Federal Reserve Keeps Interest Rates Steady, Sees Long Pause Officials indicate comfort with leaving policy on hold through next year, while keeping eye on economy
(…) “Our economic outlook remains a favorable one,” said Fed Chairman Jerome Powell. The rate-setting committee voted 10-0 to leave the central bank’s benchmark rate in a range between 1.5% and 1.75%, the first unanimous vote since May.
New projections released after the meeting showed most officials think rates are low enough to stimulate growth. If their favorable outlook holds, most expect they could leave rates unchanged through 2020. In that scenario, most see the Fed raising rates once or twice after that. (…)
“As you can see, inflation is barely moving, notwithstanding that employment is at 50-year lows—and expected to remain there,” Mr. Powell said. “And so the need for rate increases is less.” (…)
“I would want to see a…significant move up in inflation that’s also persistent before raising rates to address inflation,” he said. (…)
The FOMC’s official forecast is for core personal consumption expenditures (PCE) at +1.6% in 2019, 1.9% in 2020 and 2% by 2021.
Inflation Isn’t Likely to Take Off Anytime Soon
Consumer prices rose at a 2.1% annual pace in November, from 1.8% in October, mainly due to higher energy and shelter costs, the Labor Department said Wednesday.
Meanwhile, U.S. unit labor costs—a measure of labor costs and production output—were revised down sharply for the second and third quarters in a Tuesday productivity report.
The readings suggest that companies have less pricing power because of factors including globalization and consumers’ growing tendency toward comparison shopping, say economists, who expect these trends to continue even though U.S. unemployment is at historic lows and companies face higher prices for some products tied to tariffs. (…)
The Cleveland Fed’s Median CPI measure is steady at +2.4% annualized but the 16% trimmed-mean CPI is stuck in the 3.0-3.5% range:
The Atlanta Fed’s sticky/flexible CPI provides another perspective on inflation trends: Sticky Prices (total is same as core) are now up 2.8% YoY, up from 2.1% one year ago and 2.4% last June. Flexible Prices have decelerated from the 2.0-3.0% range of 2017-18 to –0.5-+0.5% in 2019 while Flexible Core prices have slowly accelerated from negative to between 0% and 1.0% in the last 12 months.
Given the FOMC’s focus on inflation expectations, the Atlanta Fed’s analysis is interesting:
(…) because sticky
prices are slow to change, it seems reasonable to assume
that when these prices are set, they incorporate expectations
about future inflation to a greater degree than prices that
change on a frequent basis. (…) the evidence
indicates that the flexible-price measure is, in fact, much
more responsive to changes in the economic environment—
slack—while the sticky-price variant appears to be more
forward looking. (…)In terms of the overall, or “headline”
CPI, we judge that about 70 percent of it is composed of
sticky-price goods and 30 percent of flexible-price goods.
About half of the flexible-price CPI comprises food and
energy goods, the remainder being largely autos, apparel,
and lodging away from home. The sticky-price CPI includes
many service-based categories, including medical services,
education, and personal care services, as well as most of
the housing categories which, by construction, change only
infrequently. (…)We find that forecasts of the headline CPI that are based
on the sticky-price data tend to be more accurate than the
forecasts based on headline inflation. Further, CPI predictions
using sticky-price data perform pretty well relative to
CPI forecasts using core CPI data. (…)
So we have 70% of the CPI, the sticky part, rising 2.8% YoY in November and trending up, muted down to the 2.0% range by Flexible Prices hovering around zero.
Conclusion: total inflation is not accelerating but one should be flexible on that…
For the Rule of 20 Valuation Barometer, the inflation component declined from 2.4% to 2.3% in November but, based on the above, it seems unlikely to provide much upside to P/E ratios in the near future. This is happening when trailing EPS are flat to down, creating a widening gap between Fair Value (yellow line) and the Index (blue) with valuation into the “Rising Risk” area. With little or no backwind, the ship must stay away from reefs and unamicable environments…
- The 13/34–Week EMA Trend Chart (CMG Wealth) remains positive:
