In Powell our Nation Trusts

Everyone has been talking, of course, about the attempted assassination of Donald Trump all day, and I don’t think I can add anything to all of that; so, I’ve just run a lot of stories available to everyone today to recap the event and tried to select stories that give different angles or info.

Thank God the attempt failed, or it would have thrown the nation into extreme chaos and violence and deep sadness for many as people had their right to choose who they vote for stripped out from under them by a single player who tried to take the world into his own hands.

It’s sad that it even happened as an attempt and that innocent people died or were injured because of something like this that really does strike to the core of our democracy as a true assault on democracy where one person tries to take the nation’s voting options into his own hands at any cost. I hope that the voices that have said they want to tone the rhetoric down prevail. Even Trump said he threw out his acceptance speech for the big RNC Convention that began today and wrote a new speech to tone down the heat that is boiling over in our nation.

Powell’s Progress

In a talk at the Economic Club today, Powell said the economy was growing strong last year, yet inflation came way down. This year he said the economy is cooling, but inflation is still slowly settling. In J-Pow’s view, the labor market is now no longer any tighter than it was before the pandemic:

So we’re back to that place—no longer overheated.

On inflation: In the first quarter we didn’t make any more progress. The second quarter actually we did make some more progress. We’ve had now three better readings, and if you average them it’s a pretty good pace.

So, Powell believes he is seeing what he wants to see.

So, turning to policy… what we’ve said was we didn’t think it would be appropriate to begin to loosen policy until we had greater confidence that inflation was moving sustainably down to 2%. We’ve been waiting on that, and I would say we didn’t gain any additional confidence in the first quarter, but the three readings in the second quarter, including the one from last week do add somewhat to confidence.

In my latest Deeper Dive, I laid out a case for how background inflationary pressures in the very areas that allowed inflation to relax a little in the second quarter are pushing up against those lows … as we saw at this time last year when inflation started rising in the background, which eventually became that first quarter that did not give Powell & Co. any confidence. I laid out where the good news showed up but also how those very areas are now looking like more trouble down the road—particularly fuel and housing.

Powell noted that, as I’ve suggested in the past, now that labor has cooled some in his way of seeing things and inflation has, too, the Fed will finally be looking at both mandates—inflation and full employment so that, if they do see an unexpected weakening in the labor market at this point, that might be reason for a reaction from the Fed.

The good news Powell was talking about for the second quarter looked like this, where what had been flatlining or by other measures slowly rising inflation finally settled back to its 2023 nadir:

But you can’t say from that it’s turned. It’s just right on a knife-edge where it could turn.

Powell’s Backpressure

What I noted as significant back-pressure that could mean inflation is the outlier where a surprise would come in for the Fed more than labor (and we just saw labor tighten back up a little, too) is that producer price inflation is coming in exactly as it did just before this whole inflation fiasco lit on fire back in 2020 and 2021.

Look at this graph by Wolf Richter at how the Producer Price Index pole vaulted recently, and how it did exactly the same thing in late 2020 when the Fed believed it had inflation under full control, and then it kept that rate of rise in 2021, eventually pushing the consumer price index right on up with it:

As Wolf summarized,

What it shows is that inflation is now re-gaining momentum beneath the surface of consumer prices.

That’s a scary thought.

I pointed out several other factors this weekend that are hitting right in the strong points of the latest inflation reports, adding likelihood that the areas of good news will soon become the areas of bad news. Just as with the Producer Price Index, what hits producers now is what is in the pipeline to be passed along to consumers not too far down the line.

Positive Powell, however, sounded hopeful today. No wonder markets price in a 90% chance that the Fed will lower its discount rate in September.

As I summarized in the Deeper Dive:

If the Fed does cut in September because of lovey-dovey Powell, it will be a big mistake in terms of inflation, even if our stealth recession is demanding it. This is the trap I’ve said the Fed was setting for itself where they can’t do anything right. They will have to choose between the risk of relaunching hot inflation or tightening the economy deep into recession. We’ll die by fire or die by ice. Thank you, Fed for your years of profligate policies.

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