This week is ending with sad news rather curiously circling the letter I. First we had the aircrash in India and overnight Israel attacking Iran.But we also have something which has become rather familiar in the Presidential terms of Donald Trump.
CPI JUST OUT. GREAT NUMBERS! FED SHOULD LOWER ONE FULL POINT. WOULD PAY MUCH LESS INTEREST ON DEBT COMING DUE. SO IMPORTANT!!! ( Truth Social)
Inflation
If we stay with the inflation numbers that were released on Wednesday he was referring to this.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent on a seasonally adjusted basis in May, after rising 0.2 percent in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months,the all items index increased 2.4 percent before seasonal adjustment.
If we look at the monthly moves we see that the 0.4% and 0.5% at the turn of the year have been replaced by -0.1, 0.2% and now 0.1%. So a turn lower and in fact the last three months annualised would be well below the 2% target. Plus the Federal Reserve does not target this number it uses PCE or Personal Consumption Expenditures inflation which tends to be 0.4% lower.Now there is quite a bit of variation on the relationship but you can see where that is potentially heading.
Yesterday we were told this.
The Producer Price Index for final demand advanced 0.1 percent in May, seasonally adjusted, the
U.S. Bureau of Labor Statistics reported today. Final demand prices declined 0.2 percent in April
and 0.1 percent in March. (See table A.) On an unadjusted basis, the index for final demand rose
2.6 percent for the 12 months ended in May.
Looking at the monthly numbers gives a not dissimilar pattern. We had 0.5% and 0.7% at the turn of the year which has been replaced more recently by 0.1%, -0.1% -0.2% and now 0.1%. So it appears to be roughly flatlining. Thus we see the numbers that have encouraged President Trump and let’s face it he seldom needs much encouragement!
At this point one might reasonably ask what happened to all the Tariff driven inflation that was predicted? It may be too early for consumer inflation but the producer ones should have picked up something. For the other side of the debate below is someone on the other side of the tariff debate.
Former Treasury Secretary Janet Yellen predicts President Donald Trump’s tariffs will cause prices to rise and average household income to fall, despite a slowing trend in the U.S. inflation rate.
“I would expect inflation, on a year-over-year basis of this year, to shoot up to at least 3%, or slightly over, because of the tariffs,” Yellen said Thursday on CNBC’s “Money Movers.”
Whislt she has an awful track record in predicting inflation she is likely to ramp up the numbers which are quite a bit lower than previous predictions. That is a change for her because on her watch they soared.
Back to Trump rhetoric
According to the Financial Times there has been more pressure.
Donald Trump has called Federal Reserve chair Jay Powell a “numbskull” for not cutting interest rates, saying the White House may “have to force something” if the US central bank does not reduce borrowing costs. The president on Thursday repeated his calls for the Fed to cut borrowing costs by a full percentage point — a measure Trump said would save the US hundreds of billions of dollars a year on its debt.
The use of “force something” is different in that he has no real way of doing this.What he has is open mouth operations. He could also try this.
Remarks last Friday from Trump that he could make a decision on a potential successor “very soon” have led to speculation among some economists that he could nominate a “shadow Fed chair” in a bid to massage expectations of future rate cuts once his preferred candidate takes charge of the central bank. ( FT)
But that does not really force anything as around the world we have loads of “shadow” bodies for interest-rates and I have yet to see any of them do that. The suggestion below looks incredible rather than credible to me.
The “shadow” role could, in theory, move expectations of where interest rates will be years from now, which would — if credible — lead to immediate movements in US borrowing costs.
Anyway let us move on with President Trump singing along with Tom Petty.
Well, I won’t back downNo I won’t back downYou could stand me up at the gates of HellBut I won’t back down
Debt Costs
The last nine months or so have provided a clear contradiction to this.
“We are going to spend $600bn a year because of one numbskull that sits there, [saying] ‘I don’t see enough reason to cut the rates’,” Trump told reporters, referring to Powell, who he has nicknamed “too late”. ( Financial Times)
If we look back to September and the pre election 0.5% interest-rate cut from the Federal Reserve we see that cuts so far have totaled 1%. But the US long bond was below 4% after the initial cut and recently has been above 5% before coming back to 4.84%.So in round numbers a 1% cut in official interest-rates has seen a 1% rise in the long bond yield.
So what we might need instead is this. From Barchart last night.
UST IN : There is now a 0% chance of an interest rate cut at the June FOMC meeting. Instead, the market is now giving a very, very, very small chance of a rate hike.
Someone has high/low ticked the market to see what happens. But the issue here is that a mechanistic or algo style approach may well conclude what is needed is higher interest-rates to reduce bond yields.
A contradiction
There is a clear flaw here
THE GREAT, BIG, BEAUTIFUL BILL WILL GROW THE ECONOMY LIKE IT HAS NEVER GROWN BEFORE. AT THE SAME TIME, IT IS CUTTING EXPENSES BY 1.6 TRILLION DOLLARS. IT PUTS OUR COUNTRY ON THE RIGHT TRACK, PLUS! MAKE AMERICA GREAT AGAIN!!! ( President Trump)
If the economy is about to be as strong as that why do you need interest-rate cuts? Indeed you could be back to arguing for rises.
Comment
We have covered a lot of ground today and let me add in something I have been saying in recent podcasts. The various establishments clearly want interest-rate cuts and they will try to find a way to reduce bond yields which are putting rather a noose around many economic necks. Just to throw something in could they stop QT balance sheet reductions?
Now if we switch to what I think then if we look at the broad money measure of the US it grew by 4.4% in the year to April. Plus that rate has been picking up as it was less than 1% in the spring of 2024. So growth could soon be what was considered rather a gold standard of 5% split in theory 3% growth and 2% inflation. So looking ahead there is in fact not much of a case here for interest-rate cuts and that is before the risk of it being 3% inflation and 2% growth or worse.
Next up is that we have a volatile situation in the Middle East with the price of oil up by around 10% on earlier this week. So there is a challenge there too….