomers.
If the FOMC does cut rates (even only 25 basis points), that’s a huge win for those who have been fighting higher interest rates since the beginning. I think the 1970’s is playing out again. While inflation has come down, how long has the FFR been restrictive? A year or so. Where are Reserves at? Reserves have been increasing. I don’t think there’s enough evidence for a rate cut. I wouldn’t be surprised if there is some arm twisting in the background. Happened in 2019, and happened in the 1970’s with Arthur Burns.
Yes, possible arm twisting after elections. One candidate wants to boss the FEDs. Not mentioning the name.
At what point do we stop calling the bond market “smart money”? They’ve been as wrong as the Fed in forecasting anything. All we have anymore is “dumb and dumber money”.
🤣🤣🤣
Bonds always do bad in steep interest raise environments.
Prob should sell if it happens again.
We’re heading into a great bond environment or at least good.
If you want to buy and hold bonds for yield (maybe you’re a life insurer or a prudent retail investor, and you intend to hold to maturity), high and rising interest rates are good, and low and falling interest rates are deadly.
If you want to trade bonds (buy low, sell high), high but falling interest rates are good and low but rising interest rates are deadly.
I’m curious if you think new issue Treasuries over the next 2 years (i.e., during the presumed Effective Federal Funds rate cuts) will be able to offer substantially lower bond interest rates and still get buyers, or will the need for the US govt to borrow increased trillions of dollars still keep Treasury bonds in a ‘respectable’ range as a safe allocation, say ~ 4% or more. Thanks.
Yields are determined by demand. If there is not enough demand at 5.0%, the yield moves up until there is enough demand. That’s what a market does best. And auctions are part of that. Treasury notes and bonds are offered with a coupon interest rate, and at auction, if that coupon rate is too low to attract demand, the bonds sell at a discount, which raises the yield for the buyer. If the to-be-auctioned notes have a coupon that pays $50 a year in interest on a $1,000 bond, and there is not enough demand, the bond will sell for a lower price, maybe $980, and the buyer, who will get $50 a year in coupon interest, ends up with a higher yield ($50 on a $980 investment). And when the bond matures, the buyer gets face value ($1,000).
So the only question is how high/low yields will go to meet demand.
👍👍👍
And crypto?? Is that “dumbest” money? Is there a 4th degree of dumb, like maybe having the United States set up a cryptocurrency reserve?
Or is that just a way to broadcast the idea, buy calls, then puts, and make even more money when you can’t spend a fraction of what you’ve accumulated?
the fed balance sheet is below where it was in june of 2020, when the s&p was half of what it is now.
the current asset bubble is not due to qe or interest rates but due to investors believing the fed will do whatever it takes to prop up asset prices.
dropping the fed funds rate from 5.5 to 5.25 is more symbolic about the doing whatever it takes than anything else.
FG, the “investors believing the fed will do whatever it takes to prop up asset prices” is true of every central bank. Can’t blame them, really. They’re just trying to make the trains run on time.
Can’t blame them too much at all, because the markets are basically right. Look at how far the Fed were willing to go in response to the banking nanocrisis in early 2023. Then look at what markets did right after that, and continue to do. Message sent, message understood.
“The Fed will likely “look through” a bad CPI report for August. If inflation accelerates further month-to-month from the month-to-month acceleration in July, combined with a strong bounce of nonfarm jobs in August, then the Fed can decide to “look through” that acceleration of inflation, as it had “looked through” the spike of inflation in early 2022. With regards to the 2022 episode, Powell said, “it can be appropriate for central banks to look through a temporary rise in inflation.” So this time around, if the CPI report is bad, the Fed will likely cut anyway in September, perhaps with some dissenting votes.”
Oh yeah, more “transitory” BS to juice asset prices for their wealthy buddies while pinning the cost on the backs of the working class and the poor. These people are crooks.
Not for the first time do I have the thought after reading this article that I just need to delete twitter and wait for wolf’s articles. I’d free up hours and hours in my life!
We deleted twitter when the petulant toddler took over. At the same time, we shut off the Television. We now exist on reading a good book at the library, Getting free DVD movies at the library, and reading good periodicals at the library. And, checking in on Wolf.
Life isn’t just good; it is GREAT!
I am glad to know I am not the only one who lives that way! :D
@Louie: A petulant toddler can be difficult to handle but they can be cute as well. The guy who took over Twitter is plainly dangerous and sometimes weird as heck.
“The upside risks to inflation have diminished. And the downside risks to employment have increased.”
“as long as inflation expectations remain well anchored, it can be appropriate for central banks to look through a temporary rise in inflation.”
FOMC is going to ignore High inflation readings in coming months.
Should they do it? NOT.
Will they do it? I guess answer is most probably YES.
One side when they say increase in Unemployment rate is not because of elevated layoffs, if that’s case why to rush to reduce rates.
After this Jackson hole, I don’t hope FED will HOLD rates in Sept 2024. I am thinking they will do 2-3 rate cuts and then take a Pause to see.
In July FOMC meeting minutes, Members discussed how Market is expecting Rate cuts and all BS.
Volcker used to say FED’s job is to ACT and Market’s job is to REACT. Lets not get that mixed up. I dont think current FOMC has that much guts.
First of all Wolf, your Research in Macro & Financial Markets i put at or above practically anyone out there, and the amount of in depth research and quality in Micro Markets is very impressive as well, to have both of these and the amount of research you publish ( i’dont know if you also have a team of researchers) is in a sense amazing. Your a SuperStar Researcher.
There is no Reason for a Interest Rate Cut by the FED ! ,
It is either….
(1)The Fed is trying to help the Democrats win the election and that will also have the effect to will help Powell keep his Job, because as we know Crazy Trump will replace him as he already said. (Note: Trump as president would be worse he would decrease interest rate to hell if he could) ,
or (2) the Fed has fallen to the Pressure of Wall Street to boost Markets and there Sales of Bonds / Loans ( the lower the interest rate the more Corporate Bonds and Junk Bonds, and Mortgage Backed securites could be sold boosting there revenue and commission and bonuses ).
or (3) The Fed Reserve is trying to claim a Soft Landing too early , so that they can say they averted a recession at the same time decreasing inflation, so they can be put down in the record books, so its more about ego, than what is best for the Economy
Even if there is a Interest Rate Cut in September, from a Rational Economic Standpoint, it would not make sense to put in 2nd Rate Cut , If you look at it Globally,
– The Euro-Zone has been suffering from Slow and flat to negative Economic Growth the last 2 years, there Inflation Rate is lower than here in the US, they Cut in June , but they did not cut July citing high inflation in services segment
– The UK has also been experiencing slow to flat/negative economic growth the last 2 years, there nominal inflation rate is lower, but there core is the same as the US. They are citing high Services Inflation and our very cautious about decreasing interest rates.
In both cases of the Euro-Zone and U.K., they are at least experiencing slow economic growth and have experienced negative economic growth in the last 2 years.
Meanwhile the US Economy has not experienced that, we have had solid-good economic growth the last 2 years, and the US Economy like the Euro-Zone and UK Economy is experiencing Higher Inflation in the Services Sector.
Any further Cutting of Interest Rate after September in the US would further accelerate the Inflation in the Services Sector. If there was a cut in September (iif give them the doubt of political election pressure in Novemeber), I would assume the Federal Reserve would have the Logic and Reasoning to not do a 2nd cut in December. But than again the Fed does not always follow Logic and Reasoning, they proved that on Friday in Wyoming in Powell Speech.
So the the Markets are asking and pricing for the Fed to do 50 Basis Points cuts at each meeting, when Other Economies (Euro-Zone/UK) in the world which have actually experienced slow to negative economic growth have done 25 basis points. Makes no Sense, What are they Smoking.
Your #1 is internet goofery. Think about the timing: If the Fed cuts in September, it’ll be six weeks till Nov 5 election day, and that’s absolutely too short to have any impact on the economy. And one cut doesn’t have any impact anyway. If they had wanted to help Democrats, they should have started cutting months ago, and multiple times. But they didn’t.
What potentially helped Democrats is that the Fed brought inflation down a lot, from the crazy levels in 2022. That 8% inflation, if it persisted today, would have been a huge vulnerability for Democrats — and rightfully so.
If a failure to cut in September leads to even a short term fall in the markets that is bad for the party in power…
Right, I think it’s more psychological.
A rate cut six months before the election won’t *actually* have much affect, but it will be *perceived* as such by the public.
But to Wolf’s point, the Fed shouldn’t actually care about the election – after all, the Fed is supposed to be independent and apolitical. If they feel the time is right to cut rates, an upcoming election shouldn’t matter.
However I still don’t agree that the time is right fo rate cuts.
The stock market falls when the Fed starts cutting rates. Look at 2000 and 2007. If they begin to cut rates now it’s because the economy is substantially weakening and stocks will follow, just like before. A cut in September means the economy is already diving, not good for the incumbents.
But see the Stock Market is vulnerable, but not really fundamentally, but by the Markets Psychology as the Pushers on Wall Street have been crying for Multiple Cuts the whole year and looking Stupid. So if there is no Interest Rate Cut in September, that knocks out really down to 1 Possible Cut left (in extreme case possibly 2).
From a Price Action standpoint the Stock Market is around Record Highs, Just from a correction it can go downhill for a short period of time. By doing an Interest Rate Cut in September that more assist in the Stock Market to continue going up before the November Election.
A Economic Data Point i track right now is the Money Supply, the Money Supply has been increasing even with Higher Rates ! since October 2023 . The Velocity of Money has been increasing Since 3rd Quarter of 2021. Both of these things are a recipe for continued Higher Inflation . By doing even 1 Interest Rate cut, that in effect increases the Money Supply, it adds more Fire to the Smoke. So 1 Interest Rate Cut does matter whether Short Term or Medium Term is debatable ,because of current Economic Environment and Money Supply Dynamics, i would argue even 1 Cut will matter in the Very Short Term.
“Think about the timing: If the Fed cuts in September, it’ll be six weeks till Nov 5 election day, and that’s absolutely too short to have any impact on the economy.”
It’s all about Wall St. You know that, Wolf. A rate cut can pump stocks into the stratosphere immediately. C’mon…..
JP behaviour is quite sane and logical. Even in the context of elections. Trump recently declared to hand twist FEDs when elected. So logically to save the economy, makes sense to support dems (but he seems quite neutral). Even the promises by dems make sense. I would also allow more spending and minimize Trump election since this is a grave danger to American democracy and constitution. USA destruction. Is that not clear?
IMHO,the Federal Reserve should wait until America knows what group of clowns the voters elected…
Since each candidate has a inflationary agenda,the Federal Reserve should carefully examine their respective Budget proposals for the next FY…
Well said. Government over-promising in any direction is inflationary. Unfortunately, at least the perception is, the broad electorate demands it. Sobriety and prudence doesn’t get one elected. So it circles back to the crowd’s deficiencies, again. Tons of people have conspiracy theories about the elites. I also have them about the masses. The Founders looked nervously in both directions and tried their best to minimize the tip too far either way.
James Madison argued for the creation of an electoral college because he feared the masses, that populists were too easily conned by popular and superficial opportunists. The electoral college was his idea of a reservoir of honorable, wise and responsible people who would prevent a populist result.
But, as we saw, the electoral college fell on its face in 2016.
I agree with Wolf that CPI will increase, however, the Fed is wrong, and they know they are wrong. The increasing costs (inflation) is not going to abate. Jerome is Arthur Burns 2.0, but in a very different country with an unsustainable debt load.
Hedge Accordingly. (hint; so long as manufacturers keep making real things, get long commodities)
@WB: I think you’re right that the Fed expects inflation numbers over the next 2-3 months to be on the higher side. The Fed is not wrong, Powell may just be just dangling a carrot to the interest rate cuts crowd to buy some more time.
Just like they have been able to drag out the interest rate cuts since late last year by having the various Fed governors talk from both sides of the mouth, I think they may drag this out till the end of the year and see what happens.
It would be crazy to cut rates by even 25 basis points, then have to revert to no cuts or even a hike.
That will make them look even more clueless than they actually are. Not a good look at all.
Good points. The markets won’t give them credit for satisfying the markets’ desires if they have to turn around and undo it all later. The markets will just blame the Fed for getting it wrong.
If it Trump ever wins an election interest rates would go to zero because of his real estate empire. I think Trump will get trounced in the voting.
Oh Tony, come on, be an optimist. If Trump wins, he says we will never have to vote again. That’s gotta be worth something!
Since 2000, the government almost doubles the debt every 8 years. It does not matter which clown show reigns supreme.
Fairly obvious or potentially clueless statement, as I have learned the line is narrow between the two. While inflation has come down to a degree, and wage increases have helped, it can’t be too long(less than a decade, two at most) before a significant event occurs(another pandemic, major international event, significant worldwide recession, etc) that will require a massive injection of Federal money to stabilize things. Many in the US government already want to increase military spending because of the Chinese “threat”. What possible hopeful trajectory is there is US can’t control spending in the good times and provide essential services for society when the tide will enivitably turn? Printing money again in the future seems inevitable we don’t successfully have the means to target those most in need(my unneeded COVID checks went to family members overseas who had no safety net as I was fully employed throughout it). What does seem obvious and backed by observation is that our government has no desire to reign in spending and the ideas they do have generally target those who can ill afford them(block grants to states, increase in retirement age, SNAP benefits and so on). Would be nice to see something resembling a path towards hope for the future rather than the inevitable and unnecessarily bumpy roller coaster our system creates.
Howdy Youngins Relax, because we have such a long way to go still. Took a couple decades last time and with all the Govern ment spending , I doubt things will settle down for 20 to 30 years this time. Don t be divided by blaming who did this. THEY all did this to US……
It’s always THEY. It’s never us lol.
Howdy Escierto. No matter who wins in Nov, spending will increase.
Good Luck
I vote “bubba” for office of “Dept of rural squirrel and conservation”.
That’s right bubba, we have a long way to go, it’s us against them, I’ll gather the racoons and other various rodents for our protest march.
Insanity bubble update: S&P 500 market cap now above $47 Trillion again. That is not all US equities, just the S&P 500. $5875 for every man, woman and child on the planet. $47 Trillion is more than $10 Trillion higher than the national debt. Total US equities to GDP ratio is now 194%, the highest it has ever been. The S&P and the Nasdaq have had just one down month since last October, forming charts that resemble Mount Everest.
Reality Reminder: How much is a Trillion?
If you could travel at the speed of light–186,000 miles per second–it would take you 62 days to travel one trillion miles.
If you could build a stack of $1000 bills (that is correct, one thousand, not one hundred,) it would reach an altitude of almost 65 miles, which is higher than Jeff Bezos’ spaceship goes.
Regardless of interest rates, I am not budging with my call that the S&P is a lock to see 4500 again, and 4100-4200 a coin toss. I am not making any timeframe predictions, I just know that it is going to happen, as all bubbles eventually burst, and the current level/valuation of stocks is irrefutably a major bubble. What occurred on August 5th was proof.
Thanks for putting a trillion in such relatable terms. Next time I am travelling speed of light or travelling way above Earth I will have a solid reference point;).
4500 from here would be a minor correction, a nothing burger. I say sell your cleverness, and buy bewilderment.
4500 would be about 20% down from the current level. That is just my “LOCK” level. I make the odds about 50% for a drop to 4100-4200, and a return to test the bear market low of $350 on the “SPY” is very possible. Not probable of course, but definitely possible. The options “out of the money” probability reflects that. The probabilities are always changing, and anything is possible. When the market takes another big drop–and it will–I see the QQQ getting annihilated.
It was 4,100 within the last 12 months so it’s not a big deal. A public sector deficit = private sector surplus. Look at the graphs of US debt and US equity market cap..it’s basically the same. So I’d expect the increasing deficit spending to translate to higher asset prices over time.
What are you planning to do about it?
“Fed can decide to “look through” that acceleration of inflation, as it had “looked through” the spike of inflation in early 2021.”
Wolf, is that subtle finger-wagging at Powell I’m reading?
You know I’ve defended the Fed in comments here over the past few months, but I just can’t agree with a decision to cut right now. The economy is mostly fine at current rates. Treasuries are selling fine – in fact all this demand for USG debt is pushing rates down and sort of doing the Fed’s job for them.
Inflation has come down a lot on average, but it’s still above target, and services inflation (65% of consumer spending) is still high, and shelter inflation in particular has not come down much lately. The labor market has come into better balance but unemployment isn’t that high, and there’s more supply of workers causing it rather than job losses. I think we both agree here.
In this context, what is the benefit of cutting rates vs holding steady as the Fed has been?
“Rather, the increase mainly reflects a substantial increase in the supply of workers [from the huge wave of immigration] ”
Do these employment surveys include illegal immigrants? If so, this will distort all the government figures. You can’t believe any of it.
Some do, such as the nonfarm jobs report (how many jobs created, establishment survey).
Some don’t, such as the huge downward adjustment we got last week, which was based on state unemployment insurance tax filings by companies; since illegal immigrant workers don’t qualify for UI, they’re not in the UI data, and so the huge downward adjustment would have been a lot smaller had it included the working illegal immigrants.
So good that all the lamdlords feel so secure in there rentals. I hope they have deep pockets and plenty to loose.
A long time ago I owned a dozen rentals in a small northern california town. OWNED! Logging shut down and I almost went broke. No one was buying and few could pay their rent. Courts sided with all the sad family stores
You may think it could not happen, but think CRE. I can drive down my local main street and half of the strip mall junk is empty. I know most of the owners and they are individuals and not funds. Asking prices and rents are too high. Some believe it will all come back and they are wrong.
My parents have owned residential apartments for over 30 years. Nine before Hurricane Katrina and four ever since. NONE of their children have ever wanted to follow in their footsteps on this one.
It is bad enough to be regulating disputes between tenants… but ONE bad tenant can cause enough physical damage to a home to wipe out YEARS of profit. You will hear any manner of sob stories about why they can’t pay the rent… and if they can’t get you to bite on their story then they will tell the story to a sympathetic judge who will give them the benefit of the doubt and stick you with the bill.
It has provided my parents with a lot of additional income and tax breaks over the years… no doubt. But it certainly isn’t all that it is cracked up to be.
Especially since the cap rate is below Treasuries now
Get your broker to buy T bills for you…. would be first guess.
Or buy a Treasury index?
Apparently, Berkshire Hathaway has $250 billion in T-bills. Let’s ask him on how to submit a competitive bid in the Treasury auction.
“on a sustainable path back to 2%”
So I get 2% poorer every single year
Not if: your income goes up more than 2%, your interest income is over 2%, and your other assets rise by more than 2%.
“More than” is key since interest and gains are taxed on a nominal basis…
Grammar Nazi says “Whomever” but otherwise spot on analysis. :)
Grammar Nazi dug a huge pit and plunged into it.
whom = objective case (accusative) of who. Whom did you call? I called him. Also dative of who. To whom did you give the book? I gave it to him.
who = nominative case (subject of a verb). Who spoke? He spoke. Who is in the White House, and whoever is in the White House.
whose = possessive case. Whose house is this? It’s mine.
Helps to learn a language that still has cases, such as Latin or German. Old English used to have cases, but most fell out of use. There are still remnants though, such as who and personal pronouns. Or maybe just pay attention in grammar class?
The biggest problem with teaching grammar is the terminology: subjunctives, antecedent, participle, anaphoric and its opposite, cataphoric, phrase, clause… We’re you careless and created a pleonasm? I think that the most effective way to teach grammar is in the nude.
It’s no wonder that most English speakers hate grammar.
Listened to Wolf Richter as the guest on Adam Taggart’s youtube channel Thoughtful Money. Interesting discussion on how screwed up some of the data is. Is it just limited to employment related data or is it possible that there are other key metrics that are similarly screwy? One thing that comes to mind is the good ‘ole CPI Health Insurance adjustment. And in discussing equity markets; since they have detached from the economy long ago – are they investable at this point?
A way to think about today’s equity market is the game of “Old Maid”. The market today is like a deck, rich with old maids..
If the Fed continues with QT, the money supply will continue to decline, and inflation will probably remain tame. However, with the massive issuance of Treasury securities, interest rates might go up.
Lately, the Treasury has been issuing 4-week, 8-week, and 13-week bills to hold down the rates on longer-term notes and bonds. If they issue enough, the rates for these bills might be considerably above the Fed overnight rate. You might see a Fed Funds rate of 3%, an 8-week rate of 5%, and then a 1-year rate of 3%, a 2-year of 3.2%, a 5-year of 3.4%, and a 10-year of 4%. The Treasury would try to fix this by issuing more longer-term notes and bonds.
But you can’t hold down all interest rates forever. Eventually, something will give.
The more demand there is for borrowing the higher interest rates will be. Econ 101.
Interest rates are lower because they people want safety and liquidity…
Ever thought of that?
Just watched your interview with Adam Taggart. Such good stuff as always. Thank you!
Question: How does one ‘T-Bill and chill’ if outside the US?
Thanks!
Get your broker to buy T bills for you…. would be first guess.
Or buy a Treasury index?
Apparently, Berkshire Hathaway has $250 billion in T-bills. Let’s ask him on how to submit a competitive bid in the Treasury auction.
“It’s as if they wanted to flip the bird at the economic establishment.”
A consummation devoutly to be wished — couldn’t happen to nicer people, really …
Rate cuts now are inflationary regardless of who wins the election.
I have repeatedly said that the Fed wouldn’t change rates until their November meeting right after the election so as to avoid being seen as playing politics. I included a couple of caveats but that has been my position ever since the famed December 2023 “Dot Plot” came out.
Powell now seems to be signaling a small adjustment (downwards) in September. I presume that he was polling the FOMC members privately before giving his speech in Jackson Hole last week and thus is signaling what he expects they will do in September.
So why the change? My guess is that the downward revision in the job growth numbers is the cause. Being off by one-third is a BIG MISS. Granted it is in the “growth” of the job market and not in the OVERALL employment numbers. Still that metric is a signal of the direction of the labor market and the miss was obviously big enough (and long enough… an entire year from April 2023-Mar 2024) to give the Fed pause as to whether the economy is cooling faster than they think it is.
So I am going to switch my assumptions a bit. Instead of thinking there is a 20% chance of a small rate hike in September and 80% chance of NO hike… I will go with the 80% chance of a small hike and a 20% chance of no hike. They may still decide to hold off until November… the data continues to be all over the place… but they have held off for long enough now that it will be hard for political partisans to get much traction by blaming them for what happens in the economy in the last six weeks of the campaign.
@SpencerG: Hike? Really? Even Wolf is talking about a small cut (I am guessing perhaps 25 basis points) and the rate cut maniacs are now salivating over a possible 50 basis point cut.
I would be happy if the Fed kept its sanity and deferred the rate cuts to December or beyond.
Oh… I am sorry… I meant to say “cuts” not “hikes”… Powell was VERY clear what direction he sees the movement of rates.
Wolf, please revisit Newton’s Principia Mathematica, you may find that faith is not exclusively for ‘church’. And to anyone well aware of times we’re living: The Economic Decline of Empires.
It looks like consumers were not the only drunken sailors. The question is whether or not the crew of “the good ship transitory” have sobered up.
Wolf, you mention you see CPI Inflation Statistics spiking in the next report for August and the next couple of months . What is your expectation for the CPI Inflation Number for August ?
Also, the ” Cleveland Fed Reserve ” as Inflation Forecast “NowCast” is estimating the August Nominal CPI Inflation to be lower at around 2.6 %, but the Core CPI remaining the same at 3.2 % .
Link : https://www.clevelandfed.org/indicators-and-data/inflation-nowcasting
1. I was talking about the month-to-month number, not year-over-year (annual).
2. I wasn’t forecasting August CPI. What I said in the article was this: “If inflation accelerates further month-to-month from the month-to-month acceleration in July,” … and … “So this time around, if the CPI report is bad, the Fed will likely cut anyway in September, perhaps with some dissenting votes.”
Okay. Do you think the year to year will likely spike ?
It depends how bad the CPI report is, if the yearly spikes in the 2-3 percentage points or more, they would be very foolish to cut a interest rate, cause the risks only increases while the fall and winter spending season begins. The best hedge for them to not loose credibility would not cut in that scenario. But they put themselves in a unique situation with extra dovish tone that Powell did on Friday at Jackson Hole speech, which was a huge mistake.
Cat litter cheap brand $3.50 two years ago spiked to $6.50 in ’23 just this week is now $6.99 –inflation is still hot