Fed trying not to get 'stuck' in inflation: Evercore ISI's Guha

Thu, Jun 13, 2024, 7:50 AM

May's Producer Price Index (PPI) data saw wholesale prices fall by 0.2% last month. On Wednesday, the latest Consumer Price Index (CPI) print showed inflation to have plateaued in May, with monthly and annual core CPI rising lower than expected. At the center of all this inflation data, the Federal Reserve decided to hold interest rates higher for longer at the June FOMC meeting this week.

Evercore ISI Vice Chairman Krishna Guha sits down with The Morning Brief in-studio to talk about the Fed's monetary policy and how regulators are "just trying to track that the basic story is still on track" regarding their inflation target.

"We don't have to be in a real rush to get to 2.0 [percent inflation rate], but we don't want to get stuck at three," Guha says, listing off certain economic factors that may lead to a more positive inflation picture: "I am optimistic that we're heading in the right direction. I think it's reasonable for the Fed to say, 'okay, but I'm not just going to turn over one good card and say, that's all right, I want to turn over several cards and check we're in more of a trend here.'"

Guha also comments on the string of employment and jobs data the Fed has been thoroughly examining as per its dual mandate agenda: "Payroll survey versus household survey — truth is probably something a little bit in between. I do think that the payroll survey is probably a better measure of job creation at this point in time. It generally is."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Luke Carberry Mogan.

Video Transcript

Features are mixed here this morning on the back of another key inflation print, we got producer price index out this morning, unexpectedly falling about 2/10 of a percent in the month of May.

The reading, coming on the heels of yesterday's comments from Fed Chair Jay Powell, where he once again reiterated more data, is necessary before feeling comfortable about cutting rates.

Here's what Chair Powell had to say.

We'll have to see where the data light the way you know, we're We're, uh we're at, uh, the The economy has, you know, repeatedly surprised forecasters in both directions and all right, we wanna bring in Krishna Guha.

He is Evercore I SI vice chairman here.

We we we need to take a look at what is happening right now.

And and some of the comments that we heard from Fed Chair Jay Powell Does it make sense in terms of remaining so data dependent and balancing that risk here and potentially going too far?

What?

What do you think?

Well, of course you're right.

It's a balancing act for the Fed, right?

They don't don't want to declare victory too soon and cut rates.

They don't want to hang around at 5.5% for too long and find that they end up blowing the soft landing.

So that's been the balancing act for a while.

It's still the balancing act right now.

What we heard from the Fed yesterday was, you know, thumbs up.

The last inflation print was good, but one print, not enough.

We need to see a more sustained downshift in inflation over several months to build that confidence that in the balancing of those risks, the time has come to cut rates.

Do you think the Fed should be as stringent as it is about getting inflation to 2%?

So I think the truth is that the Fed will be fine about taking a couple of years to get all the way down to 2.0 on their preferred measure, the Cor the P CE deflator.

But what they want to make sure is that they're not getting stuck at three.

Late last year, everything was looking fantastic.

They were teeing up to go in June, remember they they were gonna go at this meeting this week, Three cuts this year and then we ran into that unexpectedly hot patch of inflation data.

So they're just trying to check that the basic story is still on track.

We are still heading down towards two.

We don't have to be in a real rush to get to 2.0 but we don't want to get stuck at three.

Are you?

Are you convinced that we are going ahead on that downward path?

And I guess how bumpy is that ride potentially going Well, Bumpy is a loaded word, right?

Uh so I am optimistic that we are on that path.

I think if you look at the labour market at the economy more broadly, I think the economy is broadly back into balance.

We've had a big assist from this massive supply of cheap immigrant workers over the last year, year and a half.

So whatever you think about the larger political and social issues relating to that from a narrow economics perspective, that's more labour supply, helping to meet demand for workers.

I think when you look at the inflation earlier this year, most of it not all of it, most of it was in backward looking categories.

You know, the the official measure of the housing related cost.

The O still hasn't caught up to the step down in private sector rent.

Vehicle insurance was running high because it was still catching up with the increase in used car prices beforehand.

And there were various other things that were printing hot but didn't feel like they were really a good guide to where inflation is heading going forward.

So I am optimistic that we're heading in the right direction.

I think it's reasonable for the Fed to say OK, but I'm not just gonna turn over one good card and say, That's all right, right?

I wanna turn over several cards and check We're in more of a trend here, so I just quickly then what would be What do you think the Fed needs to see in order to be convinced that it is OK to act?

So it's a holistic view across what's going on in the economy itself.

Economists will use the term real economy, you know, spending, employment, those kind of things, and what's happening on inflation.

Inflation is first among equals.

They want to see that downshift in inflation.

So let let's say three, at least maybe four really good months on inflation like the one we've just got in May, but they're also paying attention to what's going on in the economy in general.

If the economy is rip roaringly strong, they'll ask for more proof on inflation.

If the economy is showing more signs of weakening, which I think is more of the tone of some of the data recently and some of the market signals, there'll be a little bit more give on the inflation front, the Fed in all of the cards that you were mentioning, that they turn over and are looking for something very specific and that to really show them a trend more broadly that they're looking at is there forward looking data instead of all of this backwards looking data that they should be considering.

So you're 100% correct.

That policy has to be forward looking, and the type of risk management that the Fed needs to conduct has to be forward looking.

It's not enough to say, Oh, well, last month, the payrolls were fine.

Well, last month the spending was fine.

Is there something that issue is where are we going?

Going forward.

The problem is that in this post pandemic world.

It's been very hard to forecast the economy.

Right stuff has been happening that isn't familiar, and we don't have a good sense of how to model this.

So, inevitably, that makes the Fed and other central banks lean a little bit more on the actual data as opposed to forecast.

But I absolutely agree with you that policy should be, needs to be forward looking.

You can't get trapped in just looking in the room view mirror.

What I think the Fed can reasonably say is we want some minimum confirmation in terms of the current run rate of inflation that things are moving back in the right direction and then we pivot to that more forward looking view.

What do you think about some of the softness that we're starting to see within the labour market when you take a look kind of over the divergence of what we got with the Household Survey versus Establishment Survey, we have that unemployment rate right now right around or at 4% that risk here that that could start to slide and we could then see further weakness within the labour market.

How are how likely is that.

And I guess the risk that that then ultimately poses when we're talking about the Fed, maybe needing to see needing to be a little bit more convinced before they feel comfortable cutting.

Maybe that's exactly what they need to say.

So the Fed has said that they wanted to see the previously tight labour market ease off a bit.

What we've seen up to this point, with unemployment edging up to 4% still looks like the sort of desired easing off of things a bit and not the scary.

Oh my God, unemployment is shooting higher type of thing.

But as in all fairness, Powell himself acknowledged yesterday, if you wait until you get that big spike in unemployment, you've screwed up right, so you can't say, Well, OK, but you we're gonna wait until that happens.

No, you need to try and act in a way that prevents that from happening now.

Payroll Survey versus Household Survey Truth is probably something a little bit in between, but I do think that the payroll survey is probably a better measure of job creation at this point in time.

It generally is, but also when we have this big influx of immigrant workers that's probably getting better captured in the corporate payrolls than the household survey.

So the household survey isn't being scaled up in a way that fully captures the amount of new immigrant workers, UH, that have entered the US economy in the last year or so.