Contact

A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

News

 

The Elephant in the Room Forcing the Fed Rate Cut


Many in the consensus regard the widely-expected Fed rate cut as unnecessary. Yet, the elephant in the room remains the inflation cycle downturn that leaves the Fed with little choice but to cut rates.

This is because Fed officials believe they need to cut rates now to boost inflation while economic growth is still good. As Fed Chairman Jerome Powell recently stated, they wish to avoid the trap that Japan has fallen into and now confronts the Eurozone, where “lower expected inflation gets baked into interest rates, which means lower interest rates, which means less room for the central bank to react” when recession threatens.

The early-2018 downswing in ECRI’s U.S. Future Inflation Gauge (USFIG) predicted the current inflation cycle downturn. But this downturn was missed by most – including the Fed, which hiked rates last September and December after we warned of the downside risk for inflation.



In fact, following the USFIG downturn (chart, upper panel), year-over-year (yoy) CPI inflation (lower panel, gray line) and yoy growth in the personal consumption expenditures (PCE) deflator (lower panel, black line) – the Fed's inflation target measure – both turned down in mid-2018. That cyclical downswing continues, despite the latest uptick in core PCE deflator growth (not shown) that looks to be tariff-driven and thus likely to be temporary.

Now, many are focused on whether the Fed is acting in time to head off a recession, still ignoring the elephant in the room – the inflation cycle. However, it is the inflation cycle that bears watching.

Indeed, the downturn in the USFIG allowed our clients to be forewarned and prepared for the plunge in bond yields that began last fall. That downturn was a precursor to the Powell pivot early this year. Today, the ongoing inflation cycle downturn predicted by the USFIG gives the Fed plenty of room to cut rates.

Click here to review ECRI’s recent real-time track record.

For information on ECRI professional services please contact us.

Follow @businesscycle on Twitter and on LinkedIn.

Related News & Events

China and G7 Inflation

Bloomberg July 16, 2019

ECRI spoke with Bloomberg Daybreak Asia, about global industrial growth, inflation and China’s stimulus. More

 

Earning Growth Outlook Plunges

CNBC July 11, 2019

Earnings growth is highly sensitive to cycles in economic growth, so every cyclical slowdown sees a plunge in earnings growth. More

 

Interview: What will the Fed do?

CNBC July 8, 2019

"Elephant in the room" remains the inflation cycle downturn. More

 

Related Reports