Powell Rocks, Rolls Markets
The old Deadhead struck a seemingly discordant tune on Tuesday.
Stocks were all over the place and yields surged on Tuesday in a topsy-turvy trading session made that way by Federal Reserve Chair Jerome Powell.“The more recent data show solid growth and continued strength in the labor market,” the most interesting central banker in the world said during a moderated discussion with Bank of Canada Governor Tiff Macklem at the Washington Forum on the Canadian Economy.
Those same data reveal, however, “a lack of further progress so far this year on returning to our 2 percent inflation goal.” In other words, the economy is too strong to cut rates right now.
“The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence.
“If higher inflation does persist,” Powell said, “we can maintain the current level of restriction for as long as needed.”
There’s slim to no chance of a rate cut in May or June, though the futures market is pricing in roughly even odds of a quarter-point move in July.
Chief investment officer Lori Heinel also noted that policy works with a long lag and that the quality of recent incoming data has been low. “The overall inflation picture supports a cut,” Heinel said.
Sahm noted first that the Personal Consumption Expenditures Price Index for March is likely to look a lot better than the Consumer Price Index. Core PCE is the Fed’s preferred inflation gauge.
Sahm also notes that “what’s left in the fight against inflation is far more concentrated than in 2022” and that “some of what’s being bemoaned as ‘sticky’ inflation by commentators is some inflation settling in at sustainable levels.”
Sahm, now the chief economist for New Century Advisors, also underscored that the inflation problem has narrowed to areas including shelter and auto insurance where the Fed’s tools are not suited to the challenge.
The risk the Fed runs here is that holding rates at the present level or raising them puts the economy into recession. That would surely reduce demand in areas where monetary policy does have an impact and reduce overall inflation toward the 2 percent target.
But, as Sahm emphasizes, hawkishness may not solve the problem as it now stands, and it could create new ones.
