Highlights of the Federal Reserve speech from
- Must be confident underlying inflation is moving to objective or, we have work to do
- I would be hard pressed to describe broad financial conditions as restrictive.
- While this summer’s PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved.
- Overall economy appears to have strengthened
- Credit and loan markets showing few signs of policy restraint
- Inflation expectations tend to look durable until they don’t, must be closely mined
- Business investment rising rapidly
- Important to gauge effects of high growth expectations for capex, corporate earnings
- Market prices show confidence that we will deliver price stability
- One indicator of strength is how well an economy holds up to shocks… both Wall Street and main street have been “remarkably resilient”
- Full text
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do,” he said. His answer at the moment appears to be that he’s not confident but he isn’t strongly signaling it.
Another important passage:
To try to gauge underlying inflation, I find it instructive to disaggregate the 199 individual components of the PCE price measure. Over the past 12 months, 54 percent of goods and services in the PCE basket showed price increases above 3 percent. This is well below the post-pandemic highs of about 77 percent, but it remains well above the level of 32 percent in the two decades that preceded the pandemic.
Ahead of the speech, the market was pricing in a 33% chance of a hike on September 16 and that has since risen to nearly 50%. The S&P 500 was up 7 points (now down 7 points) and the yen was trading at 159.57 (now at 159.88 in a broad USD bid).
This sounds like he’s strongly leaning towards a hike and that’s exactly the message from markets.
This article was written by Adam Button at investinglive.com.