Where Things Stand Now With Inflation and the Fed

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:16)

Tracy, it's been a while since we've just sort of had a macro state of the economy episode, but I think now is a very good time for it.

Tracy Alloway (0:24)

Yeah, absolutely. So we are recording this on December 14th, literally two hours after the Fed's latest decision in which they hiked by 50 basis points. That was widely expected, but what wasn't as expected was the CPI number that we got just yesterday, which came in, I think the headline figure was 7.1%, which was lower than expected.

Joe Weisenthal (0:47)

Right, so a pretty big week. I mean, the story, the big macro story is everyone's waiting for some clear sign of inflation deceleration.

Everybody is trying to figure out, you know, is the Fed gonna pivot and what pivot even means, which I think is a contested word. And so I would say a pretty big week, because as you say, we got an inflation report, a Fed announcement, press conference, all of that. And so I think a good moment to take stock of where we are in these stories.

Tracy Alloway (1:16)

Right, is this a turning point in these sort of high inflation interest rate hiking cycle narrative that we've had for some time? And the fact that I've said turning point means that, and the fact that we're doing an episode on this means that it's probably gonna amount to nothing and I've cursed it, but you never know.

Joe Weisenthal (1:31)

We keep setting ourselves up for the jinx right now. So we have all of our bases covered, but anyway, I think we should just get right into it because we have two great guests, two of the people we most like to turn to on these big macro questions.

We've spoken to them many times over the years. We're gonna be speaking with two guests. Tim Duy is the Chief US. Economist at SGH Macro Advisors, as well as a Professor of Practice in Economics at the University of Oregon, and Jon Turek, the founder of JST Advisors and the author of The Cheap Convexity Substack, which is a must read.

Tim and Jon, thank you both for coming on.

Tim Duy (2:08)

Well, thank you for having us.

Joe Weisenthal (2:11)

Absolutely. So why don't, you know, I'll throw a question out for both of you, but like really simple. We just, just as we're talking, wrapped up Powell's press conference, why do you sort of give us your summary, you know, you start with Tim, but both of you can go, of like, what did we just learn from Powell?

Tim Duy (2:31)

Well, that's a, okay, so what did we learn from Powell?

So no, no, you know, I think, you know, I think the main thing that we really learned from Powell is that they are very much committed to this idea that they need to hold rates, you know, at a restrictive level for an extended period of time. And then we also know that they're closing in on what they think that level is. And so, you know, what this seems to be coming down to is causing, you know, deliberately causing something that looks very much like a recession, although Powell would say that, it's something in the forecast, which is interesting now because it's gonna create some questions, given this disinflationary trend we're seeing in the data, it's really gonna, you know, people are gonna start asking, well, why do you need to create a recession here?

Jon Turek (3:26)

Jon?

Yeah, I mean, for me, I think of it, I took away three key things from today. I mean, I think that one is that they are kind of transitioning from this, where is terminal to how long to stay there stage. And I think that that really was, I think most put forward by the fact that Powell seemed very open to going in 25-pip intervals, starting at the February next FOMC meeting. So that, you know, along with the commentary, the press conference does make it seem like they're in the ballpark of what they deem to be sufficiently restrictive. I think the second thing is that they are seemingly looking at this at least ex ante, as that they want to stay at five, around 5% FED funds for a while.

And then third, I think the interesting thing from the dots to me, you know, obviously one can point to an interesting 2023 core PC number, but I think, you know, most interesting to me is that if you look at the real rates for 23 and 24 using FED funds and their core PC projection, it's 160 basis points for both years. So I think in terms of defining what sufficiently restrictive this sort of big, maybe dynamic term means, I think they gave you a pretty good insight into the level that they seemingly are going to be targeting that's, you know, equates to inflation back and target over the medium term.