The Fed -- August 22, 2024

Locator: 48484ECON.

The Fed's Jeffrey Schmid: listening to Steve Liesman's interview with "the Fed's Schmid" reminded me of my post back in late June, 2024. Wow, no sympathy / empathy for folks struggling with "restrictive rates." Schmid is still not convinced cuts are necessary. I agree, but that's different. LOL. So, the question becomes, will JPow hold back on cuts if he doesn't get a unanimous vote?

Re-posting, from June 28, 2024:

*****************************
The Fed

The Fed, the "rate," the market, the talk: after lots and lots of discussion about the Fed and when will the Fed cut rates, and then today's numbers (the PCE) and then comments from various Fed committee members. the fog is starting to clear:

• "they" may be talking about 2% inflation, but no one has really defined what components / what metric the Fed is really, really following (they have a "preferred" metric but that's just one of many); and,
• no one has really, really defined how long the metric must remain at 2% for the Fed to cut.

If one has not yet noticed, the Fed's promise to cut the "Fed rate" is like watching Lucy holding the football for Charlie Brown to kick, and furthering the analogy, if Lucy ever lets Charlie Brown kick the ball, he will find Lucy has moved the goal posts.

This is what's going on and how things will play out:

• the Fed is not shooting for 2%; they're shooting for 1.5% inflation rate for several months and for indications that inflation has truly been tamed before they will make meaningful cuts;
• to get to 1.5% inflation, we will have to see significant deflation (or is it called disinflation now?);
• bottom line: the Fed is now targeting 1.5% not 2%;
• the only way to get to 1.5% is to get through 2% and to see lots of pain;
• the Fed hawks will want to see headlines of "pain" on the business pages of general interest magazines and other media outlets, not simply in the headlines of business magazines and other business media outlets.
• the only "thing" now holding back that 2% target is rent, and maybe house prices, but in the big scheme of things, the only "thing" between now and 2% inflation is rent;
• and the housing situation is so tight in the US, there is no chance landlords are going to lower rents, which is required if we're going to get to 2%.

So, again:

• the Fed is targeting 1.5% inflation using undefined metrics and undefined time periods;
• to get to 1.5%, lots of pain will need to be endured by the broad "middle class" -- however one wants to define that demographic
  
• the lower class is relatively unaffected by inflation (and if they are, no one is listening to them anyway); and the wealthy are doing, doing very, very well with 5% in  money market funds to hedge against their investments in Nvidia.

And, oh by the way, while contemplating the above, no one has ever explained to me why the Fed targets a 2% inflation rate, and not 1% or 1.5% or 3% or 3.5%. So, even targeting 1.5% is incorrect. In fact, the Fed is looking for something else, but the press and Steve Liesman need a number, and 2% is the Fed's number, though in fact, it should be clear by now, it's really 1.5% if one needs a number. 

In fact, the Fed is looking for something else.

The Fed is looking for this: an undefined (for lack of a better word) "pain index."

The Fed's “pain index":

• increasing unemployment rate, greater than 5% in U-3 unemployed;
• the lack of "we are hiring signs" in the store windows on Main Street;
• headlines in USA Today screaming the US economy is deteriorating;
• a falling GDP but without going negative.

The Fed will get no credit if it lowers rates  in a Goldilocks environment, but if the economy starts to deteriorate and the pain index is obvious to all, then JPow can swoop in, cut rates, and look like the hero. And if timing works out, the Fed’s dithering could prove to be incredibly fortuitous for the next president, whomever (whoever?) that might be.