This is a mess.
The Fed raised the year end Core PCE median forecast to 2.8%... two weeks ago it came in at 2.753%. At the pace of decline recently, we’re going to be at 2.6% by their July 31st meeting.
What?
We are down 2.0% in one year but all of a sudden it’s going to level off for the next six months? No further progress on inflation, and maybe even a rebound? What are they going to do if we are below 2.8% this month? This is good news for JMo if you believe the Fed knows what it’s talking about.
But it isn’t just inflation. The SEP suggests that unemployment will finish the year at 4.0%... exactly where we are already. Next year 4.2%, and then 2026 will be 4.0%. We’re up from 3.4% to 4.0% over the last year and the next 2+ years are basically unchanged.
This is the goldilocks soft landing scenario. Slowly reduce interest rates, maintaining a consistent amount of braking action on the economy that basically holds inflation/labor/growth steady.
Rates were down 12-15bps after this morning’s CPI report. When the statement first came out, I thought for sure we’d give half that back. But we didn’t. What gives?
Powell also noted that most members do not update their forecasts after an important data point at 8:30am on the morning of the second day (which is a debate for another day). That means this morning’s cooler CPI likely isn’t reflected in the SEP.
SEP Median Fed Funds Projections
2024: Rate cuts dropped from 3 to 1 (5.1%)
2025: 4 cuts (4.1%)
2026: 4 cuts (3.1%)
Interestingly enough, the Fed seems to be acknowledging that 2.5% is no longer “neutral” and the ultimate landing spot will be higher. Nine members now believe it’s 3% or higher, with one member suggesting 3.75%.
Labor
“Unexpected weakening of the labor market” was brought up again. He clarified this to mean “more than the forecast”. Given that unemployment is already at their year end forecast, I don’t think that leaves much cushion before we hit ‘more than expected’.
Powell also noted, “There is an argument that payrolls may be a bit overstated”. I knew he was a fan!
I continue to believe that the Fed is shifting focus from inflation to labor. The war on inflation is not yet won, but it is contained sufficiently enough to focus on protecting jobs.
When asked about the risk of waiting too long given that labor is a lagging indicator, “We completely understand that’s the risk and that’s not our plan.”