Well the peanut gallery is really agitated now.
This whole idea that the Fed is chasing the proverbial dragon by aiming at antiquated inflation targets that no longer make sense in a post-crisis world characterized by structural deflationary forces (like tech) is becoming ubiquitous.
Simply put: if you’re printing money in order to hit inflation targets that aren’t hittable, then all you’re doing is inflating asset bubbles.
That of course argues for abandoning the targets and focusing on stability instead.
But as former FX trader Mark Cudmore notes in his Wednesday morning missive, if you’re going to continue to focus on those outdated inflation metrics, well then you’ve at least got to be consistent and right now, those metrics aren’t exactly screaming “hike.”
So is the Fed about to be forced by market expectations (the hike is almost fully priced) into making a policy mistake? Cudmore thinks so. His full note is below…
Investors May Regret Limiting the Fed’s Options
Rates markets aren’t giving the Fed any flexibility. Investors across many risk assets may come to regret that.
- The Fed will raise its benchmark rate today mainly because it’s almost fully priced and, as a result, holding rates steady would cause more turmoil in the short-term due to the shock factor
- However, the inflation report being released five-and-a- half hours before the FOMC decision is set to emphasize how unnecessary it is to tighten monetary policy now
- Headline CPI is forecast to fall for the third straight month, to the slowest annual pace since November. The outlook is even more dismal when you exclude food and energy – that measure has already dropped to the slowest pace since September 2015
- Real average earnings growth data will be released at the same time – and that input is clearly stuck in a deteriorating trend that has already lasted for more than two years
- Other data prints in June are sending the same message loud and clear: inflation pressures are receding rapidly; the ISM Prices Paid component slumped to 60.5 from 68.5 prior; and the average hourly earnings growth rate has fallen to the lowest level in more than a year
- The Bloomberg Commodity Index hitting a 13-month low on Tuesday provides another disinflationary force
- The economy may be doing fine and asset prices are roaring. As this column has discussed previously, inflation targeting is perhaps outdated monetary policy — but as long as that is still officially the goal, tightening tonight will soon be perceived as a potential mistake
- The concept that the Fed, as comptroller of the financial system, is failing can trigger a negative cycle in risk assets. Investors are inadvertently creating the setting for a negative markets narrative and they aren’t giving the Fed the appropriate leeway to change the script