I made French toast for my daughter this past weekend. Most people think I’m a pretty decent cook, especially with weekend staples like French toast, pancakes, etc.
I left her to chow down while I went back to work — only to find this when I returned. The conversation went something like:
Me: Didn’t you like it?
Her: I don’t like the crust.
It reminds me of the task ahead for newly minted FOMC Chair Jerome Powell. He must somehow convince investors that the economy is yummy, but that inflation (the crust) isn’t a problem.
In his prepared remarks, he cites the 1.5% core PCE annual rate (as of December) in describing inflation as “low and stable.” He further makes reference to some of the monthly data:
We continue to view some of the shortfall in inflation last year as likely reflecting transitory influences that we do not expect will repeat; consistent with this view, the monthly readings were a little higher toward the end of the year than in earlier months.
By “a little higher” he is apparently referring to the 0.4% November monthly CPI figure — carefully avoiding mention of the 0.5% increase registered in January.
Hopefully, he will do a good job of explaining how strong economic growth is compatible with low inflation. The market will not be pleased if he can’t demonstrate more intelligence than Steve Mnuchin did last week, insisting that “you can have wage inflation and not necessarily have inflation concerns in general.”
I suspect Powell is not only much more knowledgeable, but less likely to stick his foot in his mouth. If his word salad of prepared remarks are any indication, he will walk the same fine line as his predecessor. Look for his testimony to promise nothing more than the Fed’s continued focus on maximum employment and price stability.
All he really has to do is buy some time, keeping a lid on rates until February’s inflation data is released on Mar 16. The way things are shaping up, it should be considerably lower, supporting the narrative that inflation was transitory after all, irrespective of actual inflation [see Inflation: The Charade Continues.]
Our analog remains on track. For those who’ve been away, note that I revised the timeline yesterday. Details may be found in the members’ section at A Break or A Breakdown? Tomorrow, Feb 28 is our new Day 12.
Powell’s testimony is a potential disruptor. But, for now, the algos like what they’re hearing.
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