Play It Again, For Longer
The story for this round is straightforward: the incoming data have been -on net- as expected and support the “for longer” view. At the moment, there is no reason for the Fed to hike at this meeting nor in December. Keeping the long-end of the curve elevated is what the Fed is trying to achieve. We expect the communication to reflect such goal.
Main points:
- The incoming data have been as expected by the Fed staff forecast inferred from the latest FOMC minutes, as a downward surprise in August was offset by an upward surprise in September. In our view, the Fed staff should not materially revise the near-term forecast. The incoming data should reinforce the message «be patient» to the FOMC. Importantly, the distribution of price changes (core CPI shown in Figure 1) continues to be very different than pre-Covid. At the moment, “3% seems to be the new 2%”. Very little (if anything) suggests that the US economy can reach 2% in the medium-term.
Figure 1. Core CPI MoM prices change distributions.
- The Fed staff medium-term judgmental forecast (the Tealbook) should also be little changed. At this point, 2023 is not relevant for policy and the staff has little information to change the 2024 forecast. Neverthless, the model-based forecast is unchanged to rounding in 2023 and a bit lower in 2024 due to a lower estimated persistency of the process. This is another evidence supporting the view that the Fed can take time right now and go “for longer”.
Figure 2. Comparison of the evolution of the 2023 (Q4/Q4) core PCE price inflation forecast.
- The Fed staff (2021) Taylor rule implies a terminal FF rate of 5.6%. The inertial Taylor rule implies a terminal rate of 5.8%. FRB-US has a terminal rate of 5.6%. (If anything, the Taylor rules disagree with the dots in late 2025 and in 2026) In any case, there is no reason for the FOMC to hike at this round. We continue to expect the main message to be “for longer”.
Figure 3. Taylor rules.
As usual, we would be more than happy to schedule a meeting to discuss the details.