My biggest concern is that the Fed, by focusing almost exclusively on flawed government data releases, and now shunning all the evidence of benign inflation pressures and economic softness from a wide array of survey information and its very own Beige Book, is going to end up making a policy misstep by waiting too long to remove its monetary restraint (and now there is market chatter that the next move could actually be a rate hike).
The Fed seems to be focusing not just on flawed data, but on headlines only. I don’t sense any analysis of the data by the various FOMC officials as much as reporting of the data. Take the PCE price deflator, for example. Just as has been the case with the hot CPI headlines, the information beneath the surface in the Q1 data revealed a very narrowly based inflation picture — dominated by just three idiosyncratic items: financial services/insurance, health care services, and housing/utilities. I don’t see how the Fed can influence these inherently non-cyclical areas. And it is unclear how long-lasting these influences will be.
What we do know, however, is that durable and non-durable goods prices are either stabilizing or deflating outright, and that is also the case with various economic-sensitive services at this point. Outside of the three items I cited above, core PCE inflation only posted a +1.5% annualized increase in the first quarter (the headline was +3.7%).
Even the meager +1.6% annualized real GDP growth rate in Q1 was confined to just government, health care, and financial services (the latter two gave the feel of a solid service- sector spending number, but again, outside of these areas, real consumer outlays expanded at less than at a +2% annual rate). Meanwhile, household expenditure on both durable and nondurable goods contracted at a -0.4% annual rate, and these are far more exposed to the shifts in the economic cycle. Outside of the four segments identified in the opening sentence of this paragraph, real GDP growth was basically flat last quarter. So much for the “hot economy” narrative.
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