“People may have too much confidence in Mother Fed”
Having previously warned of the possibility of “inflationary pressures of a kind we have not seen in a generation” and deriding the Fed for not taking the danger seriously enough, Larry Summers is walking some of the tough talk back. The éminence grise of US macro policy was not afraid to use the “transitory” card in an interview with Bloomberg, saying that “‘transitory factors’ have been one element in a faster slowdown in US inflation than he anticipated”. Generously, Larry gave some credit to the Fed, citing “tighter Fed policy than expected” as an important cause of lower inflation. However, Summers warned that he still didn’t see a “soft landing” as likely, explaining that “there’s been a little bit of a prematurity in some of the declarations of victory”. “Some people have too much confidence in Mother Fed”.
While talk may be cheap, there’s a lot to be gleaned from the latest market “price action”, or as we sometimes say, “poker tells”. Take, for instance, the response to the latest CPI. A 0.1% beat led to a 2% rally in the broad indexes, a 5% move in the Russell, and a multi-sigma move in bonds? While we are all for enthusiasm, the size of the move did seem a little disproportionate to the news. Is it possible that despite the Fed’s valiant efforts to address it, problems with bond market liquidity have persisted? Perhaps the large moves were simply a function of positioning? Either way, a 10 bps beat had some help from the BLS in the form of a (pre-announced) change to the calculation of health insurance costs, a series that has a rather esoteric basis of calculation. Arithmetic shenanigans from the BLS you say!? We are shocked. Shocked! Wolf Richter of the blog “Wolfstreet” offered a rather blunt characterization of the shenanigans in Health Insurance CPI, saying that the data had been turned into “chicken$#!t” and calling for the firing of BLS officials. Regardless of the view you take on these rather arcane calculations, the “shenanigans” may have only provided some temporary relief, as the underlying dynamics of the series mean that the readings in certain sub-categories (shelter and health care costs) will likely continue to be biased higher over the near term. This reinforces a previous analysis from the Boston Fed on housing dynamics putting “upward pressure on inflation in the medium term” and should give some pause to those looking for inflation to continue its reassuring decline back to pre-pandemic levels.
The flip side of the faith in the Fed are those who are apparently willing to bet that the Fed will change its mind on the whole “Higher for Longer” plan? The Fed Funds market has never fully bought into it, and Thursday’s curve priced in a slight chance of a cut as soon as January. We sometimes wonder how this is consistent with the idea that “hope is not a strategy”. Is this a widespread thumbing of noses at the Fed and its supposed resolution or is it an expression of conviction that there is in fact substantial (necessary?) pain in the pipeline? Walmart’s latest earnings warned of a weakening in the seemingly indomitable US consumer (earning them a swift kick in the stock price), which was then echoed by Cisco, which “gave weaker-than-expected revenue guidance”, citing “a slowdown in orders as customers deployed Cisco products they had purchased in recent quarters”, which is of course, slang for excess inventory.
