InfraCap Special Commentary, New York, September 20, 2023 ~ Today’s Fed meeting is likely to be a mildly positive inflection for the market as the Fed is likely to pause and the dot plot should be more dovish than the June meeting. We expect 12 participants forecasting 1 or more increases and only 6 forecasting a pause, with a much larger number of participants (perhaps 9/18) forecasting an end to rate hikes!
Nonetheless, the implied number of cuts in 2024 may go down from 4 implied cuts by the last dot plot, which will be a minor negative and will reinforce the Fed’s message of higher for longer.
We do not expect the Fed to raise rates again as the Fed has signaled it will not raise rates in September and we expect that data over the next two months will show a softening labor market and continuing declines in reported inflation. We reiterate our view that we expect this fundamentally flawed Fed will be forced to consider abandoning its “persistent / entrenched” theory of inflation and to acknowledge that inflation is declining rapidly, just as lagging data in late 2022 forced the Fed to abandon its disastrous “transitory” theory of inflation.
The labor market has decelerated dramatically over the last 3 months. Private payroll growth has averaged only 140k vs. 222k over the prior 3 months, with over 60% of that growth coming from the health sector. In addition, the health sector is growing on a secular vs. cyclical basis due to the aging population and Pandemic effects. The most recent jobs report also showed the unemployment rate rising to 3.8% from 3.5% and wage growth slowing to .2% from .3%.
Further, Fed Governor Waller, who is normally very hawkish, recently made dovish comments acknowledging recent data support pausing at in September.
We also expect that the ECB will now pause even though the ECB is a single mandate central bank. The last vote to increase was a split vote with significant debate clearly indicating that the ECB would pause. We project that the ECB will be forced to cut rates as Germany has already entered a deep recession and the rest of the Euro Zone will follow.
The Bank of England has launched an inquiry led by Ben Bernanke to determine what went wrong with the central bank’s policy framework that led it to miss the surge in inflation. We believe the Fed should launch a similar inquiry and revise its policy framework as it raised rates 3 months after the BOE so was even more incompetent than the BOE.
In our view, the Fed should change its policy framework by targeting a 2-4% range of inflation and looking at a variety of measures of inflation including both headline and core for PPI, CPI, PCE, and CPI-R, and be more attentive to leading indicators of inflation such as the money supply, housing prices, auto prices and energy/commodity prices.
The Fed’s hardline adherence to the 2% target has made the Fed the primary culprit during this century in the decline of the middle class as the Fed attempts to depress nominal wages to hit their unreasonably low target. There is a growing consensus that the Fed should raise its inflation target, with a number of research papers supporting an increase and most recently a WSJ opinion piece from Jason Furman advocating for a 2-3% target.