“Getting closer…soft landing…moving consistently in the right direction…risk recession if we wait too long…need to see more data…” This week’s Fedspeak message from various officials is very clear, we aren’t cutting in July, but we definitely plan to in September after we see 2 more CPI/PCE/Employment reports. Fed Chair Powell’s recent Congressional testimony and questioning highlighted the partisan tug of war he is facing. Democrats pushed for rate cuts asap, while Republicans focused on easing proposed capital requirements for banks. Policy statement on the Federal Reserve website: “Experience around the world has also shown that countries with independent central banks that are able to make decisions free from political influence have better economic outcomes for their citizens.” There it is, the core belief underpinning the Fed’s avowed independence and “apolitical” status. They are taking extraordinary steps in announcing the next rate cut well in advance as “surprise” announcement could be perceived as a boost to one side or another. Bottom line is the Fed is weighing the risk of being seen as politically motivated vs the risk of delaying and triggering a recession. Futures markets are now pricing in 2 (maybe 3) cuts this year. Assuming a September cut, that would push any further cuts to after the election. 

Speaking of “need to see more data”, the chart below demonstrates some of the “lagging statistics” embedded in the official CPI/PCE announcements. The “Sticky Price CPI” is calculated by the Atlanta Fed. The dark line shows the “flexible components index” of the categories that change price frequently (some feel that this is a truer reading of where the inflation battle stands today). The orange line is the “sticky index” of items that change price relatively slowly (these items may be “propping up” the official CPI during times of cooling inflation). The “flexible components” index is below the Fed’s target right now. Stay tuned…

By David R. Pascale, Jr., Senior Vice President at George Smith Partners.

“I’ve got the apolitical blues, and that’s the meanest blues of all” – Little Feat, Lyrics by Lowell George