The Fed's preferred measure of inflation, the PCE price deflator, continues to move lower with both the headline and ex food and energy indices showing a strong downtrend. The transitory story seems to make sense albeit it took longer than expected. The supply shock disruptions from the pandemic are done. The demand shock from the excessive stimulus also looks to be done.
The decline in inflation was achieved to some degree in spite of the Fed increasing rates. It is not clear, at this time, that financial conditions have been tightened to offset demand and create a recession. Financial condition indices are not indicating overly tight conditions.
The question is whether inflation will get to the 2% target in the near-term and how much more does the Fed have to raise rates to help that process. The last mile is always the toughest.
Will a recession occur? It is likely, but the story of a soft landing is gaining more followers and there is little evidence in the near-term of a recession. The recession story is being pushed into 2024.
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