The lesson from Powell: It's kind of fallen apart ...Middle East

The key line from Powell at Wedensday's FOMC press conference was "it's kind of fallen apart", which isn't the kind of thing you want to hear from a Fed chair in any context.

But what was the context? A reporter asks Powell if what's driving the hawkish shift is the election but he pushes back strongly. The whole thing is worth a read:

So what's the broader context here?

Here are the PCE inflation forecasts in the latest summary of economic projections:

2024: 2.8% → Up from 2.6%2025: 2.5% → Up from 2.2%2026: 2.2% → Up from 2.0%2027: 2.0% → No change

If you go back to September, the median PCE forecast was 2.3% on the headline and 2.6% on the core, so we're 0.2 pp above that. If you got back to this time last year, they were both at 2.4% which means that while headline is close, core is 0.4 pp higher than forecast.

So what's the real message here?

Powell and the Fed are worried about inflation again. The emphasis has tilted from the employment side of the mandate back to inflation. You can see that in rising Treasury yields in the aftermath of the decision. Add in tariffs, corporate tax cuts and other potential election largess and it may take awhile for those worries to go away.

Ultimately, I think they will because there are strong deflationary impulses in goods and the services (esp housing) drags are slow to pass through. Part of the drag is that longer-term rates are higher now and 30-year fixed rates are back at 7% with home builders getting beaten up. That will eventually win out and that's why I would be buying bonds if they can get to 5% but we're not there yet.

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