Let’s Count It Down to CPI Day
Our data dependency is paralyzing right now.
For much of the last hour of trading on Monday afternoon through to the close all of the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite were flashing the Daniel Simpson Day “zero-point-zero” level for their respective intraday percentage changes.Only the Russell 2000 had shown itself, rising 0.5 percent, according to Koyfin.com.
The mystery here, if you will, is not the infamous “Animal House” fix-it man’s whereabouts but merely Federal Reserve Chair Jerome Powell’s intentions.
When Powell spoke at the Stanford Business, Government, and Society Forum on April 3 he reiterated the importance of inflation expectations. It wasn’t the first time Powell has said he wants to see that key indicator trending lower.
In fact, when the Fed announced the first move in this most recent rate-hiking cycle – 75 basis points – the chair framed it in terms of inflation expectations.
The central bank’s biggest single rate hike since 1994 was meant to anchor inflation expectations. “Expectations” were a key factor that held inflation at a higher-for-longer level in the 1970s.
At the press conference following that big June 2022 move that took the fed funds target range up to 1.50 percent to 1.75 percent, Powell identified as one of the factors in the Fed’s decision to move ahead with 75 basis points what it saw in inflation expectations.
“Some indicators of inflation expectations have risen, and projections for inflation this year have been revised up notably,” he explained. “In response to these developments, the committee decided that a larger increase in the target range was warranted at today’s meeting.”
As James Lee, Tyler Powell, and David Wessel of the Brookings Institution noted at the time, a few days before that press conference the University of Michigan’s preliminary reading on long-run inflation expectations had moved up to 3.3 percent from a range of 2.9 to 3.1 percent. It eventually came in at 3.1 percent.
So, paraphrasing Powell from June 2022, it’s important to understand whether the Fed’s approach has helped ensure that longer-term inflation expectations remain well anchored at 2 percent.
The trend, courtesy of Josh Shafer of Yahoo Finance, looks good.
“Data dependence” is tough right now because the incoming data are not conclusive for anyone’s narrative case right now. We had another expectations-beating “blowout” headline jobs number, but the rate of wage growth slowed.
Investors, traders, and speculators await 8:30 a.m. ET releases of Consumer Price Index data on Wednesday and Producer Price Index data on Thursday, despite the fact that they all know the Fed’s preferred inflation gauge is the Personal Consumption Expenditures Price Index.
The quest to cure uncertainty is what life is. (And, not incidentally, economy is about life.) So, if that quest is burning for you right now, take a look at the inflation expectations data. The New York Fed conducts a similar survey to the one relied upon by the Brookings folks (and, apparently, Jerome Powell and company too).
Its report for March, released on Monday, also showed signs of stability, with the median one-year inflation forecast steady compared to February at 3 percent. The three-year expectation was 2.9 percent, the five-year 2.6 percent.
We’ll have more on inflation as the week progresses.