Outlook:

Today we get the University of Michigan's preliminary inflation outlook. See the chart from the St. Louis Fed. The U Michigan covers several different periods of time but let’s take this one, which is for the upcoming 12 months. Some analysts like to look at the 5-10 year outlook, but that’s stupid. Even experts can’t forecast that far, let alone survey respondents. The point of this chart is that inflation expectations bottomed in July 2017 and are on the rise again. For anyone to say inflation is muted and likely muted for an indefinite period, which is what the Fed is saying now, is not really backed up with data. 

FRED

 

We get talks by St. Louis Fed Bullard and Boston Fed Rosengren today. Bullard has already said he supports a 25 bp cut. Will he go to 50? Some analysts say 50 makes sense for July because otherwise we will only be expecting another 25 in September so just get it over with. This is a corrupt point of view. For one thing, it denies any value to data. Central banks are supposed to care about data and to make policy on data, not ideology or with an eye for political advantage. For another, to rush to 50 implies that the Fed is so scared of something that an extraordinary move is justified. What? Losing their jobs? The president shutting down the Fed altogether? Intervention?

Something has spooked the Fed. We wish we knew what it is. Wild talk of the US joining Japan and Europe with zero or negative return on the 10-year is or should be very frightening. A zero return on capital means some kind of awful, terrible misallocation and the need for a complete recalibration of the financial system. Maybe there’s just too much money in the world and money supply needs to contract. Or something.

Longer-term outlook aside, the 50 bp rate cut due in a week and a half is likely to hold everyone’s attention until the deed gets done. Like payrolls (which comes right afterwards, by the way), the size of the rate cut will get the usual two-way spike. This is an unprecedented situation. You can’t seek guidance from logic or from history. At a guess, if the Fed does 50, the ECB will be right behind and maybe right away instead of Sept/Oct as now expected. Since the ECB can’t match 50, the euro has a decent chance of coming back into favor. Well, that’s what Trump wants.

 


 

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