CPI Expected to Cool in December
CPI Expected to Cool in December
Today is the day Fed Chair Jerome “Jay” Powell is to be confirmed by the U.S. Senate, after accepting President Biden’s renomination several weeks ago. Powell’s first four-year term has been a most eventful one, first entering the chairmanship as a trade war with China was brewing under President Trump, and deflation presenting a greater set of challenges than inflation.
Clearly, this has reversed — and to a good extent due to Powell’s leadership on Fed policy. Weeks before the initial flood of Covid-19 infections ravaged the country and subsequently the economy back in February 2020, Powell led highly accommodative monetary policy to keep economic gears from sticking after the initial shock of the pandemic: slashing interest rates to near-zero, and repurchasing assets worth $120 billion per month in Treasuries and mortgage-backed securities.
Powell held firm to this policy even as inflation finally crept its way back into the economy, and eventually accelerated past the optimum +2% level. The Fed Chair kept a close eye on the second part of the Fed’s dual mandate: full employment. While inflation spiked early on supply-chain issues, it clung to the economy more permanently once employers needed to raise wages in order to secure desirable numbers in the workforce.
By autumn of 2021, it was clear higher inflation metrics would not disappear overnight, even with supply-chain easing. Yet it took Powell until late November to announce a change in policy, whereby the $120 billion added to the balance sheet each month would be tapered by first $15 billion, then $30 billion, per month. With the asset purchase program on course to end in the spring of this year, Powell assured market participants that a rise in interest rates — which would only come once the easing policy is completed — was not imminent, and remained reliant on data-based decision making.
What investors found out Wednesday of last week is that the Fed was also openly concerned (among its voting members, not necessarily the public) about shoring up the $9 trillion it had put on its balance sheet due to the asset purchase program. This is a sign of increased tightening of policy, which put interest rate hikes back front and center to concerns of market participants. There is nothing that has sent recent market sentiment into bearishness more than this recognition that the era of easy access to money is coming to a hard close.
In the Senate this morning, Powell can be sure to hear plenty of concern from Republicans regarding interest rate policy, and just as much concern from Democrats about full employment. We see new policy shifts have helped the 10-year bond yield crank up to two-year highs (though +1.77% is historically still a low figure), and this will likely generate questions for Powell on Capitol Hill today, as well.
Just this morning, we heard from the National Federation of Independent Business (NFIB) that more than 20% of small businesses in the U.S. now see inflation as their top concern. This is the first time in over 40 years inflation has topped this survey list. Yet the NFIB optimism index rose 50 basis points month over month to 98.9, a three-month high. So even with major shifts in Fed policy underway, they are undergirded by an historical strong economy overall. Powell may likely reflect on this during his time on the Hill today.
Meanwhile, Omicron cases and hospitalizations have zoomed to record highs, with 1.3 million cases of Covid — by far mostly related to the highly infectious Omicron variant — reported. Dr Scott Gottlieb cited the U.S. is seeing around 1% of its population infected per day, and with this new wave of the pandemic moving rapidly from East to West, he estimates up to 40% of Americans will have been infected by the time this wave passes.
Pre-market indexes are all hovering around flat at this hour, with the S&P 500 trying to stave off a sixth straight down day. We’re still a few days away from the “start” of Q4 earnings season* with some of Wall Street’s biggest banks, and today’s appearance by Powell on the Hill will be closely followed. Tomorrow morning brings us a new Consumer Price Index (CPI), which is expected to cool in December from a hot +0.8% in November. And, of course, weekly jobless claims are out Thursday.
Until then, the market will continue to seek equilibrium. With any luck, we may see some of the downward pressure ease a bit as the trading day moves along.
* Those of us who read weekly articles from Zacks Director of Research Sheraz Mian recognize Q4 earnings season has already begun, with more than a dozen companies listed on the S&P 500 having reported.
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