I am more optimistic about a rate cut than July. The reason is that I believe inflation is going to recede a bit more quickly than you describe. And the primary statistic I focus on is owner's equivalent rent. I know it is not as much a factor in core PCE, nevertheless I believe it is going to drop quickly here. (Many other countries do not even factor that in-if we did not inflation would be at 2% right now.) I also believe the economy is a lot more fragile and that while tariffs may push up prices - that is a one shot- but the effective tax on consumption is continuous. I also believe many consumers are front running tariffs and there will be a significant fall off the cliff for consumption after tariffs are in place. Slow growth overseas tends to wash up on shore here. Lastly tariffs are driving up the value of the dollar and this is a brake on prices.
One thing I forgot to add is Powell's comment that fed funds rate is meaningfully restrictive. He has stated in the past that he looks at yield curves from 3 months to two years. And they are still inverted (restrictive). We are just now feeling the effects of the tightening cycle from 2022-24. It is not a stretch to believe the economy will continue to soften. It is becoming increasingly vulnerable to an erogenous shock.
The current trading model rewards efficiency based on Adam Smith’s theory. But democracy is not efficient in any means. There is unequal protection of labor and environmental law across the globe, the current trade system let authoritarian countries exploit labor while labor in democratic societies lose market value. It is a sure slow death to America economy. America’s education is for innovation, however first mover advantage is not awarded due to lack of protection in intellectual property across the globe. The current globalism system favors every country except America. If you see the heartbreaking reality of pre-industrial small towns America plagued by poverty, this would be everywhere in America if we lose our high tech industry and it is coming. Trump is a wild card to disrupt the current unfair system. America’s economy matters beyond because we are the stronghold of political and economic liberty against communism which is fundamentally authoritarianism (absolute power is virtue).
Great summary, I find your perspective very useful. Thanks! Quick Q, I saw 6 and 3 month annualized inflation were more like 2.3%, indicating we might be a bit closer to target than the 0.8%, is that a fair way to characterize where we are? (Lots of uncertainty w tariffs, policy etc but pretty close to where we want to be?)
Dr Sahm, hopefully you are in good health and spirits.
On the topic. I have to say that Powell is a cool customer. He's sitting on a volcano of economic uncertainty and doesn't show any stress. And there isn't anything to gain by reacting to this stress. There's no point in criticizing Trump's policy (which undoubtedly will lead to train wreck). Criticizing Trump means getting on bad side of him and warranting firing/removal.
Tariffs, especially on allies, are bad even if they are slowly introduced. Even mindless threat of Tariffs is bad (Krugman has explained this point in recent blog). Mindless budget cuts and firing of federal employees is bad. Mindless deportation exercises is bad. Trump cannot deport millions of migrants. But even a fraction of it will create chaos and instability in labor markets & economy. Mindless obsession with taking over Greenland and threatening Canada is bad. Creating strategic reserve of Crypto is bad.
All the above things and many more will be happening in Trump era. And BTW, Trump has also demanded lower interest rates from Fed. At some point shit will hit the fan and Powell has to confess that Trump's policies are wrecking the economy. We are just one week in the Trump rule and clown show has just started. Things will get worse in coming time.
I am more optimistic about a rate cut than July. The reason is that I believe inflation is going to recede a bit more quickly than you describe. And the primary statistic I focus on is owner's equivalent rent. I know it is not as much a factor in core PCE, nevertheless I believe it is going to drop quickly here. (Many other countries do not even factor that in-if we did not inflation would be at 2% right now.) I also believe the economy is a lot more fragile and that while tariffs may push up prices - that is a one shot- but the effective tax on consumption is continuous. I also believe many consumers are front running tariffs and there will be a significant fall off the cliff for consumption after tariffs are in place. Slow growth overseas tends to wash up on shore here. Lastly tariffs are driving up the value of the dollar and this is a brake on prices.
One thing I forgot to add is Powell's comment that fed funds rate is meaningfully restrictive. He has stated in the past that he looks at yield curves from 3 months to two years. And they are still inverted (restrictive). We are just now feeling the effects of the tightening cycle from 2022-24. It is not a stretch to believe the economy will continue to soften. It is becoming increasingly vulnerable to an erogenous shock.
The current trading model rewards efficiency based on Adam Smith’s theory. But democracy is not efficient in any means. There is unequal protection of labor and environmental law across the globe, the current trade system let authoritarian countries exploit labor while labor in democratic societies lose market value. It is a sure slow death to America economy. America’s education is for innovation, however first mover advantage is not awarded due to lack of protection in intellectual property across the globe. The current globalism system favors every country except America. If you see the heartbreaking reality of pre-industrial small towns America plagued by poverty, this would be everywhere in America if we lose our high tech industry and it is coming. Trump is a wild card to disrupt the current unfair system. America’s economy matters beyond because we are the stronghold of political and economic liberty against communism which is fundamentally authoritarianism (absolute power is virtue).
Great summary, I find your perspective very useful. Thanks! Quick Q, I saw 6 and 3 month annualized inflation were more like 2.3%, indicating we might be a bit closer to target than the 0.8%, is that a fair way to characterize where we are? (Lots of uncertainty w tariffs, policy etc but pretty close to where we want to be?)
Dr Sahm, hopefully you are in good health and spirits.
On the topic. I have to say that Powell is a cool customer. He's sitting on a volcano of economic uncertainty and doesn't show any stress. And there isn't anything to gain by reacting to this stress. There's no point in criticizing Trump's policy (which undoubtedly will lead to train wreck). Criticizing Trump means getting on bad side of him and warranting firing/removal.
Tariffs, especially on allies, are bad even if they are slowly introduced. Even mindless threat of Tariffs is bad (Krugman has explained this point in recent blog). Mindless budget cuts and firing of federal employees is bad. Mindless deportation exercises is bad. Trump cannot deport millions of migrants. But even a fraction of it will create chaos and instability in labor markets & economy. Mindless obsession with taking over Greenland and threatening Canada is bad. Creating strategic reserve of Crypto is bad.
All the above things and many more will be happening in Trump era. And BTW, Trump has also demanded lower interest rates from Fed. At some point shit will hit the fan and Powell has to confess that Trump's policies are wrecking the economy. We are just one week in the Trump rule and clown show has just started. Things will get worse in coming time.
Is this a fed that is nervous about what Trump might do? Or are they just very cautious?