Vital Statistics:
Stocks are higher this morning on no real news. Bonds and MBS are down again.
The economy grew in September, however services continue to be the driver while manufacturing wanes. Confidence is deteriorating, as input costs continue to rise, especially labor.
“The early survey indicators for September point to an economy that continues to grow at a solid pace, albeit with a weakened manufacturing sector and intensifying political uncertainty acting as substantial headwinds. A reacceleration of inflation is meanwhile also signalled, suggesting the Fed cannot totally shift its focus away from its inflation target as it seeks to sustain the economic upturn.
“Business sentiment, demand, hiring and investment are being subdued by uncertainty surrounding the Presidential Election, casting a shadow over the outlook for the year ahead at many firms.
The survey’s price gauges meanwhile serve as a warning that, despite the PMI indicating a further deterioration of the hiring trend in September, the FOMC may need to move cautiously in implementing further rate cuts. Prices charged for goods and services are both rising at the fastest rates for six months, with input costs in the services sector – a major component of which is wages and salaries – rising at the fastest rate for a year.”
Chicago Fed President Austan Goolsbee said in an interview that we ““we have a long way to come down to get the interest rate to something like neutral.” and are “hundreds of basis points” away from the neutral interest rate. When the Fed stopped hiking rates in July 2023, the core PCE Price Index was rising at a 4.2% annualized rate. Last month, the core PCE index rose 2.6%, which means that monetary policy tightened an additional 160 basis points since the Fed stopped hiking a year ago.
Historically, the spread between the Fed Funds rate and the 10 year has been around 1%.
Minneapolis Fed President Neel Kashkari expects the Fed to dial down its pace of rate cuts in the future. “I think after 50 basis points, we’re still in a net tight position, so I was comfortable taking a larger first step, and then as we go forward, I expect, on balance, we will probably take smaller steps unless the data changes materially….Right now, we still have a strong, healthy labor market. But I want to keep it a strong, healthy labor market, and a lot of the recent inflation data is coming in looking very positive that we’re on our way back to 2%.” So I don’t think you’re going to find anybody at the Federal Reserve who declares mission accomplished, but we are paying attention to what risks are most likely to materialize in the near future.”
Meanwhile, Atlanta Fed President Ralph Bostic expects the Fed to move aggressively to get to a neutral rate: “Progress on inflation and the cooling of the labor market have emerged much more quickly than I imagined at the beginning of the summer,” said Bostic, who votes this year on the FOMC. “In this moment, I envision normalizing monetary policy sooner than I thought would be appropriate even a few months ago.”
