The Landing Will Be Anything But Soft

What a joke!

We are referring to the Fed’s latest set of economic and interest rate projections. Sure enough, inflation is held to be fading away like the morning mist; a soft landing with no recession lies around the corner; and they are 96% done with their interest raising campaign.

The only thing they didn’t say was—-BTFD!

The interest raising point, of course, is just math. It reflects the difference between their terminal rate expectation of 5.1% compared to the post-meeting Fed Funds (FF) level of 4.9% and the starting point last March of 0.05%.

The Wall Street whiners didn’t even need an abacus to compute that the 485 basis points rise in exactly 12 months was the biggest rate increase in that span of time since the dreaded days of Tall Paul Volcker. Except Volcker’s measures actually were “increases” and they got the inflation-adjusted Fed funds rate up from -1.0% to +5.0% in just 16 months.

Having started at the absurd level of 0.05%, however, the Powell Fed isn’t really raising rates; it’s just normalizing them and, as we noted yesterday, has a long ways yet to go, That’s because the real FF rate still stands at -1.2%, no matter how you slice the inflation rate.

Well, except if you delete food and energy and latch on to the balance of the PCE deflator for dear life. The latter, of course, is not even a proper general price index, which perforce must represent a fixed basket of goods and services over a reasonable period of time. By contrast, the weights in the PCE deflator basket change every month, meaning that if inflation-pressured consumers buy more spam and less steak, inflation goes down!

Simple. And stupid, too.

That’s obvious enough if you index both the CPI (yellow line) and the PCE deflator less food and energy (purple line) to the Covid bottom in May 2020—after which all the economic turmoil from the Covid lockdowns, stimmies and whole hog money-printing at the Fed generated the current inflationary storm. It turns out that through the latest month (January) the CPI has risen by 45% more than the Fed’s sawed-off measuring stick!