Thoughts From The Divide: Strength in Numbers

  • Posted on March 21, 2024
  • by MI2 Research

“We will get aggregate inflation down to two percent over time”

All the way back in December of 2022, with inflation coming in at a zesty 6.45%, we highlighted Powell’s rather defensive comments on the potential for a move away from the 2% target. Feathers ruffled, Powell, perhaps inadvertently making a mockery of himself, responded that “changing our inflation goal is just something… we’re not thinking about, and it’s something we’re not going to think about”. We contrasted this official party line with the thoughts of Olivier Blanchard, who pondered the possibilities in an FT article, noting that when “inflation is back down to 3 per cent, there will be an intense debate about whether it is worth getting it down to 2 per cent if it comes at the cost of a further substantial slowdown in activity”. Now, more than a year later, we have perhaps arrived at Blanchard’s world of inflation “back down to 3 per cent”, and rather than the “intense debate” Mr. Blanchard suggested, the silence is deafening.

Instead, we have a Fed Chair who corrects himself during the latest press conference, “… we’re looking for data that confirm the kind of low readings that we had last year and give us a higher degree of confidence that what we saw was really inflation moving sustainably down to two percent, toward two percent”. A pearl of wisdom offered by Jerry for those literalists who believe close doesn’t count except in horseshoes and hand grenades. What’s more, when asked if rates being kept the same, i.e. showing cuts, but inflation projections and growth forecasts moving higher, “mean more tolerance for higher inflation and less of a willingness to slow the economy to achieve that target?” Powell offered the nicely tautological explanation that “the inflation data came in a little bit higher… and I think that caused people to write up their inflation [forecasts]”. Whether there is ever an explicit admission, it seems obvious at this point that, in practical terms, the Fed believes that if further reductions in inflation must come at the expense of growth, the squeeze isn’t worth the juice.

There is, however, strength in numbers and if Keynes was right that “it is better for reputation to fail conventionally than to succeed unconventionally”, the Fed will be just fine. The SNB announced cuts this week, becoming the “first major economy to cut interest rates in surprise move” and Andrew Bailey said “Britain’s economy is moving towards the point where the Bank of England can start cutting rates”, “I think we are on the way”. Admittedly, the rest of the world isn’t quite experiencing the same economic momentum as the US (the latest S&P Flash PMI noted that “input costs rose at the fastest pace in six months, while firms increased their selling prices to the largest extent since April last year”), making cuts a more palatable choice, but we feel for the Fed, who wants to be the odd man out? The cynical among us are pondering the problems that would have hit the global economy should the Fed decide that further hikes are in order just when the rest of the world needs rate cuts, but perhaps this is a discussion for another moment. Let’s just enjoy the sea of green while it lasts.

P.S. Japan is fine being the odd man out.

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