One of the things which the Fed is reported freaked out about is rising wages. Your bete noire, the NYT, reported yesterday that nearly a million near seniors choose retirement rather than reentry into the workforce. That's a pretty clear supply shock which ought to raise wages. Falling ocean shipping rates, fuel prices, and housing prices all suggest that disinflationary momentum is strong. I'm afraid that the Fed has already blown out chance for a soft landing.
Core inflation less shelter is negative the past 2 months. Shelter measures of inflation lag, so we know that will fall. And although businesses probably won't see the price of their energy (diesel, coal, natural gas) fall much, it shouldn't increase. No new inflation shock is visible, though such things are rarely foreseen. No pandemic supply shock, no massive fiscal stimulus in a divided government, no QE that pushes OAS MBS yields through Treasuries, no wartime supply shock. Housing investment is falling, real PCE is flat, there are 350 bps of Fed rate increases less than 9 months old, and the Fed will presumably raise at least once more.
Isn't there a decent chance of DEFLATION in 2023? Hopefully mild, unlike after the last time we had combined pandemic and war. If there is deflation, but no exogenous shock or fear, would the Fed immediately cut rates or engage in QE? I suspect their action would be to pause QT, particularly since Reuters reports that dealers are universally screaming about Treasury illiquidity and believe that continued QT is impossible. A global recession and QT would cause long yields to plummet. Now add to that the debt ceiling in late summer, along with an FOMC that doesn't want to look wrong or reactive, and you get the most inverted yield curve ever. One that will probably destroy some nonbank financials.
One of the things which the Fed is reported freaked out about is rising wages. Your bete noire, the NYT, reported yesterday that nearly a million near seniors choose retirement rather than reentry into the workforce. That's a pretty clear supply shock which ought to raise wages. Falling ocean shipping rates, fuel prices, and housing prices all suggest that disinflationary momentum is strong. I'm afraid that the Fed has already blown out chance for a soft landing.
Core inflation less shelter is negative the past 2 months. Shelter measures of inflation lag, so we know that will fall. And although businesses probably won't see the price of their energy (diesel, coal, natural gas) fall much, it shouldn't increase. No new inflation shock is visible, though such things are rarely foreseen. No pandemic supply shock, no massive fiscal stimulus in a divided government, no QE that pushes OAS MBS yields through Treasuries, no wartime supply shock. Housing investment is falling, real PCE is flat, there are 350 bps of Fed rate increases less than 9 months old, and the Fed will presumably raise at least once more.
Isn't there a decent chance of DEFLATION in 2023? Hopefully mild, unlike after the last time we had combined pandemic and war. If there is deflation, but no exogenous shock or fear, would the Fed immediately cut rates or engage in QE? I suspect their action would be to pause QT, particularly since Reuters reports that dealers are universally screaming about Treasury illiquidity and believe that continued QT is impossible. A global recession and QT would cause long yields to plummet. Now add to that the debt ceiling in late summer, along with an FOMC that doesn't want to look wrong or reactive, and you get the most inverted yield curve ever. One that will probably destroy some nonbank financials.