The chart below plots the PCE index vs. the CPI in terms of the Year-Over-Year percentage change as measured each month.
The consensus amongst investors seems to be that the Fed will pivot in Q1 2023. We are not so sure. Why would Powell & Company (i.e. the Fed), raise rates through year-end 2022 only to pivot in Q1 2023? Why not simply apply the brakes now?
Our view is that Chair Powell does not wish to be the second coming of former Fed Chair Arthur Burns (famous for executing a premature Fed pivot in the 1970’s which allowed inflation to catch a second wind), and will continue to raise the Fed Funds Rate into 2023 (although not aggressively enough).
Thus far the Fed has failed to leverage QT – a powerful tool – as its Balance Sheet essentially remains unchanged.