It was a double dose of financial news on Wednesday June 12, 2024. I can’t remember the last time this happened, but the CPI numbers and the FOMC statement were released on the same day.
The CPI for May came in flat, which was slightly better than expected. The year-over-year CPI stands at 3.3%
The median CPI came in at 0.2%. The annual change for the median CPI now stands at 4.3%.
You could look at this news in different ways. As most of the headlines read, price inflation is coming down. (Actually, they don’t usually use the word “price”, but I do for accuracy.) It is clearer to say that the rate of price inflation is coming down, even as prices continue to rise.
On the other hand, even though the rate of price inflation is coming down and came in lower than expected, prices are still rising in excess of 2% per year. I would contend that any inflation created by a central bank is not good, but I quote the 2% number because that is supposedly the Fed’s target.
If the price inflation rate has been well above 2% for a couple of years now and it still hasn’t fallen back to that level yet, why would the Fed even be discussing rate cuts? Wouldn’t they want to get the rate of price inflation down below 2% before cutting rates? And what ever happened to the Fed looking to average 2% over time? If they were still following this policy, then they would want to see an extended period of inflation below 2%.
FOMC Statement
The market fully expected the Fed not to touch rates (i.e., the federal funds rate). Therefore, the fact that the CPI numbers were released in the morning did not impact the Fed’s policy statement. It would have been more interesting if it wasn’t at all clear what the Fed would be doing and then a surprise CPI number came out.
I assume that the FOMC statement is prepared more than a few hours before it is released. So, it would have to be a pretty drastic and unexpected CPI number to change the statement.
In this FOMC statement, there wasn’t much new at all. The federal funds rate stays the same for now. There is now anticipation of only one Fed rate cut for the remainder of this year.
The Fed will continue to reduce its balance sheet holdings. It will be at the reduced pace that was announced at the previous meeting.
The Fed continues to play Goldilocks – not too hot and not too cold. The problem is that the price inflation rate remains above 2% while we have had an inverted yield curve for about a year and a half.
If the severity and length of the yield curve inversion is indicative of the severeness of the next recession, then we are in for a whopper. This is why predictions of a 25 basis point cut in the federal funds rate is just about pointless. It can all change so fast if we hit another financial crisis.
U.S. stock market indexes continue to roar to all-time or near all-time highs. The higher they go, the harder they fall. Maybe this isn’t quite as true as it once was with the people running the Federal Reserve now. They would probably find it more than acceptable to start another round of quantitative easing (money creation) even if price inflation hadn’t officially fallen below 2% yet.
The Fed will return to QE to save the bond market or to save the financial/ banking system. The Fed is not going to intervene because stocks fall 20 or 30 percent. But stocks could ultimately rebound like they did in 2009 because the Fed is willing to supply easy money to a distressed financial system.
This time around, the Fed does not have as much control of the dollar as it did in 2008/ 2009. Not only is price inflation higher, but the dollar is starting to be rejected more by foreign countries, particularly big players like Russia and China.
Either way, I expect stocks to fall hard in a recession. The big question is just how much the Fed will intervene to bail out the big players, particularly the banks. If and when that time comes, we can reassess to see if stocks are a good buy.