• Posted on March 14, 2024
  • by MI2 Research

“I regret saying it was transitory”

With the Fed in blackout, the market has been left to its own devices to digest this week’s onslaught of economic data. The inflation data was particularly indigestible. CPI numbers came in hotter than expectations, with both Core and Headline higher than forecasts on a YoY basis at 3.8% and 3.2%, respectively: only slightly worse than expected, but worse than expected. The market also had to deal with PPI that was substantially hotter than expected: the month on month came in at 0.6%, double the consensus forecast. Under the surface, goods inflation appeared to once again be rearing its head, accounting for “about two-thirds of the rise in the headline PPI”, courtesy of “a 1.2% surge in goods prices, the biggest increase since August 2023”. (The Houthis are not helping). While the Fed may have taken a temporary vow of silence, Yellen is under no such constraint. Speaking in an interview on Fox, the Treasury secretary said, “I regret saying it, [inflation,] was transitory”, following up with the jab that “I think transitory means a few weeks or months to most people” (how long is a piece of string? To be fair, predicting inflation is, apparently, tricky: “there are clear limitations to how far into the future we can forecast inflation”).

Meanwhile, though the price side of the Fed’s mandate received most of the attention this week, there were also a few interesting developments in the labor market. As Ernie Tedeschi (who is notable as a member of the CEA) pointed out in a short thread, “some current macro mysteries” might be partially explainable “if immigration has been undercounted”. We are also fans of William of Ockham. Additionally, as shown by the latest news regarding the FedEx pilot negotiations, employees continue negotiating for better wages/contract terms, even in the face of potential headwinds for their employers: for the FedEx pilots, “the contract talks are taking place against a backdrop of falling volumes” and the latest NFIB survey saw a relatively steep drop in both the number of companies expecting to hire and the number of companies expressing difficulty in finding quality labor. Turns out that striking while the iron is hot has its advantages.

So where does this leave the FOMC going into its meeting next week? We’d be loathe to make a prediction as to where the all-important dots will land or whether the median Fed dot will land on two cuts or three (see Andy Constan’s discussion of the sensitivity of the dots here), but we are intrigued by the potential for the Fed to continue to signal cuts despite what appear to be strong inflation readings, including healthy/dangerous numbers coming from their new pet metrics (see 6-month changes, which “boost the signal-to-noise ratio”). Like a child who wants to wear its new bathing suit even though it’s snowing, the Fed’s continued focus on cuts and the various narratives constructed to justify them make us wonder whether the move is a foregone conclusion. Let’s hope they don’t arrive on the other side with something new to regret.