April CPI came in hot this morning.
Headline inflation jumped to 3.8% from 3.3%.
Core CPI accelerated to 2.8% from 2.6%. The spike in oil prices is clearly in the inflation numbers.
But what accompanied the bottom in inflation, which happened before the Iran strikes?
The Fed’s December stop and reverse on the balance sheet — the return to balance sheet expansion (which is inflationary).
And as you can see in the next chart, with the Fed holding the effective Fed Funds Rate at 3.64% throughout the year, today’s 3.8% headline inflation print creates negative real rates (Fed Funds Rate minus headline inflation) for the first time since 2023.
As you can also see in the chart, the last time real rates dipped into negative territory was late 2019 — and the setup was identical. The Fed flip-flopped — they followed a quantitative tightening campaign by returning to balance sheet expansion, to respond to “strains in the money markets” (i.e. tightening liquidity conditions).
Liquidity tightened. The Fed prioritized liquidity over inflation. Real rates went negative.
All of this comes the week Kevin Warsh takes the helm as Fed Chair. And his view has been, smaller balance sheet, lower rates.
