Kelly Evans
Scott Mill | CNBC
Oh boy. We didn’t get a good data point this morning. And you probably won’t hear much about it, but it’s a crucial data point for the Fed.
We just got preliminary consumer sentiment from the University of Michigan at 10am ET, and on the surface it seems encouraging; sentiment “surprised to the up” with a five-point jump to a reading near 65. Recall that this reading hit a record low in mid-June as pump prices soared to all-time highs.
Of course, consumer sentiment is recovering as gasoline prices have fallen. The problem? Inflation expectations are also recovering. And not the short-term ones, which are most sensitive to food and energy costs. The longer-term ones, telling the Fed that inflation is at risk of entrenching.
The only scary data point for the Fed, I would argue, is what US consumers think inflation will be over the next five to 10 years, ie what they think is “normal”. This rose to 3% in today’s report, the highest since petrol prices peaked last June! That’s correct–Consumers today, after everything that has happened in recent months and with all the talk of an impending recession, have as much of a chance of “normal” future inflation as they had back in June when prices were still soaring.
I haven’t seen the Fed’s futures markets, but it should be a major concern for savvy investors hoping for a quicker Fed pause or smaller and fewer rate hikes. Recall that last year the Fed hiked interest rates for the first time by 75 basis points on Wednesday after this very report showed a rise in consumers’ long-term inflation expectations.
Right – on Friday 10th June we got the very bad CPI report, but 90 minutes later we also got the very bad sentiment report which showed long-term inflation expectations rising to 3.3% (I wrote about it here ). This afternoon I said I wouldn’t be surprised if the Fed hiked to a 75 basis point hike at the upcoming meeting — exactly what they cabled the Wall Street Journal this weekend, followed by the first of the which would be four 75 basis point rate hikes on June 15th.
If you wanted the Fed to pause now, today’s numbers would have to show a sharp drop in long-term expectations to around 2.5%. That clearly didn’t happen. We saw similar stubbornness in the New York Fed’s own survey, released earlier this week, showing that three-year expectations are still at 3% and five-year expectations are up a tenth to 2.4%.
So our Steve Liesman is absolutely right in reporting today that as far as markets are concerned, “the Fed’s beating of additional rate hikes will continue”. Which is a shame, because I would put much more faith in the collapse being signaled in forward-looking bond market indicators than in these “random” consumer reports.
But the Fed has decades of research and empirical work on how inflation expectations are one of the main channels for influencing actual future inflation, and Fed officials talk about it all the time. What we don’t hear that much about is their research that bond futures markets are excellent predictors of GDP, which itself can be the dominant factor in how employment and inflation will behave over time.
The best the bulls can hope for is that consumer inflation expectations fall as sharply in the coming months as bond markets have already done. This week’s data suggests not to hold your breath.
See you at 1 p.m.!
Kelly
Twitter: @KellyCNBC
Instagram: @realkellyevans
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