Thoughts From the Divide:  Tremendous

February 15, 2024

“A tremendous mistake to focus on minor fluctuations”

Poor Joe Biden can’t catch a break. It’s one thing to have a (Republican appointed) special counsel from the DoJ say that you lack the mental capability for ‘mens rea’ and paint a picture of a doddering, but “well meaning”, “elderly man with a poor memory”. But it’s another thing entirely to have the paper of record (some might say the voice of the Democratic Party) open a report on your failing faculties with the sentence, “Joe Biden should not be running for re-election”. This was followed by another kinder, gentler op-ed that leaned in the same direction… (As an aside, those who are hoping that this cracks the door open for someone like RFK, we’d recommend all six of you take a look at this article breaking down how a mental breakdown, resignation etc… would put the Democratic nomination not in the hands of primary voters, but in the clutches of… the DNC. Some will see this as a feature rather than a bug.)

Leaving “war by other means” aside and returning to our usual turf, markets and the latest economic data have also been decidedly inconvenient to the incumbent (regardless of party) thanks perhaps to too much of a good thing? Following the CPI revisions (discussed last week) that were a nothingburger, this week’s inflation readings provided much more of a show. Not that the numbers themselves were particularly extraordinary, with month-on-month readings of 0.3% and 0.4% and year-on-year readings of 3.1% and 3.9% for Headline and Core, respectively. Rather, the issue wasn’t the degree, but the direction of the surprised expectations, which was to the upside, reminding bond buyers that not all dreams come true in a timely fashion. Rate futures moved to price out some of the cuts in a hurry (though the S&P has since shrugged it off). For a dive into the specifics, we recommend taking a look at this thread from Jason Furman, the middlest of middle-of-the-road macro commentators. (Bad news: Services inflation, which Powell mentioned specifically as the new baton carrier, saw a 2nd derivative increase that was among the biggest “of the entire inflationary episode”.)

All of this required “framing” from the “Queen of coo” and Yellen did not disappoint, appearing with Michigan Governor Whitmer while “visiting Detroit on a swing through the battleground states of Michigan and Pennsylvania”. Opting to focus on the glass being half full, the Treasury Secretary admonished those who took the hotter-than-expected numbers as a sign of a trend change, warning that they were making a “tremendous mistake to focus on minor fluctuations and to have failed to see the longer-term and bigger trends” (Does Yellen share a speech writer with Trump?) and wishing to redirect attention to the “strong economy and rising wages”. With PPI due out tomorrow, Yellen’s words (and the Superbowl message on “shrinkflation” featuring the Commander in Chief) give us a clear look at exactly how the Administration views the topic of inflation and its impact on poll numbers. While there is likely some argument within the Administration as to whether supply chain shocks are both necessary and sufficient or simply necessary (mirrored by the Fed’s own divergence in views), it’s clear that Yellen and the White House are not too concerned about the Philips Curve, nor seem to put stock in John Cochrane’s “fiscal theory of the price level”. After all, Yellen is still quoted as saying that the US is on a responsible fiscal path, despite the deficit (which is, as Mosler notes, the public’s surplus). Or perhaps they think that with some proper cajoling, the greedflation genie can be put back in the bottle (at least temporarily) as CEO’s find a renewed sense of civic virtue and community? We wouldn’t hold our breath.


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