Relatively speaking, the Treasury market was quiet yesterday. Amongst participants, there was more conversation about potentially changing the inflationary speed limit from 2% to 3%. Richmond Fed President Thomas Barkin stated that if this were to occur, the Federal Reserve could lose credibility.
According to the WSJ, the 2% target was first established, informally and privately, under Chairman Alan Greenspan in 1996. When it was first established, core PCE inflation averaged 2.6% over the previous five years thus it was more aspirational in nature.
This 2.0% inflation speed limit was formalized in 2012. This move came after a decade of sustained low inflation globally, triggered in part by the emergence of China as a world economic power that pushed down prices on a wide range of goods and after a long period of low US wage growth.
The labor market was anemic for many years after the Great Financial Crisis, and the Employment Cost Index [broadest measure of labor costs] averaged just 1.9% through the five years through 2012 according to the WSJ. Labor is the largest cost or production.
Core PCE inflation or the Fed’s preferred measure of inflation, averaged only 1.6% over the same period as per the Journal, so the 2% inflation target was intended largely as signal of the Fed’s intention to use policy to push inflation up.
Fast forward to the Jackson Hole Symposium of 2020 when FRB Chair Powell stated the new Fed policy is to permit growth and inflation to run ahead of the mandated speed limit, perhaps to monetize the debt given burgeoning deficits. The Fed did not give any guidance as to how long or how high it would permit growth and inflation to be above trend.
There are two ways to overcome massive debt; inflate or restructure. The latter is not a choice.
The world has radically changed since 2020. Trade has been weaponized. Some could argue China will force prices to decline via its trade policies to stimulate its economy. However, psychology has radically changed. Price is no longer the primary determinate of a purchasing decision. Availability is now the primary determinate. Reliability has replaced efficiency.
There are dynamics that are occurring under the surface that may not be recognized or acknowledged for many years, with perhaps the greatest dynamic is the ending of the outsourcing of vital production to our adversaries.
Circling back to this week’s Monetary Policy Summit, expectations are virtually nonexistent that the inflationary speed will be changed Friday.
Equites were bifurcated yesterday as the financials led the Dow down about 0.50% and NASDAQ unchanged ahead of NVDA’s earnings that will be released later today.
Last night the foreign markets were up. London was up 0.97%, Paris up 0.44% and Frankfurt up 0.48%. China was Japan up 0.48% and Hang Seng up 0.31%.
Dow and NASDAQ futures are up 0.3% and 0.6%, respectively. The 10-year is up 16/32 to yield 4.27%.
