Insurance Built In
Macro Perspectives
We'll get to see the latest reading on the Fed's favored (Core PCE) inflation gauge - it's likely to tick up, but remain in the low 4s (year-over-year percent change). Importantly, as per the chart below (using Core CPI), the Fed's target rate is well above inflation.
This dynamic of getting the Fed Funds rate (short term rates) above the rate of inflation has historically been the formula for putting downward pressure on inflation - the Fed has built in plenty of cushion, to the tune of over 100 basis points (previous Core PCE reading was 4.1%, consensus for today is 4.2%).
So the Fed has its foot on the brake.
Moreover, the market is pricing in about a coin flips chance for another quarter point hike by the end of the year. That expectation has been set by a combination of the Fed's formal rate projections, along with the persistent jawboning we hear from Fed officials about "keeping at it" until they get inflation down to 2%.
The manipulation of expectations serves as more foot pressure on the brake (by design).
That said, the Fed is supposed to be "watching the data" for their guide on next steps and much of the data has been falling into their comfort zone.
So, what gives?Â
Remember, loads of government spending is still yet to be deployed. With rates well above inflation at the moment, and a hawkish posture, the Fed has built in some "insurance."
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