Jarod Scott

This podcast is a good explanation of the Fed's 2% inflation target. The argument made in this podcast is that having a target like this keeps inflationary spikes from getting embedded in long-term inflationary expectations and long-term bond rates. The public, or at least the bond market, understands there is a 2% target and that the Fed will take steps to bring inflation down to that. That is what the Fed started doing in the Spring of '22. It started raising interest rates and did so 11 times, until the Fed Funds target rate reached its present level of 5.25-5.50% last July. There was an expectation earlier this year that inflation would drop fast enough to allow the Fed to start cutting interest rates. That hasn't happened. Tomorrow, we will get the latest monthly core PCE, the Fed's inflation gauge of choice, and it is expected to show inflation ex: food and energy to be 2.8%, year-over-year, for April. 2.8% is not 2%, and this isn't a matter of quibbling over 0.8%. If the long-run inflation expectations have stayed subdued because everyone believes the Fed is firm on 2%, but then the Fed says, well, 2.8% is close enough, let's start cutting interest rates, then that risks undermining the Fed's credibility. Once that happens, we could be back in the 1970s, when the Fed didn't have much credibility on inflation and so high inflation was baked into everyone's long-run expectations. That meant that the late Fed Chairman Paul Volcker had to come in and yank up interest rates a lot and put the country into two recessions - in 1980 and 1981-82 - to bring inflation down. A lot of people were thrown out of work. What the Fed wants to do is bring inflation down without a repeat of the Volcker recessions. So far, it has done that. Inflation has come down slowly from 2022 levels and U.S. unemployment is 3.9% vs. 10.8% in November 1982. GDP in Q1 was 1.3% annualized, which is slower than the 3.4% in Q4 '23, and so maybe a soft landing. When historians write about the Fed's role during the pandemic, some will argue that the Fed kept interest rates too low and monetary policy too accommodative for too long, and that fueled the inflation that it has been trying to snuff out. The Fed responded with 11 interest rate hikes of 25 to 75 basis points over 15 months. It didn't go up 525 basis points in one meeting, because it didn't have to. Long-term inflationary expectations were a little up, but not way up. The Fed had the room to attack inflation for two years without bringing down the economy, because it had credibility on its 2% target. Folks are impatient with the Fed and want lower interest rates, but they should consider the history of the Fed from the 1970s, and how miserable the early '80s were when Volcker had to quickly work to restore the central bank's credibility and prove he was serious about inflation. 30-year mortgage rates at 7% are no fun but 18.5% was what we were borrowing at in the fall of 1981.

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Two economists have created an indicator suggesting that we may have been in a recession since March. https://lnkd.in/eA6BPuGb Now the government says that GDP increased at an annual rate of 2.8% in the second quarter, and the Atlanta Fed model estimates it is growing at 2.9% right now in Q3. A recession call does not depend on quarterly growth. The NBER makes a call based on a variety of economic indicators. But quarterly growth is a handing rule of thumb, and when the GDP is growing, you wouldn't expect that we are in a recession. But these economists have tested their indicator against all the recessions going back nearly a century and they say it has been right each time. So I don't know what to tell you. Sometimes, with a mild recession, it is hard to know that it actually started until the gnomes at the NBER tell us. If it turns out that the recession of 2024-2025 started, then the Fed should have started cutting interest rates already. But the Fed has been focused mostly on getting inflation back to 2% and less on anything else. The next Fed meeting is in 5 weeks, and markets assume there will either be a quarter-point or half-point cut. Five weeks is a long time from now. The PPI is out this am for July and the CPI tomorrow. The Fed peeks at these, although its inflation gauge is the core PCE, which doesn't come out for July until Aug. 30. Cleveland Fed model has core PCE at 2.73% for July, y-o-y.

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CPI was up 2.9% in July, better than expected. This line in the BLS release continues to interest me. "The index for shelter rose 0.4 percent in July, accounting for nearly 90 percent of the monthly increase in the all items index." The price of gas at the pump adjusts like every day, and I can see it move when I drive by the Trade Mart near my home. You could show me the price of a gallon at the Trade Mart and I could probably accurately tell you whether things were chill or not in the Middle East and what was happening in China's economy. When shelter prices get high, they stay high for a long time. Eventually, the market responds and supplies more shelter but it is harder to build new housing units than it is to turn a West Texas oil rig on and off. For one thing, existing homeowners - who form things called civic leagues - want their house to be the very last one built. Next up is retail sales tomorrow for July, which is important because the consumer is most of the economy. And initial jobless claims for last week. In the situation we are in right now, where everyone is trying to guess what is happening in the economy, certain metrics start to take on outsized importance for markets. Nobody at the Labor Department, when it started putting out the weekly unemployment claims number in 1967, intended it to be a number that would move markets. They just wanted to provide some visibility into the labor market between the monthly jobs report. There is a fair amount of noise in these initial claims reports. But they have become a thing. My metric of choice is, of course, the Baltic Dry Index, which tracks shipping rates for things like iron ore and grain. This is also the Houthis favorite metric. It has come down a lot since December thanks to the US Navy.

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This past weekend, I watched Reagan and found myself deeply moved by the film. It took me back to when I first arrived in the United States in 1977, a time marked by uncertainty—high inflation, high gas prices, and a nation divided. It’s incredible how history seems to echo, as we face similar challenges today. What struck me most was Reagan's unwavering determination. From his early days, he developed a deep-seated disdain for communism, having witnessed its influence firsthand in the entertainment industry. He began his fight on a small scale, as President of the Screen Actors Guild, but he soon realized that to truly make a difference, he had to take the fight to a larger stage. This led him to the governorship of California, and eventually, the presidency, where he could play a pivotal role in defeating the very ideology he had long opposed. Reagan was a man of simplicity—a trait that was evident in everything from the modest 1,100-square-foot "White House" he shared with Nancy in California to the hand-written letters he penned late at night, urging world leaders to pursue peace over conflict. His ability to forge unlikely relationships with people like Gorbachev and Thatcher resonates today, reminding me of the connections leaders like Donald Trump have made with figures like Putin and Kim Jong-un. These relationships, though controversial, have the potential to bridge divides and open dialogues. Leaving the theater, I was filled with a renewed sense of hope, reminiscent of how I felt when I first came to America—a belief that the future could be bright again. Despite the challenges we face—a spiraling economy, high inflation, and the divisions in our society—I believe, as we did in the '80s, that we can find our way out of this. Back then, it was through decisive actions like the Fed's interest rate hikes and policies that ultimately brought us out of a recession and into a period of prosperity. Today, we stand at a similar crossroads. The road ahead is tough, but if we look to the lessons of the past, we can find a way forward. Let’s channel that same spirit of resilience and determination to claw our way back to economic stability, to create opportunities, and to build a future that is bright once again. What are your thoughts? How do you see us overcoming the challenges we face today?

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CPI came in good 3.3 vs 3.4 - US10YR falling 4.28 we are back to levels prior to that hot Nonfarm payroll report. We are now under the key 4.33 level. This is good for rates as inflation cools. #mortgagerates

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Impeachment politics aside, Are budget estimates from the Treasury not reviewed and approved by the Budget and Appropriation Committee? How do you approve a bloated budget and then turn around after the beneficiaries have utilized the funds, or did they disregard the Public Finance Management Act, 2012, for political expediency? Sadly, our business lobby groups and professional bodies, as part of their annual ritual, will spend all their energy, time, and resources in the next few months tabling their views on taxation measures to the Finance Committee (led by the Molo constituency MP), INSTEAD OF: A laser-focused review of the budget estimates from the Treasury as presented for public discourse (public participation) by the enviable Budget and Appropriations Committee (currently led by the MP for Kiharu constituency ). Or could this be an opportunity for finance professionals to guide the public on what matters: The budget estimates, not taxation matters? In any case, increased taxes are an outcome of bloated budget estimates! #PublicFinance #BudgetMatters #MPsAccountability #PublicParticipation #FinanceProfessionals #PublicFinanceManagement #Taxation #BudgetReview #GovernmentTransparency #FinancialManagement #BudgetEstimates #PoliticalAccountability #MPs #PublicExpenditure

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@MorningsMaria. @FoxBusiness. I thought Chairman Powell’s comments yesterday were predictable, and he’s taking a cautious view about cutting rates in September and perhaps again in October, just before the election. After yesterday’s comments, we certainly saw a bounce in the market, and there were predictions this morning that it would be up. The fact that he’s talking about a softening in the #InflationRate, I would say, is deceptively correct. We are living with an embedded rate that reached 9 percent on many of our food and services -- from food, to gasoline and even home insurance. Everyone took advantage of surge pricing, so a pullback is helpful, but it will take years to offset the high #CostOfLiving and the cost of running a business. But whether it’s the private equity companies or big corporations I’m dealing with, the fact that #InterestRates may be coming down to 3 percent (Powell’s predicting 2-1/2) might be positive emotionally. It’s not going to move the needle. What I’m seeing every day are pullbacks in production requirements and market order rates, along with reductions or pushouts. Businesses are still dealing with inflationary rates in specialty materials and the embedded labor rates problem. The price of a commodity like lumber has decreased, but why? It’s because housing starts are down, which, of course, is impacting laborers like farmers, plumbers, and electricians. I think Chairman Powell’s comment about labor is spot on, and I’ve mentioned before that the second largest employer in the US last year was the government. However, many government jobs are in healthcare, which will continue to mask the cutbacks we’re seeing in manufacturing jobs and people being laid off. It’s still a little frothy out there, and the certainty of uncertainty will carry through to the second half of this year.

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The U.S. non-farm payroll data for August showed employment growing, but slower than expected, while the unemployment rate ticked down slightly. Two questions remain. Will there be a recession? And will the Federal Reserve cut by 50 or just 25 basis points when it meets later this month? Both are left unresolved. The answers seem a little further away. The longer-term fed funds predictions:A 50 basis-point cut this month is slightly less likely, but along the rest of the curve cuts are expected to be a little deeper and last a little longer.  EURUSD traded between 1.1070 to 1.1160 in the last week. It is trading at 1.1080 this morning. The highest gyration was seen on Friday post the US non-farm payrolls, which was expected. EUR upside seems capped at 1.1200 and we will watch the 1.1050 and 1.0950 supports. GBPUSD has traded between 1.3130 to 1.3220 over the past week. We are at 1.3125 this morning, we will watch the 1.3095 support for fresh direction.  USDJPY is below the 143 levels. Yen strengthening over the last 2-3 trading days has coincided with equity market weakness, which is not surprising given past history of Yen having a positive correlation with increasing risk aversion. Analysts feel that while the Yen will continue to be used as a funding currency, the carry trade era is probably over.As the BOJ pushes on with its hiking cycle in 2025, the market is likely to see some repatriation of Yen as local investors take advantage of rising domestic returns. USDCNY is at 7.1097. It has traded between 7.08 to 7.12 in the preceding week, which is broadly in line with what we witnessed in the week before that. China’s inflation data for August may highlight economic slack. Consensus is for the CPI to rise to 0.7% yoy from 0.5% in July, while the decline in factory-gate prices is set to deepen to 1.5%. Analysts feel the CNY’s recent rally has limited room to extend as China’s economic woes may discourage the repatriation of USDs following US rate cuts. Chinese companies’ foreign-asset holdings have been in focus with talks of repatriation.However, there’s skepticism over the extent of that unwind given China’s economic woes, the risk of higher tariffs and a still-wide yield gap with the US. A stabilization of sentiment and fundamentals in China could help a larger recovery. USDINR traded between 83.88 to 83.96 in the previous week. The 1M range has been 83.80 to 84.00. Global cues will ultimately make it break out of the narrow ranges.   Borrowers in EM have issued more bonds than in the early part of any previous September. Issuance by governments and companies hit US$28 billion through Friday. In the same period last year US$12 billion of deals were closed.According to analysts,issuers are trying to get ahead of the US presidential vote in November and another growth scare akin to Aug. 5 when panicked investors fled everything from emerging-country currencies to Japanese shares.

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The country's 3Q24 final GDP number is due, which is expected to remain unrevised at 2.8%. Additionally, a report from the Labor Department is likely to show initial claims for state unemployment benefits fell 12,000 to a seasonally adjusted 230,000 for the week ended Dec. 14.

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