Stocks are higher this morning as Trump meets in China with Xi Jinping. Bonds and MBS are up small.
Kevin Warsh was confirmed as the next Fed Chairman 54-45 on a party-line vote. Fed Chairman votes are usually pretty bipartisan affairs so this is unusual. Jerome Powell said he will stay on as a governor until the DOJ investigation is completed.
“The Senate’s confirmation of Kevin Warsh as the next Chairman of the Federal Reserve is a welcome step towards finally restoring accountability, competence, and confidence in Fed decision-making,” said White House spokesman Kush Desai.
Warsh is considered more dovish than Powell was, but after the recent CPI and PPI prints I think we can stick a fork in rate cuts for the rest of the year. The December Fed Funds futures are handicapping a tiny chance for any cuts
Minneapolis Fed President Neel Kashkari sounded hawkish in a speech yesterday. The situation in Iran has “upended” the inflation environment, with inflation having been “too high” for the past 5 years. The Strait of Hormuz closure is boosting fertilizer prices which will raise food prices. It isn’t just about energy.
Kashkari also poured cold water on the idea that the Fed might accept a higher level of inflation, say 3% to acknowledge the new reality. “We need to get back to 2% because we need to let people know that we’re not going to move the goalposts.” Kashkari characterized the labor market as “lukewarm” but “hanging in there.”
FWIW, the 2% inflation target is a pretty recent phenomenon. It was introduced in 2012, when the enemy was deflation, not inflation. It was intended to send a message to consumers that the Fed would not permit deflation, which was intended to get consumers spending. The US was still fighting a deflationary spiral after the burst real estate bubble in 2008.
If you look at inflation over the years, we have spend most of our time well above 2%. Generally speaking it took some sort of crisis to get inflation back to 2%. In the late 80s, it was the stock market crash. In the late 90s, it was the Asian Crisis. In 2002, it was the combination of the burst stock market bubble and 9/11. In 2009 – 2011 it was the burst real estate bubble, and in 2000 it was COVID. I am not sure what the catalyst was in 2015.
Inflation averaged above 3% in the 1990s and I think most people remember that period as a pretty comfortable time economically. My point is there is no magic in the 2% inflation target, and it was put in place to fight deflation not inflation. Will consumers and employees change their behavior if the Fed moves the target from 2% to 3%. Perhaps, but I doubt it.
Eris Future’s Geoffrey Sharp sat down with the Chrisman Podcast to discuss how mortgage bankers can hedge non-QM loans.
