Chris Waller’s speech “There’s Still No Rush” before the Economic Club of NY on March 27, falls in line with the advice and analysis I have been purveying of on this site. Stay tuned…
I saw Chris earlier in the year at a Money Marketeer meeting in NYC and had a chance to talk with him. At that time inflation data were still beneficial and I was wary of the Fed deciding policy on well-behaved but volatile and potentially fickle short term inflation data. Three- and six-month inflation had come down close to Fed-target range results, but the year-over-year calculations were still high. At that time Waller was still in the ‘I need more information mode...’ I was much more in the “Hey this is good” mode BUT “look at the economic strength… and the fact that the drop in inflation was concentrated in the goods sector!” Hello?? Service sector inflation is/was and is always more stubborn.
Where have seen this sort of denial before??
I wonder?
Oh. I think we can trace it to Mr Fauci and the pandemic! We know that services inflation is stickier than goods sector inflation. Similarly, virologists know that when you get a virus you get natural immunity that is usually quite effective, and usually it is better than the immunity you get from a vaccine. But Fauci unilaterally decided that might not be so this time… And virologists also know that as a virus changes over time it tends to become more transmissive and less dangerous (less lethal). Yet when it came time to make policy Fauci would not look at any of those things and he insisted on building the wheel from scratch and re-proving everything we already knew about viruses. This approach left the economy in an impaired state for longer than was necessary.
So, returning to economics, here we are with inflation. Waller, once willing to sip the Kool Aid of optimism, has decided that it’s not that good and he is wary of what inflation does next- he remains hopeful of better results ahead.
In my view (of course, if you have been reading my opinions you know this…) there has been a Fed obsession with achieving a soft landing that I think has been a really bad idea. I have and continue to argue ‘soft-landing’ is the wrong pitch for US policy at this point. ‘Soft landing’ is a policy that emphasizes controlling the rise in unemployment and accepting whatever happens with inflation as a result. That is not where the US and monetary policy should be after three years of persistent inflation overshooting.
So… Waller is back to wanting to see more progress. He is skeptical that goods inflation can stay low. He sees inflation creeping into producer prices and is wary of what progress might continue for services.
Job growth has been strong and while the unemployment rate has crept up, there does not seem to be anything fundamental about that since last month it was driven by volatile youth unemployment – a fickle category.
Waller makes an important reference to what has been strong productivity growth. But this followed some real productivity set-backs, and he is wary about projecting this kind of progress forward- even as he says he hopes it can last. Chris knows policy can’t be made on hopes- whatever his economic predilection- he is a realist.
In the end Waller sees fewer rate cuts as the profile for cuts is being pushed further out in his world. This is a bit of a change. Markets are of the same belief. We can see that in the way foreign exchange markets are behaving, by boosting the dollar. US rates are now expected to be higher, not as they were expected to be before. Still, we must watch price data, job data, and incoming output data. The Fed will continue to be data driven. The question is what will those data show? My point continues to be to let the data form your opinion about that, rather than forming an opinion and trying to force the data into agreement. That usually does not work. And that is another reason to distance yourself from the soft-landing idea. You really do not want to cheer for it. You want to be dispassionate and know if it is getting to be more or less likely. Right now, it is definitely less likely.