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The Fed may need to call it a day and soon. The annualized rate of headline CPI inflation in Q4 of 2022 was about 3.1% and that of Core CPI inflation was about 4.4%. And as Christie Romer points out, we may not have started to see the lagged effects of the monetary tightening yet.

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Yes, indeed. This does not seem to me to be the time to hit the economy on the head with a larger brick...

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Yes, Bingo! I was writing about it at length as your comment came by. Please indulge me a little. Here are some numbers I'm looking at: The 3-month annualized % change in the core PCE index has dropped from about 6% in June 2022 to roughly 3.8% in November 2022. For the CPI, in the upcoming months, by my calculation, the headline index has to increase over the prior month at less than 0.5%-0.6% non-annualized rate for the annual inflation rate to keep falling from the current pace. That's not too high a bar. I wish I could send you charts of monthly trends (and surveys) that I have been seeing. Here are a few more telling numbers: The 3-month annualized % change in 1) The CPI core goods prices (June 6.8%, Dec -4.8% (the minus is not a typo). 2) The goods PCE index (June 9.8%, Nov. -0.74%). Meanwhile, the economy has been more or less gangbusters with the unemployment rate reaching 3.5% in December. Clearly, this deceleration of goods inflation (and inflation in general) is not an ebullient demand story. It seems more about global supply chain bottlenecks unclogging. We know where the shelter prices are likely headed given the rapid decline in house prices and rents these past several months. Yes, the Fed should be concerned about the services wage pressures and the consequent. second round price increases, but it should also know that few, if any, got a 9% raise based off of the inflation rate mid-2022. Real wages and incomes are actually down, big. And they want to hit this further with a larger brick. I've been scratching my head raw.

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Yes. Skating toward where the puck is guarantees complex eigenvectors in your dynamic equation, and hence oscillatory overreactions...

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I see that for December, average weekly earnings are down from the previous month. Retail sales excluding gas and autos are down from the previous month. Freddie Mac's national house price index is down for its 5th straight month. Apartment Lists national rental price index has fallen for its 4th consecutive month. Core CPI is up 3.7% annualized from the previous month, but is negative if the highly imputed and lagged Shelter component is excluded.

And we're really considering raising interest rates because core services less housing inflation is too high? Q4 PCE data isn't out for a week, but Q4's CPI services less shelter is 0.9% annualized.

What am I missing? Is everyone else looking at Year over Year data?

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Also, if I may in another comment, you are right to set aside the theories for the time being and listen to Mr. Bond Market under these unusual economic circumstances. It thinks that the Fed is making a mistake and may have to retrace at least one or two steps. This isn't Mr. Bond's most recent itch. It has been quite resolute about this for a while.

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I feel about macroeconomic theory the same way that George Washington felt about religion. It is very important for people to believe that the FOMC is possessed of some form of higher truth, even if they are really just a bunch of reasonably smart folk who are otherwise as much in the dark as the rest of us. Otherwise, the FOMC would not be able to function in our democratic polity. Americans don't defer much to authority, but they still bow to miracle and mystery. The same is true of the courts, but academic lawyers are more willing than economists to admit that there is no there there.

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El Erian: Does he mean that the Fed’s model was wrong. The model said raise FF rates in March 2022 when It should have said September 2021 (or some other date?) And, supposing he is wrong, is he is wrong because of HIS theory? (Ditto Hubbard, Kashkari.) And even if we think they are right that the Fed should have started tightening sooner, how does that translated into it needing to tighten more now?

“Such discussions seem to me to mean…”

They are supposed to mean that the Fed sees it obligation to _flexibly_ stabilize average inflation at 2%, where both the 2% and the degree of flexibility at any time are chosen to facilitate market clearing given shocks and heterogeneous price flexibility.

“neutral rate of inflation”—the rate of inflation below which you should not try to push the economy”

Surely the target is at least that! Although it would mean not push the economy above that rate, either, except “flexibly” in response to extraordinary shocks.

“But how high is the natural rate of inflation in normal times? And how does it alter in times of supply shocks and of sectoral-rebalancing demand shocks? Not enough economists have spent not enough time on these issues.”

Answering these questions correctly is the TOR of the Fed. And grading the exam is the TOR of macroeconomists.

The remainder of your piece is I guess – above my pay grade – such a grading process in real time before all the questions have been answered. Both pass and fail are still possibilities but you fear a borderline D.

2% PCE = 2.4 CPI? Bingo. liner regression 2015-present 2.39%; 2001 to present 2.33%

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I think that we (others not I) _do_ have a theory, but it’ like string theory that it has so many degrees of freedom that you can’t derive monetary policy instrument settings from it. Still, I think it would help if the Fed and its commentators talked about finding the instantaneous rate of inflation that kept resources as fully employed as possible given the need for relative prices to change and heterogeneity in the flexibility of prices.

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Is our tight labor market now due to excess demand (in which case, shouldn't inflation be broad based?), or is it insufficient supply of labor? Because if low immigration, retiring boomers, and millennials on the steep part of the raise curve are the "problem", then maybe that should be solved by Congress and employers rather than beating aggregate demand to a bloody pulp.

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Yes, exactly. Some are claiming right now that we can see this in broad, based indices of wages in service work. I cannot.

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Weekly earnings trending down last year. Then January weekly earnings up 10% annualized - pandemonium. February down 0.5% annualized - crickets.

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