Contrary to the vocal critics of the Federal Reserve, who contend that Chairman Powell’s policies may be fueling a resurgence of inflation through a renewed wealth effect, a closer examination of granular “micro” data suggests that inflation might be even lower than reflected in headline statistics. This perspective draws on the impact of sluggish commodity performance and weak third-quarter earnings.
The year-over-year change in the Producer Price Index (PPI) entering negative territory is a noteworthy observation shedding light on the reasons behind the relatively restrained sales and earnings per share (EPS) growth, trailing overall economic expansion.
Of particular interest is the Federal Reserve’s readiness to reduce interest rates before achieving a sustained 2% inflation rate. Powell recently clarified this stance, emphasizing that the critical factor is not the precise inflation rate at the initial rate cut but officials’ confidence in its trend toward the 2% target as the policy rate decreases. However, there is some tension between easing policy restrictions before hitting the 2% mark and the Committee’s strongly expressed commitment to restoring price stability at any cost, which may be perceived as somewhat overstated and less convincing.
In essence, the de facto single mandate in place since March 2022 is no longer operational. The dual mandate has been reinstated, prioritizing the maintenance of robust growth, potentially at the expense of the proverbial “last” inflation “mile,” such as the return from 3% core price growth back to 2%.
On a positive note, the market, for now, does not appear to view the Federal Reserve’s approach as a policy mistake regarding inflation, even in the face of critics holding a different view. Whether attributed to the decline in oil prices or other factors, breakevens not only remain stable but are also near their lowest levels in three years.
Bank of Japan Faces Delicate Balancing Act in Shifting Economic Landscape
Navigating a complex dance, the Bank of Japan (BOJ) Chief grapples with the delicate task of preventing the Yen from weakening without triggering excessive market enthusiasm about future rate hikes. While the BOJ contends with managing a market poised to react strongly to any hint of a policy reversal, the European Central Bank and the Federal Reserve grapple with an entirely different set of challenges.
Now may not be the opportune moment to adopt a bullish stance on USDJPY. Any selling pressure on the Yen is expected to be short-lived, given that recent drops in global yields are likely to persist, reflecting the apparent reality of global inflation declines.
