- 5/15/2024
Bluford (Blu) Putnam, former Managing Director and Chief Economist of CME Group on Benzinga's Premarket Prep.
- Evolving expectations for the Fed Funds Rate at the end of 2024
- PCE Core Inflation VS Fed Funds Rate
- Taylor Rule for the Fed Funds Rate
Inflation
- Wage inflation
- Shelter inflation
- Tariffs on China, impact on inflation
- Evolving expectations for the Fed Funds Rate at the end of 2024
- PCE Core Inflation VS Fed Funds Rate
- Taylor Rule for the Fed Funds Rate
Inflation
- Wage inflation
- Shelter inflation
- Tariffs on China, impact on inflation
Category
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NewsTranscript
00:00All right, Blue, here we are, once again, working our way back down.
00:05You gave me some great information.
00:08What I want to do is I want to run through your presentation real quick.
00:11Well, first, let's get your initial thoughts, let's go through your presentation, and then
00:16we'll see what kind of questions the chat has.
00:18As we are ripping no resistance in the market, Blue, what's your initial reaction?
00:22Well, this, you know, is close enough to expectations, certainly in line with the inflation stuck
00:29around 3%.
00:31It doesn't tell you it's headed toward 2%, but the, you know, the little bit of upward
00:37momentum in the first couple of months of the year seems to have dissipated.
00:41By the way, that was probably seasonal adjustment confusion, I'd say.
00:48The pandemic really messed up seasonal adjustment, so it's, and so it upward, it gives a little
00:54upward bias to the first couple of months of the CPI, and that seems to be dissipating.
00:59So, but, you know, this is a 3% kind of territory, it's not 2%.
01:04Okay, let's just go for the expectations of the Fed funds rate here at the, let's go to
01:11the end of the year here, because we were talking about, you know, the Fed pivot and
01:15lower interest rates here.
01:17You know, where are we at for rate cuts in 2024?
01:22Well, you know, there's, the current market has one or two cuts by the end of the year.
01:28This data will support that, so, you know, but it's definitely not going to be four or
01:35five cuts.
01:36The Fed's going to wait, you know, they're not going to do anything at the next meeting.
01:40This is definitely not convincing of that.
01:43So it'll be later on in the year, and so, you know, the market's in pretty good shape,
01:48I think.
01:49Okay, all right.
01:51So one to two cuts.
01:52This supports what Mr. Powell's been telling us.
01:56Let's move on to the next side here.
01:59Pretty much going around the same thing.
02:02The way the expectations have changed, I mean, going to flatten out here, those blue and
02:07black line to converge, or going to continue to move farther?
02:13We're going to stay with the blue line, you know, we'll, we'll get a little more optimistic
02:18on this number.
02:19The debate within the Fed is, do you wait for 2%?
02:24Are you okay with progress made toward 3%?
02:29And you know, they haven't been very clear on that.
02:31But Jay Powell seems to like say we've made enough progress to do at least one cut this
02:36year.
02:37All right.
02:38Now, they give you numbers, they give you other numbers, and they say, no, the government
02:44focuses more on PCE core inflation compared to the Fed funds rate.
02:50I know we get the PCE later.
02:52I mean, these things seem to follow each other pretty closely, right?
02:55Like, we're not going to get kicked in the face by the PCE number now, are we?
03:00No.
03:01And in fact, the PCE over the last 50 or 60 years has been slightly lower than the headline
03:09CPI.
03:11That doesn't mean anything for this month, of course, but you're exactly right.
03:14They track each other.
03:16And you know, the Fed's pretty much committed now to a new era of keeping the Fed funds
03:21above the PCE core, and they just have to decide, you know, how far above.
03:27Okay.
03:28All right.
03:30This is pretty much the Taylor rule.
03:33Are you talking, I didn't know you were a Taylor Swift fan.
03:38No, definitely not.
03:40I'm not in that generation.
03:44But I do follow Professor Taylor.
03:47You do like somebody.
03:48Who'd you go see in New York a couple of weeks?
03:50Was that a play or was that you did see something a couple of weeks ago?
03:54Well, we do go.
03:56We went to Vegas and saw U2 at the Sphere, and then we went up to New York and saw the
04:02SNL folks.
04:03So, you know, we do different things.
04:05Oh, man.
04:06Okay.
04:07Back to the Taylor rule.
04:08James Taylor.
04:10Yes.
04:11Yeah, the Taylor rule is just says, you know, the Fed has got a dual mandate.
04:17They got to trade off unemployment and inflation.
04:20And there's a highly debatable formula about the Taylor rule.
04:25This is my interpretation, but it's pretty much in line with everybody else's.
04:29And if you follow the Taylor rule, you'd cut rates.
04:32Hmm.
04:33Okay.
04:34All right.
04:35All right.
04:36Let's get him on the replacing pile here immediately.
04:42Okay.
04:43Six-month annual percentage change.
04:46We came down fast.
04:47Joel, before you go, I just listened to that.
04:51I'm listening in the background.
04:52Why?
04:53Like, why cut rates?
04:54The Taylor rule explained this to us here, because just taking it at face value, I want
04:57to get Blue...
04:58Because Blue's smart.
04:59I want to...
05:00He's smarter than me.
05:01I want to listen to what he's got to say.
05:02Why, Blue?
05:03Why does the Taylor rule...
05:04I don't know about that.
05:05So the Taylor rule basically takes unemployment at its kind of trend rate and says, look,
05:14so on unemployment, we're kind of checking the box.
05:17We're not going up.
05:18We're not going down.
05:19It's not a big impact right now.
05:21And then you look at inflation, you say, well, inflation's come down a lot, and it's below
05:26the federal funds rate.
05:28So, you know, the Taylor rule says, okay, sure, the unemployment rate's low, but inflation's
05:35come back down well below fed funds.
05:37Let's cut rates.
05:38Okay.
05:39So that's where...
05:40So, okay.
05:41So let's just say we cut rates.
05:46What happens?
05:47And again, you know, and, you know, maybe the market, this is what the market wants
05:50to see.
05:51You know, maybe this is what, you know, a lot of people want to see.
05:54What happens though, like, why should the Fed do this?
05:58Because what if inflation does start ticking higher?
06:00I mean, the economy's humming along, the S&Ps are at all-time highs.
06:05Why, you know, start cutting rates just for the sake of cutting rates?
06:08Well, you actually make a pretty good point there.
06:11So you're smarter than you think, you know, but the thing is, the U.S. economy is not
06:20nearly as rate sensitive as it used to be back in the 50s, 60s, 70s.
06:27So it probably doesn't make a lot of difference.
06:31Whether the Fed funds rate is 5.33 or whether it's four and a half, you know, those are
06:39not going to change that many investment decisions.
06:43They're not going to change consumption.
06:44I mean, if people, you know, if personal consumption, they pay credit card rates or home equity
06:51rates, you know, they're way higher than the Fed funds rate.
06:56So the Fed doesn't have a compelling reason to cut rates.
07:00What the market, I think, really would like and what most economists prefer is stability.
07:07And you know, the Fed funds rate is at a pretty good historical premium above the prevailing
07:15inflation rate.
07:16I'm just going to say prevailing inflation is three and a half.
07:20You know, that gives me on the high side of some of the PCE core numbers, but it's not
07:24two and it's not four and it's not five.
07:27It's somewhere in the threes.
07:29So if you've got Fed funds at five plus, you know, you've got room to do a little bit
07:35of cutting if you want to do it.
07:37But I agree with you, Dennis, it's not going to have a big impact.
07:41And if you're a market trader, if you're a day trader, you'll get a pop.
07:46But if you're a long term trader, it's probably not a huge deal.
07:51So, Blue, and I guess, you know, correct me if I'm wrong, but if you're in the camp that
07:56the Fed would be able to cut rates here with inflation above its 2% target rate, then I
08:02guess you would have to believe that, you know, the interest, the low interest rates
08:07weren't what was driving up inflation.
08:09So then what is and then how do you how do you remedy that?
08:11How do you fix it if it's not just as simple as, OK, raise interest rates to bring inflation
08:17down to 2%?
08:18Well, you ask a lot of questions and one question.
08:23I'll make it simpler.
08:26Are interest rates, so what interest rate, bringing interest rates down, you know, not
08:31make inflation go, you know, bring inflation higher and then B, how do you fix it?
08:36OK, so if they cut interest rates from where they are now by, say, two cuts, get below
08:435%, 475, something like that, that's not going to affect inflation, future inflation at all.
08:50It's not going to affect the economy much at all.
08:53We're just not that sensitive to a small cut like that.
08:57If they were to raise interest rates, you know, 6%, 7%, they could really slow things
09:02down.
09:03That could still work, but they're not going to do that because, you know, what caused
09:08this inflation?
09:09Man, we had huge fiscal stimulus in the pandemic.
09:13We got a surge in inflation.
09:15The Fed supported it with zero rates and quantitative easing.
09:19And then we had supply chain issues.
09:21Every one of those things has gone away.
09:24OK, so there's no danger of going back to 6% or 7% inflation.
09:30Could it tick up to 4%?
09:32Sure.
09:33Could it tick down to 2%?
09:34Yeah, that's possible.
09:35But I'm in the camp that it stays more in the threes because I don't think people appreciate
09:42how much globalization kept inflation down.
09:46I'm talking about 1994 to 2019 or 18.
09:52We're out of globalization, man.
09:54We're putting tariffs on stuff.
09:56We're using protectionism.
09:58People are changing their supply chains to be more resilient.
10:02That's going to cost money.
10:04We're not going to go back to 2%.
10:06I don't think so.
10:07But we're three and I'm not worried about five or six.
10:13If there's a bugaboo in all these numbers, and let me know if you want to go to any particular
10:19chart here.
10:21But you talk a lot about housing pricing and shelter inflation.
10:26I mean, that's still looking like it's moving in the right direction.
10:30Yes, housing and shelter inflation is coming down.
10:34It's just coming down slower than any other component.
10:38And it really matters for the CPI.
10:41The total amount of shelter in the CPI is about one third.
10:47And of that, in the CPI, 25% is this thing called owner equivalent rent, which is a mess.
10:55But the point is that shelter, the way they measure it, it's lagged.
11:00But it's coming down.
11:02Why should you hold the economy hostage to one component that you already know is going
11:09in the right direction?
11:11So that would be my question for the Fed.
11:14What about I want more money?
11:16What about wage inflation?
11:17People, you know, hey, your companies are doing good, they're beating earnings.
11:22You know, the pandemic changed and it was an interesting point you made about filtering
11:28through the pandemic and the supply chains.
11:31What about wage inflation?
11:32You saw that, you know, when it peaked and then it dropped here, are we just going to
11:37get into one of these 2010 through 2016, 17 patterns or do you think people are going
11:44to start wanting some more, more money?
11:46Well, I definitely want more money, so I'm with you.
11:50But I, you know, I think we're in a, I expect this data to hover around the 4% zone.
11:57If inflation is 3%, we've got pretty good increases in productivity.
12:02We got some, the economy's growing.
12:05But this data, this is the hourly earnings data chart you're showing.
12:11It is a, it's weighted by the type of worker.
12:15So if you have more low income workers, you know, your servers at the restaurant, things
12:22like that, hotel workers, tourist industry workers, if they grow faster than any other
12:28segment, the index is coming down and nothing's happening.
12:33You know, so this is a, not the greatest index.
12:36Unfortunately, people look at it.
12:38So I look at, if the Fed looks at it, I look at it, but I don't think you should.
12:43Okay, good.
12:44And then just back to the core PC inflation, the Fed's favorite target.
12:50I mean, things look, you know, look good, but that man, that looks like that 2%.
12:56It was a breakout above 2%.
12:58They're not going to look at this too technically.
13:00I mean, I agree with you too.
13:02I mean, I don't, that what the Fed did at the end of last year caught a lot of people
13:07off guard with the Fed pivot.
13:08I really thought the Fed pivot was when they're going to say, you know what, we're giving
13:13up on 2%, two and a half percent.
13:16So talk about core PC inflation, the Fed's favorite target, and you mentioned it a couple
13:22different times or is that going to be the next, the next big pivot in the, from the
13:27Fed?
13:29Jay Powell is not going to, not going to go away from 2%.
13:35What I hope Jay Powell will do, but I have no idea, is that he will say, we've made enough
13:41progress.
13:42We can do one or two cuts, but if you're waiting for 2%, you're waiting for Godot.
13:47He's not coming, you know, and he's not coming because the world has changed.
13:54Pax Americana is dead.
13:56You can't put your factories just anywhere in the world.
13:59You've got to, you've got to have more than one place for your supply chain globalization.
14:03We're seeing higher tariffs.
14:05All of these things are very, very tricky for global inflation.
14:09And by the way, the Fed's models don't even consider any of these things, which of course
14:14is a huge mistake not to understand the context and how it can change.
14:20I don't want to, let me be a little careful.
14:24It's really hard to do what I just said.
14:27But you know, demographics change, globalization changes.
14:31These are important long-term factors.
14:33And if they're not in some way involved in your modeling, you're going to get it wrong.
14:39And the Fed's pretty much gotten it wrong.
14:41Yeah.
14:42And I mean, Blue, the Biden administration just announced new tariffs on China, I believe
14:47it was yesterday.
14:48I mean, that sounds like something the administration wouldn't have done had it been as
14:53worried about inflation as, you know, as it was, say a year and a half ago, when we
14:57saw inflation at, you know, 40 year highs, do you think they're saying, okay, we can
15:02start doing some of these tariffs now because inflation has fallen?
15:05Or do you think that will have no impact whatsoever on inflation?
15:08Well, the particular new tariffs are all about EV cars, you know, the electronic vehicles.
15:16How many Chinese electronic vehicles are, you know, how many do they sell in the US?
15:21Okay, virtually none.
15:23None, yeah.
15:24So this is a no impact tariff, it's 100% about politics.
15:29Okay.
15:30I mean, I thought it applied to just like overall, you know, aluminum and steel and
15:35stuff as well, not just as it relates to EVs, but I think, you know, that it was primarily,
15:42you know, targeting Chinese EVs.
15:45I was just curious because it sounds like implementing new tariffs is something that
15:49you wouldn't do, again, if you were that worried about inflation.
15:54If inflation was your primary objective, you certainly wouldn't be putting on tariffs,
15:59they raise inflation, no question about it.
16:03Consumers end up paying, companies may absorb some of it in the short run.
16:09Certain countries may absorb some of it in the short run, but at the end of the day,
16:13it's higher prices.
16:14But, you know, this change on tariffs on electronic vehicle, that's not going to be
16:18a big deal.
16:19Got it.
16:20What about, I mean, just looking at the health of the overall economy right now, Blu, I mean,
16:25we're doing a lot better than I think a lot of economists would have thought with where
16:28the interest rates have been for the last, you know, year or so.
16:32What about people that would say though, that like, you know, you have the big tech companies
16:37and earnings from those companies really driving the boat in terms of economic growth right
16:41now.
16:42And that for like the average American consumer, things aren't really as good as they're making
16:46them out to be for the economy.
16:49Well, my take on the consumer is if you still have your job, you're still spending money.
16:59When you lose your job or when your, some of your relatives lose their job, or maybe
17:04their neighbors lose their job, you get a little scared.
17:08That's not happening right now, but I will tell you that the overall mood is that everybody's
17:15still worried about their jobs.
17:18We're all worried about the economy.
17:20This is a, you know, we got, we got a war in Europe.
17:23We got a war in the Middle East.
17:24We got, you know, big changes in the technology sector.
17:29I don't blame people for being nervous about their jobs, but they still have them.
17:34And so personal consumption is going along just fine.
17:39We're basically a two to two and a half percent real GDP economy.
17:43Now it was underneath that in the first quarter.
17:45It's probably going to be a little above that in the second quarter, but it's just bouncing
17:49around that kind of number.
17:51So we're okay right now.
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