Inflation and the FED meeting: neither concern nor distraction

Inflation and the FED meeting: neither concern nor distraction

This week will be the Federal Reserve conclave. Has the improvement stopped? Is it a measurement error? Has the FED rushed and should it tighten the screws more?

The FED will meet this Tuesday and its verdict will be known on Wednesday. Inflation jumped in January and raised eyebrows. February confirmed a trail of higher readings than those that closed 2023. Has the improvement stopped? Yes. Or is it a measurement error? Maybe, but it doesn’t invalidate the above. Did the FED hurry with its December pivot and the promise to lower rates by 2024? It is clear, he is not going to rush to comply. Should the FED tighten the screws more? Will let the bonds do it if necessary.

Let the prosecution present its case. Consumer prices rose 0.2% in November and December, but rose 0.3% in January and 0.4% in February. If the core basket is examined, the increase was 0.3% per month in the last two months of last year and accelerated to 0.4% in January and February. The year-on-year trend continues to decline, yes, but at the margin the rebound is undeniable. Producer prices fell, in absolute terms, in the last quarter of 2023; but they grew 0.3% in January and double that, 0.6%, in February. Wholesale inflation of physical goods, which seemed dead and buried, resurrected vigorously in February: +1.2%. Is it a last gasp or is there something more?

Prices linked to foreign trade also joined this display of unexpected vigor. Imports fell in the final three months of last year – at an average rate of 0.6% – but they started 2024 on a firm footing: +0.8% in January and +0.3% in February. The same drawing, but more pointed, was drawn for export prices. From sinking 0.7% in the last quarter of 2023, they rose 0.9% (revised) in January and 0.8% in February. What happened that everything overheated all of a sudden? Will the FED, which certainly did not see this coming, be able to look the other way and remain, as it has done since July, undaunted and with arms crossed? Why do you send so many spokespersons to explain monetary policy and none of them referred to this barrage of bad results?

Jerome Powell spoke at length in Congress, but that was before having the information from February. And when these numbers came to light, the mandatory silence that is imposed in the prelude to each meeting already prevailed. What Powell said, even so, did not lose validity. The FED does not claim victory in the fight against inflation. And it will not do so until all attempts at rebellion cease. But in the same way he thinks that months ago his policy tuned the intensity necessary to bring prices to the 2% path. Has he changed his mind with these figures? It is very unlikely. It is advisable, in principle, to separate the chaff from the wheat (even if the prices of both rise). Wholesale inflation is non-existent. Beyond its month-to-month fluctuations, and the recent strong jump, the level of producer prices is 0.2% lower than in June 2022. If import prices are taken, their level is 0.8% lower than a year ago. And those for export are 1.8% lower. There is no problem there. His bullish pretensions succumbed a long time ago.


The market will be more than attentive this week to the Fed's decisions.

The market will be more than attentive this week to the Fed’s decisions.


Consumer inflation: what the Fed will do

Consumer inflation is another story. In principle, the central bank is guided by the personal consumption expenditure deflator and February data has not yet been published. But everything suggests that, after remaining unchanged from October to December and climbing 0.3% in January, it will repeat the figure in February. A more recalcitrant dynamic is at work here, although if the inflation of a single item is removed, the cost of housing services, the remainder has been growing below 2% for more than half a year. As long as that is the case, the FED will remain idly by, confident in the silent work of real interest rates and afraid of tightening too much (even with this negative string of prices). You can’t be distracted, but you won’t worry. It is possible, however, that it wants to moderate the pace at which it reduces its balance sheet to avoid straining the system’s liquidity conditions. (and do not react late if these become evident). It is necessary to reduce the QT before lowering the rates. Of course, if it bothers you to seem distracted, you can toughen your speech, although it is not necessary. Last week, the two- and ten-year rates alone rose a quarter point in reflex reaction. If Powell wanted more rigor, he could scribble the points map, and retect one of the three casualties he included in December. There the long rates will take note with due diligence. And what will become of the promise of cuts? As long as the economy holds up, and even more so if inflation bucks, it will continue to be that, a promise.

Source: Ambito

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