For the Fed, ‘3% is the new 2%’ when it comes to inflation

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Friday, January 13, 2023

Today’s newsletter is Alexandra Semenova, markets reporter at Yahoo Finance. Follow Alexandra on Twitter @alexandraandnyc. Read this and more market news on the go Yahoo Finance App.

Inflation fell for the sixth straight month in December, data on Thursday showed.

This drop in prices shows that, finally, the Federal Reserve’s rate hikes to fight inflation seem to be working.

But this tool may not be enough to bring inflation down to a level consistent with the Fed’s 2% target. At least not because of the amount of money.

At an event hosted by Wilmington Trust earlier this week at Electric Lemon – the funky restaurant located at the Equinox Hotel in Hudson Yards, New York City – the company’s CIO Tony Roth opened the evening’s discussion by criticizing the “3% and the new 2%,” referring to the the Fed’s inflation target.

“As inflation goes down — and it will go down, it’s already going down — it’s going to stick,” Roth said.

“And it’s going to get stuck because of the real shortage of workers and the impact on wages, it’s going to get stuck because of the lack of cheap unlimited supplies from China, and it’s going to get stuck because. electricity prices are not going back to the past.”

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Chairman of the Board of Governors of the Federal Reserve System Jerome H. Powell participates in a session of the Central Bank Symposium at the Grand Hotel in Stockholm, Sweden, January 10, 2023. TT News Agency/Claudio Bresciani/via REUTERS ATTENTION EDITORS - THIRD IMAGE PROVIDED IT'S PART THREE.  SWEDEN OUT.  NO USER OR EDITOR IN SWEDEN.

Chairman of the Board of Governors of the Federal Reserve System Jerome H. Powell participates in a session of the Central Bank Symposium at the Grand Hotel in Stockholm, Sweden, January 10, 2023. TT News Agency/Claudio Bresciani/via REUTERS

The Consumer Price Index (CPI) for December released on Thursday showed that inflation rose 6.5% year-on-year and fell 0.1% last month. Core CPI, which covers food and energy, rose 5.7% in the previous year and 0.3% in the month – indicating a stabilization in inflation.

Currently, the Fed is aiming for a 2% long-term inflation rate based on the annual change in the value of the real money supply.

But Wall Street is increasingly seeing this goal as impossible in a pandemic-stricken country. A country where the workforce is still less than 3 million workers who are about to reach the peak of COVID-19, companies are moving to foreign countries to produce closer to home to reduce disruptions, and electricity prices are still rising.

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“What will happen is, as we go through the year, this debate – ‘Is 3 the new 2?’ – they will definitely be ahead,” said Roth, adding that the Fed’s decisions to raise or lower interest rates will become more important as inflation approaches 4%.

And in this view that “3% is the new 2%,” Roth is not alone.

Hedge fund manager Bill Ackman is among other Wall Street voices who have questioned the credibility of the Fed’s 2% inflation target in recent months.

In December, Ackman tweeted that the goal could not be achieved without “major, job-destroying declines.” And on a call with investors last month, he said it was the company’s view that the central bank would not meet that target.

Rising global wages, changes in other energy sources, global disruptions, and changes in domestic employment and production will all undermine the Fed’s ability to reduce inflation, according to Ackman, in addition to risks to manufacturing “which have caused almost the U.S. everyone. The CEO also thinks about foreign or remote chains.”

“A lot of that is coming close to home, and it’s expensive to do business here,” he said.

Billionaire investor Leon Cooperman, chairman and founder of family office Omega Advisors, said in a television interview with CNBC earlier this month that if the Fed tries to hit 2% inflation instead of a steady 3% or 4%, the S&P 500 could fall. low 3,000s.

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And BlackRock CEO Larry Fink shared the same sentiment at the New York Times Dealbook Summit in New York City last month, warning investors to expect inflation of around 3-4% and interest rates of 2-3% – which he called a period of “malaise” in the economy.

What to Watch Today

Wealth

  • 8:30 a.m. ET: Entry Price Indexmonth-on-month, December (-0.9% expected, -0.6% in the previous month)

  • 8:30 a.m. ET: Price Index Excludes fuelmonth-on-month, December (-0.3% expected, -0.3% last month)

  • 8:30 a.m. ET: Entry Price Indexyear-on-year, December (2.2% expected, 2.7% last month)

  • 8:30 a.m. ET: Export Price Indexmonth-on-month, December (-0.7% expected, -0.3% in the previous month)

  • 8:30 a.m. ET: Export Price Indexyear-on-year, December (7.3% expected, 6.3% last month)

  • 10:00 a.m. ET: Opinion of the University of MichiganJanuary Preliminary (60.7 expected, 59.7 pre-read)

Earnings

  • Delta Air Lines (DAL), JPMorgan (JPM), Citigroup (C), Bank of America (BAC), BlackRock (BLK), First Republic Bank (FRC), Wells Fargo (WFC), UnitedHealth (UNH)

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