Losing the narrative. The November FOMC is here and this time, we have a problem. Back in September, the FOMC cut the FF rate by 50bps, sounded very dovish and concerned about the labor market. However, the data we got since the July FOMC (July, not only September) are inconsistent with an aggressive Fed because the economy remains solid. The truth is that while we expect the Fed to cut rates (25bps) in November, a truly “data dependent” Fed would skip. Put is simply: the Fed has lost the narrative and this is a problem now. The hope is that Powell will bring some clarity but honestly we doubt it.
Main points:
- The incoming data have been a bit stronger than expected by the Fed staff forecast inferred from the latest FOMC minutes. No progress in the distribution of price changes, which remains not consistent with target.
Figure 1. Core CPI MoM prices change distributions.
- The main medium-term model forecast is little changed.The “main” model forecast (sample ends in Q3) continues to project core inflation to gradually moderate. The (Q4/Q4) model forecast is: 2.9% in 2024, 2.45% in 2025, 2.5% in 2026, and 2.4% in 2027. The forecast remains higher than the Fed target.
Figure 2. Current and previous FOMC round “main” model forecast of core PCE price inflation.
- The estimate of “underlying inflation” (pi*), the crucial variable in the Fed staff forecast, is little changed. According to our models, the Fed staff is estimating pi* at 2.4 percent. Pi* is very persistent by nature and remains above the Fed target.
Figure 3. Evolution of the estimate of pi*.
- FRB-US. The model continues to see solid growth, stable unemployment rate, and core inflation a bit above target at the end of the medium-term. According to the model, the FF rate is expected at 3.65% in 2025 (100bps cumulative cuts in 2025), 3.3% in 2026, and 3.3% in 2027.
Figure 4. Latest FRB-US forecast (red dashed line) vs latest SEP (blue solid line).
As usual, we would be more than happy to schedule a meeting to discuss the details.