The Fed's Christopher Waller has quickly become one of the most influential voices on monetary policy other than Fed Chair Powell himself. "He's the best leading indicator" of Fed policy, as Bank of America's Aditya Bhave put it yesterday on Power Lunch.
And yesterday, in a speech entitled "Hike, Skip, or Pause?" Waller said he's concerned we haven't seen enough progress on bringing down inflation. The headline CPI barely nudged down from March to April, he said. The core (ex-food and energy) was still running 5.5% versus 6% a year ago. And six of the seven alternative inflation measures the Fed offers are up between 4-5% over the past year, he noted.
But all of these figures are backward-looking. They are still measuring prices relative to one year ago. What markets care about (and what the Fed should really be focused on) is where inflation is heading over the next 12 months. And there are several ways--from market-based expectations, to annualizing more recent inflation prints, to using more "real-time" data--to try and determine that. And all of them are looking much more soft.
The one getting the most buzz lately is "Truflation," which garnered plenty of attention when its headline inflation gauge fell below 3% this week. At the turn of the year, it was measuring 6.3% (and last summer, it had surged to nearly 12%). This newer metric tries to use "real-time" pricing in the spirit of MIT's "1 billion prices project" to get fresher data than what they claim the Labor Department is using. Its partners include Zillow, CarGurus, AAA, the EIA, and others, according to the website. It's picking up a notable drop in food and beverage prices in recent weeks, for instance.
But the Fed itself also has some efforts in this vein. For instance, the Cleveland Fed has produced a daily "Inflation Nowcast" for the past decade or so, which it has found to be a better leading indicator of inflation than surveys of economists or other such measures the Fed has typically relied upon. And it's achieved that basically through the use of daily gasoline prices, along with a few other metrics. As of today, the "Nowcast" suggests a big drop in the May CPI, from the 4.93% that Waller was so disappointed about last month to just 4.12% on the headline print! (And they expect the Fed's preferred "PCE" gauge to post a 3-handle!)
The sharpness of that deceleration is echoed elsewhere, not just in alternative "real-time" data sets like Truflation's, but also in the market's own inflation expectations. The market's expected annual inflation rate over the next five years has fallen back to 2.1% as of yesterday--just barely above the Fed's target. And of course, many market participants are worried we could fall even below that threshold, given that the M2 money supply is declining in an unprecedented way (but the Fed doesn't like to comment on that).
Not to mention that Don Peebles warned yesterday that multifamily real estate could start to face similar challenges to office as major amounts of supply come online--which sounds like it should put downward pressure on rents going forward, a key component of inflation.
With all of this in the cards, markets are really hearing two things from Waller and the rest of the Fed right now: (1) they are still only going to talk about the lagging monthly inflation prints, and (2) they are likely to keep hiking as a result, no matter what the anticipatory data suggest. Indeed the market is now almost fully pricing in another rate hike at the Fed's June 13-14 meeting.
Ironically, the next CPI print will be released at 8:30am on June 13th, just as the Fed's meeting gets underway. Perhaps that will be just enough cover for officials to "skip" a rate hike. Either way, their hawkishness in response to lagging inflation data has already put us on course for a hard landing.
See you at 1 p.m!
Kelly
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