Thus we see that while services and shelter are still bothersome, real wages are improving, and the headline, the core, and the core goods CPI measures are all definitively turning down.
So should the Fed perhaps pause on its journey of hiking rates? The signs in this report look like inflation is being tamed. And since monetary policy takes three to five quarters to have a full impact, there is still plenty of inflation-killing ammunition which has already been shot but just hasn’t gotten to the target yet.
Furthermore, there are many signs that the economy is quite likely to be heading into a recession. We are seeing falling retail sales, shrinking real disposable personal income, slowing real consumption expenditures, consumers worrying more about the future than the present, slowing in the labor market, a collapsing housing market, weak ISM reports, and of course the inverted yield curve. It’s a gruesome list. And that inflation-killing ammunition is headed directly at the economy too. Maybe the Fed should take a breather?
It won’t. Chairman Powell has been very explicit, vocal, and forceful about the Fed’s commitment to raise rates high and keep them there until the Fed is sure it has defeated inflation.
At the Fed’s press conference at the end of the December meeting, Powell said:
· “Historical experience cautions strongly against prematurely loosening policy. I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way,”
· “There’s an expectation really that the … services inflation will not move down so quickly so that we’ll have to stay at it,”
· “So we may have to raise rates higher to get to where we want to go and that’s really why we’re writing down those high rates and why we’re expecting that they will have to remain high for a time.”
· “It will take substantially more evidence (than the easing CPI) to have confidence that inflation is on a sustained downward”
· “Price pressures remain evident across a broad range of goods and services”
The Federal Reserve’s minutes of the December meeting were basically (my words): “Get out of the way, we are coming through and no you are not going to get your rate cuts this year.” Here is an actual quote:
· “No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time. In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautions against prematurely loosening monetary policy. “
· And the Fed strongly suggested to the financial markets they’d better stop causing trouble with any over-optimism about, again, rate cuts in 2023: “…an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability.”
An increase in the Fed Funds rate at the February 1st meeting is all but a certainty at this point, and there will very likely be another one at the March 22nd meeting unless the inflation picture improves much more rapidly and definitively than currently expected. The economy is in peril.