Personal Spending Accelerates & The Fed Hedges Rate-Cut Talk
Theya is an app for simplified Bitcoin self-custody. With our Modular Multisig solution for self-custody, you decide how to hold your keys.
Whether you want all your keys offline, shared custody with trusted contacts, or robust mobile vaults across multiple iPhones, it's Your Keys, Your Bitcoin.
Download Theya on the App Store and secure your bitcoin with ease.
Good afternoon everyone, happy Good Friday. Today's post will be nice and tight so you can spend time with your friends, family, and loved ones.
The personal consumption report for February was released this morning, at the same time Chair Powell delivered remarks at an event at the San Francisco Fed.
The Fed's preferred inflation metric, core personal consumption expenditure (PCE), which tracks personal expenses but removes the volatile food and energy components, rose 0.3% in February after rising 0.5% in January. While this is a slight decline in the rate of change month-over-month, it is still strong and positive. Also, the change in inflation-adjusted spending rose back into positive territory after falling in January:
Personal spending accelerated from 0.2% MoM in January to 0.8% MoM growth in February. While resilience is encouraging for the US consumer, it is not a welcome development for the Fed which has been locked in a rate-hiking battle to try to bring it down to its target after running hot for years.
Powell kept his cool despite this, saying the report is "pretty much in line with our expectations... we didn't overreact to the good data we had in the second half of last year... and you won't hear us overreacting to these 2 months that are higher."
Taking the yearly measures of PCE and core PCE, which removes food and energy, see how both are still well above the Fed's desired long-run target range. After breaking above the Fed's inflation target in 2021, prices have been accelerating at this undesirable rate for 3 full years without reprieve, weighing on US consumers whose personal savings rate is now at a multi-decade low below 3.5% of income:
This rise in PCE is also tightly correlated with employment costs, as employers need to raise wages to stay competitive in response to a higher cost of living. This is a headwind for further spending into the US economy:
On the balance of risks, Powell said "If we reduce rates too soon, there's a chance that inflation might pop back and we would have to come back in, and that would be very disruptive, that would not be good for the economy. There's also a risk that we would wait too long, and in that case, it would be unnecessary, needed damage to the economy and perhaps the labor market."
Well, that's exactly what the Fed made the mistake of doing last year when it forecasted rate cuts too pre-emptively. CPI has been stuck at 3% for its 9th straight month. Only now has Powell, in light of today's consumer spending data and the very strong economy, decided to walk back talk of rate cuts. Too little too late, from this perspective. If he had held his word last summer, we may already be at 2%:
Powell correctly pointed out that "this economy doesn't feel like it's suffering from the current level of rates". Again, it took him way too long to say this. We have record-low unemployment, low jobless claims, and CPI inflation that is no longer decreasing and stuck above 3%.
He then added the most important sentence in today's remarks: "That means that we don't need to be in a hurry to cut, it means we can wait and become more confident that inflation is coming down to 2% on a sustainable basis"
The reaction from the futures market for the Fed Funds rate says everything here. After Powell remarked that perhaps cutting this summer would be too soon given today's PCE data, inflation data, and economic activity more generally, there is now only a 25-basis point rate cut priced in for June, down from a 50-bps expected rate cut just a few weeks ago. If the stock market was open today we'd likely see a selloff in the wake of Powell's comments, as his pre-emptive dovishness is part of what has caused this face-melting rally to begin with:
Powell expects that rates won't return to near-zero interest rate policy, but says he isn't sure how low they will go once the Fed starts cutting. Here's the reality: recessions have always caused the Fed to cut rates to lower than where they were when the Fed started hiking. We may be in a new regime of positive real interest rates, after 4 decades or more of a secular decline in rates, but this remains doubtful given it would bankrupt the US at its current debt levels. If history is our guide, negative real interest rates will make a return:
Final thought: have a blessed Good Friday, and a happy Easter to all of you.
Take it easy,
Joe Consorti
Theya is an app for simplified Bitcoin self-custody. With our Modular Multisig solution for self-custody, you decide how to hold your keys.
Whether you want all your keys offline, shared custody with trusted contacts, or robust mobile vaults across multiple iPhones, it's Your Keys, Your Bitcoin.
Download Theya on the App Store and secure your bitcoin with ease.