Jason's World

Today’s PCE report came in exactly in line with expectations-PCE came in at 3.3% and core PCE came in at 4.2%, just as analysts expected. This is a marked difference from past months with lower-than-expected inflation numbers creating widespread ebullience in the markets due to optimism about inflation coming down and the Fed pivot that would soon come.

Today’s report should serve as a reminder that inflation remains nowhere near what the Fed deems acceptable, and likely won’t for quite some time because of the base effect. The inflation reports of the past two months may give off the illusion of rapidly decreasing inflation, but as of now, even if PCE grows at 0.15% MoM for the foreseeable future, the top line PCE rate will stay above 2% until February of next year. 

The PCE report contrasts with earlier data figures showing a rapidly cooling economy, with job openings and consumer confidence coming in at levels much lower than expected. The fact that the job and consumer markets are cooling down at such rapid rates could mean that the impact of rate hikes from last year may be beginning to show-and it may very well get much worse since at this point last year, we were in the middle of the most aggressive phase of the current hiking cycle with rates increasing at a pace of 0.75 basis points per meeting.

It is likely that continued strength in GDP growth as suggested by the Atlanta Fed will be the focus of Fed leaders who want to eliminate inflationary pressures to bring down inflation in a lasting manner, with Chairman Powell’s reiteration that below-trend economic growth is necessary to keep inflation down, despite recent estimates showing that the economy may not be as strong as what we previously thought-Q2 GDP was revised down even as economists predicted that there would be no such revision, driven by a decrease in inventory investment.

The inflation numbers would also mean that the cooling in the economy has ultimately ended up doing nothing to alleviate the enormous risk posed to the economy by looming CRE defaults, the depletion of excess savings fueling $1 trillion in spending per year, and a wave of junk maturities. Far from indicating that inflation is on the right path, it signifies that the economy will be less able to withstand the shocks that these factors may pose to the economy. 

With consumer confidence and job openings rapidly falling, the fact that inflation isn’t doing the same should raise questions about whether a soft landing will occur. If the economy ends up cooling off too fast, the banking system’s troubles and a prolonged elevation of bankruptcy rates might lead to something resembling the Lost Decades. Maybe that’s the “below trend economic growth” that Powell always wanted?