CPI Delivers Mixed Message as Fed Weighs Next Move

**SPEAKER_1** (0:00)
Joining me right now, David Doyle, Head of Economics at Macquarie Group, and Brian Jacobsen, Chief Economic Strategist, Annex Wealth Management. Thank you both for being with me. So as we take a look here, David, some of your thoughts, as you said, the path is uncertain. Why is that? What the Fed may or may not do, based on what we've gotten thus far?

**David Doyle** (0:22)
Well, I mean, I think the Fed is, you know, it's sort of an off-use phrase, but data dependent, right? So a lot of what they'll do going forward hinges on what the profile of the data looks like through the fall. I think there's some members that are already in favor of hikes, but the median voter, the one that will drive the policy decision, I think probably needs to see more than what you saw from today's CPI print to get them over the line in terms of advocating for a hike. So again, to us, it looks like they'll be at a hike ahead, our baseline, we penciled in December for the Fed, but a lot depends on the data that's coming through, both on the inflation side and on the growth slash employment side of the ledger.

**SPEAKER_1** (1:11)
How would you describe, if you were to pick a word for today, would you call it a tame print today? Coming on the heels of June here, David, just a final take away from the CPI print for there.

**David Doyle** (1:24)
Yeah, I think tame is a decent word for it. I mean, there's modest freshers that came through. You know, I don't think we can read again. It's a single month, so it's hard to read, draw two firm conclusions from it.
I think if you were sort of on the hawkish side of the ledger, what you would argue is that the core goods component showed a bit of a pickup, and that's a bit of a shift from what we've seen in some of the recent months. And then also, like the owner's equivalent rent and the rent of primary residences seems to be stabilizing at around 3% year-over-year for the last several months. So that no longer seems to be driving any sort of disinflation. So I think that's what would be sort of on the hawkish side. On the dovish side, you'd of course say, okay, well, there's no burning platform here. We're not seeing sort of significant inflationary pressures come through and the year-over-year measure is still moderated. So again, there's something in there for the hawks, there's something in there for the doves, and I think we'll see what comes for the data for August, September, October and see what the implications are in the flow from those prints.

**SPEAKER_1** (2:26)
And Brian, you talked about inflation here. You said, look, there's no code red flashing at the same time.
And while it's going in the right direction, you still have questions. Tell me about that, Brian.

**Brian Jacobsen** (2:39)
Yeah, absolutely. I think that really the message is inflation, it's better but not great, but it might be good enough to keep the Fed on pause, at least through the September meeting. Of course, we'll have to wait and see what happens with the data after that. But I think that really what this does is it sets up a situation where with some of the labor market slowing, despite having a low unemployment rate, when it's going down because the labor force is shrinking, that's not a great thing. So people will be able to point to that to say, maybe the labor market isn't quite as strong as we thought that it was. And then with inflation, as long as it's trending in the correct direction, by the time they get to their September meeting, you can say, well, let's just wait to see how things play out. Plus, I think that Kevin Warsh would be much more of an advocate for using a different tool to fight inflation than just adjusting the federal funds rate. That's been their go-to tool all these years, but he's been much more focused on what about the balance sheet.
Perhaps it's actually more prudent to shrink the balance sheet faster before they actually contemplate starting to hike rates. I think that policy sequencing here is going to become much more important as the year goes on.

**SPEAKER_1** (3:56)
Do you think that's likely? Do you think he may actually do that, Brian?

**Brian Jacobsen** (4:00)
Well, I think that he'll make the case for it when he speaks at Jackson Hole. And then to actually put that into practice obviously requires the consent of the median voter on the FOMC. That's gonna be a tougher hill to climb. But I think it is one where he could say, you know what, what we did, where just a couple months ago, they stopped shrinking the balance sheet, right? Perhaps they can let it shrink again and then contemplate whether or not they need to hike. So perhaps it's gonna be, you'd much rather see a much smaller balance sheet, but they can take a baby step in that direction. It would be really fascinating if at the September meeting we got a situation which we have not seen since the late 1930s, which is where the chair is actually in the descent, where if it was for some reason the committee wants to hike rates, I think that he might actually say, you know what, I'm going to be one of the dissenters and we haven't seen that in nearly 100 years.