Gordon Gekko: From July to today, what changed and much is the perception of the labor market. The evidence of a drastic reduction in the rhythm of creating new jobs and today is clearly exposed on the table was missing.
GG: As is. And the unemployment rate climbed one tenth in July and another in August. The reading is not very high -4.3% – and a couple of tenths are located below what the Fed projected in June for December, but confirms the rising dynamics. Fast scale unemployment between some groups such as African -American and Latinos that are usually the spearhead of a gestation problem. It is better to prevent than cure. That is the reason that justifies the loss of rates. I do not see difficult so that a consensus is built.
Q.: But, inflation also goes up. And the Fed is in “Off Side” with respect to its 2% goal since the second half of 2021. Can inflation wait?
GG: Yeah.
Q.: Although it is around 2.9%? It rose half a point since May. It is not a small thing.
GG: Those are consumer prices. If the deflator looks, the increase to July is 2 tenths, to 2.6%. But that inflation increases is not discussed. Although Governor Chris Waller, one of the two dissidents in July, and who has already anticipated that he will vote for a reduction of a quarterfinal, thinks that it is not so. Waller points out that, if the incidence of tariffs is excluded, which is an only time effect, inflation is going down.
Q.: I think I heard a district president -alberto Musalem, from the Fed of St Louis-that he will not buy that idea, lying of the hair, to use as a reference to an ex-anrancel inflation measure.
GG: It doesn’t take so much. It is enough to notice the anemia of the labor market. And share the idea that, in the past, a characteristic of this market is that deterioration can rush very quickly. That is the Leit motiv of the loss of rates. A reason for caution.
Q.: It is inevitable to think that Fed has relaxed its inflation goal without expressly recognizing it. Mohammed says Erian, a very listened analyst, that the really goal – the one who triggers decision making – is no longer 2% but 3%.
GG: In its June projections, the FED estimates inflation of 3% at the end of the year. If in July we are in 2.6%, as we said, there is margin so that it climbs more and is not an impediment to cut the rates. And not one but twice. But the goal is still 2%. That did not change.
Q.: It complies, but it is not fulfilled.
GG: That is the goal and it was not modified, although there is no hurry to achieve it. The Fed does not expect to get it before 2028, according to those same projections. Calculate an inflation of 2.4% to the end of next year and 2.1% at the end of 2027.
Q.: Is it a semantic problem or what? In fact, inflation can remain for long periods – let’s say from 2021 to 2028 – above the goal. And nothing happens.
GG: To the extent that long -term inflation expectations do not move away from the 2% goal does not happen. If expectations were disagree another would be the story. What we saw in 2021-2023 is that inflation could get a lot away from the goal-and even overcome the threshold of 7%-and expectations remained firm around 2%. It is a matter of long -term credibility that it had never been tested so raw and that it did not crack. That allowed the Fed rates rise to also need to climb higher than inflation so that inflation hit the turn.
Q.: Consumer inflation became 9%, and short rates touched 5.50% as a maximum value before starting to retreat last year.
GG: The Fed has a dual mandate. With credibility, it can be barefoot and allow inflation to walk over the goal to try to better fulfill its full employment mandate. I believe that today it helps that the impact of tariffs, when you look at the prices of imports in real time, is very limited. The rise is limited. A peak is detected in July and a posterior decline of prices. Fed does not like to talk about transitory inflation after Covid, but that is what identifies. See a punctual ascent this year that will reverse next.
Q.: Can there be quorum to push a half -point reduction?
GG: There may be an isolated voice, yes. And up to three perhaps (Waller, Bowman and the new transient governor Stephen look that will be released in the function). My impression is that there is going to be unanimity for a retouching a quarter point. In October it will be seen if there is a need to replicate the dose. Or if it is more convenient to leave it for December.
Q.: What does it depend on?
GG: The data will mark the pulse of the low rate. In June employment was destroyed. July and August showed recovery signs. The response of long bonds, whose rates have already fallen in advance, will be very important. If they accompany the loss of short rates with a new retraction, if the ten -year rate sinks below 4%, it will be comfortable for the Fed to repeat at the next meeting.
Q.: What changes with a Trump man in the heart of the Fed?
GG: Much will depend on the position you assume. Does it align with the positions of Waller and Bowman? In that case, it will not happen much. Is it an ram that seeks to impose the drastic reduction of rates that Trump promotes? It is another story. If Waller and Bowman are the ones align, it will be difficult for Powell to lead the institution until May that is when his mandate dies. That is unlikely, but you never know. If they look it is a kind of lone llanero, determined but isolated, it will be uncomfortable, as it is already dealing with Trump, but no more than that. In all cases, I believe that Powell will keep the independence of the Central Bank until the reins. And, judging by prices, markets think similar.
Source: Ambito
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