“There is a tide in the affairs of men. Which, taken at the flood, leads on to fortune”. – Brutus to Cassius (Julius Shakespeare)

Are central bankers taking it at the flood or missing the moment? We shall find out in due course.

Fed rules out this March (almost)

Fed sticks and does not pre-commit to March, but also didn’t rule it out totally– yes inflation is at 2% annualised etc but it’s not well anchored yet and that appears to be what the Fed is working on – the assumption that to cut too soon risks undoing all the good work they have achieved. And why bother; when the economy is humming along as nicely as it is and unemployment is so low? Why risk the inflation demons being unleashed – for what – a few extra points of GDP? It would be daft to move quicker than it needs – but it will move quick if it has to – a couple of months of crappy jobs data could move it. And the other thing is that the dovish language in December last year already created easing in the markets that meant to fuel that message further was unnecessary. It turns out the Fed cannot say anything remotely dovish without the market massively front-running the cuts, which makes it all the harder to deliver those.  

 The Fed ditched the tightening bias from the statement, whilst pretty much ruling out an early hike in March. It thinks rates will be lower this year. “We believe that our policy rate is likely at its peak for this tightening cycle and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialling back policy restraint, at some point this year,” said Powell. 

 Labour market strength would not delay it from easing when inflation is sustainably at target; but it would cut faster should it weaken. “If we saw unexpected weakening in the labour market, that would make us cut rates sooner,” said Powell. This makes the next few labour market reports of great importance for markets. A nonfarm payrolls report is due tomorrow to help set the scene. 

 Powell dare not repeat the mistake of the 1970s or a premature celebration of a soft landing. The Fed would want to be more confident of inflation returning sustainably to target and Powell stressed that cutting in March is not the plan. “I don’t think it’s likely that we’ll reach a level of confidence by the time of the March meeting … I don’t think that’s the base case,” he said. Odds of a cut in March have come down from around 70% at the start of the year to 35%.

NFP today

“If we saw unexpected weakening in the labour market, that would make us cut rates sooner.” – Jay Powell, Jan 31 2024

Cue the Challenger jobs report on Thursday- the 2nd highest January layoff announcements since 2009 and January hiring plans lowest on record. Meanwhile initial claims also topped estimates, rising to 224k vs. 212k fc (prior 214k). Continuing claims also rose in the week to Jan 20th: 1.898mn vs. 1.839mn fc (prior 1.833mn).

But here is something: productivity +3.2% vs +2.5% estimated. Here’s Challenger to explain that “…layoffs are also driven by broader economic trends and a strategic shift towards increased automation and AI adoption in various sectors, though in most cases, companies point to cost-cutting as the main driver for layoffs.”

So, AI is a factor already – and this has important implications for how the Fed and other central banks look at things like the labour market, how Main St is doing and what impact rate cuts will have on the Philips Curve…it’s all happening right now under our noses. Andrew Bailey, the BoE chief, yesterday said AI would not be a “mass destroyer of jobs”. I wonder what the full extent of his knowledge is on that front? I would assume that based on history it won’t destroy jobs as much as change the type of work that we do – but in the same vein, learning from history, it will widen inequality in the labour market, concentrating resources in an ever-decreasing circle of high skilled workers. So I guess you will probably need to own some stocks…

Anyway, we have the NFP jobs report today to consider. Expected at 187k from 216k last time, average earnings fc down a touch at +0.3% and unemployment fc ticking up to 3.8%.

Inflation: The Last Mile?

So what about inflation? Are central banks looking at the wrong thing when focused so squarely on disinflation and anchoring of expectations for inflation? Because the Last Mile will be tricky and jobs might start going before it’s back to target. We should always remember those long and variable lags of monetary policy.

The last mile won’t be so easy, we already think this and the EZ inflation data pointed in that direction.

• Euro zone headline inflation fell slightly in January, with the flash figures at 2.8%, in line with forecasts. Inflation had jumped to 2.9% in December 2023 from 2.4% in November.
• Core inflation fell to 3.3% in January from 3.4% in December 2023, against forecast decline to 3.2%.
• Services inflation was still pretty hot at 4.0%

Bank of England

And that Last Mile is going to be especially important – and tricky it seems – in the UK. The Bank of England removed its tightening bias from yesterday’s statement but remains a way off cutting. Again, we come back to the rather sticky problem of services inflation, which rose to 6.4% in December 2023 from 6.3% in November. The BoE yesterday said it requires “more evidence” that inflation would continue to fall. The language is a bit more in line with the ECB and Fed now but the BoE is further away, it would seem, from its first cut: the view from Table Mountain is fine for now.

And finally here’s the Atlanta Fed making the rather spurious point that the Last Mile may take more time but that does not make it any more “arduous” (surely, speed is distance over time?). Anyway, physics aside, the point to the fact that the Last Mile may not need more hikes to squeeze the labour market, but sitting higher for longer.

They write: “The idea is that we have already done the “easy” part of lowering goods inflation. However, the persistence of services inflation will require extra tightening to bring the overall inflation rate down to its target. The problem with this view is that “sticky” does not mean “difficult”—it simply means more time. Inflation can be persistent due to prices that are relatively sticky, so it takes times for inflation to fall to its target. This by itself does not imply that the last mile is more arduous. Instead, it suggests that policymakers need to be patient as inflation moves down to its target over time.”

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