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If Fed Chair Jerome Powell were any less buttoned up, he’d be well within his rights to call a press conference, stride up to the lectern in a T-shirt and board shorts and say three words — “soft landing, jerks!” — before dropping the mic and walking out.
Jay won’t do that, of course. But I can’t help imagine him quietly fist-pumping the moment he got wind of the latest inflation data.
ICYMI: Annual inflation, as measured by the Consumer Price Index, slowed to 3% last month — the slowest rate in more than two years and the 12th consecutive month of declines.
For context, a year ago the CPI peaked at 9.1% — the worst inflation in more than 40 years.
After a punishing stretch of rising prices, “the fever is breaking,” wrote Bill Adams, chief economist for Comerica Bank.
That is, to be clear, fan-freakin-tastic.
You can quibble (and many Twitter commentators did) that Wednesday’s CPI report is not a slam dunk — core inflation, which excludes food and and energy prices, is still uncomfortably high, at 4.8%. But we are objectively much better off than we were a year ago, and all signs point toward inflation continuing to ease.
(For the record, the Fed has a 2% target for inflation. And while the CPI gets more headlines, central bank officials favor a different inflation gauge, the Personal Consumption Expenditures price index. The most recent core PCE index reading was 4.6% in May.)
Jay Powell and Co. probably can’t go on holiday just yet.
“We’ve seen these repeated predictions that recession is right around the corner — and the data have instead delivered continued resilience in the economy,” said Lael Brainard, President Joe Biden’s top economic adviser. “The US is defying expectations that inflation wouldn’t fall absent significant job destruction.”
The resilience Brainard is referring to:
- Since 2021, consumers and businesses have barely flinched while absorbing the Federal Reserve’s 10 back-to-back interest rate hikes.
- The labor market, which is usually hurt by rising rates, remains steadfast. Unemployment is hovering at around 50-year lows and businesses are still adding jobs at a rate of more than 200,000 per month.
- For most of the past two years, wage growth hadn’t kept up with inflation, but even that looks like it’s shifting. Wages were broadly up 4.4% in June.
In other words, the Fed may actually pull off the “soft landing” — lowering inflation without tanking the economy — that few believed was doable even six months ago.
“The odds of achieving a soft landing just went up drastically,” Dan Alpert, managing director of Westwood Capital, told me. “I’m not saying there won’t be a recession, I just think the recession’s not going to be in 2023.”
Even Jamie Dimon, the JPMorgan Chase CEO who warned a year ago that an economic “hurricane” was coming, is reassessing. In an interview with The Economist this week, he said those storm clouds had only “partially hit.”
Bottom line: The CPI brought us a rare dose of good news, and the Fed deserves at least some of the credit for the relatively smooth disinflation — sans mass layoffs — over the last 12 months. While markets are still betting on yet another rate hike from the Fed later this month, they now expect that will be the last of the tightening.
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