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Is 'Totality' the New 'Transitory'?

CAMS Weekly View from the Corner - Week ending 5/3/24

May 6, 2024

This past week the Fed held their customary interest rate setting meeting with the follow-on post-meeting press conference. 


“Totality” had surfaced a bit in the previous presser or two but was used more consistently in this press conference.   “Totality of the data” rather than a specific set of price inflation measures themselves was often used when Chairman Powell was questioned on the persistent price inflation issue.


We are curious; will totality become the new version of transitory? 


Recall transitory was the operative phrase used three years ago to inform the citizenry that the then burgeoning price inflation was of little concern.  Nothing to see here folks, move along.


With price inflation rates generally increasing in the front months of 2024, doing the opposite as expected, one would think a hard line approach toward price inflation as a sole reference point would have been invoked by Chairman Powell.  We would surmise this in light of how consistently the Chairman has offered that winning the price inflation battle is of the utmost importance.


When questioned on the unexpectedly strong price inflation results of late and asked specifically about the persistent price inflation being in the 3% range (notably above the Fed’s 2% target) and if the Fed feels said persistency would warrant a rate hike the Chairman offered “totality” of the data and how the “outlook evolves.”



EDWARD LAWRENCE. I wanted to follow on the 3 percent, is there a time frame of persistent inflation that would trigger a rate hike?


POWELL. There isn't any rule, you can’t look to a rule, these are going to be judgment calls. Clearly restrictive monetary policy needs more time to do its job. That is pretty clear based on what we're seeing, how long that will take and how patient we should be is going to depend on the totality of the data, how the outlook evolves.  (Transcript of Chair Powell’s Press Conference May 1, 2024


Interestingly, Powell consistently offers his view that restrictive monetary policy needs more time to do its job.  (This is known as the “lag effect” in econ jargon.)  This has been a consistent message offered in his recent pressers.  Strangely, restrictive policy is continually referenced while general financial conditions loosen.


What is not addressed is how rising growth rates of price inflation coupled with a “hold steady” Fed Funds rate equals a lowering of their Fed Funds rate on a real basis.  When the price inflation adjusted Fed Funds rate is calculated you see their “restrictive monetary policy” actually loosening if they hold their Fed rate as is while price inflation growth rates increase. 


An example is if you have a 5% Fed rate and 3% inflation rate their real Fed rate is positive 2%.  If the 5% is held steady and price inflation moves to 4% you only have a 1% real rate – equating to a cut in their interest rate and a loosening of financial conditions.


We share this because it will become a topic downstream in the Fed watch/market(s) landscape if price inflation growth rates increase further from here. 


If this occurs it will be another under the radar metric pointing to the actual loosening of general financial conditions while the Fed and Powell continue to emphasize they are restrictive and the lag effect needs more time. 


We continue to ask can this price inflation era be closed out alongside loosening of general financial conditions such as has occurred in the previous year.  History offers no and thus far history is being proven correct. 


The Chairman is counting on the lag effect to show up anytime now but this will continue to prove difficult unless market and economic system participants begin to take away the loosening of financial conditions they brought forward over the previous year?


Powell’s current day messaging is not helping the needed reversal.  Hold this thought.

Above is a National Financial Conditions index offered from the Chicago branch of the 12 District Federal Reserve System


To the far right we highlight the downtrend (loosening) of financial conditions that began in March of 2023 – over a year ago.  At the bottom of our red downtrend line is our current level which remains looser than what this Index posted when the Fed began to raise interest rates in March of 2022. 


The overall emphasis here is general financial conditions are not tight and we use this index as a quick one-stop picture to offer a visual.


Tiger by the Tail


In an earlier edition we shared the view that Powell and the Fed have a tiger by the tail in the form of significant loosening of financial conditions of which they played a significant role in creating.  The above loosening of financial conditions gained its momentum by general market and economic system participants taking note of the Chairman’s messaging. 


In the previous near-year he allowed peak rates and follow-on rate cuts to be entered into the national conversation which morphed into a national expectation.  Upwards of six rate cuts became the expectation for 2024 while price inflation rates continued to come in well north of the Fed’s 2% target.  That is crazy talk.


Said participants began acting in real-time for what they expected to see (affirmed by Powell’s messaging) in the near downstream economic landscape.  Through this financial conditions loosened and growth rates of price inflation halted their down trending behaviors.


This is What Soft Messaging Looks Like



We are prepared to maintain the current target range for the federal funds rate for as long as appropriate. We are also prepared to respond to an unexpected weakening in the labor market.  (Transcript of Chair Powell’s Press Conference May 1, 2024


At the presser Powell offered the above in prepared remarks.  To a casual observer this surely appears benign.  In Fed watch lingo, market/economic system participants run toward this similar to a dog toward a steak bone.


This is one of many examples of how financial conditions loosen via messaging. 


The Fed is in a dog fight with price inflation.  If winning said fight is your central focus you steer clear of even a hint of cutting rates.  By offering, unnecessarily so, that the Fed is also prepared to respond (think cutting interest rates) to unexpected weakness in the labor market he instantly messaged “don’t forget about potential rate cuts.” 


Ask yourself, what do you hear or experience more of in your socioeconomic life:  Price inflation issues/concerns or inability to find employment? 


On a personal note my interaction in society screams price inflation issues/concerns from fellow citizens while finding employment seems to be nearly non-existent. 


Interestingly and yet not surprisingly, with the above excerpt in mind, last Friday market participants acted in kind relative to the above messaging when the monthly employment data was released reflecting yet more job growth.  


The kicker here is that job growth came in less than expected and the Unemployment Rate moved upward by 1/10th of a percent – yes one-tenth – which still has said rate solidly in the low range of recent years.  The response was a large stock and bond market response upward.  Why? 


Hey, the Fed, per their messaging, is willing to cut rates if unexpected weakness shows up in the labor market.  Yes, sometimes it is that simple – like a dog to a bone.


A lower than expected employment report with a tiny increase in the Unemployment rate qualifies as such right.  This is how financial conditions loosen all while Powell and the Fed offer their monetary policy is restrictive.


At some point Powell and his Fed will most likely have to go hard line towards price inflation in order to close out this inflation era.  Offering their policy is restrictive while simultaneously stating or even inferring that rate cuts could be coming offers a polar opposite simultaneous message.


With this the market participant in you may enjoy the upward move in market prices while the citizen within you experiences the frustrations of higher consumer/services prices and the downstream societal discontent that often comes with it. 


As long as general financial conditions remain loose history offers price inflation will not be leaving the scene soon.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

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