How is the Fed going to cut rates with inflation over 3%?

[Gregmal]

3 minutes ago, james22 said:

 

Duh lol. 

[Gregmal]

This is what’s so bizarre about this whole inflation saga. The culprits have been super obvious. First go around it was clear as day that stimulus checks and shut down related supply chain disruption was the majority of the “9%” inflation. Now it’s obvious housing and secondarily energy is most of the inflation. Yet people wanna talk about services lmfao….it’s like talking about the attractiveness of a 500 lb chick and being like “yea she’s got a really nice bracelet!”…Who TF cares?

[changegonnacome]

3 hours ago, james22 said:

 

 

I'm sorry this is dumb from JPM.

 

The Fed is fully aware that itself is 'inflating' car payments and 'inflating' mortgage payments..eh its called tighnting monetary policy guys!!......so no JPM......the Fed is not measuring the "inflation" itself is creating it strips all that out as it can turn around tomorrow and makes everybodys car payment 20% less....what it cant do tomorrow is turn around and drop the price of haricuts 20%!....you dont get a PHD and do something as dumb as this (you do other dumb stuff but not this dumb)...so rightly the Fed is concerned over the inflation figures for which it itself has only tangential influence over via financial conditions.....put another way the Fed is concerned with the inflation occurring in sectors of the economy (mainly services) which are persisting at 3.x%+ levels and that have nothing to do with covid supply chains , have nothing to do with the fed funds itself and have nothing to do with energy and have nothing do with OER....namely SuperCore.

 

SuperCore (ex-energy! ex-housing! ex-interest rates increases the Fed is doing itself!) just keeps trucking on MoM basis, on a 3m basis, on a 6m basis and YoY at levels completely inconsistent with 2% inflation........now if you think 3.5% inflation is whatever thats a completley different conversation......but if you take the narrow aim of price stability.....the FACTS say we arent headed for 2% sustainbly.

 

 

[bizaro86]

5 minutes ago, changegonnacome said:

 

I'm sorry this is dumb from JPM.

 

The Fed is fully aware that itself is 'inflating' car payments and 'inflating' mortgage payments..eh its called tighnting monetary policy guys!!......so no JPM......the Fed is not measuring the "inflation" itself is creating it strips all that out as it can turn around tomorrow and makes everybodys car payment 20% less....what it cant do tomorrow is turn around and drop the price of haricuts 20%!....you dont get a PHD and do something as dumb as this (you do other dumb stuff but not this dumb)...so rightly the Fed is concerned over the inflation figures for which it itself has only tangential influence over via financial conditions.....put another way the Fed is concerned with the inflation occurring in sectors of the economy (mainly services) which are persisting at 3.x%+ levels and that have nothing to do with covid supply chains , have nothing to do with the fed funds itself and have nothing to do with energy and have nothing do with OER....namely SuperCore.

 

SuperCore (ex-energy! ex-housing! ex-interest rates increases the Fed is doing itself!) just keeps trucking on MoM basis, on a 3m basis, on a 6m basis and YoY at levels completely inconsistent with 2% inflation........now if you think 3.5% inflation is whatever thats a completley different conversation......but if you take the narrow aim of price stability.....the FACTS say we arent headed for 2% sustainbly.

 

 

 

Haircuts are getting more expensive because wages are going up.

 

Wages are going up because otherwise employees can't afford their rent, so they're pushing harder for increases.

 

 

[changegonnacome]

And surprise surprise Jay has to dash hopes on the impending cuts forecasts..... cause you know like the facts (ex-housing ex-energy) dont support it yet.

 

So we aren't talk past each other here - if you want to talk about why the 2% inflation target is dumb....and 3% is Ok thats like a totally different discussion........and a valid one......the facts here are consistent with what J-Pow says in his talk today....the Fed isnt done, cause inflation isnt quite done (yet).

 

Inside these inflation discussions one interesting thing I've observed is that the group of folks who are convinced inflation is done and that it is now some kind of hoax........are also (usually) the same folks who subscribe to the self-servingness of those in power and the government to spin facts and narratives to serve their own ends......high inflation serves nobody currently in power.......taking the next step out from that....those same folks should then be surmising (to be logically consistent) that inflation numbers being released by government are actually consistently UNDERSTATING inflation and not over-stating it. Anyway just an aside

 

 

[John Hjorth]

Jack Manley .

 

Why is Jack Manleys opnion important here?

[changegonnacome]

9 minutes ago, bizaro86 said:

 

Haircuts are getting more expensive because wages are going up.

 

Wages are going up because otherwise employees can't afford their rent, so they're pushing harder for increases.

 

 

 

It can be all circular......so you can start anywhere you like in the circle of inputs and get to where you want to go......big picture, outside the circular micro micro micro stuff....haircuts are going up because the economy is demanding more haircuts than can be supplied given the availability of workers to provide those haircuts against the level of haircuts being demanded 

[Gregmal]

Nah. Remember how long Fauci kept lingering around and doing his stupid pressers even though everybody but NY and CA moved on from COVID? Jerry’s doing the same thing. 
 

Im actually semi hoping for a Trump victory just to see this guy get fired. He’s a clown.

[Sweet]

4 hours ago, james22 said:

 

Certainly seems possible.

Disagree and agree with Greg here, Powell imo has done a very good job, but less talk please JP.

 

 

Edited April 16 by Sweet

[DooDiligence]

1 hour ago, John Hjorth said:

Jack Manley .

 

Why is Jack Manleys opnion important here?

 

Speaking of haircuts, he has a nice forehead.

[John Hjorth]

4 minutes ago, DooDiligence said:

 

Speaking of haircuts, he has a nice forehead.

 

Yeah, listening to Jack Manley is the way to go! <*cough-cough* <out of sarcasm>>

 

Disclosure : That said, quite content JPM shareholder during now quite some years.

[james22]

I'm keeping a close eye on waitresses and hemlines.

[Hektor]

https://www.wsj.com/economy/central-banking/us-gdp-economy-first-quarter-2024-1675df05

U.S. Economic Growth Slows to 1.6% in the first part of the year, falling short of economists’ expectations.

[TwoCitiesCapital]

1 hour ago, Hektor said:

https://www.wsj.com/economy/central-banking/us-gdp-economy-first-quarter-2024-1675df05

U.S. Economic Growth Slows to 1.6% in the first part of the year, falling short of economists’ expectations.

 

1.6% growth with interest rates @ 5+%. 

 

That's how the Fed cuts rates with inflation over 3%. 

[Jaygo]

lol. If anyone is surprised by these numbers they are blind. When every single railroad is shrinking volumes ya know something ain’t right. Wages and employment are next. 

[mcliu]

Core PCE +3.7% but only +1.6% GDP? Just a quarter but are we seeing potential stagflation?

[gfp]

1 hour ago, Jaygo said:

lol. If anyone is surprised by these numbers they are blind. When every single railroad is shrinking volumes ya know something ain’t right. Wages and employment are next. 

 

I expected a higher GDP print (and I'm always bearish LOL).  I think rail traffic is actually fairly normal if you ignore Coal volumes.  I don't think coal volumes are a big economic red flag personally.  There is some shifting back towards the western railroads again I would imagine.  I would expect BNSF to print a decent intermodal number.  Auto shipments are high.  Petroleum products and chemicals are high.  Looks healthy to me as far as rail traffic goes.

[Jaygo]

Both cn and cp released flat to down RTM quarters, Brk mentioned slow rail traffic in the past 6 months.

 

Pretty sure we are not booming. As far as I can tell the economy is slowing due to to high rates but still moving due to government largess. I think we are one rate cut from a boom to fill pent up demand and people who are on the fence just want to know what way to jump. People in their 20's just want to have a taste of the good life that comes from real capitalism not this dog and pony show we have. 

 

If they keep dicking around with China and rates we could see outright recession. Id say drop rates to 3, let the Chinese build are shit for us cheaper than we can, Adam Smith style and we can just focus on spending.

 

[TwoCitiesCapital]

4 hours ago, Jaygo said:

Both cn and cp released flat to down RTM quarters, Brk mentioned slow rail traffic in the past 6 months.

 

Pretty sure we are not booming. As far as I can tell the economy is slowing due to to high rates but still moving due to government largess. I think we are one rate cut from a boom to fill pent up demand and people who are on the fence just want to know what way to jump. People in their 20's just want to have a taste of the good life that comes from real capitalism not this dog and pony show we have. 

 

If they keep dicking around with China and rates we could see outright recession. Id say drop rates to 3, let the Chinese build are shit for us cheaper than we can, Adam Smith style and we can just focus on spending.

 

 

I haven't verified myself, but saw somewhere recently that S&P earnings are actually negative YoY ex the mag-7.

 

If true, it's not exactly a ringing endorsement for equities in general. Nominal EPS for the S&P 500 index barely surpassed its 2021 nominal high (and is still significantly negative on a real basis) and we're already rolling over again? 

[changegonnacome]

20 hours ago, TwoCitiesCapital said:

I haven't verified myself, but saw somewhere recently that S&P earnings are actually negative YoY ex the mag-7.

 

If true, it's not exactly a ringing endorsement for equities in general. Nominal EPS for the S&P 500 index barely surpassed its 2021 nominal high (and is still significantly negative on a real basis) and we're already rolling over again? 

 

Yep - nominal number haven't been whacked but the real ones have....but nobody really cares cause everybody hasn't inflation adjusted anything in like 40yrs so they forgot...it's why somebody, for example, in major US metros will tell you their home value hasn't gone down while cumulative inflation over the last two years would tell you that house prices have fallen (inflation adjusted) relative to their 2021 peak ...and then to the extent that Mag7 numbers are levitating the overall EPS picture......I mean when you have monopoly or monopoly adjacent market power as a subset of Mag7 have.....you are deciding your EPS growth in the boardroom YoY and not out on the street (excepting deep economic headwinds ala 2008 when even the mighty get crushed).

 

The GDP/inflation picture is interesting - what I would say is that on the road to 'fixing' an inflationary bout one should expect a short-ish period of stagflationary numbers like we are getting now......it's kind of an expected waypoint on the road back to 2%. 

[mattee2264]

Inflation isn't going to get back to 2% until government spending is brought under control and there probably will need to be a recession to achieve meaningful further disinflation. Unfortunately the Fed seem to have no further appetite for rate hikes and the US government will continue to spend because there is no one to stop them doing so. 

 

I can understand the desire to avoid the pain of a recession. But the alternative of getting stuck with 4% inflation for the next decade is much worse for the average joe even if investors will probably do just fine (it is high inflation not moderate inflation that kills the stock market). 

 

But what is pretty interesting is that we only managed 1.6% real GDP growth in Q1 with a government deficit of over 1/2 a trillion for the quarter with the economy at full employment (if you believe the official figures). Resilient consumer spending seems to be what is keeping the US out of recession growing at 2.5% for the quarter. Question is how long that can continue with job losses starting to rise and the saving rate at new lows. 

[gfp]

In case anybody hasn't read "Trillion Dollar Triage" and has an interest in the history of Fed independence from the White House, this article is basically a big excerpt from the first part of the book -

 

https://www.wsj.com/economy/central-banking/a-brief-history-of-the-feds-uneasy-peace-with-the-white-house-608dee30?mod=hp_lead_pos4

 

 

[TwoCitiesCapital]

1 hour ago, mattee2264 said:

Inflation isn't going to get back to 2% until government spending is brought under control and there probably will need to be a recession to achieve meaningful further disinflation. Unfortunately the Fed seem to have no further appetite for rate hikes and the US government will continue to spend because there is no one to stop them doing so. 

 

I can understand the desire to avoid the pain of a recession. But the alternative of getting stuck with 4% inflation for the next decade is much worse for the average joe even if investors will probably do just fine (it is high inflation not moderate inflation that kills the stock market). 

 

But what is pretty interesting is that we only managed 1.6% real GDP growth in Q1 with a government deficit of over 1/2 a trillion for the quarter with the economy at full employment (if you believe the official figures). Resilient consumer spending seems to be what is keeping the US out of recession growing at 2.5% for the quarter. Question is how long that can continue with job losses starting to rise and the saving rate at new lows. 

 

I just don't think you need higher rates with GDP where it's at. 

 

Under a lowish/stable inflation regime, I'd argue the nominal rate on the 10-year should roughly approximate GDP growth. At this point, were ~2-3x that level. 

 

The gold/copper ratio is also suggesting significantly lower 10-year rates. 

 

But the 10-year rate probably won't/can't go meaningfully lower until rate cuts occur and 5+% short term rates are absolutely restrictive in a 1.6% annualized growth environment. 

 

 

Edited Friday at 11:47 PM by TwoCitiesCapital

[mcliu]

Nominal GDP was up 4.8% annualized. Seems kind of high for a rate cut. Also unemployment is only 3.8%.

[mattee2264]

You are comparing nominal and real variables. Except for monetary regimes of financial repression (e.g. post WW2 and post GFC) the 10 year nominal yield has always been well above the real GDP growth rate (historical average around 3-4%). However if the yield curve un-inverts in a meaningful way there might be some scope to reduce rates 50-100bps or so. 

 

Anyway none of this really matters for the market. Fed fund rates has been above 4% for the last year and a half and during that time period a Mag7 ETF has gone up 150%. And with those kind of returns no one is going to care what your risk-free rate is or what inflation is. And even if you do think we are higher for longer and inflation is going to be sticky at around 3% to 4% why would you invest in a long bond and get real returns of approximately zero?