Moody's Talks - Inside Economics - CPI and CCAR

Episode Date: February 16, 2024

The Inside Economics team is joined by CPI guru and colleague Matt Colyar to discuss the bevy of inflation-related data released this week. First the team dissects the Federal Reserve’s CCAR stress test scenarios and laments the perpetually inconvenient timing of their release. Talk turns to the root causes for the inflation of the past few years and why shelter inflation is so stubborn. The team imagines themselves on the FOMC for a day and what they would do with interest rates going forward. Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by a few of my colleagues. Of course, we've got Marissa D. Natali and Chris D. Reuters. Hi, guys. Hey, Mark. Hey, Mark. You'll never guess who I ran into yesterday.

The Dalai Lama. No, no. A close second. Mario Dragi. A close second. Ryan Sweet. Oh, yeah. Former co-host of Inside Economics.

How's Ryan doing? Where'd you run into him? At the NAB conference. Oh, that's right. National Association of Business Economist. So he's actually moderating a panel on monetary policy today as we record this. Oh, very cool. But the most exciting piece of news I wanted to relay is that I asked him to come on the podcast and he agreed.

No, really? He did. He did. And we were thinking maybe a little bit of a battle the champions when it comes to the stats game, given Merriss's promise and his promise. Maybe we can do something around that. Well, is he finally given up on the whole recession call?

I mean, he was like the ardent supporter of, oh, we're going to have a recession in 2023. He admits that we did not have a recession in 2023. So he's still holding to it then, still recession. No, no, I don't think. Well, that's why we need to have them on. Yeah, that would be really good to have him back on. Yeah, very good.

Good. And so you were at Nabe and what were you speaking on? I spoke on commercial estate. Ah. And this question of whether or not there's going to be a doom loop. Yeah. Did you learn anything in the conversation? I don't know they learn from you, but did you learn anything? Yeah, absolutely.

So there were some interesting remarks from there were some practitioners there, folks that are in the industry. So just kind of interesting ways that they look at the market and how they sub-segment it. So finally, right? Class A office property is not just class A office property. It's got a lot of different nuances and sub-segments, top and bottom end. So it was just interesting. I mean, my sense of it is that this has become, it's obviously a risk and still a weight on the economy.

but the threat is abating, at least in terms of this idea that we're going to go into a doom of, did you come away with that view or something different? Yeah, yeah, that was a view going in. That was a view coming out. Yeah, certainly some cities are in, you know, going to have tougher time adjusting to the loss of office properties, for example, top property tax revenue. But not at a national level. It's very unlikely.

And even the financial system itself, yeah, there may be a few banks here or there that get caught up with larger losses. But we don't see a systemic problem arising here unless you couple it with something else. Yeah. This may be too much of a tangent because there's a lot to talk about here today. A lot of data, it's consumer price index, PPI, a lot of there's a data dump industrial production, retail sales, housing starts. So there's a lot of economic data. and the Fed came out with the so-called C-car stress test, and I want to come back to that in just a second.

So there's a lot to talk about, but one quick change, well, now that we're on CRA, commercial real estate, we construct our own estimate of commercial real estate prices by property type. And, you know, you look at that data, at least based on the way we're constructing it at the moment, and you come away thinking the worst is already behind it. You want to describe that? Because we just got that data. We got this data point yesterday for the fourth quarter of 2023.

You want to describe that data and, you know, interpretation of it? Sure. So very quickly. It's a commercial real estate price index. It's a repeat sales index, which is similar to many of the house price indices that listeners may know about the Kay Schiller or our own Moody's Analytics house price. So we're looking at the same properties transacted multiple times and inferring price changes from those changes.

It's a way to try to control for the quality of the properties or the mix or distribution of properties that are transacting. Bottom line is in our latest update, which is an equal weighted series, right? So we give all the properties equal weight in this version of the index. We actually see that things are actually picking up or some a little bit of an increase in property prices really across the board, even office. showing a little bit of strength. So, yeah, maybe worse is over seems reasonable.

I'd be a little cautious to read too much in the next because we also know that transaction volumes are still very, very low. So we may only be observing the best properties or the properties that are in, you know, healthy markets that are transacting. So there might be some of that bias creeping in here. But, you know, taken at first blush, it looks as though things may be, no, not zooming back to solid growth, but at least not declining as rapidly as they had been. Now, in a value weighted basis. So you said this is equal weighted.

So if it's a small office building versus a tower sitting in New York, we don't make a, in that index, there's no distinction. But if you weight things based on the value, there you see some. That's right. Yeah, so we have another version of the index that we're working on that show more significant price declines, right? Once you account for, you know, because it is those larger central city properties that are seeing some of the largest declines, right? In that version of the index, you do see much more severe type of declines. But even there, it looks as though things may be stabilizing at the end of the series. Again, given all the same caveats apply.

I wonder if we made the same forecast error with CRA prices as we did with house prices. You know, house prices initially declined back in 22, then they kind of came back in 23. And now we think they're going to be flat. But previously we thought they'd continue to decline. We're now still thinking CRA prices are going to decline more, but maybe not. Maybe given with declining interest rates and economy doing reasonably well and maybe the adjustment here is prices go flat for a while as opposed to go down. It could be.

I guess another takeaway from those practitioners I talked about is just how creative the CRE investment community property managers are. They're going to figure out a way to use these properties with high vacancy rates. They'll repurpose them. It may take some time, but I would not, I think it would be premature to count them out, say, oh, these properties are dead forever. I think they're a pretty creative bunch. Yeah, interesting.

Okay. All right. Well, I fail to introduce, and I, now I got to say his name right. Oh, boy. Pressure on. Matt is here. Perfect. Oh, no, I think I know.

I think I got a clue. Collier County is Naples. So I'm going to say Matt Collier. Perfect. Oh, my gosh. Really? Way, way to go. I was ready to give up, too. That's great. No, that really helped out a lot, Caliore County. Yeah, that makes a lot of sense. That's Naples, Florida. Yeah, absolutely. It's good to have you, Matt.

Yeah, great to be here. Yeah, and of course, when we get the CPI or inflation data, you're the first person we think of, so we're going to dive into that. Before we get into the CPI, though, and the PPI and all that stuff. The other big thing that happened this week was the Federal Reserve Board. finally, finally released the so-called C-Car stress test. This is the bank stress test that were established in the wake of the financial crisis back in 2009. And each year about this time, we're waiting, waiting for the Fed to release those scenarios so that we can run them through our models and the banks can use them in their capital planning and everything else.

And this year, the Fed took it right down to the legislative wire. I didn't realize this, But written into law, I guess Dodd-Frank, the big reform legislation that was passed in the wake of the financial crisis, the Fed has to release by law these stress tests by February 15th. And yesterday was February 15th. What the heck? What do you think? What was going on there, Chris? I mean, what was the delay, do you think? Well, they added two scenarios this year to exploratory scenarios.

and they claimed, or they stated that they used data through the 13th of February. So, you know, perhaps that's why they wanted to wait until the, you know, last possible moment to incorporate the latest information into this. I don't know. I don't know. Making up, you pick up Q4, 2023, Q4 data more fully, maybe. Is that what you're saying? Well, no, it's actually some of the market data, because there's some market data in there. I think it's some of the, they were trying to capture more, maybe the more recent.

Okay. Okay. So typically in recent years, the Fed releases two scenarios. One is just the baseline, which is basically, I don't know, blue chip consensus or something similar. Something like that. Yeah. And then they release a so-called severe adverse scenario, which is a pretty dark scenario,

kind of on the tail of the distribution possible outcomes. That's what the banks, the big, I guess this year's there's 32 banks that are taking the test, I think. That's right. Yeah. They use that to determine how much capital. they need to hold against the losses in a very severe scenario, stress scenario. But this year, they added what they call two exploratory scenarios, scenario A and scenario B.

You want to describe what those are? Yeah. So these are new. They are scenarios that are really designed to focus on some of the key stresses to the financial system, to the banks themselves. I assume they're born out of last year's mini banking crisis. What happened was SVB and other institutions. So these scenarios really focus on funding stress primarily, right? So what if a bank undergoes a severe period of funding stress in addition to an economic recession?

So the two scenarios include funding stress plus either a mild economic, economic recession or a more severe recession. So the combination of these factors plus inflation plus rising interest rates. So that's kind of a layering, if you will, of multiple risks. At least that's how I interpreted it. So it feels like a reaction to last year's banking crisis, SVB, the kind of the banks kind of choked on the losses on their security holdings. They got kind of wrong-footed in terms of their funding, their funding costs above their lending rate. their net interest margins coming under pressure, that kind of thing. And this is a way to say, hey, guys, let's go stress your balance sheet income statement.

Let's make sure you're okay under a severe, in one of the exploratory centers, very severe kind of stress environment, both in terms of the economic environment, but also in terms of the funding environment. That's right. That's right. Yeah, good. Mercer, did you, have you had a chance to look at the scenarios at all? A bit.

Yeah. Yeah, what do you think? The baseline and severely adverse look typical as they normally do, right, the Fed is mandated to, in the adverse scenario, kind of move it with the current data so that, for example, if the unemployment rate is higher, right, the peak will be proportionally lower than it was in the prior year. If it's, you know, it's higher today, right, than it was a year ago when we did these. I mean, the Fed has, so they're adding two new exploratory scenarios.

There have been years where they've had multiple regular scenarios. They used to have a baseline, an adverse, and a severely adverse. So it's not, you know, it's a little bit more work for them than they've done in the past couple of years. But they have previously done multiple scenarios in the regular C-car test. And I guess we should note, Chris, too, that these exploratory scenarios aren't going to be used in capital planning for the banks. They're not exactly optional. I think the Fed, certainly our banking clients are not treating them as optional, but they're not going to be

used in capital planning. They're kind of for their information to help kind of gauge the risks going forward, but they're not going to be graded on these scenarios like they are on the regular C-car scenarios. I think the results will also be reported in aggregate. for those two scenarios. You won't put the bank by bank. Right. Yeah, the Fed actually scores each individual bank and publishes each individual bank's results, whether they pass or fail these C-Car scenarios every year.

So they're not going to do that individually for these exploratory scenarios. Did you happen to notice, and I'm probably pressing too hard, though, too hard there? But what was the peak drop decline in CRE commercial real estate prices in the severe adverse scenario. I think last year was about 40%. Is it the same? I think it's the same. It's the same. Okay. All right. That's so interesting. You know, just to, if anyone from the feds listening, you know, you're ruining our weekend. I mean, like, you're ruined everybody's more than a weekend. This is like crazy. You could take it right up to the wire February 15th. And then you added another two scenarios, you know, hair on fire. You know, everyone's scrambling here to get this

thing done. I mean, I'm not sure why, why? Why it's a secret of when it's going to be released? Why can't you just say it's going to be this date and it's this date and. And there are four scenarios. And there's four scenarios and, you know, be ready. Yeah. Yeah. Why? I mean, I guess I guess you could say, and I'm just guessing operational resilience. I mean, they're just putting pressure on the banking system and everyone involved to see if you actually can do this. It's part of the stress test. It's called a stress test, guys. Come on.

You got to be under stress. Well, they usually ruin Super Bowl weekend. At least they didn't do that. That's true. It's almost always Super Bowl weekend. Oh, maybe that's why they delayed it to the 15. Yeah. So now it's President's Day weekend.

So if you go all the way back in the stress testing, it was 2009. It was in November. It was Thanksgiving, got ruined. Oh, yeah. They pushed it. And then Christmas was getting ruined New Year. So I think they're just going through the holidays, right? Yeah, I just find it so weird.

It is odd. It is odd. They're probably just trying to make people upset for themselves. Like, you know, in case they make a mistake and they get to go back and redo something or they rethink something or it's not 100%. ready, they're probably just trying to take the pressure off themselves to have a specific date. They don't have a deadline. Yeah.

You guys have a deadline. We don't have a deadline. Right. All right. Well, there's definitely information. They could tell us a week before, a couple days before. Hey, it's going to be, you know, a little later, whatever. There's just silence, right?

And then all of a sudden appears. Takes the fun out of guessing. Okay. Fair enough. All right. Okay. Nothing of the venting, I guess. Yes.

Yeah. enough of that thing, at least for the time being. There better not be a mistake in the data, and there has been in the past, not in recent years, but that would be, I think we would have heard about that already if there was some problem. The exploratory scenarios are a little weird. But they're always a little weird. When they were doing the adverse scenario, as you pointed out, it was always weird. You know, immaculate conception, inflation is raging.

You know, no explanation as to why, but, you know, there it is. You know, so anyway. Okay, let's move on. Let's talk about the economic news of the week, and inflation was the headliner. We got both the Consumer Price Index. I believe that was on last Tuesday, was it not, this past Tuesday. And then the producer price index, that prices kind of at the wholesale level. That was released this morning, both on the hot side, and hot meaning stronger than expected.

And, of course, markets have reacted to that, bond market, stock market. Matt, do you want to give us a kind of a top-line sense of the numbers? And then we're going to, I think we're going to dig a little deeper into some aspects of this, particularly owners' equivalent rent costs of housing services because that's a big chunk of the miss here in terms of the high inflation. And we might risk going too deep into the bowels of these numbers, but I think it's worthwhile. Anyway, Matt, you want to give us kind of high level with the data say? Sure. It was definitely more than everybody wanted to start the year, the CPI report that came out on Tuesday for January. So the headline number from December to January, the CPI rose 0.3%. We were closer to 0.1. Consensus was 0.2. So it's nominally looking at it. That's not a disaster, but it's hotter than expected. So you're on Twitter, so I know you may remember this silly conversation a year or so ago

that was like a couple of months of point one, even 0% monthly growth was held out as success that, hey, inflation, we're winning, this inflation battle is going as we want it to. And then there was a pushback of like, oh, what are you talking about? It's still 7%. It's the annual rate. Like there was this, which both parties were right. This struck me immediately as like, oh, that's the opposite. the headline number dropped from 3.4 to 3.1 on an annual basis.

Year over year, year over January. Right. But we get and it's like, okay, that's, that would be great. We'd be out of the woods pretty quickly if we got that every month. But the monthly rate is what's causing all the concern. Certainly what financial markets were reacting to, as you mentioned. So I thought you were going to say, and I may have this wrong, but my recollection is last January, we also got a hot number. That was higher than expectations, no? Yeah. I think, the period I'm referencing is maybe like mid-2020. We start, it was very early to start to get over the peak. Oh, the reason I bring that up is because it feels like this one will come back to it,

but seasonality here is a, maybe pulling a big role. I mean, it's noise versus signal. I'm going to ask you how much is noise, how much is signal, but go on. What else do you want to tell us about these numbers? So just breaking down components and I know we'll spend more time on shelter, but the big one's energy was a negative contributor this month that was expected. There's been a real decline in late 2023 and into January for gas prices. So gasoline contributed, I'm sorry, gasoline fell like 3.3% from December to January. Electricity prices, which come from natural gas, go into the utility

CPI was positive, but not so much. So the 0.9% decline in the energy CPI in January is the third month in row of declines, of a decline. Let me stop you for a second on the electricity, and that has been increasing. But we know that natural gas prices, I don't know if you've looked recently, but they have collapsed. I mean, we're now below $2 per million BTU. $2 in my mind is this kind of threshold. Anything below that. is very, very low because we have all this inventory of natural gas everywhere. And natural gas is the key feedstock into the production of electricity in the country. So that would argue if this continues, and it feels like it will, that we're going to start

seeing some negative signs on electricity prices you're going forward. Would you concur with that? That's right. And our model, it's a lag of about a month or two when you see those natural gas prices drop when that actually shows up in electricity bills. Okay. But moving the other way is gasoline prices since bottoming out in January have drifted up. WTI closer to 70 throughout January is now a lot closer to 80.

So there is the kind of counterbalancing effect there. So the increase that's coming, I would not expect, as we are today, we're still only halfway through the month, to be a dramatic increase. But I would say the increases in gasoline and in oil are going to offset the. decline in natural gas prices. Okay. So that's energy. So energy is basically flat to down. I mean, down this month, flat next month, or something in that order back to it.

I think that's fair. Okay. Okay. Food prices, which were pretty stable, even though they get lumped in with the volatile food and energy category that we look at course, when we look at core CPI, accelerated in January, so a 0.4% increase. a lot of that still is coming from food away from home, which is your dining out, which is a more labor-intensive way to get food than going to the grocery store

and you're dealing with manufacturing prices and shipping and logistics. But when you go out to eat, dining out has been much more expensive, less affordable than grocery store prices. So food away from home rose 0.3% in December and then 0.5% in January. and is up over 5% relative to a year ago. So that remains an inflationary source in the U.S. in a way that groceries aren't. So food at home, rose point.

You're going to sense a theme here by the next thing I say. Sure. And that is, it feels like food away from home price growth is also going to slow because, you know, you listen to some of these large retail restaurant change, like a McDonald's or a young brands, they are saying demand has come way off, particularly by their lower income customers, and they sense some real sensitivity to the price increases

and that consumers are starting to pull back. I mean, if that's the case, that would argue that these companies as restaurateurs are going to have to become a little bit more circumspect than their price increases. Does that resonate with you? Certainly makes a lot of sense. and would be a good disinflationary force.

Chris, you see what I'm doing here? I see the setup. You see the setup. See right through it. Yeah. Okay. Okay.

Now we're at food at home. And this is, you may say, well, it's kind of flattish and really hasn't, the good news is it hasn't really increased that much in the past year. Obviously, it rose a lot in 2021 in 2022 into 20, 23. And it feels like that's the thing that has people really upset, right? It's the food. It's got them going crazy because, you know, we buy food, people buy food every single day and very focused on that. And, you know, when people think about inflation, they think about the cost of a gallon of regular and leaded, no doubt that's a big deal. But they're also thinking

about some food item as well. So what's going on with food at home? Do you think we're going to see continued moderation there as well? I think so. I mean, I think you're at the same type of price sensitivity point. You have the slowing economy or moderating the way that we expected to. I think those are all reasonable intuitions. Okay. I guess the other thing is if diesel prices stay down, right? Obviously, a big chunk of the cost of food at home is getting food from the farm to the store shelf. That goes to cost of transportation, which goes to trucks, which goes to diesel. diesel prices, or I don't think they're falling anymore to your point about oil prices,

but they're down quite a bit as well. And that should help, I would think, in the next, at least a few months. That sounds right. I haven't thought about our diesel forecast, but would be interesting to look at energy. Yeah. Okay. Any particular food items that you notice that were up significantly? And is there any stories behind them?

Someone mentioned to me meat prices, but is it, were meat prices up a lot? during the month? Do you know? They fell, I think. Okay. Oh, really? Okay. I'm surprised you didn't bring up hot dogs, Mark. Oh, really?

I know you're a lover of hot dogs. I love hot dogs. Of 2% over the month, Mark. Oh, wow. Maybe that's what the meat, the person was saying about meat. You know, egg prices are down almost 30% over the year. Remember that great egg debate? Yeah.

I'm not a big egg fan, but I'm a hot dog fan for sure. That's good. I was scanning for something for the numbers game, like an obscure food that they moved oddly. And I think tomatoes rose like 5% or 4.5% which is ketchup, which is a hot dog adjacent. But I didn't go. I was trying to figure out how to connect the dots. Yeah. I'm not sure hot dog is meat, but that's a connection to ketchup.

Okay. Okay. Where do you want to go next, Matt, in the report? I can dig further into components, but after talking food and energy, I think core CPI is a good transition. So core also came in a little bit stronger than we expect. Core being X energy and food. So yeah, okay.

So 0.4% growth on the month. And that kept core CPI at 3.9%. Which, again, we expected a 0.3%. So we're talking a 10th percentage point difference. You've highlighted the points. And we'll have a few more that we think, okay, tough month, but still the larger picture is a positive. one, I think within core CPI, a good place to go would be to talk about vehicles.

Well, wait, wait, wait, so hold on. So the big thing in core CPI was the cost of housing services, right? Right. That, the housing services, that's rent of shelter and homeowners equivalent rent. I'm a homeowner. And what is it? What is the implicit rent that I charge myself to live in that home? That's how the Bureau of Labor Statistics measures, the cost of homeownership. That's a, I believe, correct me if I'm wrong, a third of the CPI and maybe, what, 45% of close to half of the core CPI. So that's really the ballgame right there.

And in fact, again, correct me if I'm wrong, but if you look at the consumer price index, the whole thing, less shelter, that one third, that year over year, that is now, I think 1. Through January, 1.6%. That's the rate of growth in CPIX shelters. The only reason why CPI, top line CPI, is 3.1, the number you mentioned earlier, is because of the very continued strong growth in the cost of housing services. So the key here to getting inflation back to something we all feel comfortable with, back to the Federal Reserve's inflation target of 2% on the core consumer expenditure of later, is getting the growth and the cost of housing services down. And it has been the view, not just our view, the kind of the universal view, that that's

going to happen because ultimately the way the Bureau of Labor Statistics measures the cost of housing services is through measuring rents for rental property, what's going on in the marketplace. And we know that rents nationwide have been flatted down over the past year. And everything indicates that that's going to continue to be the case going forward here, at least for the next year or so because there's just so much multifamily supply coming into the market and vacancy rates, which are already off bottom, are going to rise meaningfully more. The surprise here has been that this slowing and the expected slowing in the growth in the cost of housing services has not happened nearly as quickly. And in fact, last month in January, instead of showing any sign of

slowing, it re-accelerated, right? I think in December, owner's equivalent rent rose four-tenths. and in January it rose six-tenths, you know, something like that. That's right. Did I characterize all that correctly? Yeah, absolutely. Okay. So let me turn to you, Chris. What is going on?

And that's a very deep question because when you get down to measuring owner's equivalent, measuring anything is difficult, but it feels like measuring owner's equivalent rent is like really difficult. Am I right? Yeah, it's so difficult. that most countries don't actually do it. Right.

They just look at observe rents, market rents. Even that has some nuance, right, how you control for different rent, but at least their market prices you can see and observe over time. Then there's this owner's equivalent rent, which is just a very squishy concept, right? What exactly we're trying to measure here? Lots of ways we can think about it, right? You want to have a deep philosophical discussion.

There are lots of alternative approaches, but the way that the BLS does it is through this idea of taking observed market rents and imputing using that data to impute values for all the owner's properties, right? Because we don't observe the housing service cost of someone who owns their property. We're going to impute it from this other data. In theory, that sounds reasonable, but throughout there's some big measurement issues, right? In a lot of markets, the owner mark, the owned market and the rented market are very distinct or disjoint. So you might not have data that really allows you to accurately assess what the owner's properties, values really are, or rental values really are. And so that could introduce some potential error. And I think that might be part of the reason why we see these movements here.

It's just that imputation process is imperfect. But over time, I think it'll, I still think it'll correct. I think there's just some sources of noise here. Yeah, I got a little distracted there. You might hear the dogs in the background. I don't know. But you may have said this, but just to reiterate, one thing we learned since the release on Tuesday because we dug, you know, every, every month we dig deeper and deeper into the

boughs of the data to try and understand what's going on, that to impute owners equivalent rent, the Bureau of Labor Statistics looks at rental properties at a block group level and says, okay, the homes that are, the homes that are owned for ownership, we tie those back to those rental properties and the rent's being paid and use that as a basis for constructing owner's equivalent rent. The issue is, or there's many issues, but one of the most obvious issues is that in some parts of the country, there aren't a whole lot of rental properties. And, you know, there's no good way to tie the rental market back to the home ownership market. But the Bureau of Labor Statistics has to do that anyway. And this isn't really an issue

in most times because, The housing market is more homogeneous in terms of the dynamics and what's going on with rents and everything else. But in the current market, there's this large distinction between what's going on kind of at the lower end of the housing market because the affordable part of the market because the affordability is so tough. There's vacancy rates that are excruciatingly low, record low. There's no supply. So rents have held up better. And if I go towards the higher end of the market, which would be more correlated with the homeownership market, that's where we've seen more. more weakness. So if we take what's going on at the more affordable part of the market and apply

that to the homes at the high end of the market, we're going to get this result. We're observing where we're getting relatively strong increases in other's equivalent rent that just doesn't seem to conform with what we're observing. I said a whole lot there. Did I make sense? And do you agree with that? I do agree with that. It does make sense. I think it may not be the only reason, right? I mentioned there are some other measurement challenges, right? You always go back to seasonal adjustment, whatnot, so there could be some other reasons why this particular month. The disconnect between owners' equivalent rent and rent, primary rent, was so large. But I would agree that there's, you know, that imputation process, you know, is imperfect. And it can lead to a situation like this,

given the current dynamics. There's a statistic for you. 16% of census block groups have less than 10% rentals, right? So just to give you a sense of the problem, right? It's not insignificant. It's a pretty substantial part of the market. How do they know what's for rent? Like, especially in a single family home market.

How do they know what's for rent? How do they know if you're talking about a block group, right? and let's say on my street, it's all single family homes. Some of these are owned but rented out. How do they know what's for rent, what's being rented versus what's being owner occupied? Do you know? I thought they were just sampling, right? Yeah, calling people up and seeing.

Saying, do you rent? Do you own? Yeah. Yeah, I think that's the way they do it. They just ask, are you a renter or are you a homeowner? Right. Okay, so all right, but your sense is still despite at all, the growth in the cost of housing services should continue to moderate going forward, just because the rental market in aggregate is soft. Yeah, the market rents are exactly, are showing, or all the other private data sources show, you know, weakness in the rental market.

So that has to bleed in over time. But again, it could take a while, right, given this methodology. Okay. So just to summarize, energy basically flat, maybe down, feels like, unless oil prices go up here, that's definitely a risk. But barring that significantly, food prices kind of flattish, maybe down for food away from home because, you know, the price competition and the resistance consumers are now showing with regard to price increases.

Growth in the cost of housing services, that we feel is going to continue to slow. Now, let's turn to vehicle prices. And you may say, well, how big a part of the index could that possibly be? Well, it's not inconsequential, particularly if you consider the cost of insuring a vehicle and the cost of maintaining and repairing a vehicle. Those are also in the basket of goods and services and the consumer price index. And they're all tied back to, at the end of the day, new vehicle prices. And new vehicle prices have been, when skyward during the pandemic because of the supply change disruptions and the collapse in inventory.

But now we're starting to see more inventory and more discounting is starting to come into the market. And we expect that to continue. Matt, do you want to provide any more detail there on the new vehicle prices? and maybe used if there's any insight there as well? Yeah, I certainly agree with this story, but to throw some numbers on it, new vehicle prices were flat in January, so it didn't change from the month before,

and were very little change from a year ago. It's about 0.7% relative to January, 2023. Speaks to your suggestion that lots are building up. There's not the supply. We're moving further and further from the supply issues of a couple years ago. used vehicles fell 3.4%, which is massive, which is the biggest monthly decline in about late 60s. So what's that? 60 years. 55. So and are about the same as they were a year ago.

That decline is a little misleading. There's a methodological change at the BLS that updates, mileage, depreciation on a vehicle monthly instead of annually. So it's not something that we're going to expect to see again and again and again. It was kind of a lot. down level shift. So both those, we have flat for new use vehicles, big decline for used vehicles. And then as you alluded to, motor vehicle insurance jumps again. And it's risen over 1% each month for at least through 2023, now into 2024. And that's a response to the increases in prices we've seen before in both vehicles and now in vehicle repairs, which are intuitively very correlated. So relative to a year ago, motor vehicle insurance is 20.6% higher. It's another one of those

kind of essentials that you mentioned that has people, yes, inflation's moderating, but look at these essentials, you'll see motor vehicle insurance like food be held out as a pain point. And if you look back to 2019, motor vehicle and car insurance is about 40% higher than before the pandemic. And, but that's still less than that. car repairs. So there's, you could suggest that there's still more room to go for insurance premiums in a way, even if we're starting to see moderation in new and used vehicles. Okay. Okay, but bottom, but bottom line feels like as we look forward here over the next six, nine, 12 months, we should see vehicle prices here really throttle back and actually see some

negative numbers in aggregate, you know, as we move forward. Yeah, I think that's fair. And just mathematically, the vehicles cost more, and are given more weight than insurance and repairs are. Okay, so what in the inflation measures, what component could be a surprise to the upside that's going to add to inflation here? Because so far, everything seems to feel like it's, you know, the direction here is for slowing inflation or outright price declines. What could add to inflation here of consequence? I don't want to overstate how much of an ad, but, but most moving in that direction is medical care. And I think we saw it in January. And this is, medical care has not been part of the story of the post-pandemic bout of inflation in a way that,

you know, cars have had their moment. Housing, we're still, you know, talking about. But medical care is a big part of the CPI basket. And it's been, it's only up 1.1% relative to a year ago. But the past three months has been 0.5%, 0.4%. And now again, in January, a 0.5% increase. So that's a 5.4% annualized rate over that period. And there's a few things going on here. Some of it is the well-known staffing shortages that hospitals have had. That's increased in labor costs. Those eventually get passed through in prices, which in healthcare are slow to change.

And they're often, those costs are set far in advance. So these price increases take a bit. There's also some idiosyncratic stuff, the way that the CPI goes about calculating based off of insurance retained earnings, which we can delve into or not. But I think the more interesting point is, go ahead. No, no, go ahead. I was just going to say, we dug so deep in the other one. Maybe we'll wait until next month and dig into the other one into the medical care. I think we're exhausted. Yeah. Yeah. So my main interest and not to lead the way too much is, okay, what does this mean for the PCE deflator? Because they're in that measure, yeah,

which the Fed cares more about. Their health care is a bigger weight. And if we're seeing this surprise in January, is it just noise? Is it a sign of things that come? And I think there's a lot of reasons that it isn't just noise. And if anything, the CPI has perhaps been underselling or understating medical care inflation or health care inflation in a way that the PPI or the PC deflator wouldn't.

So I think we could see another stretch for a few more months. where health care, medical care is providing upward pressure on the CPI. And it's tough to disaggregate in the PCE deflator. But the kind of thing that after this report this week for the CPI and the PPI, I think both make me think that a downside surprise for the core PC deflator is less likely. Or say to another way, away, we're going to get a strong PPI increase is what you're saying.

I mean, a strong PCE increase. Consumer expenditure deflator increase. Correct. Yeah. Okay. Yeah, you want to, is like, do you have an estimate yet of what it's going to be for the month of January? I know our model. I know our model is 0.3% month over month growth. Which is hot because annualize that. That's what, 3.36, 37

and target is too. Yeah. Yeah. But of course, that comes after six months of at Target kind of growth. Right. But okay. Anyway, so you take this Melange's stuff and extrapolate forward, forecast forward.

We continued, at least my expectation is that by the end of the year, we're going to be pretty consistently at the Fed's target, 2% on the core consumer expenditure inflator, PCE deflator. you know, CPI will have come in more. PPI will remain tame. Anyone take umbrage with that forecast? Is everyone still on board with that forecast despite January's number? I mean, about January's inflation numbers. I mean, nothing changed for me, given the numbers, you know, data zig and it zags and January is a tough month, seasonal noise, signal, so forth and so on, everything we just said about the trajectory here for all the different components.

It feels like we're headed towards target by the end of the year. That's our forecast. Anyone disagree? Merissa, do you disagree with that forecast? No, you're good with that. Okay. Chris? No, I might even go so far as to say there's risk in another direction.

Oh, is that right? Lower. I'm on the old ears. Yeah, why would that be? Oh, we do see some softening of demand that you mentioned. You see some of these things coming in. They could, you know, think about food or whatever, some of these other commodities here. they could certainly move in the other direction as well.

We could get some upside risk, if you will. Okay. And you, Matt, any? Well, Chris surprised me. I thought I was going to piggyback on Chris being less optimistic about inflation, maybe staying elevated, was my guess. But I think if you have another month or so of reports that are, okay, above consensus, again, above expectations, the last mile conversation that, hey, maybe we've leveled off

wage growth isn't going to continue moderating. I think those will get louder and louder and justifiably so. Well, that comes back to Fed policy. And what I'd like to do is talk before we get to Fed policy, we'll end on Fed policy. And of course, between now and then we'll do the statistics game. But the one thing I'm going to do here before we move on to the game is take a big step back and look at inflation more broadly in inflation dynamics. And I want to finally put a stake in the part of the argument that the high inflation that we suffered in 20, particularly in 2021 and 2022 coming into 23, was demand driven, mostly demand driven. You know, there's this broader debate. Is it supply related or demand? It's both supply and demand, obviously, but which is more

important? And it's been, you know, my strong contention that it's been mostly supply, it was the pandemic, its impact on supply chains and labor market. We talked about that in the context of, you know, the multifamily construction and the cost of housing services. We talked about it in the context of the vehicle industry. And, of course, the Russian war in Ukraine and the impact that out on energy prices, agricultural prices. And the fact that those two shocks kind of conflated together and affected inflation expectations,

which got into the wage and price dynamics. And that's when the reserve obviously went on high alert. And, of course, everything I'm describing here is the dynamic that's played out. globally. It's not just the U.S. It's the same kind of thing has happened everywhere. But good news, the pandemic, the economic fallout from the pandemic in Russian were now in the rearview mirror. They're fading away. And as that has happened, that's allowed inflation to come back in, reasonably gracefully without any significant slowing in demand.

Unemployment remains below 4%. You know, the economy is not skipped a beat as a result of fed rate hikes and inflation has still come in. To me, all of that is evident. of this is mostly supply. Not completely. You know, demand was playing a role probably more significantly back in 2021 when we had the American Rescue Plan and all the fiscal support and stimulus, but that's long faded. And at this point in time, it's really not about demand to any significant degree. It's mostly, it's been mostly about supply.

Okay, that's a soliloquy. I'll stop. Anyone want to tackle that? Take umbrage with that, you know, disagree with that. Chris, would you argue back? Would you take a different perspective on that view? No, no, in general, I'd be on board with this. Certainly you could point to some specific products or services if you want to go underneath

the reports here. But if you're talking general inflation, I think that's probably consistent with my view. Yeah, demand was a pretty significant component back in 21. I don't think you're disputing that. but that it's really been the supply side throughout and continuing to have some impact on inflation today. Marissa? No.

Yeah, I think demand was a factor back in 2021, but only to the extent that supply couldn't meet that demand because it was so supply chains were so gumbed up. I mean, we did not have a normally functioning supply chain throughout the world in 2021 yet, right? So had they been functioning normally, maybe it would have been enough to meet demand at that time. And that wouldn't have spiked prices as much as it did starting in the middle of the year. I think the other sort of argument when people talk about demand being a major driver in inflation is, if you look around the world, right, people a lot of times point to the fiscal stimulus and say, well, how could that not have been a major factor in juicing up demand? But that was not unique

to the United States. Most developed economies did a significant amount of fiscal stimulus during the pandemic. And there too, you know, we haven't seen lingering. You know, Europe was behind the curve, but that was mostly due to Russia's invasion of Ukraine and what it did to energy and natural gas supplies coming into Europe. I think if you look around the world, I think it's hard to argue that fiscal stimulus in the U.S. had a major role in juicing inflation and that it's still pervasive because it was not, that stimulus was not unique to the United States. And you see similar patterns around the world. The other thing I would say is that I think inflation has been helped out by weakness in other economies, other developed economies elsewhere. We've talked about

China a lot, right? And the very weak economy, relatively speaking, in China and how that's probably tamped down inflation globally. Now we see Japan maybe in a recession. You know, much of Europe is sort of hanging on edge, has been sort of teetering on the brink of very, very slow to no growth. So I think the fact that the ex-US global economies have been weak has also helped out the inflation picture at home. All good points. I guess someone, you were saying someone that asked a question that was, one of our listeners that asked a question that was relevant to this discussion.

Did you want to bring that up? Yeah, I mean, I think you just answered it. I mean, the question was really so Fed. Governor Waller had given an interview with the New York Times, and he was asked about the causes of inflation in the past couple of years. And he said that if it had been all on the supply side, in other words, if inflation was caused only by supply, then we might expect price levels to drop down to where they were prior to the pandemic once the supply side, you know, issues were resolved. And because we didn't see price levels come back down, that suggests that there was a

demand component to inflation as well. He wasn't arguing that it was mostly demand, but he was arguing that it was a mix of the two. And so the listener wanted to know what our take on that statement was. Yeah, I think there's some validity to that person. I'll be more affirmative. I think that makes sense. Although I will say the old adage, you know, prices go up like a rocket. They come down like a feather. You know, in a supply-constrained economy, prices took off. And it's going to take time. And you can see it in profit margins for companies. The margins, you know, economy-wide are very wide because businesses were able to jack up prices very aggressively during that period and outstrip the growth and the cost of their inputs, labor and everything else. But prices only come in slowly over time as

competitive pressures intensified. We talked about in the context of the food away from home, you know, the McDonald's and the Yum brands. It takes time for competitive pressures and for price sensitivity to kick in to a place where businesses say, oh, okay, I have to become more circumspect than my pricing. Even then, I think there will be some products and services where you see price declines as things as that feather continues to fall. But I suspect in many industries it's more about pricing just kind of going more flatisher. Businesses are very, very reluctant to cut price, but they are much more willing to be more cautious and raising their prices. So I wouldn't be surprised if we have an extended period of, you know,

inflation that is, you know, very lower, maybe even below the Fed's target, as, you know, given the competitive pressures as they begin to kick in. But I mean, I'm sympathetic to that Waller view that, you know, if it was all supplied, then you'd see prices come in. But I don't know that I would take it, I don't think that's a really strong argument because this just goes to the kind of the typical pricing dynamics that exist, you know, in the actual economy among businesses. The other point I wanted to make, and this goes to a podcast I was listening to this weekend. I don't listen to many podcasts. I listen to our podcasts, but I don't listen to many podcasts.

But I was listening to one. And the, you know, a very good one. Economist was arguing that it was basically arguing was mostly demand and fiscal supports, stimulus. And he was doing this kind of the back of the envelope calculation. If you add up all of the fiscal stimulus between the CARES Act, which was the first pandemic-related support program passed in March of 2020, all the way through the American Rescue Plan, which was March of 2021. And there was a few other fiscal stimulus packages, you know, provided in between. It comes to, I don't think these were his numbers, but they're my numbers, $5 trillion. That's $25,000.

percent of GDP. And then he argued, well, apply a multiplicical multiplier to that of one and a half or two. That's a lot of GDP. And how can that not be driving, you know, the inflation that occurred? I think the point, though, is that that $5 trillion, and that's the right number, 25 percent of GDP, that was spent out over a long period of time. It's still being spent out, in fact, if you look at state and local governments, they got a big check from the, the federal government, and they don't need to spend that out, I think, completely until the end of 26. They have to commit it by the end of this year, but not until the end of 2026. And there's other aspects of the funding that hasn't even been spent. Like, for example, if you look at the

way Congress wants to pay for this piece of tax legislation that's making its way through Congress right now, this goes to R&D tax credits and LI-TEC and child tax credit. It's paid for by the employee retention tax credit, which was funding that was appropriated part of that $5 trillion during fiscal stimulus and it's still sitting out there and they're going to use it now for these other tax support. And the other thing I'd point out is there's still, by our estimate, a lot of excess saving, you know, savings that were built up during the pandemic that's just kind of sitting in people's checking accounts. And so the multiplier wasn't one and a half or two. The multiplier was probably point two or point three. It was not that large.

And so it did help support demand, but didn't help it, didn't support it to the degree that it would be the primary cause of underlying inflation. Anyway, I was out there doing my old man weightlifting and listened to this podcast and getting a little annoyed by it. Getting a little annoyed by it. But anyway, that's why we have this podcast so we can express our views. Matt, anything on that before we move to the stats game? No, all sounded great. Okay. Sounds good.

Okay, let's go to the stats game. We each put forward a statistic. The rest of the group tries to figure that out through questions, deductive reasoning, clues. The best stat is one that's not so easy. We get it immediately, which is hard to do with Marissa playing the game, and one that's not so hard we never get it. And if it's apropos to the topics at hand, all the better. Marissa, you're up. All right.

My statistic is positive.8% in January. Positive 8%. 0.8.0.0. 0.8. 0.8. 0.8. Yeah. Government statistic? Yep. Retail sales. No. No. They were down.

No, that was minus 0.8. Okay. That was a 0.8 in that report. With a negative sign. Inflation related? Yes. In the CPI report? In the PPI report?

No. The statistic that came out this week? Yeah. Expectation. No. Expectations. A government statistic, though. Point eight.

Hmm. What do you think, Matt? I don't know. I'm looking at the releases, but not specific data. I just remind you of the releases. The calendar, yeah. Is it one of the, this might be unfair. One of the releases we cover on Economic View.

It is. Oh, Matt, how embarrassing. How embarrassing for you, Matt. How embarrassing for you, Matt. Well, not if I don't, if I get it right now. Is it import prices? It is. Yes.

Okay. Nice. Very good. Nice recovery. Nice recovery, yeah. I knew I needed to put a stick in your eye to explain, Mursa, pointing. Yeah, so the prices of imported goods rose 0.8% over the month in January. They are down about 1% over the year.

But they've risen for actually the increase in January followed three monthly declines. The increase in import prices is important because imports are part of the basket of goods that we consume and are therefore reflected in the CPI report as well. The price of imported fuel and energy rose pretty sharply over the month in January, but so did the prices of things like capital goods, consumer goods, vehicles. So a lot of across the board imported goods prices rose over the month contributing to at least likely some of the gain that we saw in CPI. Export exported goods were also up by 0.8%. So the cost of goods that we export to other countries was up 0.8% over the year. And exported good prices are down over 2% over the year.

So I just thought it was another way of thinking about the basket of goods, right? When we focus on CPI, we're talking about domestic prices, but many of these goods that are being counted in CPI come from abroad. So that's 0.8% year over year through January. No, it was 0.8% over the month. Really? Yeah, it was 0.8% over the month. Year over year, import prices are down a little over 1%.

Okay, that makes sense. Okay. So this state is volatile month to month. I mean, the trajectory here is for lower import prices, right? Strong dollar. That's right. Point about China and the global economy. I mean, that's been a restraint on inflation. So that number in January feels weird. Yeah. It was an outlier, which is why I brought it up. Yeah. Yeah. Okay. Fair enough. In export prices, year over year, they're down 2.4%. Okay. All right, very good. So more. More than import prices. Okay. Matt, you want to go? Sure. 0.53%.

Okay. Government statistic? Sudo government. Like the Federal Reserve statistic? Yes. Industrial production? No. It's not an industrial production report.

No. 0.53. It came out. this week? Yes. Do anything on consumer credit come out this week from the Fed or that's not consumer credit related, no. Hmm.

Is it financial related, financial system related? Inflation related. Oh, inflation related from the Federal Reserve Board. What could that be? Maybe not the board, but Federal Reserve. So, like the New York Fed or one of the Fed district banks. Yeah. Yes.

Okay. And it's inflation related like a Cleveland Fed median. Oh, that's it. Nice. Oh, geez. Okay. I knew it was obscure, but I thought we'd get it. That's good.

I'll take that. What is it? Pretty good. That is good. The Cleveland Fed's median CPI estimate, where they'd at the item right in the middle. So the .53 increase is from December to January. It's the fastest pace for the Cleveland Fed median CPI in almost a year, which I don't think,

I mean, January has its own weirdness and I don't think that we're experiencing any kind of reacceleration, but it's not, I mean, shelter is rising, it's very strong, but there is a little bit of broadening out in inflationary pressures. that pushed that up. So year over year, it's 5.7%, which is up about 5.3% year over year. So I don't think the last mile conversation is really heating up, but it could heat up.

Was it 0.5 last January or? No, in February. So it was 0.6. And it was 0.6. Yeah, so not entirely a seasonal thing. It's funny. When inflation was raging a year or two ago, I look at that number religiously from the Cleveland Fed.

I haven't looked recently. I probably should. That's probably a mistake. I should probably keep looking at it. Okay. All right. Did you look, there's the Fed puts out,

the other fed's put out all kinds of so-called trim mean, other different measures, try to get a kind of core, sticky price inflation, that kind of stuff. Did you look at those? Are they? Nothing top of mind.

Not on mind. Certainly can. Yeah. No worries. Chris, you're up. Sure. 35.7%. And minus 26.6%.

Are these... Positive? 35.7? Positive, yep. Are these inflation related? Nope. No. What was the second one?

Negative 26.6. You can't chat GPT it, Matt. That would be unfair. They're not inflation. They'll probably tell you the temperature in Anchorage, Alaska or something. Is it a government statistic? Yes. Is it housing related?

Yes. It's related to housing starts. Oh, is it housing? Yeah. Not starts. Permits. Yes. Oh, I know what it is.

Single family was up, multifamily was down. You got it. Yeah. Oh, that's a good one. Yeah. Overall was up 8.6% because single family is larger, right? Yeah. What's going on?

I chose it because housing usually is, housing construction, you're really early warning indicator of some weakness. And, you know, although there's some weakness there, builders still seem pretty optimistic, they're applying for these permits. But you do see that shift, right? Multifamily pullback, much more emphasis on the single family side here. So, yeah. That's all I'm going to count. Yeah, so multifamily has been kind of surprising, right, because we've all been waiting for it to slow down, given the banking crisis a year ago and the hand ring over commercial real estate. And actually in our CRA going back to the beginning of the podcast, our CRA price indices show that multifamily prices

are down from the peak more than any other property type, at least so far. That's right. So we can be kind of sort of waiting for kind of the Florida fallout, so to speak, in the multifamily construction. I guess the sense is that what's going on here? Yeah, although, you know, a little perspective needed here. Yeah. We're down a lot on multifamily permits this year, but we're kind of right back where we were in 2019, end of 2019, start of pandemic. So we're, you know, we're not collapsing here. There's still new multifamily projects being projected and put up.

But you do still have this fairly sizable inventory of projects still under-construed. you have those financing issues that are reducing some of the activity. But I don't see them, it's not a collapse, right? Still kind of going back to where it was. Okay, that was a good one. I'll give you mine. This is a bit obscure, but the very, yeah, it's a little obscure, but I'll give it to you. I'll give you some big hints.

2.2%. And that is the monthly percentage increase in January, 2.2%. And here I'm going to give you the year-over-year increase. This is CPI related? It is not. It is not. It's a statistic that came out this week. And the year-over-year through January, up 20.6%.

It's a stat that came out this week. is from the Federal Reserve Board. Yep. Federal Reserve Board. Is it semiconductor production? Oh, my gosh. How did he know that? How did he know that?

I would love to be congratulated. But Mark, you asked about this earlier in the week. So this was fresh. Oh, that's right. That's right, I guess. Asked Matt's question. Yeah. I deserve credit for this honor, this integrity.

You should not have said anything. You knew that was like highly impressive. That's impecc. Although I think 20.6% is exactly what motor vehicle insurance is up to over a year. But that's... Oh, really? Oh, wow. Okay.

Yeah. So this is industrial production in the chip industry, semiconductor industry. And it's booming. It's booming over the past year. And it probably has nothing to do. You'd think first blush chips act. Remember the Chips Act? That's the legislation that was passed a couple years ago.

It provides a lot of tax subsidy to build semiconductor fat plants here in the United States. The thing is, those plants are still under construction. They're not going to be finished until this year or next year in 2026. So this increase is all about, largely about AI. I think it's artificial intelligence. That just gives you a sense of how powerful that has been. And, you know, also demand to some degree. I think chip inventories got overladen back a year or so ago.

coming out of the pandemic and the supply chain disruption, companies rebuilt inventory and then some because they were fearful that they'd get disrupted again. But now inventories are, you know, and they had to work some of that off, but now inventories are back to something more normal, and that's allowing production to kick back into gear. But we're going to see some pretty sizable increases, I think, in industrial production in the chip industry over the course of the next couple, three years given the chips act. So I thought that thought that was interesting. Oh, Matt, yeah, I forgot completely.

I asked you what was going on. I thought you were tearing me up to look smart, which I appreciate. Yeah, that's so funny. That is so funny. Well, let's end this way. Let's give him all the discussion about inflation and we were railing on the Fed at the beginning of the podcast regarding the stress test. Let's come back to the Fed. And I want to ask the question, Net, let's assume that you were sitting on.

the Federal Reserve Board, you were part of the FOMC Policymaking Committee, and you need to make a decision about future interest rates. So the question is, what would be the next move on rates, and when do you think you would move it and why? Okay. And just as context, I believe, correct me if I'm wrong, Chris, if you look at market expectations, the next move is for a cut, and the most likely date for a cut is the June meeting? Is that like the, so it's not the March meeting. It's not the May meeting. It's the June meeting. And that happened this week, given the strong inflation statistics, the market now thinks the Fed's going to be delayed. So, okay, Matt, you're on the FMC. What do you think? What should the Fed do here? Not what will it do, but you can say that too, if you want, but what should

it do? I think May is a fine time to make the first cut. That's our baseline forecast. That's probably what I would pine for. I think if you wait for the economy to show signs clearly that it's slowing and in trouble, then it's too late. So I think getting ahead of it, the trends that we're confident in, shelter, even if it's a little delayed, those prices are going to come down. And the risk of waiting too long is a lot more dangerous. So I would start cutting in May. And I'm a little surprised at the futures markets that now put June as the likely probability. Of course, we get, another inflation reporter too here. And if they came in on the hot side,

would that change your mind? I think it depends. So the February report comes out before the March meeting, which is the doors closed on that. But if you see another report, and it's the same broadening of inflation in the way that isn't just stuff you can point to and kind of wave away,

then I think then, yeah, maybe we're looking at the second half of 2024, at least June. Okay. All right. Marissa? I think I would wait for another inflation report, and I think I would do a small rate cut, 25 basis points in May. And when you say you'd wait for the inflation report,

make sure that nothing looks to be concerning in that report following on this one and the PPI report and the strong jobs report that we got with wages accelerating. I think I feel pretty confident that all of these things that we've recently gotten that have run hot are sort of one-offs, and I wouldn't be too worried about it. So I'd be inclined to move sooner rather than later. Right. Okay. Chris, what's your inclination? I'm going to go with a 25 basis point cut in June. So wait, be a little bit patient here. Kind of building on Mercer's theme, just wanting to be sure.

I think the downside risks are greater than the upside of cutting earlier. So, yeah, but May June, it's not a dramatic difference. Yeah. I also don't think cutting 25 basis points is that dramatic. either in either of those months. Right. So even if you jump the gun a little bit, you cut 25 basis points and then you wait and see again, I don't think you're going to do a lot of damage with that small rate cut. Right. I don't know. I think that first cut is psychologically important, right? That's true. Declaring the end of the cycle, right? It's like, it's like, it's that mission

accomplished banner. So that's what I would worry about more than the size. Presumably, markets would take the one cut and say, oh, more are coming. Financial conditions would ease. So be very careful about that. You know what? I think I'm going to make the case they should cut now. I'm confused as to why we should wait. Here's the logic.

The Fed is very close to achieving its mandate. It has two goals. One is full employment. the second is low and stable inflation, and they define that as 2% on the core consumer expenditure deflator. On full employment, check, we're there. You know, the 3.6, 7% unemployment rate, that feels like full employment. It doesn't feel like we're beyond full employment. That, you know, I don't think the full employment unemployment rate is four to four and a half. I think it's three and a half to four. That's consistent with everything we're observing

with regard to wage growth and labor market dynamics. And the other thing is, I'd say, it feels like the labor market is getting squishy to me. You know, you can see it in hours work. They've declined. You can see it in hiring rates. They've declined. You can see it in temp help that's declined. You can see it in quit rates.

That's declined, you know, back to kind of pre-pendemic. Wage growth is moderated. The only thing that's kind of hung in there in the labor market, thank goodness. Otherwise, we would have recession, is layoffs. They're low. But everything else in the labor market feels softish to me. and, you know, suggest that, that, you know, we've got to be careful that we don't start seeing layoffs.

So on full employment, you know, we're there. On inflation, I keep going back to CPI inflation X shelter, 1.6% year over year. We're there. And we all feel confident in our forecast, and this is more accounting than a forecast, economic forecast, that the cost of housing, the cost of housing is going to slow, and we're going to get back to the Fed's target here in a reasonably graceful way over the next, certainly by the end of the year, we'll be there. And by the way, we're, you know, on a six-month annualized basis, we're, you know, look at the

core consumer expenditure depleter, it's 1.9% annualized. You know, maybe it'll be a little high in January, and I chalked that up to seasonals and noise more than signal, but nonetheless, I mean, we're on a six-month basis. We're already there. So inflation, it feels like, you know, all the trend lines are moving in the right direction and we're going to get there in a reasonably graceful way. Inflation expectations, well-anchored. No sign of either in terms of bond market expectations or expectations of consumers were there. financial conditions. It feels not too hot, not too cold. The stock market's, you know, high, but bond yields are up. You know, the 30-year fix is sitting at 7% plus. That's pretty high.

That's high on the high side. Financial credit banking lending has tightened up in the wake of their banking problems of a year ago. The dollar is very strong. You know, we're at, you know, 150 yen to the dollar. The wand is low relative to the value of the dollar. So financial conditions, kind of a wash. So you add this all up and you go, okay, you know, I've achieved my goal. I'm there. And in that context, why a five and a half percent funds rate target? Does that make sense to anybody? I mean, the Fed is saying the equilibrium rate R-star, the rate that's consistent with monetary policy and either supporting or restraining growth, is two and a half. But, okay, maybe it's three, maybe it's three and a half, but still, five and a half? I mean, that doesn't, you know, why?

You know, why are we doing that? So I don't know. I think I can make a, I think I just did make a pretty strong case for let's get going here. Come on already, you know? And I agree with you, you know, March, May, June. That's, you know, a couple, three months. I don't know that that makes a big difference in the context of the resilience of our economy. But, but I don't, you know, I'm increasingly, I'm increasingly nervous that these guys are going to make another mistake, the Fed. The Fed, the Fed made a mistake on the other side of this. If you go back to early, and I don't, you know, I don't want to cast aspersion because it's, this is a tough job. This is not, get this right, is not easy. But they got it wrong. They waited too long to raise rates back in early 2020. So they have a

pension for waiting too long. And I'm worried that they're going to do that again here. And this, I mean, I know I'm feeding Chris's downside scenario, but that's why you, I was surprised you said, June, they should go sooner rather than later, not wait, you know, for something to go wrong, for something to break somewhere as a result of all this. Okay. I just said a lot. Anyone want to push back on that? Did I change anybody's mind? Well, what about the, I mean, the economy seems to be doing just fine at the Fed funds rate that we're at. I'm not so sure. It doesn't seem. to be as sensitive to interest rates as we would have thought prior to the beginning of this cycle. So what's the hurry?

And I'm not actually not disagreeing with you. I'm just sort of maybe playing devil's out. No, no, that's very fair. Well, I'd say I agree with you. That's why I think the equilibrium rate our star is not two and a half. I think it's higher than that. I think it's three, could be three and a half. you know, not forever, but, you know, in the current next year two or three, it's elevated

for the reason you just express. But I sense some underlying weakness in the economy. I just expressed it in the context of the labor market. I mean, we're one round of layoffs away from, you know, the economy really flipping here. And the other thing is you go look at, you know, then you say GDP, but I'd say GDI, GD, gross domestic product, gross domestic income, you've got to average those two things. And if you average those two things, it shows a more pedestrian economy. It doesn't show, you know, this economy is really strong. So I, and then I keep going back to, you know, if you have interest rates very high like this in short rates above long rates and the yield curve inverted and it's still inverted, something in the financial system

could break, you know, somewhere, because that's, you're putting a lot of pressure on the system and in the rest of the operating environment for the banks and financial institutions and all that great anyway. I mean, slower loan growth, rising credit problems, higher regulatory costs. I mean, so I don't know what that could be, but I didn't anticipate SBB a year ago either. And maybe the next thing that breaks isn't in the banking system where the Fed can get to it very quickly. It's in the non-bank part of the system, which is like, oh, my gosh, how do I help that part of the system out in a reasonably graceful way? So I'm saying why, and why, why take that risk in the context of everything we know about what's going on in the economy.

I have achieved my goals. Let us declare victory. Come on. And I'm not saying cut rates quick. I say cut rates, quarter point, maybe once every quarter, start taking them down. And even if you do that, we don't get back to the equilibrium rate until the end of 2025 or early 2026, right? So anyway. Chris?

It's a reason. It requires a fair amount of nuance on the data, though, right? to make that argument, right? You're going to say, all the things we've been talking about in terms of the inflation report today, right? You've got to look through it. There's nuance here. There's a lot of technical detail.

Yeah, I can strip it out. That may be a lot to argue here in terms of convincing market participants that inflation really is under control here, right? You're making a case that, you know, the underlying inflation, I agree with you on this point. but still it's not showing up in the data quite yet. And what if, hold on. What if owner's equivalent rank goes up seven tenths of percent next time, right? Yeah, okay.

But that's not going to happen. I mean, all likely it's not going to happen. Well, but hold on. It's coming down. Actually, what do you, what do you, what, now this is like to the fact, what do you want? I mean, the core PCE over the last six months is 1.9% annualized. What do you want? What is it that you want exactly?

Do you want it to be 2% year over year for three years before you cut interest rates? I mean, what's the bar? I mean, yes, every month to month, thing goes up and down and all around. And yes, you're going to have season. We know the seasonals are playing havoc with the data, especially the month of January, to the economic data. We know this. We know this. So what do you want exactly?

What's your bar? And I'm just saying, my bar, I'm over it. I'm over. Let's go, baby. And I'm not saying slash interest rates. I'm saying, cut them a quarter point and indicate that we're going to cut a quarter point every quarter, you know, until unless the data really does, inflation expectations start to rise or growth starts to reaccelerate or whatever it is. But that, you know, that what is it that you need to convince you that we're there? You know, we've done what we need to do.

Anyway, as you can see, I'm gearing myself up here for it. I'm writing, I'm writing a piece. This is the argument. Okay, that's what you think they should do. What will they do? Oh, they won't do what I just said. Yeah. Yeah.

I mean, our forecast is May. You know, I'm like the markets is putting some, what, a third probability on May, maybe two-thirds. I'm making this up. Two-thirds on June. Yeah. That's probably a pretty good forecast of, you know, what the Fed's going to do at this point. But as we can see, that thing can move rapidly with one release.

So the next release, if it's down or up, we could. You change the dynamics here very quickly. Yep. All right. Thank you for giving me the opportunity to vent. I've been venting this whole podcast, but I really appreciate that opportunity. But anything else, guys, before we call it a podcast, Matt, good job on the rundown. Chris, Marissa, anything?

And we'll get Ryan Sweet on. Yeah. It's your job, Chris. Got to get him on. We'll do. We'll do. All right. Very good.

All right. With that, we're going to call it a podcast. Thank you for paying attention to us, dear listener. Talk to you next week. Take care now.