January Inflation

[SAJ-99]

There are a lot of pieces of this complicated economic pie. I don’t envy Powell at this time.

I’ll parrot what the main economist (group of 5) I’ve been reading/listening to think on the rate issue.

The Feds is in a tough position because the Fed needs to decide if it lowers rates to encourage employment (spur the economy) or raise rates to fight inflation.

The economists said that the Fed considers full employment as an unemployment rate of 4.6%. Any unemployment rate lower than 4.6% causes salary inflation. Current unemployment rate is 4.2%.

On the other hand, Fed wants inflation at 2%. Current inflation is 2.4%. Close to the goal but an inflation gap exists.

Due to the expected inflationary pressure from tariffs, the economist thought the Fed would choose to fight inflation. Raising rates was never mentioned but the thought was no lowering of rates in 2026.

No discussion of the effects of the rates on Federal debt because the economists wouldn’t expect the Fed to react for that reason. Politicians probably have closed door discussions about the subject with Fed board members.

I get both confidential information (job related) and have read public comments from the economic group. Private information is doom and gloom. Public information is more economist cagey with asterisks.

The decisive factor will be how long the tariff situation continues.

Yeah, I get it. I don’t necessarily disagree with that model, but I don’t know that I agree with it either. It’s an odd space for me to be in. FF rate was still well above wage growth rate and inflation continues to slowly decline, so maybe. I just don’t see the direct impact to tariffs- not seeing anything like this in 100yrs doesn’t help. So I continue to wonder if that model overemphasizes int rate’s impact on wages. Way too deep of a discussion for this thread. LOL.

The main question for markets is Fed rate cut in May, Y or N. The reality is there might be more impact from perception of not bending to Trump as there is to actual data. The tariff-impacted data will continue to trickle in and it will be harder to spin as positive. China made sure of that by shutting down factories and sending back empty boats.

 

[brymoore]

The main question for markets is Fed rate cut in May, Y or N.

For what it’s worth, last report I had earlier this week showed the interest rate swap market had zero rate cuts priced into rates in May, and I believe June, and sixty percent chance for July. I might be off a month and it’ might be sixty percent for June. I thought two months no cuts. Definitely zero for May. Swap market opinion changes daily on reports.

Swap market opinion is wrong quite a lot too but it’s interesting to see how Chicago thinks rates will move.

 

[JAG]

Yeah, and especially so in the past few months. The firing and subsequent rehiring of many federal employees skews the data which makes it difficult to identify the true macro employment trends.

Is there any substance to rendering the jobs data to resolve those from the public vs private sector?

 

[JAG]

The Feds is in a tough position because the Fed needs to decide if it lowers rates to encourage employment (spur the economy) or raise rates to fight inflation.

Is it possible the fed may associate high tariffs as an equivalent or similar impact as raising rates?

Edit:
Iow, would high tariffs be a factor that entices Powell to lower interest rates?

Is this apples to apples, or oranges?

 

[brymoore]

Is it possible the fed may associate high tariffs as an equivalent or similar impact as raising rates?

I’ve never heard this theory mentioned.

(This is me thinking out loud. Doesn’t mean I’m right)

Raising interest rates and high tariffs have a few similar reactions and contrary reactions.

An argument could be made that high tariffs will weaken the economy and slow it down, similar to raising interest rates. However, high tariffs will also increase inflation. Raising interest will lower inflation. Contrary reactions.

I’ve yet to hear an economist say that tariffs are good for an economy except for possibly administration personnel.

 

[JAG]

For what it’s worth, last report I had earlier this week showed the interest rate swap market had zero rate cuts priced into rates in May, and I believe June, and sixty percent chance for July. I might be off a month and it’ might be sixty percent for June. I thought two months no cuts. Definitely zero for May. Swap market opinion changes daily on reports.

Swap market opinion is wrong quite a lot too but it’s interesting to see how Chicago thinks rates will move.

swap markets?!… my head really hurts now.

Just did some reading on this. I’m shocked that I just learned about it and how big of a deal they are.

Do normal people know about them?

 

[brymoore]

swap markets?!… my head really hurts now.

Just did some reading on this. I’m shocked that I just learned about it and how big of a deal they are.

Do normal people know about them?

I use them professionally. Otherwise, no.

 

[JAG]

I’ve yet to hear an economist say that tariffs are good for an economy except for possibly administration personnel.

I concur, no economist may ever admit that.

While the current administration (Trump) is currently boasting of income from tariffs for temporary spin/soundbites, the others, like Bessent (same goal, but more measured), describe the boring, long goal of no tariffs, fairer trade, and alludes to nuanced deals customized by each country.

 

[JAG]

I use them professionally. Otherwise, no.

Neat to know there is an entire economic universe out there that gambles (sorry - ‘speculates’) on what interest rates (and other things) will or won’t do.

 

[brymoore]

Neat to know there is an entire economic universe out there that gambles (sorry - ‘speculates’) on what interest rates (and other things) will or won’t do.

While some gamble, others use the markets to hedge interest rates or other commodities. Gamblers add liquidity to the markets for the hedgers.

 

[SAJ-99]

For what it’s worth, last report I had earlier this week showed the interest rate swap market had zero rate cuts priced into rates in May, and I believe June, and sixty percent chance for July. I might be off a month and it’ might be sixty percent for June. I thought two months no cuts. Definitely zero for May. Swap market opinion changes daily on reports.

Swap market opinion is wrong quite a lot too but it’s interesting to see how Chicago thinks rates will move.

Sorry, I should have said June. Fed Funds futures are currently showing no rate cut for May (meeting next week) and about a 33% chance for a cut in June. This Fed does not surprise, EVER, so we will see if next week they start prepping the market for a cut in June. I expect Trump to post something derogatory when they don't cut next week.

Oddly, the Treasury market is not pricing in the same cuts, as the 1 mo and 3mo rates are on top of each other. A crazy chart that shows where we are and makes this equity market rally look questionable.