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Caution: Hawks Ahead |
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Today the Federal Reserve released the minutes from the April meeting of the Federal Open Market Committee, which reflected a more hawkish tone than Chair Jerome Powell’s post-meeting press conference. That’s going to create problems for incoming Fed chair Kevin Warsh. |
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Only three FOMC members officially dissented against the language in the committee’s previous April statement, noting that including phrasing about “additional adjustments to the target range for the federal funds rate” suggested the Fed’s next move would be a cut. But it turns out that support for removing the word “additional” may have had more support than those three members alone. Tuesday’s minutes noted that “many participants” indicated that they would have preferred removing the word. |
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In fact, it looks like rate hikes may be under serious consideration. “A majority of participants highlighted, however, that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2%,” the minutes noted. |
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All of this is rain on Warsh’s metaphorical parade ahead of his White House swearing in ceremony on Friday. Warsh is going to have to really scramble to justify rate cuts with so much of the committee concerned about not only the recent inflationary pressures of the Iran war’s oil shock, but also factors like higher inputs for metals, higher demand and cost increases for electrical components, and ongoing tariff gyrations. |
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Warsh has indicated he will rely more on the trimmed mean inflation measure, rather than the core personal consumption expenditures price (PCE) index that excludes food and energy costs, as an alternative approach that supports his dovish calls for rate cuts. At the moment, the Dallas Fed’s Trimmed Mean PCE Deflator measure suggests more benign inflation trends. But Santander’s Stephen Stanley, a proponent of trimmed mean inflation models, cautions that this, too, may be poised to accelerate due to second-round effects from the oil shock and the ongoing impacts from higher tariffs. |
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During 2022’s sky-high CPI inflation prints, the trimmed mean model lagged behind. That likely helped propel the “transitory” narrative. But you know the how the saying goes: “Fool me once…” |
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It stands to reason the Fed can’t afford to be caught flat-footed on inflation again. “Warsh and the Fed would be well-served to continue to give serious consideration to this measure over time, but at the moment, it may be offering false hope for the inflation picture,” Stanley notes. |
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The Calendar |
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Copart, Deckers Outdoor, Deere, Ralph Lauren, Ross Stores, Take-Two Interactive Software, Walmart, Workday, and Zoom Communications report quarterly results tomorrow. |
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The Census Bureau reports residential construction data for April. Consensus estimate is for a seasonally adjusted annual rate of 1.4 million privately-owned housing starts, roughly 100,000 less than in March. |
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S&P Global releases both its Manufacturing and Services Purchasing Managers’ Indexes for May. Economists forecast a 53.6 reading for the Manufacturing PMI and a 51.3 for the Services PMI. This compares with readings of 54.5 and 51, respectively, in April. |
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What We’re Reading Today |
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Barron’s Live returns on Monday. Barron’s Live features timely and actionable insights for investors. We give you behind-the-scenes conversations with the newsroom, connecting you with our editors and reporters covering the markets, the economy, and more. |
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