Pro Perspectives 2/1/23

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February 1, 2023
The Fed meeting came and went today with another quarter point hike. 
As we’ve discussed in recent days, that puts the Fed Funds rate ABOVE the Fed’s favored gauge of inflation (core PCE).  
That’s where, historically, the Fed has gone to quell inflation, so it’s sensible to think the Fed should be satisfied and ready to step back and watch from here (i.e. pause).
Today, Jerome Powell maintained the mantra of “finishing the job” on inflation, but he spent far more time making the case that the job is done.
He’s spent the past year telling us they have “more ground to cover.”  Today he said they’ve “covered a lot of ground.”
He’s told us “we’ll want to reach real positive rates.”  Today he said, “real rates are positive.”
In the December press conference, Powell used the word disinflation (falling inflation) zero times.  Today, he used it a lot!
But, what’s the one thing the Fed has been targeting for the past ten months?  Jobs.  Specifically, Powell has talked endlessly about the mismatch between the number of job seekers and the number of job openings
Ten months ago, when the Fed started the tightening campaign, there were two jobs for every one job seeker.    
The concern?  With leverage in the job market, job seekers and employees can command higher wages.  With that, the Fed has feared an upward spiral in wages, where wages feed into higher prices (inflation), which feeds into higher wages … and so the self-reinforcing cycle goes.
So, the latest “job openings” data came in this morning.  It’s virtually unchanged from ten months ago, no progress. 
So what did Jerome Powell say about today’s job openings report, when asked? 
Dismissively, he said “it’s been quite volatile.” 
“I do think, it’s probably an important indicator.” 
“It’s an indicator.”  Ha!       
Perhaps the biggest clue that the Fed has changed its stance:  Powell said nothing today to push back against a stock market that has been on a tear since the beginning of the year, and an interest rate market that has been pricing in rate CUTS by the end of the year (which includes a 10-year government bond yield that’s now trading 225 basis points lower than the historical average, relative to the Fed Funds rate). 
Of course, this mix of higher equity prices and cheaper borrowing costs (based on benchmark market interest rates) is stimulative to the very economy that Powell and company have been trying to suffocate for the past ten months.