Vital Statistics:
Stocks are closed today in observance of a day of mourning for former President Jimmy Carter. Bonds will have an early close at 2:00.
We will have a slew of Fed speakers today
The minutes of the December FOMC meeting were released yesterday, and they provided a little clarity on the Fed’s thinking.
In their discussion of inflation developments, participants noted that although inflation had eased substantially from its peak in 2022, it remained somewhat elevated. Participants commented that the overall pace of disinflation had slowed over 2024 and that some recent monthly price readings had been higher than anticipated. Nevertheless, most remarked that disinflationary progress continued to be apparent across a broad range of core goods and services prices.
Notably, some participants observed that in the core goods and market-based core services categories, excluding housing, prices
were increasing at rates close to those seen during earlier periods of price stability. Many participants noted that the slowing in these components of inflation corroborated reports received from their
business contacts that firms were more reluctant to increase prices, as consumers appeared to be more price sensitive and were increasingly seeking discounts.With respect to core services prices, a majority of participants remarked that increases in some components had exceeded expectations over recent months; many noted, however, that the increases were concentrated largely in non-market based price categories and that price movements in such categories typically have not provided reliable signals about resource pressures or the future trajectory of inflation. Most participants also remarked that increases in housing services prices remained somewhat elevated, though they continued to slow gradually, as the pace of rent increases for new tenants continued to moderate and would eventually be reflected further in housing services prices…
Several observed that the disinflationary process may have stalled
temporarily or noted the risk that it could. A couple of participants judged that positive sentiment in financial markets and momentum in economic activity could continue to put upward pressure on
inflation.
The takeaway is that Fed policy will largely be driven by shelter inflation. Consumers are becoming more price sensitive, and most other measures of inflation are back to normal. If you compare the pre-pandemic level of shelter inflation to its peak in early 2023, we have retraced about 70% of the spike.
The Fed is concerned that cutting rates would push the housing market higher, and that explains their desire to slow the pace of rate cuts. Note that monetary policy is still restrictive, and the Fed Funds rate probably has to move another 100 basis points lower to get to neutral territory.
On the issue of shelter inflation, homeowners insurance does not appear to be included in the CPI, so any increases there won’t affect the numbers. Homeowners insurance companies had been fleeing California and Florida already, and the wildfires in LA will be an impetus for more to leave, especially since CA regulators rejected their requests for rate increases.
On the issue of tariffs and immigration, it seemed like some of the participants included a factor for it while others did not. Immigration restrictions will have a push-pull effect on inflation: demand will decrease as population growth slows, however that could increase wage pressures in some sectors of the economy. Tariffs are not certain either, and could be offset by falling prices and currencies. This is especially prevalent in China which is in a deflationary spiral similar to Japan in the early 1990s.
US employers announced 38,792 job cuts in December, according to the Challenger and Gray job cut report. For the year, companies announced 761,358 cuts, and increase of 5.5% compared to 2023. “Companies underwent extraordinary change in 2024 due to rapid technological advancement and shifting economic conditions. Most employers are anticipating additional uncertainty with the upcoming administration, which is leading to slower hiring and more layoffs in the short term from various sectors,” said Andrew Challenger, workplace expert and Senior Vice President of Challenger, Gray & Christmas, Inc.
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