AFSM - Weekly Commentary: Fed Embraces Immaculate Disinflation

2024-02-03 05:45:40 ET

Summary

• Over recent months, the notion of 'immaculate disinflation' has supplanted traditional analysis.
• More remarkable even than having grown comfortable with very strong growth and labor markets, the Fed is willing to disregard extremely loose financial conditions and highly speculative financial markets.
• The explosive growth in the ETF complex nurtures huge ongoing speculative flows into the markets.

CNBC's Jeff Cox: "Just kind of looking to put it all together, you talked about basically the economy looking strong, with 3.3% annualized growth in the fourth quarter. Does the strength of the economy speak more loudly to you now than any inflation threat might? You're in a position, in other words, to keep rates elevated as long as the economy stays strong, and you're more tilted towards that. And also, perhaps, are you worried at all that the economy is maybe a little too strong right now and that inflation could come back at some point?"

Chair Powell: "I'm not so worried about that. Again, we've had inflation come down without a slow economy and without important increases in unemployment, and there's no reason why we should want to get in the way of that process if it's going to continue. So, I think declining inflation - continued declines in inflation - are really the main thing we're looking at. Of course, we want the labor market to remain strong, too. We don't have a growth mandate. We've got a maximum employment mandate and a price stability mandate, and those are the two things we look at. Growth only matters to the extent it influences our achievement of those two mandates."

Powell: "So, I guess I would just say this: executive summary would be that growth is solid to strong over the course of last year. The labor market, 3.7% unemployment indicates that the labor market is strong. We've had just about two years now of unemployment under 4%. That hasn't happened in 50 years. So, it's a good labor market. And we've seen inflation come down… The outlook, we do expect growth to moderate. Of course, we have expected it for some time, and it hasn't happened. But we do expect that it will moderate as supply chain and labor market normalization runs its course."

Powell: "In terms of growth, we've had strong growth. If you take a step back, we've had strong growth, very strong growth last year, going right into the fourth quarter. And yet, we've had a very strong labor market, and we've had inflation coming down. So, I think, whereas a year ago, we were thinking that we needed to see some softening in economic activity, that hasn't been the case. So, I think we look at stronger growth, we don't look at it as a problem. I think, at this point, we want to see strong growth. We want to see a strong labor market. We're not looking for a weaker labor market. We're looking for inflation to continue to come down, as it has been coming down for the last six months."

Powell and FOMC's thinking has gone through quite an evolution. Over recent months, the notion of "immaculate disinflation" has supplanted traditional analysis. The U.S. can have "very strong growth" and we can enjoy "a very strong labor market" without concern for how such a backdrop might impact inflation prospects.

Powell: "Our strong actions have moved our policy rate well into restrictive territory, and we have been seeing the effects on economic activity and inflation… We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year."

More remarkable even than having grown comfortable with very strong growth and labor markets, the Fed is willing to disregard extremely loose financial conditions and highly speculative financial markets. It's the same old asymmetric policy approach. Tight conditions would attract all kinds of attention, while quite loose conditions don't receive a mention. It's worth remembering that we're only 19 months past 9.1% y-o-y CPI inflation. Meanwhile, the Nasdaq100 returned 55% last year, the strongest performance since 1999, with the Semiconductor (SOX) Index returning 67%....

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