The Exaggeration of Reports on Inflation’s Demise
There has been a prevailing narrative among investors and markets that inflation is on the decline, with expectations of significant cuts in the federal funds rate by the Federal Reserve. However, recent data suggests that this may be an exaggeration.
The Personal Consumption Expenditures (PCE) price index, which measures core inflation excluding food and energy prices, fell more than expected in December. While this may seem like good news, with Federal Reserve Chairman Jerome Powell even suggesting that inflation has eased, it is important to note that the PCE price index still stands at 2.6% over the past 12 months.
Despite 11 rate increases since March 2022, raising the fed funds rate to its current range of 5.25-5.50%, Fed officials do not forecast the PCE to reach its target of 2% even by 2025. In fact, when looking at “supercore” inflation, which excludes energy and housing, the annual rate is almost 5%, up from nearly 4% for all of 2023.
Other indicators also suggest that the economy may be overheating, driven in large part by President Joe Biden’s spending spree. Consumer sentiment has soared to its highest level since July 2021, and economists expect a gain of over 175,000 jobs recorded for January with an unemployment rate remaining below 4% for two years straight.
Given these numbers, it is questionable whether any central bank would consider cutting interest rates. Kevin Hassett, a former chairman of the White House Council of Economic Advisers, argues that no central bank in its right mind would do so. Additionally, Mickey Levy, chief economist for Americas and Asia at Berenberg Capital Markets, and Michael Bordo, director of the Center for Monetary and Financial History at Rutgers University, suggest that the Federal Reserve has not tightened as much as we think, with the real federal funds rate still negative.
There are also concerns about the politicization of the Federal Reserve. Federal Reserve employees have donated significantly more to Democratic Party candidates and organizations compared to Republican politicians and causes. This raises questions about the Fed’s political independence and whether it would time interest rate reductions to influence the outcome of the upcoming election.
In conclusion, while there has been a narrative of declining inflation, the data suggests otherwise. The Federal Reserve should prioritize fighting inflation and not succumb to political pressures. The central bank’s credibility and reputation depend on its independence, and any attempts to manipulate monetary policy for political gain would be detrimental to the economy and democracy as a whole.
