At the ECB Forum on Central Banking, Fed Chair Jerome Powell warned its 2% target is going to be a long process.
Consecutive Rate Hikes Aren’t Off the Table
Please note Powell Says Consecutive Rate Hikes Aren’t Off the Table
When asked during an appearance at the annual ECB Forum on Central Banking on Wednesday if the U.S. can expect an increase at every other meeting of the central bank, Powell said officials haven’t made a conscious decision to go that route. “That may work out that way, it may not work out that way—but I wouldn’t take moving consecutive meetings off the table at all,” he said.
Bringing inflation in line with the Fed’s 2% target is going to be a long process, Powell warned. “I don’t see us getting back to 2% this year or next year [on core inflation],” Powell said, adding that he sees the U.S. making steady progress on headline inflation, but that core inflation—which strips out food and energy costs—is slower. “I see us getting there the year after.”
“We will be restrictive as long as we need to be,” Powell said. “If inflation is coming down sharply and we’re confident that it’s on a path to 2%, that would be a different situation—you would begin to think about loosening policy, but we’re a long way from that.”
Not This Year or Next Year
Powell does not expect core inflation to get to the Fed’s 2.0 percent target this year or next. If he is accurate, we are discussing 2025 at the earliest.
Higher for longer keeps getting both higher and longer, at least according to Powell. The market expectation is a big yawn.
Interest Rate Probabilities for December 2024
The median interest rate expectation for December 2024 is roughly 4.0 percent. Currently the Fed’s target rate is a range of 5.00 to 5.25 percent with an 81.8 percent chance of another 25 basis point hike in July to the range of 5.25 to 5.50 percent.
Betters now believe the Fed will not start cutting rates until March of 2024. Longer keeps getting longer but starting March of 2024, the market has penciled in a lot of rate cuts from 5.25 percent all the way to 4.00 percent by December.
Let’s Play What If?
Assuming the market forecast is correct, the Fed will be aggressively cutting rates heading into the next presidential election on Tuesday, November 5, 2024.
That’s not necessarily good for Democrats because it implies recession in an election year, typically not a good thing.
Assuming the Fed forecast is correct, inflation will then be higher longer than the market expects. If recession hits at the same time, the economy will be in a state of stagflation heading into an election, certainly not good for incumbents.
The goldilocks scenario is one in which inflation lowers to the Fed’s target, slowly, steadily, and with no recession or huge job losses.
It’s far to early to make a guess on anything other than to suggest goldilocks is not a likely setup. But that is what the equity market seems to believe at the present.
One of the problems for the Fed is that Biden’s energy policies are highly inflationary.
Inflationary Policies
- Please note that Ford Gets a $9.2 Billion Cheap Government Loan With Inflationary Strings Attached. So not even $9.2 billion is enough to make Ford profitable.
- The Inflation Reduction Act Price Jumps From $385 Billion to Over $1 Trillion.
- Hoot of the Day: The UAW Demands a “Just Transition” to Electric Vehicles
And no one yet has factored in the cost of minerals to make the batteries. EVs will not go from 3 percent of sales to a Biden-mandated 67 percent with the price of the needed metals and rare earth elements to stay flat.
For discussion, please see Critical Materials Risk Assessment by the US Department of Energy
Yep, Biden’s own energy department is issuing mineral warnings.
All in all, Biden has a brilliant plan on numerous fronts simultaneously, to create more inflation, just what the Fed wanted for years, but now doesn’t.
And banks have passed the stress test with flying colors……..but wait……some need money
https://www.marketwatch.com/story/bank-borrowing-from-the-fed-climbs-for-eighth-week-in-a-row-some-banks-are-still-under-strain-d979aff9?mod=mw_latestnews
The government spends money it doesn’t have on any stupid thing they can think of, including kickbacks to themselves. If they have to spend a billion in order to get a million in kickbacks, that’s a good deal to them. After printing too much, the CPIflation kicks in and then the government says that the lower classes (service class) is told they are spending too much and so until they revert to an austere lifestyle the beatings will continue.
Stop accepting their fake money as if it were real and all of this will go away.
Your betters know you meant bettors.
He’d so funny if he wasn’t making such critical decisions. What a bunch of bull. He is heel bent in reproducing Volker with no idea of how and why it should work.2025? Is he determined to crush the US economy? Wait until the next several shoes will drop and see how fast he will backtrack.
All he’s done is make housing unaffordable and to freeze the housing market since those with mortgages don’t want to get a new one at higher rates. The inflation is clearly due to shutting down the economy and giving out tons of free money. Now, sanctions against Russia and China play a large part.
Where housing is such a huge part of inflation, it baffles me as to why nothing’s being done to simulate more home building. Instead, the Fed’s inhibiting demand, meanwhile we’re pushing out immigrants that could do big things for our labor shortages.
20 years ago I hated that illegal immigrants came here and worked under the table, undermining fair competition in wages, now we’re at the opposite extreme.
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Twenty years ago they competed directly with you. Now you hire them. Your financial incentive changed.
No question, that’s part of my perception – but I’ve factored my anecdotal bias, I’m seeing immigrants getting 2-3X min wage on jobs that “questionable” employers would have paid peanuts back then.
Menial laborers starting @ +$30/hr, this became much more pronounced at the start of Covid, but it was still visible before that.
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Russians on the street to support Yeltsin against the coup attempt in 1991. How many showed up to support Putin this time?
https://twitter.com/McFaul/status/1674458419246559232/photo/1
The 1991 coup was real.
This one wasn’t.
In 1991 they had hope. In 2023 they have none.
But, Putin’s polling at 80%!!…and those polls are legitimate!!
Without an upvote button I can’t get my daily dopamine hit Mish. I am in withdraw.
Many of the top Fed members grew up during the 1960s and 1970s when inflation was out of control. The Fed then would drop rates as soon as inflation dipped and the premature rate drop brought on more inflation. It was a roller coaster. The Fed then was very much more influenced by politicians (Vietnam War and two oil embargos). They remember that time and are not going to make the same stop-and go mistakes. They will instead raise the rates a bit more and keep them there. It will cut off the bubble machine and make running deficits a lot more difficult to sell to the public and consequently to do. Keep the rates high. Of course I as a retired Boomer I benefit from generous coupons on government debt but I assure you that that has nothing to do with my analysis.
Interpretations of Powell’s comments are continually parsed. Seems to me his words, and the Fed’s actions during the past 12 months plus, have been prescient. (Do you think otherwise?)
Obviously an “event” or events can change the policy path in the blink of an eye. But, like it or not, the Pinocchio in the room isn’t Powell — it’s the markets.
Lol. I’ve been saying this now for.. 9 months? Maybe even a year. Only regret was not getting shorter sofr’s on the last run up over 97
I don’t see that interest rates are the cause of inflation. Rather the high cost of finance kill the consumer.
The government continues spending trillions that it does not receive in revenue. From where are these trillions coming?
Trade deficit is running at 90 billion per month! Where is the money coming from? China isn’t buying USD debt? Who is?
Who is buying Treasuries? Good question. It used to be me, but I’ve retired and am a net seller now. Multiply me by the 74 million listed above and it’s fireworks time.
Yup.
Not rolling them into new notes.
Rolling them into a boat and travel.
Powell’s hint is more likely to be correct than the market.
The market gives a virtual 100% probability of at least 1 rate cut by Dec 2024. There might be one or more rate cuts by Dec 2024, but the likelihood of none should be at least 10%.
“Powell does not expect core inflation to get to the Fed’s 2.0 percent target this year or next. If he is accurate, we are discussing 2025 at the earliest.”
And by my own forecast there will be 75 million people on social security in 2025 compared to the 71 million now which means a loss of at least 4 million people from the labor force but likely much higher at 5 or 6 million, especially if corporations start laying off older workers or illness forces them out.
Meanwhile, colleges are in a scramble for the dreaded 2025 date because there is an enrollment cliff that will put many of them out of business.
https://www.cnbc.com/2023/06/17/why-more-and-more-colleges-are-closing-down-across-the-us.html
“There are two significant issues affecting higher education right now, specifically, through the admission and enrollment offices,” said Robert Franek, editor-in-chief of The Princeton Review. “Number one, it is the admission cliff, and that is the impending decline [in the number of prospective students]. We’ll be graduating our lowest high school classes by population in 2025. And most enrollment professionals have been wringing their hands about this date of 2025, but many schools have seen those enrollment declines already.”
So we have an ocean of labor and some of it is retiring at the rate of Niagara Falls while the incoming supply is a garden hose. Yeah, this will work wonders for inflation. Won’t matter what the fed funds rate will be because it will all start spiraling out of control. I fully expect Powell to retire and wash his hands of all of it.
Good, big education has been a scam that has slowly reached its zenith over the last 23 years. There will be no tears once the “Big Short” book version of education comes out and hundreds of campuses around the country close.
Spending 80k+ on education a year is mind bogglingly numbing.
Agree, especially in this globalized economy where American wages factor tuition costs and the rest of the developed/OECD world provides college.
Only when you’re not getting one of the $500k jobs on Wall Street.
And, of course, additional bonuses.
And the expense account. You can use it for the most interesting things.
You are describing a scenario that strongly favors lower and middle class bargaining power leading to a reversal of the wealth pump effect we have been in since the 1980’s.
Invert back to pre-Reaganomics, when cash was used for consumption and the Fed didn’t have to cut rates to increase disposable incomes – in 2020 it was obvious that can’t go on forever.
The thing about cycles is that they invert. Even the globalist cycle inverted. When interest rates get to be the lowest in 5,000 years, they simply can’t stay there. An inflection will occur. The only question becomes when?
Not everybody is working up until taking social security. I’m retired but waiting (with a gross 50K pay cut).
As Dr. Scott Sumner would say, N-gDp is too high in the 1st qtr. of 2023.
https://www.bea.gov/sites/default/files/2023-06/gdp1q23_3rd.pdf
The “demand for money” is simple. The “demand for money” is falling (velocity rising). This is demonstrated by M2/GDP.
https://fred.stlouisfed.org/graph/?g=eTtE
Banks don’t lend deposits (a stock). Deposits are the result of lending/investing (a flow). Hence, all bank-held savings are un-used and un-spent, lost to both consumption and investment, indeed to any type of payment or expenditure. It’s stock vs. flow.
That’s what Dr. Philip George’s “The Riddle of Money Finally Solved” is all about.
See: “Should Commercial Banks Accept Savings Deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43
Alfred Marshall’s cash-balances approach (viz., a schedule of the amounts of money that will be offered at given levels of “P”), is where at times “K” is the reciprocal of Vt, or “K” has the dimension of a “storage period” and “bridges the gaps of transition periods” in Yale Professor Irving Fisher’s model.