Based on Today's Report, Powell Should be Biting His Lip on Inflation

The rise in inflation that I’ve said we could see by end of summer, continues to look increasingly likely to emerge soon and not like it is going to cut Chairman Powell’s rate cut a break. The US manufacturing report came in at a 15-month low, signaling the economy is not as rosy as indicated. 

PMIs disappointed in the early September print with both Services and Manufacturing falling.

Manufacturing actually fell way off, while services put in an inconsequential (so far) blip of a dip:

What really sounded off, however, was producer inflation that will be heading down the pipe to consumers, getting worse than it has been all summer.

A reacceleration of inflation is meanwhile also signalled, suggesting the Fed cannot totally shift its focus away from its inflation target…

There are some warning lights flashing, notably in terms of the dependence on the service sector for growth, as manufacturing remained in decline, and the worrying drop in business confidence….

“The survey’s price gauges meanwhile serve as a warning that, despite the PMI indicating a further deterioration of the hiring trend in September, the FOMC may need to move cautiously in implementing further rate cuts. Prices charged for goods and services are both rising at the fastest rates for six months, with input costs in the services sector – a major component of which is wages and salaries – rising at the fastest rate for a year.”

That scenario is not likely to mix well during the remainder of the year with the Fed’s supersized rate cut as its stimulus laxative slowly seeps into the general economy.

"Today, unemployment is up to 4.2 percent, inflation's down to a few tenths above 2. So, we know that it is time to recalibrate our policy to something that is more appropriate given the progress on inflation, and on employment, moving to a more sustainable level, so the balance of risks are now even,” answered Chairman Powell. He had just cut interest rates by 50bps.

We shall soon see because …

Naturally no one asked him how he felt about initiating an easing cycle with the stock market at all-time highs.

Certainly, not something I remember the Fed ever doing, much less celebrating that high-velocity market with an “crisis-scale” rate cut, as Zero Hedge tagged it.

“We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with disinflation. That’s what we’re trying to do. And I think you can take today’s action as a sign of our strong commitment to achieve that goal,” explained Powell.

No one asked whether he took into consideration forward-looking inflation indicators like gold, which has soared to a new record. And Bitcoin is up 137% over the past year.

In fact …

No one asked him about … infrastructure buildout, the coming electricity shortage, the intensifying trade war with China, how the Inflation Reduction Act is impacting policy, or whether he thinks monetary policy is all that important, now that politicians of both parties seem comfortable running deficits that throughout history were only seen during times of war.

Which looks like this:

The Fed completely underestimated inflation, got hopelessly behind the curve, then hiked rates in an unprecedented fashion. They thought the natural rate of interest for the world’s largest economy was probably negative, and in a few short years changed their minds and think it’s probably positive. The only bear market left is in the value of an economics PhD.

An emergency-scale rate cut just to keep the economy perking along when Powell says …

“The labor market is actually in solid condition. And our intention with our policy is to keep it there. You can say that about the whole economy. The US economy is in good shape.

… seems like a lot more than is needed just to keep a solid labor market and an economy that is in good shape staying that way. It sounds more like election-year stimulus to help the incumbent, which Powell would completely deny, or like there is some uncertainty in that economic picture that Powell is not letting on because he has to be careful about what he says so as not to trigger economic downfall.

In fact, the author of the article I’m quoting asked ChatGPT what it thought about Powell’s words, and the AI replied that his manner of speaking sounded very uncertain.

At any rate, a 50-basis-point cut (half a percent) during “solid” times that are in “good shape” when background inflation has been rising for months on the producer side seems like the Fed still underestimates inflation, just as it did when it was claiming in the face of continuing sizable increases in consumer inflation that it was all transitory and would go away on its own.

Well, on a long enough timeline, the earth is transitory, too, so the Fed’s view on inflation wasn’t too helpful. It damaged all of us with prices that will remain higher for the rest of our lives, even if inflation cools back down to the Fed’s norm of 2%. That will always mean 2% of a much higher number on nearly every price, barring a deep recession that is deflationary. So far, we have a stagflationary recession that is staying that way for now.