FED Rates and Inflation Here to Stay

[J. Mitchell Bernier]

The two-day FOMC meeting is starting today, and most estimates predict 75 bps hike to be announced on Wednesday, with a small outside chance that 100 bps happens instead. While most expect this, some are still looking for the FED to pivot in 2023 and start bringing rates back down to a more neutral point comparted to being in restrictive territory, around 4%. This is unlikely based on the data with inflation.

Inflation is caused by too many dollars chasing too few goods. Raising rates and decreasing the FED balance sheet will help the too many dollars part, the too few goods is still an issue. Below are three charts that are key when looking at CPI and Core CPI.

First, US Automobile Inventory is down anywhere from 60-80% of historical norms and with the recent report from Ford, doesn’t look to improve anytime soon. If inventory remains low car prices will remain high and a key metric in CPI and Core CPI is car prices.

Next is housing. According to Redfin, we are still somewhere between 500K-750K below pre-pandemic inventory levels on US home listings. This was improving, but now has plateaued as builders are slowing and existing homeowners are not looking to sell to trade up from a 3% rate to a 6% rate. Again, less supply means higher prices.

Lastly, wages are going to continue to rise for the immediate future. Current Job openings have come down slightly in recent months but is still over 250% higher than pre-pandemic. Plus, it doesn’t look to get much better as Labor force participation is still below pre-pandemic norms as well. So employers will still have to pay more for labor.

All this to say, that inflation and rates look sticky and are unlikely to change soon. I wouldn’t be surprised if in 2024 we are still talking about rates being higher and inflation still not being at the 2% FED target. Only time will tell. 

[Marcus Auerbach]

Looks like inflation is here to stay, which is a huge gift to anyone who is leveraged. Just the expectation of inflation will cause more inflation. I would not want to be in HR by the end of the year when everyone wants a 10% raise. Companies will pass that on as an annual price increase in spring and the upward spiral is in motion.

What people don't understand, even if inflation slows down, prices don't come back down, that would be deflation. It remains to be seen what mortgage rates are going to do - historically they have always dropped during recession, on average 1.8%