Following last week's surprising U.S. consumer price index report where the actual reported numbers were lower than even the most optimistic forecast, we expect members of the U.S. Federal Reserve will recognize the need to soon slow the pace of rate hikes.
What all this means is that there are more economic headwinds coming and that the Fed simply does not really know how to measure the lagged impact. Here is the conundrum. The lagged effect takes quarters to years to play out while the market can have the attention span no longer than the most recent headline.The most recent one is from Federal Reserve Governor Waller who said on the weekend that they have a “ways to go” before cutting rates.
As Milton Friedman et al have found, the economy's adjustment to changes in monetary growth is not a discrete, all-at-once event, but takes place as a distributed lag. The effects of a monetary policy action tend to begin gradually, build to a peak, and then subside. Thus, past monetary growth continues to influence gross national income long after the monetary growth occurs. An increase in the rate of monetary growth temporarily stimulates real economic activity.
One theory suggests that the cost of money needs to be restrictive to slow inflation. Many are estimating this to be about five per cent. The recent below expectations CPI number is encouraging, but they just do not know by looking at backwards looking data how it will play out. It seems to be what they are relying on. Our first chart is the core personal consumption expenditures price index year-over-year that is well known as the Fed target.
We continue the Fall 2022 virtual roadshow on YouTube and GoToWebinar. Sign up at https://investorsguidetothriving.com/ . We will focus this week on how to reduce volatility in your portfolio if as we suspect, the recent market rally has not marked the bottom yet. This educational efforts are all free to viewers. To thank us, we ask for your continued support. Over the past decade, we have raised over US$500,000 for brain health, dementia, and Alzheimer's research at the Baycrest Hospital.