Fed officials were scrambling after inflation fears sent markets tumbling

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Energy prices, which have been a major factor in the past two months’ inflation readings, pushed higher on signs of further geopolitical turmoil.
This week was filled with bad economic news, with each day literally bringing another dose of reality about inflation.
“The economy has come a long way toward achieving better balance and reaching our 2 percent inflation goal,” New York Fed President John Williams said.
Minutes released Wednesday from the March Fed meeting showed officials were concerned about higher inflation and looking for more convincing evidence it is on a steady path lower.
“If that’s the case, you would require a decent amount of unemployment to get inflation all the way to 2.0%.”
That’s why Furman and others have pushed for the Fed to rethink it’s determined commitment to 2% inflation.
“At a minimum, I think getting to something that rounds to 2% inflation would be just fine — 2.49 rounds to two.
“I don’t think they can tolerate a risk of inflation above 3 though, and that’s the risk that we’re facing right now.”


| Getty Images | Spencer Platt.

The first three months of 2024 will see a rise in inflation, and the early data isn’t looking good.

Choose your poison. Inflation doesn’t seem to be slowing down anytime soon, regardless of whether it’s reflected in retail prices or wholesale input costs. Anticipations for the future have also been going up.

The degree of persistence with which price pressures have persisted since the beginning of 2024 has taken investors, consumers, policymakers, and even economists by surprise. The Dow Jones Industrial Average gave up nearly 500 points on Friday, sending stocks plunging 2 percent lower for the week and giving up almost all of the year’s gains.

“Shoeet me once; you deserve shame. Harvard economist Jason Furman said to CNBC this week, “Fool me twice, shame on me.”. “Prints have now exceeded everyone’s expectations for three months running. Moving forward, we need to adopt a different perspective on things. “.”.

Indeed, there’s no denying that the market has undergone a significant mental shift.

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Import prices, a relatively insignificant piece of information, added significance to the story. It showed the largest increase over a three-month period in roughly two years in March. The markets, which sold off for the majority of the week before really collapsing on Friday, have all come to a major headache.

To make the deafening news about inflation even more unbearable, a Wall Street Journal report on Friday revealed that Iran intends to attack Israel within the next two days. With indications of ongoing geopolitical unrest, energy prices—which have played a significant role in the inflation figures over the previous two months—rose.

“You have a choice. The sell-off on Friday had many reasons, according to market expert Jim Paulsen, a former strategist and economist at Wells Fargo and other companies who now writes the Paulsen Perspectives blog for Substack. “This really comes down to one thing right now, and that’s the Israel-Iran war, assuming it happens. dot. All it does is make you feel extremely unstable. ****.

Hopes raised to the sky crashed.

As opposed to this, the markets believed going into the year that the Fed, which was known for being accommodative, would cut interest rates six or seven times, starting in March. But investors have had to reassess their expectations due to each month’s stubborn data, and as a result, they now expect just two reductions this year, based on futures market pricing that sees a non-zero probability (roughly 9%) of no reductions.

Furman, a former member of President Barack Obama’s Council of Economic Advisers, stated, “I’d love the Fed to be in a position to cut rates later this year.”. However, at this point in time, the data is simply not there. “.

This week was replete with unfavorable economic news; the reality of inflation was brought home every day.

Monday’s start came from a New York Fed consumer survey that revealed sharp increases in respondents’ expectations for rent increases over the coming year, to 8.7 percent, or 2 percentage points more than those observed in February. Forecast increases in the price of food, gasoline, health care, and education were also noted.

According to data released by the National Federation of Independent Business on Tuesday, members’ optimism has reached an 11-year low, with inflation being their top concern.

The Labor Department announced on Thursday that wholesale prices had seen their largest one-year increase since April 2023. On Wednesday, the consumer price reading came in higher than anticipated, indicating that the 12-month inflation rate was 31.5 percent.

Ultimately, a report released on Friday showed that import prices increased in March more than anticipated, marking the largest three-month increase since May 2022. Moreover, Jamie Dimon, the CEO of JPMorgan Chase, issued a warning, stating that “persistent inflationary pressures” constituted a risk to commercial and economic interests. Furthermore, the results of the closely followed University of Michigan consumer sentiment survey were worse than anticipated, with participants raising their inflation outlook as well.

I’m still willing to cut, maybe.

Though most stated they still expected to cut later this year, Fed officials took note of the higher readings but did not issue any panic orders.

John Williams, President of the New York Fed, stated, “The economy has come a long way toward achieving better balance and reaching our 2 percent inflation goal.”. However, our dual mandate’s complete alignment is still a ways off. “.

President of the Boston Fed Susan Collins stated that she believes inflation will “durably, if unevenly,” return to two percent, but added that “it may take more time than I had previously thought” to do so. The March Fed meeting minutes, which were made public on Wednesday, revealed that participants were worried about rising inflation and were seeking stronger proof that the rate was declining steadily.

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Even though this week’s focus on consumer and producer price indexes was on them, it’s important to keep in mind that the Fed is not currently focused on inflation. The personal consumption expenditures price index, which has not yet been released for March, is what policymakers rely on instead.

The PCE and CPI indexes differ from each other in two important ways. PCE, rather than CPI, is primarily used by the Commerce Department to account for shifts in consumer behavior. For example, if people are switching from beef to chicken due to price changes, PCE would likely reflect this more than CPI. Furthermore, PCE gives housing costs less weight, which is a significant factor given that the cost of rent and other forms of shelter has remained high.

Excluding food and energy, or the “core” reading that Fed officials monitor more closely, the PCE readings for February were 2.5% for all items and 2.8% for others. The next report is not expected until April 26. According to Citigroup economists, tracking data suggests that the core is gradually declining to 2 percent, which is better but still well short of the Fed’s target.

Totaling the signals.

Furthermore, a number of additional indicators indicate that the Fed still has a ways to go.

The Atlanta Fed’s so-called sticky price CPI increased to 4 points 5 percent on a 12-month basis in March, while the flexible CPI increased by a full percentage point, though it still only reached 0 points 8 percent. Property, auto insurance, and health care services are included in the sticky price CPI, whereas food, energy, and car prices make up the majority of the flexible price CPI.

Finally, the Dallas Fed reduced the mean PCE in February to 3 point 1 percent, which is still well short of the central bank’s target and produces extreme readings on either side.

The fact that the economy has been able to withstand high rates with little effect on macroeconomic growth or the employment situation is encouraging for the Fed. Though there have been indications of cracks in the labor market, there is concern that these conditions won’t endure indefinitely.

“I’ve been concerned for a while that the final mile of inflation would be the most difficult. The Harvard economist Furman stated that there is ample evidence supporting a non-linearity in the disinflation process. If so, a respectable level of unemployment would be necessary to raise inflation to 2 percent. “.”.

Furman and others have pushed for the Fed to reconsider its steadfast commitment to a 2 percent inflation rate because of this. BlackRock CEO Larry Fink, for example, stated to CNBC on Friday that the Fed should “call it a day and a win” if it could bring inflation down to roughly 2 percent to 3 percent. “.

“I think it would be perfectly acceptable to at least reach a point where 2.49 rounds to two percent inflation. Furman stated, “I don’t think anyone would notice it if it stabilized there.”. “But I don’t think they can handle an inflation risk greater than three, which is what we’re dealing with at the moment. “.

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