Inflation & Interest Rates: share your data sources, models, and assumptions

[BicycleB]

Whelp, we can all stop looking at this pesky, uncooperative data and reading tea leaves.  The President told Davos that he would "demand" lower interest rates, as soon as Opec cuts oil prices.  Mr. Trump said of the Fed and Chair Powell:

"I think I know interest rates much better than they do, and I think I know it certainly much better than the one who's primarily in charge of making that decision."

This, said of the Chairman he appointed in his first term.

(cheap shot of the day)

Took me a minute to switch from the dementia thread to the incident above, due to the similarity of symptoms

[ChpBstrd]

Whelp, we can all stop looking at this pesky, uncooperative data and reading tea leaves.  The President told Davos that he would "demand" lower interest rates, as soon as Opec cuts oil prices.  Mr. Trump said of the Fed and Chair Powell:

"I think I know interest rates much better than they do, and I think I know it certainly much better than the one who's primarily in charge of making that decision."

This, said of the Chairman he appointed in his first term.

Markets appear to be disregarding most of what Trump says. They're calling his bluff on:

• tariffs,
• political manipulation of interest rates, and
• deportation of a significant chunk of our GDP

The market's view is that the President is more talk and drama than action. He'll threaten tariffs, impose limited tariffs on certain categories of goods, and negotiate many of those tariffs away later. He'll jawbone and bitch about interest rates, but in the end the FOMC will make the calls just like they always have. He'll take actions to make it look like immigrant raids are going on everywhere, but in the end the numbers will add up to an average year.

So far, Trump has not enhanced his credibility. He punted tariffs from a day one priority to February 1st, and merely issued toothless executive orders which read like resolutions. He recently told Sean Hannity that he'd "rather not" impose more tariffs on China.

The stock market seems to be one-sided on the assumption that Trump is just bullshitting, because any one of these actions would cause prices to rise or a recession to occur, and with valuations where they are, that scenario could look a lot like 2000-2003. Stocks don't make sense if you take Trump seriously.

One could say that the usually-wiser bond market is the only market even slightly factoring in Trump's words. As Trump's win became more probable in September-October last year, long-term rates started shooting up, with the 30 year bond hitting a high of 5% on January 13th, compared to just 4% a mere four months earlier! This sudden increase in long-term rates and forward inflation expectations occurred as Trump was maintaining polling parity with Harris, which in the recent past has signaled a Republican win.

So it's reasonable to ask what if the stock market is wrong?

What if Trump issues blanket tariffs against the U.S's top trading partners on February 1st as promised?
What if Trump does away with due process (the bottleneck) and starts actually deporting millions?
What if Trump's political pressure on the Fed leads to continued rate cuts, higher inflation expectations, a higher cost of debt, a failed treasury auction, or a sudden devaluation of the dollar?
What if much higher deficits lead to a debt or currency crisis?

The counterargument is that we've been through this before. During Trump 1.0, all sorts of crazy promises were never kept. Milder tariffs were applied, put a dent in GDP, and were then quickly rescinded after negotiations won concessions nobody can remember. Deportations were no higher than in the Obama era, despite all the media attention. The Fed was allowed free reign to raise rates by 200bp between 2017 and 2019. The counterargument says why shouldn't we expect more of the same, from literally the same President?

The argument in favor of taking the President seriously relies on the changed political landscape. The devastating losses of 2024 demonstrate that the Democratic Party is dead for at least a generation, and their lack of ownership of media assets (Fox News, X, YouTube, Microsoft News, etc) represents a durable competitive disadvantage that Democrats don't even seem to understand yet. And the Dems are nowhere near as advanced as the Republicans in terms of owning AI assets that could work across platforms to change attitudes on the individual level - see the politically-connected Stargate initiative.

In other words, our 78 year old lame duck President with full party control of all wings of government plus the media does not necessarily have to worry about the next election. Even if his policies lead to a recession, the Republican Party will maintain control of government because of the comparative weakness of the Democratic Party and tightening Republican control over the information space.* Trump has the power to fully enact a vision like no president in recent years has enjoyed, and is relatively unaccountable for the consequences. This vision could include a regime where tariffs pay for income tax cuts, where industrial policy gradually replaces service sector jobs with manufacturing, and where AI enabled media keeps the population supporting the ruling party in perpetuity.

If Republicans ever had a dream of actually changing the U.S. in a dramatic way, reversing globalization, redesigning the tax system, axing the bureaucracy and social safety net, and ending foreign interventionism, then now is the time to do it. Whatever price there is to be paid in terms of jobs, inflation, recessions, or investment returns will not affect political outcomes. So at this time, they are the kings, with near-complete power and control.

And of course the counterargument is that Trump whittled away his last opportunity playing on Twitter and watching Fox News.

So let's break down the possibilities, think out the outcomes, and assign probabilities:

• It's All Bluster: Only minor or symbolic changes occur. 2025-2027 will be a repeat of 2016-2019 market performance. S&P500 gains about +15% per year on average.
• Somewhere in the Middle: Modestly destructive, but much less than was promised on the campaign trail. Minor recession with -15% losses.
• Whole Enchilada of Poo: Eventual implementation of the entire agenda, perhaps over 2-4 years. Major recession with -40% losses to S&P500.

Given the above, I'd estimate current odds at:

• Bluster: 40%
• Middle: 40%
• Enchilada: 20%

If I'm anywhere near correct in my assumptions (e.g. Bluster is not 95% odds) then stocks are a game of musical chairs, and we all need to be locking in near-5% yields on treasuries and replacing shares with call options instead of ignoring the risks.

*Results DO NOT matter in politics, and if you think they do matter ask Obama how his party was labelled weak on immigration when he deported more people than Trump would deport, or ask Biden about how an improbable soft landing was pulled off during his administration and yet most people thought we were in recession amid 3% GDP growth. People still believe the incorrect messaging they received on both issues via conservative owned media.

[waltworks]

Purgamentum init, exit purgamentum.

With the political wildcards at play, predictions become even more impossible, unfortunately.

-W

[EscapeVelocity2020]

Current forecast is 50/50 for the next 25 bps Fed Rate cut in May...  I'm thinking the market is expecting more cuts given stocks surging again, but yields on Treasuries are stubbornly high.  There is an expectation that Trump will come in to office like a bull in a china shop, with a comprehensive debt ceiling raise, tax cut, and border bill ready to be passed by May.  There are also inflationary tariffs in flux, possibly being scaled back.

All of this is to say, a lot of things are going to be changing between now and May, so it's useful to remind ourselves of where we were at.

So now the most likely Fed path, according to CME, is for one 25 bps cut in June and then hold.  And yet the market is near record highs again and the 10-year is steady to climbing around 4.5%.  Current Shiller PE is 38.47 equal to a 2.6% earnings 'yield' and dropping...

All of my fresh money is going in to fixed income.  I just started a deferred compensation plan, and this will be the kind of 'short term' investments that I see myself only holding for 5 years or less.  When I ER in about 4 years, this will start paying out.  It would really suck to lose a significant % in the meantime, especially knowing I have a real return of 3 - 4% available to me.

[ChpBstrd]

December PCE:            +0.3%, +2.6% annualized
December Core PCE:    +0.2%, +2.8% annualized
December Personal Savings Rate: +3.8%

PCE is in line with a small resurgence in inflation seen since June 2024 - shortly after the QT reduction in May 2024 and a couple of months before the first rate cut in September 2024.


But Core PCE has a less-clear trend - particularly due to November. This is the Fed's benchmark, and so the ambiguity will further support a wait-and-see approach.


Yet it's the Personal Savings Rate that catches my eye. 3.8% is objectively pitiful, and the PSR has been falling since January 2024 when it was 5.5%. It's not that I expect the drunken sailors around me to suddenly adopt Mustachianism; it's that any increase in consumer spending comes from the combo of changes in wages and changes in savings. I.e. consumers will spend more money if their wages increase OR if their savings rate decreases. If their savings rate increases, they can only spend more money if wages increase even more. The PSR trends around 5% in normal times, but factors such as the home-equity extraction boom of 2004-2007 or the stimulus money of 2020-2022 can send it below that 5% trendline, by reducing consumers' need to save from their paychecks. So what is causing the PSR to fall, in the absence of an external source of money for consumers? Possible answers are (1) a stock price appreciation wealth effect, which drove down savings in 1999 too, (2) home price appreciation creating both a wealth effect for homeowners and higher expenses for home buyers or renters, and/or (3) consumers are tapped out, a decrease in consumer spending is incoming, and a recession could occur.

[dangbe]

My brother who owns a retail cafe said December was the worst month he's seen in a long time, and generally December is the best month of the year.  He talked to other local businesses and they all had the same experience.  His sentiment is that consumers are tapped out. Could just be a regional thing, but its another data point I'll keep in mind. 

[MustacheAndaHalf]

Government data showed increased spending by consumers in December (0.7%), which was higher than their increase in income (0.4%) and disposable income (0.4%).  I'm not clear if those are compared to the prior month, or the same month from a year earlier.
https://www.bea.gov/news/2025/personal-income-and-outlays-december-2024

Growth of the median wage seems to be slowing in nominal terms, but rising in real terms, according to these two graphs.
https://www.atlantafed.org/chcs/wage-growth-tracker
https://fred.stlouisfed.org/series/LES1252881900Q

[ChpBstrd]

Government data showed increased spending by consumers in December (0.7%), which was higher than their increase in income (0.4%) and disposable income (0.4%).  I'm not clear if those are compared to the prior month, or the same month from a year earlier.
https://www.bea.gov/news/2025/personal-income-and-outlays-december-2024

Growth of the median wage seems to be slowing in nominal terms, but rising in real terms, according to these two graphs.
https://www.atlantafed.org/chcs/wage-growth-tracker
https://fred.stlouisfed.org/series/LES1252881900Q

I'm thinking those are month over month increases, based on the following language:

Personal income increased $92.0 billion (0.4 percent at a monthly rate) in December,

So I'll assume they maintain a "monthly rate" convention throughout. Also, a monthly interpretation intuitively aligns better with a 3.8% savings rate or 4.2% annual wage growth. I.e. if spending was increasing 0.4% per year while wages were going up 4.2%, then the savings rate would have to be going up. Still, the BEA could be clearer with their language and data labels. This is exactly why I try to always label data monthly or yearly when I'm talking about it here.

The stats you selected for comparison tell an interesting story:

1) Consumer spending growth exceeded wage growth in December (xmas effect?) and 5 of the last 7 months (not an xmas effect), causing the savings rate to go down.

2) Wage growth still exceeds inflation, which would in theory allow consumer spending to increase even if consumers weren't reducing their savings rates.

3) Given that both CPI and PCE increased 0.4% in December, consumers are buying the same amount of stuff overall and PCE is merely reflecting price increases. Thus consumers may be dissatisfied that their raises are merely being spent on inflation.

4) Given that services are the driving factor behind inflation, and wage growth makes services more expensive, I think we're in a cycle where wage growth is driving services inflation, which is driving expectations for wage growth. If any services workers take smaller pay raises than services inflation, they lose purchasing power for services. But services inflation can't go down unless services wage growth goes down. Thus the two factors are intertwined until rising unemployment or initial claims lead workers to accept wage growth below the rate of services inflation.

[MustacheAndaHalf]

It could be monthly.  I'm used to CPI reports clearly stating what is month over month, versus year over year.

Also, further down that BEA report for December, they list categories of consumer spending, ordered from largest increase to smallest.  The thing is, by itself those numbers aren't very helpful - it is unclear which ones increased the most as a percentage of prior spending.  Again, CPI reports are more helpful.  I tracked down the Dec 2024 report with details for each item, including item weights.  That seems to be flawed, though

Housing and utilities increase $29.8 billion (CPI shelter 36.707%)
transportation services increase $25.9 billion (CPI transportation services 6.586%)
gasoline and other energy goods increase $21.8 billion (CPI energy 6.442%)

Dividing each spending increase by the $133.6 billion total, I get 22.3% housing, 19.4% transportation services, 16.3% energy.  I can't really make sense of the BEA data, so maybe I should stick with CPI reports.

[ChpBstrd]

Here's an interesting perspective from Michael Gayed, who publishes a newsletter. He's commenting on Monday's post-tariff volatility, and noted that market movements were what one might see if markets expected demand to fall.
https://www.cnbc.com/video/2025/02/04/volatility-of-trump-policies-is-disinflationary-due-to-demand-collapse.html

...the market reaction... acted more like a disinflationary-deflationary scare actually, which is interesting in the context of everyone saying tariffs are inflationary.

I think the uncertainty about policy is going to be disinflationary/deflationary, because if everybody gets nervous about the volatility of policy, it's harder for businesses to plan properly and expand and have confidence in expanding. And it's harder for consumers to know if they should buy something that might be more expensive or cheaper in the future. 

I don't agree with Gayed. In my opinion, the market reacted like you would expect if the odds of a recession increased. Are recessions usually disinflationary? Yes. But it would take another Great Depression to deflate prices enough to even slightly mitigate 10%-25% tariffs, passed directly through as price increases. Second, I think businesses and consumers are just as likely to pull ahead purchases before anticipated tariffs as they are to delay purchases afterwards. Thus, while all eyes are on Mexico, Canada, and this strange fentanyl dispute, businesses might be building up inventories of imports from Taiwan, South Korea, or Europe, just in case.

Still, I bring up this perspective to note that the ground Gayed and I might agree on is that the market is being torn between two alternative possible futures. The first scenario, in which Trump's tariffs barely exceed what was done in his first term, might involve continued strong economic growth and sufficient inflation to keep rates higher. In this scenario, bonds, utilities, and commodities might be less attractive. In the second scenario, the administration eventually imposes more and more tariffs and cuts to government spending in a sort of grand realignment of government budgets, so that other taxes can be cut. The second scenario involves a recession, falling interest rates, and increasing attractiveness of bonds, utilities, and commodities.

So as the administration flips and flops between these scenarios, markets will likewise move toward and away from risky assets and low-risk assets.

[neo von retorch]

But it would take another Great Depression to deflate prices enough to even slightly mitigate 10%-25% tariffs, passed directly through as price increases.

How much consumer spending is there, in total, in the U.S.?
https://fred.stlouisfed.org/series/PCEC96 -> ~$16-17T USD per month year ==> ~$1.33T USD / month

How much is coming from China, Canada, or Mexico? Overall, how much does 10% on all imports from China affect prices on total consumer spending?
https://fred.stlouisfed.org/series/IMPCH/ $37-43B USD per month from China
https://tradingeconomics.com/united-states/imports/canada ~$36B USD per month from Canada
https://tradingeconomics.com/united-states/imports/mexico ~$40B USD per month from Mexico

Not sure if these are the right numbers to compare, but if so, adding 10% or even 25% to Chinese imports would actually have a rather tiny impact on overall costs. If you have better sources for those numbers to compare, that would be good to correct these primitive assumptions I made.

[jrhampt]

I think the personal savings rate is falling in part due to inflation of things like food and electricity.  Those are the two main areas of unavoidable spending for me which have increased.

[maizefolk]

How much consumer spending is there, in total, in the U.S.?
https://fred.stlouisfed.org/series/PCEC96 -> ~$16-17T USD per month

$16T/month of consumer * 12 = $192T/year of consumer spending.

Total USD GDP is only $27.4T.


I suspect those numbers are either off by a factor of 10, are annualized (current month * 12) or represent backward looking 12 month sums.

[neo von retorch]

How much consumer spending is there, in total, in the U.S.?
https://fred.stlouisfed.org/series/PCEC96 -> ~$16-17T USD per month

$16T/month of consumer * 12 = $192T/year of consumer spending.

Total USD GDP is only $27.4T.


I suspect those numbers are either off by a factor of 10, are annualized (current month * 12) or represent backward looking 12 month sums.

You're correct; I see the sub-heading now: "Seasonally Adjusted Annual Rate". Adjusted my original post.

So any one of those countries may account for ~3% of our spending. Taken together maybe 10%.

If all were import taxed at 25%, that would be ~2.5% increase in consumption costs.

[ChpBstrd]

I found some interesting thoughts on Fed independence and the Trump administration's ideology regarding interest rates. Treasury Secretary Scott Bessent said:

“He is not calling for the Fed to lower rates,” Bessent told Fox Business on Wednesday. Instead, he said, the Trump administration is focused on lowering the 10-year Treasury yield. “If we deregulate the economy, if we get this tax bill done, if we get energy down, then rates will take care of themselves and the dollar will take care of itself,”

So to unpack...

• The Federal Funds Rate is less important to the administration than longer-term rates, particularly the 10-year yield upon which stocks are valued, and which anchors mortgage rates and corporate debt rates. So perhaps the goal is to maintain a flat or inverted yield curve. Forecasters are currently (already?) expecting a flatter real yield curve in December 2025 and December 2026 than we have now. The 10Y/3M yield curve has already started arcing back down toward zero since mid-January.
• The administration expects deregulation, the coming tax bill, and lower energy prices to reduce long-term debt yields. How might trickle-down-interest-rates be expected to work? Presumably by reducing inflation expectations. The cynic in me notes that inflation expectations could also fall if recession expectations increase, and so the administration could claim this mechanism was working even as we slump toward negative GDP growth. Plus, the mechanism for how this will work is not detailed. If these policies excite economic activity, as also expected, then how will they suppress inflation enough to keep bond yields low? It's a good setup for further inflation of asset bubbles, and that may be the real goal.
• The Federal Funds Rate might be off the hook, but bond market operations not mentioned. We could see an E.O. to implement an "operation twist" to bring down longer term rates by increasing issuance of new debt in shorter term treasuries and decreasing the percentage that is longer term. The shortage of longer term bonds would push down long term rates, but the glut of short term debt might overwhelm markets and produce a lump in the yield curve where 3mo to 7y debt yields higher than either the FFR or the 10y. Another effect of the glut might be a liquidity crisis in the markets for those debt issues. Then again, credit spreads are so low right now that there's probably not much room for long-term treasury volumes to flow into corporate debt instead. So maybe demand will shift into mid-term debt as predicted. Yet, there would be a debt snowball to repay a politically convenient 4-7 years down the road.
• Lower energy prices are thought to be a given once pipelines, new exploration projects, and exploitation of resources on federal lands and waters are rubber stamped, but that sure didn't happen when the same policies were enacted during the G.W. Bush administration. Instead oil prices skyrocketed and contributed to the GFC. Meanwhile, Trump's statements on Gaza could provoke newfound unity among OPEC and push the Arab/Persian world into the Russia/China sphere. It could lead to another oil embargo if the U.S. or Israel took action to ethnically cleanse Gaza, and that would raise prices. To be clear, I'm in the "he's just bullshitting" camp on Gaza ethnic cleansing for now, but it's certainly not a step a president would take if their actual goal was to lower oil prices (and hurt their oil company campaign contributors). Arguably G.W. Bush's real goal wasn't to lower oil prices either, but he sure ran on the promise of lowering oil prices and eventually delivered $140/barrel for his donors.

Markets survived and thrived through the Operation Twist that started in September 2011, although back then valuations were low, investors were risk-averse and piling into treasuries, and there was lots of labor slack - the opposite of today. Overall it seems like the administration is thinking in terms of keeping asset prices afloat for a couple years longer with tax cuts, suppression of long-term rates, and supplying the labor-starved private sector with laid-off public employees. I think the plan will likely work, despite some bumps, and the next recession seems almost certainly to be >5 quarters away.

The asset which seems underpriced, given these developments, is again oil. I tagged oil in the "most intriguing investments" thread a few months ago when the price was near 70, and the price rose to 79 by mid-January. Now we're back down to the $71/barrel range with a Republican president in office talking about invading Gaza. Amid crazy gains in stocks, bonds, real estate, gold, etc. oil is the asset class which has so far gone nowhere. It has gone nowhere for a long time, despite inflation, because of OPEC disunity, electric car worries, and recession worries. I expect all 3 of those rationales will be challenged in 2025, freeing oil to rise. As a short-term trade, don't be surprised if oil rises $5 within the next few months, like it did last time it caught my eye.

[ChpBstrd]

Edit: You may be wondering, why not just buy long-duration treasury funds like TLT, ZROZ, or EDV if actions are coming to suppress long-term rates (or, if you think a recession is coming). I can't say that's a bad idea, but this thesis actually has more moving parts and a different win/loss criteria than oil.

The administration has to take the next step from believing that passive or indirect policy actions will suppress 10-year yields to actively engaging in a "twist" policy to force it to happen. How many months (years?) will that transition take, if it ever occurs? By that time, will long-term rates be higher or lower than they are now? In theory, only a failure of the passive approach will lead to the active approach if the administration ideologically believes that their political agenda solves all the problems, so long-duration rates might have to rise for the administration to take action.

In contrast, the oil idea only requires there to be continued economic growth for the next 4-12 months. But, hey, the 4.8% yield on ETFs like EDV could support a person through a couple years of FIRE even if they were wrong about the direction of interest rates. And if a person played hide and watch for long enough, the stock deals and falling interest rates might eventually come to them along with a recession in 2026 or 2027 (also the suggested timeframe for a Chinese invasion of Taiwan).

[reeshau]

I found some interesting thoughts on Fed independence and the Trump administration's ideology regarding interest rates. Treasury Secretary Scott Bessent said:

“He is not calling for the Fed to lower rates,” Bessent told Fox Business on Wednesday. Instead, he said, the Trump administration is focused on lowering the 10-year Treasury yield. “If we deregulate the economy, if we get this tax bill done, if we get energy down, then rates will take care of themselves and the dollar will take care of itself,”

I view this more of rationalizing Trump's statement, rather than an explanation of what the plan had been all along.  Maybe it will prove out, but I'll believe it when I see it.

Trump himself talked about speaking directly with Powell about interest rates.  Of course, he probably has no idea that they don't set everything.  Telling this same thing to Trump is the harder assignment for Bessent.

[EscapeVelocity2020]

Edit: You may be wondering, why not just buy long-duration treasury funds like TLT, ZROZ, or EDV if actions are coming to suppress long-term rates (or, if you think a recession is coming). I can't say that's a bad idea, but this thesis actually has more moving parts and a different win/loss criteria than oil.

I actually think TLT would be a lot more likely to beat VDE over what is expected this year.  The government looks likely to issue a lot of debt and countries like Japan are in too dire of financial straits to buy it.  Also, China will be more than happy to use this lever to make Trump look weak.

On the other hand, what drivers are there for oil to move higher?  If we have tariffs and/or recessions anywhere in the world, demand plummets.  Natural Gas has run up a bit on the AI narrative.  Alternatives / nuclear and Deepseek are spoilers to any more advances there.  And I can tell you, it's not regulation or federal lands / lease sales that are holding Big Oil back, it's that project costs have seen massive inflation.  Until drilling costs come down or oil prices get back to $75 and have a sustained upward trend, M&A plus short quick-return investments will be the name of the game... 

With all that said, we're in a crazy unpredictable world right now.  Will tariffs stay on the menu?  Will Trump's Russia/Ukraine peace plan have any effect?  Will the US succumb to recession with all these government layoffs and budget trimming?  Its risk-off for me personally, especially with US markets at all time highs and so much value to be had everywhere but the Magificent 7.

[ChpBstrd]

January CPI will be reported tomorrow (Wednesday, 2/11/25).

It seems like a low-stakes CPI report because Fedwatch already assigns a 93.5% chance of NO rate cut in March, none of the Trump Tariffs were in place yet, and unemployment fell despite a slight rise in labor force participation. Commodities became more expensive in January, but that seems to be the basis of any case for a bad CPI report.

Thus my prediction is for a relatively low month, CPI-wise:

CPI:                +0.2%, 2.9% annualized
Core CPI:        +0.2%, 3.0% annualized

My month-over-month forecast for CPI is lower than the forecast published by CNN, which calls for +0.4%. My Core CPI prediction is the same. Perhaps this forecast overweights Crude Oil or Gasoline, which spent most of January higher than in December. In contrast, I tilt toward the more comprehensive GSCI. We'll see which approach is more accurate.

The Cleveland Fed's Nowcasting service predicts CPI at +0.24%, 2.85% annualized, and Core CPI at +0.27%, 3.13% annualized.

Overall this seems like a good month to calibrate our techniques and evaluate the reliability of sources.

[EscapeVelocity2020]

I think Powell's presentations to Congress today will be more interesting than the CPI numbers...  How does he feel about these new tariffs and threats of escalating trade war?

Also, nice upside surprises to oil companies getting a boost from an activist investor (Elliott Management?) joining Buffet's buying (Oxy), this time for BP and Phillips66!

[ChpBstrd]

Thus my prediction is for a relatively low month, CPI-wise:

CPI:                +0.2%, 2.9% annualized
Core CPI:        +0.2%, 3.0% annualized

My month-over-month forecast for CPI is lower than the forecast published by CNN, which calls for +0.4%. My Core CPI prediction is the same. Perhaps this forecast overweights Crude Oil or Gasoline, which spent most of January higher than in December. In contrast, I tilt toward the more comprehensive GSCI. We'll see which approach is more accurate.

The Cleveland Fed's Nowcasting service predicts CPI at +0.24%, 2.85% annualized, and Core CPI at +0.27%, 3.13% annualized.

Ooof!
A nasty inflation surprise in January!

CPI was +0.5%, +3.0% annualized
Core CPI was +0.4%, +3.3% annualized

Rate cuts should be ruled out for the next 6-10 months. Markets are reacting accordingly. The real signal here is that inflation rose this much despite the lack of an obvious cause, as discussed above. So what’s our explanation? Is the FFR below the neutral rate, are consumers pulling ahead purchases, or is wage growth continuing to push up services?

[Paper Chaser]

Services still the largest part of inflation, but it has dropped over the last 4 reports from 2.86 ->2.76->2.68->2.62


Transportation Services category makes up the bulk of Supercore:


Motor Vehicle Insurance continues to see significant inflation:


For anybody meal planning:

[jrhampt]

Ah yes, car insurance.  I'm surprised home insurance isn't on the list as well.

[Financial.Velociraptor]

Relax, America is Great Again!  That is just FAKE NEWS.  You did not see a single non-white person today, they have all been deported and Mexico paid for the flights. The Jews, Mooslims, and Catholics are next.  Eggs prices are up because that is 'very difficult' but Trump is going to execute all the LGBTQ+ and their groomers and we can just use them for cheap animal protein. 

SO MUCH WINNING!

[ChpBstrd]

As Wolfstreet notes, rising long-term yields alongside rate cuts on the short end of the curve can only mean that inflation expectations are coming "unanchored" from the FFR. That is, regardless of what the Fed is doing with the FFR, bond market participants have figured out that inflation is heading upward.

In addition to the yield curve, Wolfstreet cites the rise in the breakeven inflation rate implied by the difference between nominal and TIPS yields. The 5-year breakeven has gone from below 2% in September to 2.66% now. In other words, the bond market has lost faith that the Fed will achieve its 2% inflation goal, on average, over the next 5 years. The rate cuts this fall seem to have been taken poorly.



Wolfstreet notes that, ironically, the Fed might have to raise short-term rates to give bond-buyers enough confidence to lower longer-term rates. Perhaps this realization also hit the Trump administration, which has taken pressure off the Federal Reserve to lower the FFR and is instead hoping that their policies have a lowering effect on 10 year yields.

As I mentioned earlier, there's no reason to think the administration's policies would lower rates or inflation expectations, particularly with tariffs, so long-term yields might reach a peak at some point just before an "operation twist" is announced to force them lower. The peak would be the time to buy such bonds, and now is probably not that time with fresh tariffs possible(?) by the end of this month, and a budget-busting tax bill in negotiations.

If this viewpoint is accurate at this moment, bond investors should wait until those risks are realized, then watch long-term rates rise for a couple of months, and then jump aboard as soon as a twist operation is announced (or most recession indicators start flashing).

[MrGreen]

Rate cuts should be ruled out for the next 6-10 months. Markets are reacting accordingly. The real signal here is that inflation rose this much despite the lack of an obvious cause, as discussed above. So what’s our explanation? Is the FFR below the neutral rate, are consumers pulling ahead purchases, or is wage growth continuing to push up services?

Could just be more greed. Lots of companies used "inflation" as an excuse to generate excess profits during the pandemic. With all the rhetoric around tarrifs, deportations, and other measures that create inflationary pressures, it would be easy for those companies to simply raise prices again while claiming "inflation."

[MrGreen]

Was at the grocery store yesterday and I noticed prices going up again, 5-10%. I've seen this now in multiple sections of the grocery store since the Inauguration, whereas prices were actually cut previously and have been stable for the last year or so. It's possible this is just my locality but I suspect we are going to see a resurgence of food inflation in the coming months.

[roomtempmayo]

Re: Tariffs, the admin has been getting some dangerous feedback about their ability to control the outcomes in negotiations.

Most recently, they walked out the "reciprocal tariffs" threat, the markets took a dive, they walked it back to a "study," and the markets immediately recovered.  Same in the Canada/Mexico case. 

Experience is telling them that they can say/do whatever with trade and international relations, and they can easily walk it all back in an afternoon.

If/when they take bigger and bigger risks with their policy rhetoric/threats, the danger of losing control of the situation is going to increase.

And with only a very bare majority in Congress, they don't have the votes to pass stimulus if the economy tanks.  I can't imagine a Dem response to a recession right now that wouldn't amount to going full Tea Party and refusing a dime of stimulus to make the Rs own every bit of their bad decisions.

Add on a Fed heading off stagflation with high interest rates, and the landing from any sort of fall seems likely to be hard.

[waltworks]

I'd say the narrowness of the congressional majority is probably irrelevant. It does not appear that any legislation will be involved in the Trump admin policies - they will simply do everything by EO and ignore the courts.

Hopefully we can get our passports done for the whole family quickly here.

[MustacheAndaHalf]

Rate cuts should be ruled out for the next 6-10 months. Markets are reacting accordingly. The real signal here is that inflation rose this much despite the lack of an obvious cause, as discussed above. So what’s our explanation? Is the FFR below the neutral rate, are consumers pulling ahead purchases, or is wage growth continuing to push up services?

Could just be more greed. Lots of companies used "inflation" as an excuse to generate excess profits during the pandemic. With all the rhetoric around tarrifs, deportations, and other measures that create inflationary pressures, it would be easy for those companies to simply raise prices again while claiming "inflation."

https://www.gurufocus.com/economic_indicators/62/corporate-profit-margin-after-tax-

[MrGreen]

Rate cuts should be ruled out for the next 6-10 months. Markets are reacting accordingly. The real signal here is that inflation rose this much despite the lack of an obvious cause, as discussed above. So what’s our explanation? Is the FFR below the neutral rate, are consumers pulling ahead purchases, or is wage growth continuing to push up services?

Could just be more greed. Lots of companies used "inflation" as an excuse to generate excess profits during the pandemic. With all the rhetoric around tarrifs, deportations, and other measures that create inflationary pressures, it would be easy for those companies to simply raise prices again while claiming "inflation."

https://www.gurufocus.com/economic_indicators/62/corporate-profit-margin-after-tax-

Not surprised at all. Companies are realizing the can push prices harder than previously thought and people are not voting with their wallets. That will continue until people wake up or a forced reduction in spending occurs via recession. Maybe even then margins will stay higher than expected. With all the consolidation, there's less competition than there has been in a long time and companies might still find it nicely profitable if some of the population can't afford their products but the rest have to continue paying high prices. A corporate "let them eat cake" strategy.

[MustacheAndaHalf]

One confounding factor I only realized after posting: the timing of big tech's explosive growth may have inflated profit margins.  Big tech companies have enormous profit margins - higher than the rest of the market.  As their market rate grows (or especially doubles from 2019 to 2020), the market's overall profit margin increases.

Ideally, someone would track the S&P 493 profit margins, excluding big tech.
Google's "AI overview" matched my understanding: "There isn't much info available about the S&P 493 profit margin by year"

[BicycleB]

One confounding factor I only realized after posting: the timing of big tech's explosive growth may have inflated profit margins.  Big tech companies have enormous profit margins - higher than the rest of the market.  As their market rate grows (or especially doubles from 2019 to 2020), the market's overall profit margin increases.

Ideally, someone would track the S&P 493 profit margins, excluding big tech.
Google's "AI overview" matched my understanding: "There isn't much info available about the S&P 493 profit margin by year"

Why not just take the total profit of the 500 and subtract the profit of the 7, then divide by revenue of the 500 minus revenue of the 7?

[ChpBstrd]

One confounding factor I only realized after posting: the timing of big tech's explosive growth may have inflated profit margins.  Big tech companies have enormous profit margins - higher than the rest of the market.  As their market rate grows (or especially doubles from 2019 to 2020), the market's overall profit margin increases.

Ideally, someone would track the S&P 493 profit margins, excluding big tech.
Google's "AI overview" matched my understanding: "There isn't much info available about the S&P 493 profit margin by year"

Why not just take the total profit of the 500 and subtract the profit of the 7, then divide by revenue of the 500 minus revenue of the 7?

Here is a 2023 source that breaks down the margin of the S&P493 separate from the Mag7.
https://finance.yahoo.com/news/one-chart-shows-how-the-magnificent-7-have-dominated-the-stock-market-in-2023-203250125.html
It is as hypothesized.

[MustacheAndaHalf]

One confounding factor I only realized after posting: the timing of big tech's explosive growth may have inflated profit margins.  Big tech companies have enormous profit margins - higher than the rest of the market.  As their market rate grows (or especially doubles from 2019 to 2020), the market's overall profit margin increases.

Ideally, someone would track the S&P 493 profit margins, excluding big tech.
Google's "AI overview" matched my understanding: "There isn't much info available about the S&P 493 profit margin by year"

Why not just take the total profit of the 500 and subtract the profit of the 7, then divide by revenue of the 500 minus revenue of the 7?

Here is a 2023 source that breaks down the margin of the S&P493 separate from the Mag7.
https://finance.yahoo.com/news/one-chart-shows-how-the-magnificent-7-have-dominated-the-stock-market-in-2023-203250125.html
It is as hypothesized.

Thanks!  I almost missed that last graph, but that's the winner, showing stocks outside the "Magnificent Seven", aka big tech stocks.

U.S. inflation peaked in 2022, and then settled down in the first half of 2023 (and is at a similar level now).  Profit margins hit a new high in 2021, but seemed to fade before inflation faded.  So the story is a mixture - greed early, perhaps later replaced by guilt.  The new level of profits wasn't that much higher than 2018.

I also found the original source of that graph, from Goldman Sacs:
https://www.goldmansachs.com/pdfs/insights/pages/gs-research/2024-us-equity-outlook-all-you-had-to-do-was-stay/report.pdf#page=22

For a comparison to inflation:
https://tradingeconomics.com/united-states/inflation-cpi

[vand]

Was at the grocery store yesterday and I noticed prices going up again, 5-10%. I've seen this now in multiple sections of the grocery store since the Inauguration, whereas prices were actually cut previously and have been stable for the last year or so. It's possible this is just my locality but I suspect we are going to see a resurgence of food inflation in the coming months.

Yes..  and scary thing is that we can't really blame the huge covid stimulus or supply side shocks any more. It's more a second order rise as the result of continual deficit spending and higher inflation expectations that are now becoming embedded.

The last few years have been terrific if you own a lot of assets as many of us here do, but they've absolutely sucked if you're poor and have no assets.  Wages may be higher but living costs have risen just as fast, and in essential non-discretionary stuff, too. 

[achvfi]

Was at the grocery store yesterday and I noticed prices going up again, 5-10%. I've seen this now in multiple sections of the grocery store since the Inauguration, whereas prices were actually cut previously and have been stable for the last year or so. It's possible this is just my locality but I suspect we are going to see a resurgence of food inflation in the coming months.

Yes..  and scary thing is that we can't really blame the huge covid stimulus or supply side shocks any more. It's more a second order rise as the result of continual deficit spending and higher inflation expectations that are now becoming embedded.

The last few years have been terrific if you own a lot of assets as many of us here do, but they've absolutely sucked if you're poor and have no assets.  Wages may be higher but living costs have risen just as fast, and in essential non-discretionary stuff, too. 

While folks in US complain about stimulus and spending, it has been used to invest in future, protect consumers and businesses during crisis. US customers are well protected for last 15+ years. There is no guarantee of those protections next time we are in trouble, especially for people in lower economic status. Current administration and lawmakers will double down backwards for next few years in response to any crisis.

We learned lots of lessons on monitory in 19th, 20th and 21st centuries from various crises. My assumption is these lessons will help us not make same mistakes again until now and we have tools to handle various situations. I think that cannot be assumed for next few years in US. I am afraid we will have to relearn some the hard way.

What people may not realize is US gets its goods cheaper than most of the world due to our trade policies and low taxes. That also makes available to us the best of the world. Trade barriers and uncertainty will do away US as preferred destination of the goods and also make them more expensive.

In addition US currency is expensive, making our goods and services more expensive and tariffs will make it worse. Also we are pushing and even insulting peoples of trading partners with no objective other than to make headlines. Traditional allies are looking inwards and beyond us. US is dismantling its own power globally.

In Trump's first term, there were many moderating influences. This time around he has people around him have even worse instincts. All this may not affect us right away but couple years of this and we will notice it.

All this to say this will all play out in slow motion over quarter over quarter. This is an opportunity for rest of the world to shake it up.

[ChpBstrd]

The National Financial Conditions Index, a historically reliable recession indicator, continues to fall. It is now -0.64763, a level that rivals the extreme liquidity of the pre-GFC era, the 2013-2014 timeframe, and a few months in 2021. Prior to that, the NFCI only reached these levels in the 90s and 1977. In other words, this metric is inconsistent with a recession starting in the next 12 months.
----------------------------------------
Initial claims came in at 219k, which is low, and with a flat trend over the past couple of months.
Continuing claims at 1.869M are higher than the lows reached in 2019 or 2022-2023, but still historically very low.
----------------------------------------
Meanwhile, Treasury Secretary Scott Bessent recently opined that shifting the issuance of treasuries more toward longer durations - i.e. 10-year notes instead of 1-year or less bills - probably needs to wait until inflation falls and QT is ended. This is the "operation twist" I was forecasting earlier.

The QT requirement will be met within months, so it seems Bessent is waiting on a good inflation report to trigger the next operation twist. If he's about to flood the treasury market with long-duration stuff, then why are 10-year rates languishing at 4.5%? If tariffs are coming to boost inflation, why are 10-year rates 4.5%?

The answer may be that either (1) markets anticipate a recession*, and/or (2) Trumpian chaos is driving up demand for safe haven assets like treasuries. But the people buying ten year treasuries at 4.5% today might regret their actions if stagflation lies ahead.

Also, market participants may believe (1) that Mr. Bessent will not get the chance to tilt toward longer durations because too-high inflation will cause that move to always seem too risky**, and/or (2) Trump is a bullshitter who will not actually implement consequential tariffs for long enough to matter. Neither belief seems to address the administration's rash and sometimes ill-conceived policies so far. Markets are certainly sanguine to the fact that that Trump is either a lame duck or an unopposed autocrat.

If markets are right about Trump being a bullshitter, and massive, permanent tariffs are not implemented as promised, then inflation will likely go down. That would allow Mr. Bessent to dump loads of long-duration treasuries onto the market, driving up their yields and steepening the yield curve. In this scenario, owning duration would be a loser. 

OTOH, if massive, permanent tariffs are implemented, inflation will go up and we'll be talking about rate hikes and recession risk. The twist will never happen, and long-duration treasury yields should be expected to go up to factor in the increased inflation expectations. In this scenario too, owning duration would be a loser.

Essentially, the administration's tariff policies seem at odds with their goals to reduce long-duration rates.

Market participants seem to be resolving the contradiction in their own minds by simply assuming neither the tariffs nor the twist will occur at more than a symbolic level. These policies are merely PR. After all, how could the smart people in the administration come up with such a self-contradictory plan? Others may think that a recession is likely to occur as Trumpian chaos disrupts businesses, discourages investment, and leads to a reverse multiplier effect as tens of thousands of bureaucrats are laid off. But markets thrived through the chaos of Trump 1.0 and almost all economic indicators are in the green.

Ironically, it may be Democrats who are selling their stocks and buying treasuries. If that's the effect, it won't last, and ironically it would be the Trump administration's own actions that would cause these investments to lose value.

For a number of reasons I'm not optimistic about treasuries. There are lots of ways to lose (inflation rising, operation twist) and only one way to win (inflation suddenly turning around and falling, despite all the reasons not to).

*note that the 10y/3m yield curve is heading back toward inversion, a traditional recession signal.
**specific risks being failed auctions, runaway long-duration rates, or a liquidity scare.
------------------------------------------
In other news, Japan's inflation rate hit 4%, with their "core-core" (comparable to core inflation in the US) at 2.5%. The last time inflation peaked this high was, according to the article, June 2023. Perhaps they have become a normal economy?

[MustacheAndaHalf]

The National Financial Conditions Index, a historically reliable recession indicator, continues to fall. It is now -0.64763, a level that rivals the extreme liquidity of the pre-GFC era, the 2013-2014 timeframe, and a few months in 2021. Prior to that, the NFCI only reached these levels in the 90s and 1977. In other words, this metric is inconsistent with a recession starting in the next 12 months.

Tracing back to March 2021, technically there wasn't a recession after it (although 2022 was a bad year for stocks and bonds).

The Jan 2018 dip doesn't seem related to Covid-19 lockdowns and recession in 2020.

And then as you mention, the 2013-2014 double-dip in excess liquidity didn't lead to anything.  Bearish investors warned about it, but missing the next 6 years was a fairly bad investment mistake.

There were signals every year from 2003 to 2007, so while there may be a prediction in there somewhere, it looks a bit like guesswork at that point.

Similarly, from late 1991 to early 1997 this indicator signaled recession.  Seems like a lot of guesses rather far in advance of the actual dot-com crash.

I'm not seeing the strong correlation with this signal and recessions.  Maybe it has weakened since the signal was originally researched?

[ChpBstrd]

The National Financial Conditions Index, a historically reliable recession indicator, continues to fall. It is now -0.64763, a level that rivals the extreme liquidity of the pre-GFC era, the 2013-2014 timeframe, and a few months in 2021. Prior to that, the NFCI only reached these levels in the 90s and 1977. In other words, this metric is inconsistent with a recession starting in the next 12 months.

Tracing back to March 2021, technically there wasn't a recession after it (although 2022 was a bad year for stocks and bonds).

The Jan 2018 dip doesn't seem related to Covid-19 lockdowns and recession in 2020.

And then as you mention, the 2013-2014 double-dip in excess liquidity didn't lead to anything.  Bearish investors warned about it, but missing the next 6 years was a fairly bad investment mistake.

There were signals every year from 2003 to 2007, so while there may be a prediction in there somewhere, it looks a bit like guesswork at that point.

Similarly, from late 1991 to early 1997 this indicator signaled recession.  Seems like a lot of guesses rather far in advance of the actual dot-com crash.

I'm not seeing the strong correlation with this signal and recessions.  Maybe it has weakened since the signal was originally researched?

I’ve always heard zero used as a signal threshold for the NFCI, with an additional caveat that the signal must persist for at least a couple of months. Seen this way, the NFCI did not make a recession prediction in 2022, but also failed to predict 2020.

[ChpBstrd]

We're seeing a combination of falling long-term interest rates and falling stock prices, suggesting that investors foresee slower or negative growth ahead, and are plowing into safe-haven assets. The ten-year treasury's yield has fallen 50 basis points since mid-January. Long-duration bond funds like TLT, ZROZ, and EDV are rallying hard. The 10Y/3M yield curve is at risk of re-inverting

One explanation is that the tariff promises that markets weren't scared of in January are suddenly scary to investors in February.

Another possible explanation is that DOGE-led layoffs are seen as a sort of anti-stimulus, with a negative multiplier effect that could slow private sector growth.

Finally, there is the risk to consumer sentiment. The Conference Board just reported that Consumer Confidence took a dive in February, especially the component that applies to the future:

Expectations Six Months Hence
Consumers’ outlook for business conditions turned negative in February.

    20.2% of consumers expected business conditions to improve, down from 20.8% in January.
    26.7% expected business conditions to worsen, up from 19.6%.

Consumers’ pessimism about the labor market outlook worsened.

    18.4% of consumers expected more jobs to be available, down from 19.1% in January.
    25.9% anticipated fewer jobs, up from 21.0% in January.

Consumers were less optimistic about their income prospects in February.

    18.2% of consumers expected their incomes to increase, a slight uptick from 18.1% in January.
    But 13.7% expected their incomes to decrease, up from 12.3%.

Assessment of Family Finances and Recession Risk

    Consumers’ assessments of their Family’s Current Financial Situation became less positive in February.

The combination of falling rates and falling stocks suggests recessionary thinking. Rising rates and falling stocks would indicate worries about inflation and rate hikes. Falling rates and rising stocks would indicate optimism about falling rates leading to economic growth. Rising rates and rising stocks indicate expectations that the economy will run hot.

But as it is, both investors and consumers have flipped to recessionary thinking. About 200,000 federal employees have been fired so far, and the media coverage has been relentless. As federal employees and Democrats get more and more gloomy, and move more and more of their retirement funds out of stocks, the demand for risky assets seems to be going down. This has been true even for crypto - long considered a gamble of conservative tech bros.

Maybe there's a certain logic to being jumpy right now, with the S&P500 at a PE ratio of 30, multiple tech megacap stocks with three-figure PE ratios, massive AI hype and fomo that the CEO of Microsoft noted has yet to generate value, home prices at worse fundamental values than prior to the GFC, and presidents of democracies participating in crypto rug-pull scams. But if the initial political shocks of 2025 play out like 2017 did, those shaken out of their positions will regret it.

So far, most of the metrics that matter suggest we're in a period of strong economic growth. Initial and continuing claims remain low, and the Sahm Indicator has been off since October. If federal layoffs end up at 300k, spread over months, that will be about one and a half weeks' of initial claims. If they all show up as continued claims, we'll be back at 2016 numbers. In reality, some of these workers will retire or immediately fill some of the 6.7 million job openings. So unless DOGE really goes wild, it will be a noticeable but not huge effect.

Liquidity measures like the NFCI and ANFCI are firmly in the green zone. House prices are rising and it appears leverage opportunities are available and ample. 

Durable Orders are showing some short-term softness, but in the grand scheme are fine. Similarly, the velocity of M2 showed a downward blip in Q4 and M2 itself essentially flatlined in January. These blips could be erased with GDP revisions, but even if not, they aren't necessarily a problem. Consumer debt delinquencies remain in what I consider "low" range.

In summary, nothing fundamental has changed since December/January. Political shocks are raising anxiety about a recession someday, but there's not yet a data-based reason to worry.

[MustacheAndaHalf]

This article highlights the accuracy of the 3mo/10yr treasury yield in predicting recessions, with one false positive in 1966.

https://am.jpmorgan.com/us/en/asset-management/institutional/insights/market-insights/market-updates/on-the-minds-of-investors/was-the-yield-curve-inversion-wrong-in-predicting-a-us-recession/

The 3 month/10 year treasury yield was inverted until Dec 13 2024, after which the yields became "normal" (longer duration paid more interest).
 As of yesterday, the treasury yields for the 3 month and 10 year were equal.  They have just flipped from normal to flat, hinting at a possible inversion.

https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2025

[EscapeVelocity2020]

Inflation and interest rates seems to have taken a back seat to worries about economic growth - https://www.atlantafed.org/cqer/research/gdpnow

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2025 is -1.5 percent on February 28, down from 2.3 percent on February 19. After recent releases from the US Bureau of Economic Analysis and the US Census Bureau, the nowcast of the contribution of net exports to first-quarter real GDP growth fell from -0.41 percentage points to -3.70 percentage points while the nowcast of first-quarter real personal consumption expenditures growth fell from 2.3 percent to 1.3 percent.

[ChpBstrd]

Here are some interesting insights from WolfStreet about plans for the Fed to do a "reverse operation twist" and to reallocate its balance sheet to shorter-term debt rather than longer-term debt (t-bills of one year of less duration instead of notes and bonds). Dallas Fed President Lorie Logan said that the post-QT balance sheet will look more like the market's allocation to treasuries, and that they will get out of the business of holding mortgage-backed securities.

I said earlier that the administration's focus on lowering long-term rates rather than the FFR would suggest that the Fed should do an "operation twist" - buying long-duration debt to drive down yields. And as the blog post points out, the Fed is talking about doing the exact opposite of this. A "reverse" twist would exert upward pressure on long-term rates, in contradiction of the administration's objectives to press longer term rates lower.

Further, a reduction in support for MBS could allow mortgage rates to further detach from treasury yields. The Fed currently holds a reported $2.2T of these, that would need to be sold. A rise in mortgage rates doesn't sound like the administration's stated objectives either.

The Fed currently holds only $195 billion in T-bills, or 4.6% of its total Treasury holdings of $4.27 trillion. But of the total marketable Treasury securities outstanding, 22.5% are T-bills.

“At present, the Fed’s portfolio is significantly overweight longer-term securities and underweight Treasury bills,” Logan said in her speech today.

So after QT ends in the future and the Fed begins replacing all maturing Treasuries, “it would make sense in the medium term to overweight purchases of shorter-dated securities so as to more promptly return the Fed’s holdings to a neutral allocation.”

So how is the Fed managing to contradict the administration's policy objectives? And for how long can this continue?

What is the theoretical rationale for the Fed's balance sheet to match "the treasury universe"? What goals are they trying to achieve or what pitfalls are they trying to avoid?

To answer these questions, I went to the source - the speech text. Logan speaks in terms of efficiency and effectiveness.

Efficiency means not bidding up the prices of relatively scarce asset classes, such as the less-liquid treasury issues. Doing either of these things would create market-distorting incentives, like a subsidy for money to flow in one direction, artificially lowering liquidity in another. Any such thumb on the scale would upset the market equilibrium and prevent transactions that would resolve inefficiencies and arbitrage opportunities on their own.

Effectiveness, she admits, has many possible definitions, but in her speech she focuses on minimizing spreads between money markets and the Fed's overnight rate on reserves. If such a spread opens up, it can be said that the Fed's interest rate policy is not being transmitted to markets. For example, if during a liquidity crisis the fed cuts rates but MM rates remain high, it could be argued that the Fed's policy is being ignored by markets.

Logan says "the Fed should structure asset holdings so they normally remain in the background and do not distract from our primary monetary policy tool, the overnight rate target." and "the ample-reserves regime reduces the need for precise control of reserve supply. Our balance sheet has also grown, so even a neutral portfolio would now contain a substantial dollar quantity of Treasury bills. In the current regime, then, I don’t think tilting the steady-state portfolio toward short-dated assets would materially enhance effectiveness."

Logan also emphasizes that in the post-GFC paradigm of "ample reserves" where interest rates are used to control money supply, the Fed balance sheet's asset allocation matters and these choices must not create inefficiencies or ineffectiveness. Logan considers the "ample supply" paradigm to be superior to the "scarce reserves" paradigm from years ago that transmitted policy through daily Fed actions to add or remove the supply of assets.

There might be nobody in the US who understands the mechanics of Federal Reserve auctions or the macro theory behind it all to the extent of Logan, but even an expert operator has objectives and values to pursue. Reading between the lines, it seems the Fed is:

• Acutely aware that a 2018-style liquidity squeeze can come out of the blue, even in an ample reserves system, if inefficient/ineffective reserve policies are pursued.
• Emphasizing to the administration that the Fed balance sheet needs to be tilted toward a "neutral" allocation to avoid subsidizing certain investments at the expense of others and reducing the efficiency / effectiveness of policy. In other words "don't meddle with the Fed balance sheet in an attempt to lower long-term rates. Instead, just wait for us to reduce long-term reserves to buy more bills, and watch the yield curve steepen." The administration will have to directly contradict her advice to do a reverse-operation-twist if they demand an operation-twist to pull down long-term rates, and in theory own the outcomes of what will be perceived as political meddling.
• The Fed's enormous balance sheet seems to be giving them the power to implement policy directly - through interest rate policy - rather than indirectly by modifying reserve supply like in the old days. I think they enjoy this theoretically increased control, but then they still have to explain what happened in 2018. Logan's explanation, backed by successful resolution of the 2023 banking squeeze, is that they've learned not to create inefficiencies that could detach policy from market realities. So, see? We've learned how to manage this fragile system and don't need amateurs and politicians touching it.
• The Fed has this delicate dance between exerting firm control over markets (efficacy) while simultaneously not affecting markets (efficiency). Phrased this way, it sounds like a logical impossibility, doesn't it? Logan argues they've adopted a stance that accomplishes both goals, while also establishing a framework to explain why any other policy would reduce efficiency or efficacy. If the administration orders the Fed to buy long-duration assets to pull down interest rates, Logan will be there to say "our analysis indicates this will create inefficiencies that reduce economic activity or misallocate assets, while simultaneously reducing the Fed's ability to facilitate the supply of liquidity to banks."
• Logan lauds the convergence of thinking among international central banks - another argument in favor of letting the experts do the driving.

Logan is probably right, but I don't see this administration as being comprised of the sort of people who could get through that entire speech and understand it, much less comprehend the Fed's market activities or understand what a short string they're working with. She's talking to the 140 IQ crowd and thinking about long-term consequences, while her audience of administration officials is... a bit simpler and focused on short term goals, like not triggering a Liz Truss style bond market seizure with the next tax bill.

So as this power struggle plays out, watch for the administration to force the Federal Reserve to buy long-duration assets at the same time as they vote on a multi-trillion dollar tax cut. If that occurs, Logan is predicting the Fed will scramble to maintain control of rates without simultaneously hindering the markets' ability to shift funds to commercial banks with acute needs.

A combined deficit blowout plus meddling with the Federal Reserve's asset allocation could send inflation expectations skyrocketing. Lorie Logan has drawn a line in the sand and said it won't be her fault!

[ChpBstrd]

Whoa! The Atlanta Fed's GDP Now nowcasting model is suddenly showing -1.5% GDP growth. The last time GDP Now went negative was in 2Q2022, which occurred right after Real GDP turned negative in the first quarter of that year. The inputs that caused the flip came from the BEA and Census Bureau.

From the BEA's Personal Income and Outlays Report
January PCE:                          +0.3%, +2.5% annualized
January Core PCE:                  +0.3%, +2.6% annualized
Jan Personal Savings Rate:      +4.6%, up from +3.5% in December
Jan Personal Income:              +0.9% !!

Personal outlays—the sum of PCE, personal interest payments, and personal current transfer payments—decreased $52.7 billion in January.

So people suddenly earned a lot more money in January, but instead of spending it they increased their savings rate by 1.1%. In particular, the full report shows, they cut back massively on motor vehicles and parts ($-41.1B), recreational goods and vehicles ($-14.9B), and other nondurable goods ($-10.4B). A third of the increase in income came from Social Security and Medicare COLAs.

Meanwhile, Core PCE is looking good - down from a 2.86% annualized rate in December.

So one interpretation is that the chaos or distraction of Trump's first half-month in office had a measurable impact on spending. Yet, a prediction I would have made that consumers would pull ahead purchases of expensive durable goods to avoid tariffs went the exact opposite way. Perhaps they all loaded up in November and December? PCE durable goods expenditures suggest this was the case, and we are merely returning to baseline consumption, minus perhaps all the pulled ahead purchases:


From the Census Bureau's Advanced Economic Indicators dashboard, the freshly reported anomalies that stick out to me are:

• Increasing wholesale inventories (+0.7%) paired with decreased retail inventories (-0.1%). Perhaps wholesalers pulled ahead purchases of imports while retailers recovered from the holidays?
• New single family homes sold (-10.5%)
• Business applications (-14%)

These are consistent with an interpretation that retailers, homebuyers, and would-be entrepreneurs got spooked by something that happened in December or January, and decided to hold off on financial risks, such as buying vehicles and toys, buying retail inventory, buying homes, and starting businesses. Meanwhile, wholesalers pulled ahead purchases before the tariffs and loaded up their warehouses.   

It wasn't Initial Claims for unemployment insurance that spooked them, because this metric spent most of Dec. and Jan. below-trend. It could have been rising inflation since October, or increasing expectations for inflation since October. Media reports prior to today's releases have been pointing to a plunge in consumer sentiment arising from anxiety about the effects of tariffs.

These are just the effects of anticipated tariffs, as the first new tariffs didn't take effect until February 1. Consumers like myself and wholesalers seemed to have loaded up on goods purchases in 4Q2024 and then consumers, at least, shut down their spending in January, having pulled ahead a significant amount of consumption.

The stock market was up today on the prospects of more rate cuts, but today's metrics suggest that American wholesalers and consumers are taking the risk of tariffs seriously. They are prepared to go on a spending strike if prices rise because they've pulled ahead enough purchases to last a while. The home sales number is particularly worrisome. In the event of actual tariffs driving up actual prices, the demand destruction might be greater than the $52.7 billion blip we saw in January.

[EscapeVelocity2020]

It's getting worse!
Latest estimate: -2.8 percent — March 03, 2025

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2025 is -2.8 percent on March 3, down from -1.5 percent on February 28. After this morning’s releases from the US Census Bureau and the Institute for Supply Management, the nowcast of first-quarter real personal consumption expenditures growth and real private fixed investment growth fell from 1.3 percent and 3.5 percent, respectively, to 0.0 percent and 0.1 percent.

[Radagast]

In the past couple months a couple construction projects we/I put out to bid got a very large number of bidders and extremely low winning bids by the standards of the past 5-10 years. I'd like to see more than two to see if it's a trend before saying anything though. My other indicator is RZV declining 20% from ATH, which would be $96.20. If both happen I'd say there is a pretty good chance of a recession within the next year. Based on my two personal very narrow and idiosyncratic indicators.

[ChpBstrd]

It's getting worse!
Latest estimate: -2.8 percent — March 03, 2025

How crazy would it be if after 2+ years of scrutinizing the records of recession predictor metrics and watching them fail, the Atlanta Fed's GDP nowcasting model eventually takes the prize? I mean, it's a sophisticated model, but who has that one on their bingo card?

Of course, the tariffs and government firings are kinda like COVID: Does a predictor really get credit for predicting a recession caused by a unique economic development that came out of the blue? Should any recession predictor get dinged for not signaling what may turn out to be a politically self-inflicted recession? It seems like developments are less about the natural business cycle and more about our collective behavior.

[ChpBstrd]

The often-bearish WolfStreet blog makes the case that the purported drop in consumer spending in the January PCE report is due to seasonal adjustment error and is inconsistent with other data sources. The input of this error would explain why the GDPnow tool threw a negative number.

Huge seasonal adjustments try to iron out the differences between December and January, by reducing December’s spending figures and increasing January’s spending figures. And since these adjustment factors are so huge, if they’re even slightly off and the error gets multiplied when it’s translated into an annual rate, the month-to-month change of that annual rate would be off by enough (see today’s -0.2%) to send the financial media into a tizzy.

Retail sales are also released as actual retail sales, not seasonally adjusted, and not annual rate, and they looked OK in January, down by less month-to-month than in most Januarys, and up by 4.8% year-over-year.

If WolfStreet is right, then we may be at a buy-the-dip moment, with the S&P500 down -4.8% and QQQ down -8.7% amid pervasive negative sentiment.

The seasonal adjustment error explanation also helps us understand how January CPI came in hot, but PCE supposedly came in tame. Maybe PCE was over-adjusted downward? PCE may be due for an upward revision, which is good for growth but makes rate cuts less likely.

[EscapeVelocity2020]

The often-bearish WolfStreet blog makes the case that the purported drop in consumer spending in the January PCE report is due to seasonal adjustment error and is inconsistent with other data sources. The input of this error would explain why the GDPnow tool threw a negative number.

Huge seasonal adjustments try to iron out the differences between December and January, by reducing December’s spending figures and increasing January’s spending figures. And since these adjustment factors are so huge, if they’re even slightly off and the error gets multiplied when it’s translated into an annual rate, the month-to-month change of that annual rate would be off by enough (see today’s -0.2%) to send the financial media into a tizzy.

Retail sales are also released as actual retail sales, not seasonally adjusted, and not annual rate, and they looked OK in January, down by less month-to-month than in most Januarys, and up by 4.8% year-over-year.

If WolfStreet is right, then we may be at a buy-the-dip moment, with the S&P500 down -4.8% and QQQ down -8.7% amid pervasive negative sentiment.

The seasonal adjustment error explanation also helps us understand how January CPI came in hot, but PCE supposedly came in tame. Maybe PCE was over-adjusted downward? PCE may be due for an upward revision, which is good for growth but makes rate cuts less likely.

I wouldn't be surprised, with all the disruption in government employment and expectations of continued employment, that there might be errors.  However, at the same time I'm also thinking buying a dip because typically reputable number might be erroneous seems inconsistent.