Why the FOMC Should Pause — Evening Brief – 12.17.24
Core PCE, the Federal Reserve’s preferred inflation gauge, was 2.7% when Chair Jay Powell announced in August at the Jackson Hole Economic Symposium that “the time has come for policy to adjust.” Rather than continuing to decline further, the index moved sideways for a few months, then ticked up to 2.8%. The November data will be released on Friday and minimal improvement is anticipated.
Other inflation indicators have shown a similar pattern. Core CPI, for example, trended lower throughout the summer, but after the 50-basis point interest rate cut in September it has largely moved back and forth of 3.3%. Meanwhile, Core PPI has been rising all year and now stands at 3.4%, the highest level since February 2023. None of the typical metrics of inflation have improved since the first rate cut, and in some cases have worsened. They are all far from the Fed’s 2% target.
The Trufaltion Daily Inflation Index, a daily measure of inflation calculated by an independent data provider that offers real-time inflation calculations, follows a similar pattern to the CPI.
The Index is updated daily utilizing over 30 publicly accessible data sources encompassing more than 13 million data points. The weightings are comparable to CPI with some exceptions.
The primary distinction is housing, which constitutes 44.4% of the Consumer Price Index (CPI) but only 23.2% of the Trufaltion Daily Inflation Index. Truflation distinguishes utilities and household items individually; when included in housing, the comparison is 44.4% to 36.2%.
The Truflation Index has the advantage of being a leading measure of inflation, whereas the Consumer Price Index is a lagging indicator.
The Index, like the CPI, shows inflation dropping in the first nine months of the year. Since the September rate cut, however, the Index has steadily risen. It rose to 2.62% after the FOMC cut interest rates for the second time in November, and it hit 3.11% last Friday, with the Fed expected to slash interest rates again.
The FOMC is widely expected to cut interest rates a quarter-point on Wednesday (96% probability). However, the trend of the Truflation Index and other measures of inflation begs the question of why the Fed is cutting rates when all inflation indicators have climbed since September, and this leading inflation index is at its highest level since September 2023, when core PCE was 3.7%.
We’ve heard from many FOMC members since the last interest rate cut about proceeding cautiously with the easing cycle. Since many voting members spoke of the need to assess incoming data, we’ve witnessed a solid jobs report and continued increased levels in inflation indicators, with the Truflation Daily Inflation Index rising.
With the stock market at all-time highs, a healthy economy, and persistent inflation, now may not be the time for the Fed to cut interest rates.