A sign advertising rental units is posted outside a building in Manhattan on April 11, 2024 in New York City.
Spencer Pratt | Getty Images
Investors, consumers, policymakers, and even economists have been caught off guard by how stubborn price pressures are as we head into 2024. On Friday, the Dow Jones Industrial Average rose nearly 500 points, and stocks fell, dropping 2.4% for the week and nearly falling. All profits for the year.
“Fool me once, shame on you. Fool me twice, shame on you,” Harvard economist Jason Furman told CNBC this week. “We’ve now performed better than anyone expected for three months in a row. It’s time to change the way we think about the future.”
There is no doubt that the market is being forced into a dramatic shift in thinking.
Even import prices, a less important data point, contributed to the story. In March, sales recorded the largest three-month increase in about two years. All of this created a huge headache for the market, which sold off through most of the week until it really fell on Friday.
As if the bad news about inflation wasn’t enough, a report in the Wall Street Journal on Friday added to the cacophony by suggesting that Iran plans to attack Israel in the next two days. Energy prices, a key driver of inflation indicators over the past two months, rose on signs of further geopolitical turmoil.
Jim Paulsen, a market veteran and former Wells Fargo & Co. strategist and economist who now writes a blog on Substack titled “Paulsen Perspectives,” said of Friday’s decline, “It’s your choice. It’s a trigger. There are a lot of them,” he said. “More than anything, this is really happening because of one thing. If it’s going to happen, it’s a war between Israel and Iran. … That just creates a great sense of instability.”
By contrast, markets this year have shown an accommodative Fed poised to cut rates early and often, cutting rates six or seven times before kickoff in March. However, stubborn monthly data is forcing investors to recalibrate, and futures market pricing suggests that the probability of no rate cut this year is seen as non-zero (about 9%), and as of now. We expect only two rate cuts.
“I hope the Fed is in a position to cut rates later this year,” said Furman, who served as chairman of the Council of Economic Advisers under former President Barack Obama. “But the data isn’t quite there, at least not yet.”
This week has been full of bad economic news, with the reality of inflation being brought to light again literally every day.
The New York Fed’s consumer survey began on Monday, with expectations for rent increases next year rising by 8.7%, a significant 2.6 percentage point increase from February’s survey. The outlook for food, gas, health care and education costs have all increased as well.
The National Federation of Independent Business said Tuesday that optimism among its members has hit an 11-year low, with members citing inflation as their top concern.
Consumer prices released on Wednesday beat expectations, bringing the 12-month inflation rate to 3.5%, and the Labor Department reported Thursday that wholesale prices rose by the most in a year since April 2023. .
Finally, Friday’s report showed that import prices rose more than expected in March, marking the first significant three-month increase since May 2022. In addition, JPMorgan Chase CEO Jamie Dimon warned that “persistent inflationary pressures” posed a threat to the economy. And business. Additionally, the University of Michigan’s closely watched consumer sentiment survey was lower than expected, with respondents also raising their expectations for inflation.
Fed officials noted the rise in readings, but did not sound panic alarms as most still expected to cut rates later this year.
“The economy has come a long way towards improving balance and achieving our 2% inflation target,” said New York Fed President William Williams. “But we have yet to see our dual missions fully aligned.”
Boston Fed President Susan Collins said she expects inflation to return to 2% “on an uneven but sustained basis,” but that “it may take longer than we previously thought.” I can’t do it,” he pointed out. Minutes from the March Fed meeting released Wednesday showed officials worried about rising inflation and looking for more convincing evidence that inflation is steadily declining. .
While the Consumer Price Index and Producer Price Index have grabbed the market’s attention this week, it’s worth remembering that the Fed’s focus is elsewhere when it comes to inflation. Policymakers are instead tracking the personal consumption expenditure price index for March, which has not yet been released.
There are two important differences between the CPI index and the PCE index. Primarily the Department of Commerce’s His PCE adjusts to changes in consumer behavior, so if people are substituting chicken for, say, beef due to price changes, that will be reflected in his PCE more than the CPI. It will be. PCE also deemphasizes the importance of housing costs as rental and other shelter prices remain high.
February’s PCE reading was 2.5% for all items and 2.8% excluding food and energy, the “core” reading that Fed officials are monitoring more closely. His next release won’t take place until April 26th. Citigroup economists said current tracking data shows the core edging has fallen to 2.7%, an improvement but still far from the Fed’s target.
Additionally, there are other signals that the Fed has a long way to go.
The Atlanta Fed’s so-called fixed-price CPI rose modestly in March to 4.5% on a 12-month basis, while the flexible CPI rose by 1 percentage point, albeit at just 0.8%. Fixed-price CPI includes products such as housing, auto insurance, and medical services, while flexible prices concentrate on food, energy, and auto prices.
Finally, in February, the Dallas Fed lowered average PCE to 3.1%, an extreme number on either side, which is still far from the central bank’s goal.
The silver lining for the Fed is that the economy has been able to tolerate higher interest rates with little impact on employment conditions or macro-level growth. However, there are concerns that this situation will not last forever, and there are signs of cracks in the labor market.
“We’ve long worried that the last mile of inflation will be the most difficult. There’s a lot of evidence that the process of deflation is nonlinear,” said Furman, the Harvard economist. “If that were the case, it would take significant unemployment to raise inflation to 2.0%.”
That’s why Mr. Furman and others are calling on the Fed to reconsider its firm commitment to 2% inflation. For example, BlackRock CEO Larry Fink told CNBC on Friday that if the Fed were able to raise inflation to around 2.8% to 3%, “it would be a one-day victory.” .
“I think it’s OK if we at least get to a level where we can round the inflation rate to 2% and round 2.49 to the nearest 2. If it stays stable there, I don’t think anyone would notice it,” Furman said. ” he said. “But I don’t think they can afford the risk of inflation exceeding 3. That’s the risk we’re facing right now.”
