Core CPI accelerated month-to-month to 0.5% (from 0.4% in January), as “Shelter” accelerated to 0.8%. Our view is that the Fed will continue to hike rates but may slow the pace of QT, particularly as it relates to Treasuries.
The Fed says it will maintain interest rate hikes as the Banking sector stumbles. More importantly, what will the Fed do with QT? The last thing the Fed should want to do during a severe recession in the midst of bank runs is shrink the money supply. We are not yet in a severe recession, nor are we in the midst of mass bank runs. Should those two events occur, the Fed ought to expand the money supply. During the Great Depression we did just the opposite, which of course made the problem worse.
Powell and the FOMC created this problem with the Fed’s ultra-loose monetary policy from March/April 2020 – March 2022. Spend-heavy fiscal policy was also to blame. The best way to curb price inflation is to dramatically cut fiscal spending for all entitlement spending categories. This will never happen. Therefore, elevated prices will be with us for the long-term and 2% CPI is not in the cards for 2023 nor 2024.
The present day is truly a stagflationary period similar to the 1970’s. The primary difference of course is that the U.S. is running fiscal deficits and carrying a public debt load that dwarfs previous periods.