The consumer price index (CPI) numbers came in higher than expectations for March 2024. While expectations were for a 0.3% rise in March, the reality was a 0.4% rise. The annual CPI now stands at 3.5%, which is actually the highest it’s been for the last 6 months.
The median CPI also came in at 0.4% for the month of March. The year-over-year median CPI stands at 4.6%.
While this is an improvement from a couple of years ago, it is still not that close to the Fed’s 2% target. Perhaps the CPI is understated, and there is nothing magical about 2% price inflation, but the Fed is still off using government metrics.
How can there possibly be a rate cut while price inflation remains stubbornly high? The only reason the Fed would cut its target rate at this point is because it anticipates a major crash or some kind of financial crisis. It’s hard to say the Fed would cut rates for political reasons at this stage because the elevated inflation is in itself bad politics.
Stocks tumbled on the news of the CPI report. Yields also jumped, sending bond prices lower. Gold was also down, although not by much, especially considering the rather historic run in the last couple of months.
Gold has all of a sudden turned bullish, and anything but a hard recession is likely to keep it going higher. High inflation has historically been good for gold investors, so maybe it is finally catching up with the game.
June Rate Cut?
With this latest CPI report, the chance of a Fed rate cut in June has dropped to about 17%. In other words, it is not likely unless something major changes in the next couple of months.
It is curious why the Fed was projected to cut rates in June and not just because price inflation is still running high. The Fed is continuing to drain its balance sheet that exploded in 2020.
It is kind of strange to talk about rate cuts while the Fed is deflating the base money supply. Then again, monetary policy has been strange since the financial crisis of 2008. The Fed doesn’t control its target rate much anymore with monetary inflation and deflation. It controls it by paying interest on reserves to commercial banks. This has just served to funnel more money to banks while making the budget deficits even worse.
The Fed is supposed to remit money made from interest payments back to the Treasury, but the Fed is actually losing money now. It is paying out more interest than it is collecting. So, we can add that to the two trillion dollars or so that the politicians are adding annually to the national debt.
The economy is anything but sound. Let’s be clear that it isn’t Fed policy right now that is causing the trouble. It was the prior policy of near zero interest rates and massive monetary expansion.
We don’t know when this whole thing is going to blow. Still, it is clear that things are not right. The yield curve is still inverted, as it was for all of 2023. There are bad signs everywhere that most people are ignoring.
Luckily, we are a wealthy society, in spite of government and central bank interference in the economy. It’s not that we are destined to be doomed. However, there is going to be economic pain down the road.
The fact that the Fed is even considering rate cuts in the face of price inflation above 3% is a signal that even the Fed sees trouble ahead.