Powell: Getting Ready to Re-Recalibrate?!

Fed's Pivot From Inflation Was Premature

Merriam Webster dictionary explains “recalibration” as the process a navigator goes through to bring a navigation system that has drifted off course back to its original path. In explaining the monster 50 basis point reduction in interest rates announced on September 18, Federal Reserve Chairman Jerome Powell referred several times to a recalibration that was taking place. The central bank’s focus had shifted from inflation to jobs, he explained, because the battle against inflation had been almost won. Equity and Treasury markets rallied in response to the message.

To be effective, a recalibration needs to be a one-shot adjustment of the navigation system. It will not work if the navigator constantly tinkers with the mechanism. The latest consumer price numbers released by the Bureau of Labor Statistics on Thursday suggest that Powell and his senior colleagues may have jumped the gun in shifting policy and are at risk of confusing investors with further pivots.

According to the BLS, both headline and core CPI inflation numbers were more elevated than expected. The headline index rose by 2.4% over the past year, surpassing consensus expectations of a 2.3% rise. The 12-month figure for the core measure, which excludes food and energy, accelerated from 3.2% in August to 3.3% in September. On a month-on-month basis, neither headline nor core inflation budged from their pace in August.

Even the break consumers got from the fall in the retail price of gasoline — 15.3% over the past year and 4.1% in September alone — did not suffice to translate to lower inflation numbers. An acceleration in the cost of new and used cars and trucks, and a surge in the cost of medical care, took care of keeping headline inflation high.

Why was the reaction of the Treasury market so tepid to the better than expected Producer Price Index number yesterday — the headline figure was flat in September compared with the 0.1% increase that had been expected? BLS data suggest that the benign figure owes a lot to the 2.7% decline in the wholesale cost of energy last month, a feature that is unlikely to be sustained.

The price of oil has turned up in recent days with growing Israel - Iran tensions, and this could transform the tailwind for US inflation from gasoline prices into a headwind stemming from global factors. Furthermore, increases in food prices, or supply disruptions, resulting from Hurricanes Helene and Milton would be reflected in various measures of October inflation rates.

But was the Powell recalibration justified in light of the jump in initial jobless claims to 258,000 in the latest week, surpassing the consensus expectation of 230,000? A significant portion of the increase is traceable to the impact of Hurricane Helene, and the weekly figures for October will be distorted by the damage caused by Milton. Due to the distortions, the forthcoming jobless claims numbers are unlikely to prove conclusive in supporting the Powell pivot.

A reading of the minutes of the Federal Open Market Committee meeting on September 17 - 18 suggests that there were some members who were queasy at the large rate cut. Michelle Bowman became the first Governor since 2005 to dissent on an FOMC decision. In her statement on September 20, Governor Bowman pointed to the strength of the US economy in explaining her dissent. “Although hiring appears to have softened, layoffs remain low,” she said. “I see the normalization in labor market conditions as necessary to help bring wage growth down to a pace consistent with 2 percent inflation given trend productivity growth,” she concluded. Such normalization of the labor market has yet to occur.

Another Fed official did a flip-flop on his stance within the few weeks that have passed since the most recent rate decision. After stating on September 30 that he would support another 50bp reduction at the November meeting if job growth slowed faster than expected, Atlanta Fed President Raphael Bostic indicated on Thursday that he may support a pause at next month’s FOMC session, if necessary. “I am totally comfortable with skipping a meeting if the data suggests that’s appropriate,” he told the Wall Street Journal. The yield on 10-year Treasurys rose above 4.11% intra-day on Bostic’s latest comment.

As for some of the remaining voting members, they seem to have gone along with the Chairman’s desire to “recalibrate” despite their own hesitation to do so because inflation remains above the Fed’s 2% target. Aren’t Federal Reserve officials supposed to be members of a thoughtful, deliberative body rather than march like lemmings following their leader?

All of this is just further confirmation that advice from the Fed, euphemistically known as “Forward Guidance”, does not amount to much. Expect volatility to continue to characterize equity and bond markets, thanks to shifts in central bank policy.

Dr. Komal Sri-Kumar

President

Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

@SriKGlobal

October 12, 2024

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