The Federal Reserve should declare an immediate ceasefire in the fight against inflation and keep key interest rates steady instead of raising the federal funds rate by half a percentage point to 4.25% to 4.50%. , as scheduled at the meeting ending Wednesday .
with relatively benign reportBased on the November consumer price index released on Tuesday, the Fed now has “compelling evidence” that it has met its immediate goal of seeing inflation slow significantly.
November CPI was better than expected, with headline inflation rising just 0.1% (1.2% YoY) and core inflation up 0.2% (2.4% YoY).
Read: Inflation is slowing, but the battle is far from over
US stock market
SPX,
on Tuesday initially welcomed the CPI report as confirmation that the Fed could start easing, but by midday cognitive blow that the Fed will continue to raise interest rates.
Market snapshot: Dow trails gains in last trading hour as Wall Street gauges lower inflation report, next Fed rate decision
Better than the media say
The CPI report is actually better than the media portrayal, which continues to unreasonably focus on year-over-year changes in inflation rather than looking at what’s happened since the Fed started raising interest rate 9 months ago. For example, what should we do. This incoherent headline in the New York Times: “Inflation in the US cools down as consumer prices increase by 7.1%”?
If we do not want to miss the turning points, we must shorten our time to less than a year, but not so short that there is only noise and no signal. Three months is approximate.
In March 2022, when the Fed raised interest rates for the first time, inflation accelerated. From January to March, the CPI increased at an annual rate of 11.3%. It was an alarming rate of inflation that prompted the Fed to act.
But then the Fed raised interest rates in six consecutive meetings, from near 0% to nearly 4%, and now inflation is decelerating. From September to November, inflation increased at an annual rate of 3.7%.
That is significant progress in the most relevant measure of inflation.
Read: Why November CPI data is considered a ‘game changer’ for financial markets
Wrong view
Progress is much less obvious when metrics are reported on an annual basis, like most media do. From November 2021 to November 2022, inflation rose 7.1% — but that number is meaningless to our understanding of what the Fed has achieved because that timeframe also includes 5 months of high inflation since before the Fed took action.
Because rate hikes take some time to have an impact on prices and the economy, they didn’t really start to kick in until July. In the 5 months since, inflation has slowed to 2.5% annually, which is noticeable to anyone looking. An unprecedented rate hike is cooling the price hike.
The progress is even greater when you take into account that most of the inflation we’ve suffered lately has come from higher rents, which are currently growing at a 10% annual rate in a belated response to with last year’s amazing 20%+ increase in home prices and a tight rental market.
Rents still go up as house prices fall
According to research by economists at Goldman, home prices have now begun to fall in most areas of the United States. Rents for new tenants are also starting to fall, but the rent that continues to be paid by tenants has fallen behind and could take a year or longer to catch up. Sachs. That’s because rents on existing leases tend to reset every year.
“ Rent is used to calculate costs not only for the tenant but also for the landlord. It’s as if we measure the price of champagne by how much beer costs. “
With more than 900,000 multi-family units currently under construction, supply constraints will soon begin to ease, reducing pressure on rents, as those units hit the market, likely to be next year or so.
Rent has a big effect on CPI, because rent is used to calculate costs not only for the tenant but also for the landlord. It’s as if we measure the price of champagne by how much beer costs. Yes, most of the time there is some correlation, but not always.
Using rent to measure homeowner costs might be an acceptable method in normal times, but not now. Based on the increase in rents, the CPI shows that housing costs for homeowners increased at an 8% annual rate in November. No one believes that to be true. Most homeowners have fixed-rate mortgages, so principal and interest payments don’t add up.
Right point of view
The best thing to do in this situation is to realize that we need to exclude haven costs (which account for one-third of the CPI) if we want to know where core inflation is headed.
“Significant disagreement over the correct way to measure shelter inflation argues for considering inflation measures less, but not more, impact on shelter inflation when deciding whether to bigger consequences,” Goldman Sachs economists Ronnie Walker and David Mericle wrote in a note published in October.
The CPI excluding shelters fell 0.2% in November and is up only 1.3% year-on-year over the past three months.
Even Fed Chairman Jerome Powell acknowledged that a sudden drop in home prices won’t show up in the leading CPI for months, but he doesn’t act as if he fully believes it. If he did, he would urge his colleagues at the Fed to pause now and let the full impact of the 375 basis point tightening hit the economy.
Than: Fed saw slow to gain quarter point in February after reading soft consumer price inflation
However, we know that the Fed will not pause. The Fed lost too much credibility last year when it missed the rapid rise in inflation as the economy emerged from the pandemic shutdown, and now it is trying to restore public confidence. them as anti-inflationists.
Unfortunately, that makes a recession almost inevitable, because the Fed will do what it always does: Raise interest rates excessively and push the economy into a job-killing recession.
Rex Nutting is a columnist for MarketWatch who has written about the Fed and the economy for over 25 years.
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