There is strongly divided opinion on whether the Fed’s decision to raise 25 bps this week was the right thing to do. What should the Fed prioritize? Financial stability or prices of goods and services? The Fed chose the latter. However, Powell added he does not see rate cuts in his base case for 2023. However, that’s not what bonds are pricing in. They see the Fed cutting rates by a further 100 bps this year. A reckoning is coming… one of them has it wrong.
"Inflation"
Fed’s 2% Inflation Goal: A Long, Slow Fight
Another month, another hotter than expected inflation report. This time it was one which the Fed focus on: “Core PCE”. Expectations were for 4.3% YoY – it came at white-hot 4.7%. Where is the problem? Simple… services. And until we see unemployment tick higher… core services inflation will remain sticky. The Fed has a long fight on its hands… and the market is only recently connecting those dots
Bear Market Rally? Or Something More?
About 100 of the 500 S&P companies have reported Q4 2022 earnings. TL;DR is they are ‘average’ at best. Most have barely met already lowered expectations. What’s more, forward guidance is weak. However, the bulls are betting on inflation continuing to plunge forcing the Fed to cut rates later in the year. I’m not yet prepared to support that thesis… with services inflation still running at 5.2%. There are some signs things are improving.
Peeling the Inflation Onion
Fed President John Williams uses the analogy of an onion when describing inflation. For example, the outer most layer consists of commodities. The middle layers consists of goods. However, the inner most layer – its core – consists of services. And it’s services inflation which generates inflation inertia. And that’s the mechanic which the Fed are exclusively focused on…
For a full list of posts from 2017…