Pro Perspectives 2/14/24





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February 14, 2024

Austin Goolsbee spoke this morning at the Council on Foreign Relations. He's the President of the Chicago Fed and an FOMC voter.
This comes on heels of yesterday's inflation report, and the related selloff in stocks and spike in yields.
As we discussed in my note yesterday, the market reaction to this January inflation report was consistent with previous episodes, of recent years, when inflation fears were significant.  But in this case, the conditions didn't fit the reaction (i.e. it was an overreaction).
Goolsbee agreed.  
He said, "don't get flipped out over yesterday" (his words, regarding the higher inflation reading).  He called the current level of real rates (Fed Funds rate minus inflation) "very high."  And he said if they stay this restrictive for too long, they will turn one problem (inflation) into another problem (unemployment).
He also, unprompted, referenced the Fed's December Summary of Economic Projections, where the Fed projected a 2.4% inflation rate in 2024, to be accompanied by three rate cuts (75 bps).  He then voluntarily added that the most recent PCE (inflation) reading was lower than 2.4% on both a three and six month average annual rate.
This is very dovish.  It sounds like a guy that's trying to moderate some of the sentiment manipulation that the Fed has engaged in over the past few weeks.
They had successfully curbed expectations in the interest rate market, which had anticipated as many as seven quarter-point rate cuts this year; by yesterday afternoon, expectations had adjusted to as few as three cuts.
Add to all of this, Goolsbee actually talked about productivity gains.
We've talked about it often here in my daily notes.  If productivity growth is offsetting wage growth (which it is), wages can rise without stoking inflation, and it increases the growth potential of the economy.
For a Fed that spent the better part of the pre-pandemic decade blaming the weak, muddling economy on weak productivity growth, they've been bizarrely quiet on the subject in this post-pandemic, inflation fighting environment.
Goolsbee has broken the silence.  He said, "nothing is more important than the productivity growth rate."  That's a big statement.   
And he said if productivity continues to run above long-term trend, "it will definitely change the way we think about the economy."  Translation:  Hot productivity growth means wages can continue to adjust to the level of prices, and, simultaneously, we can see hot economic growth and low inflation.  That's precisely what we're getting. 
As for the sustainability of the productivity gains:  As we've discussed, we are in the early innings of generative AI, which might be the most productivity enhancing technological advancement of our lifetime.