Federal Reserve Takes Center Stage!

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  • November 26, 2024

In December 2024, the release of the Consumer Price Index (CPI) reignited debates surrounding inflation in the United StatesOpinions diverge sharply regarding whether high inflation is set to make a resurgence or whether it remains firmly under the control of the Federal Reserve.

The Ongoing Controversy of Inflation Data

Statistically, the U.SCPI has shown a recovery trend over the three months following its nadir in September 2024, rising from 2.4% to 2.9% by DecemberThis indicates a notable acceleration in price increasesHowever, when considering the core CPI, which excludes food and energy prices, the numbers appear more stable, with core CPI consistently holding at 3.3% from September through November, and then unexpectedly dropping to 3.2% in December

Market analysts interpreted this as a potential sign of easing inflation pressures.

Furthermore, the Personal Consumption Expenditures (PCE) Index, which the Federal Reserve focuses on, began a gradual ascent starting in September 2024. The PCE readings were 2.10%, 2.31%, and 2.44% for September to November, with core PCE figures at 2.66%, 2.79%, and 2.82%. The December PCE data is due for release on January 25, 2025.

Trends in Key U.SInflation Indicators (From January 2023 to Present)

General sentiment regarding the upcoming PCE data remains optimistic among market participantsNick Timiraos, regarded by some as the Federal Reserve's 'whistleblower,' forecasts that, based on the CPI and Producer Price Index (PPI) data, December's core PCE year-on-year increase may be around 2.8%. Macro analyst Sam Tombs from Pantheon Macroeconomics expressed that he anticipates core PCE inflation to comedown slightly over the next two months, supporting a potential easing of policies during the Federal Open Market Committee's meeting at the end of March.

According to Yi Yan, Chief Economist at Huatai Securities, whether inflation will maintain its downward trajectory in December 2024 remains to be seen

The policies proposed by the incoming president could significantly affect both inflation trends and the Federal Reserve's monetary policy decisionsYi cautions that should the new administration enhance tariffs globally or enact large-scale deportations of undocumented immigrants after taking office on January 20, the U.Smight face renewed inflationary pressuresThis could inhibit the Fed from reducing interest rates as initially anticipated for 2025, which is pegged at two potential cuts according to current projections.

Responses from Federal Reserve Officials

The release of the December CPI data prompted several Federal Reserve officials to comment positively on the lower-than-expected inflation rate, suggesting that it indicates an ongoing decline in inflation

John Williams, president of the New York Fed, noted in Hartford, Connecticut, that while inflation is on a downward path, the goal of a 2% inflation rate is still a work in progressHe elaborated that the recent rise in long-term interest rates is indicative of strong new data, while also reflecting market apprehensions regarding fiscal policies and various global developments. He emphasized that, despite the market indicators for inflation compensation not showing significant volatility, these uncertainties seem to exert more influence than changes in monetary policy or fundamental trajectories of inflation and employment data.

“The direction of monetary policy will entirely depend on the data,” Williams asserted

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“The economic outlook remains highly uncertain, particularly regarding fiscal, trade, immigration, and regulatory issues.”

Richmond Fed President Tom Barkin remarked that the latest price data continues to align with the trend of inflation declining to target levels; however, policymakers still need to implement restrictive measures to ensure that inflation comfortably falls to 2%.

Meanwhile, Austan Goolsbee from the Chicago Fed expressed contentment with the recent consumer price data, perceiving it as supportive for the prospects of mitigating price pressures and maintaining a positive outlook for 2025, as he believes achieving a soft landing is possible.

However, none of these officials clarified a timeline for when interest rates might be lowered again, and recent surveys from the Fed suggest that inflation risks still lean toward the upside.

On January 16, in its Beige Book report based on surveys of regional business contacts, the Federal Reserve stated that general inflation remains susceptible to upward risks

The report indicated that businesses anticipate price increases to persist this year, with some citing potential tariffs as introducing additional upward pressuresIt detailed, “Most regions reported mild increases in sales prices, yet some industries, particularly retail and manufacturing, experienced stable or even decreasing prices.”

Criticism from Investment Titans on Fed’s Short-term Outlook

In fact, the Federal Reserve's heavy reliance on high-frequency data in crafting monetary policy has drawn criticism from notable investment figuresJeff Gundlach, known as the 'new king of bonds,' has been vocal about his discontent, suggesting the Fed has become reactive to short-term data fluctuations, at the expense of strategic long-term planning, thus leading to a perception that the Fed's stance on interest rate cuts has shifted from aggressive to conservative.

“The Fed resembles Mr

Magoo—an animated character known for his frail eyesight and clumsiness, often getting into trouble because of his short-sightednessWhile they eventually managed to get organized to drive down inflation, we now find ourselves amidst another upward trend in inflation over the past five monthsThis has pulled the Fed back towards short-termism with excessive responsiveness to fleeting data and a lack of strategic foresight,” Gundlach stated publicly on a recent Tuesday evening.

According to Gundlach, “The changes in CPI have left the Fed in a conundrum, transitioning from an aggressive stance to expecting that there might only be one rate cut throughout 2025.”

He further warned, “Historically, every economic recession has been paired with a decline in long-term bond yields

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