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Federal Reserve teased a ‘glimmer of hope’ in its comments on inflation

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There’s a single, subtle change in the Federal Reserve’s latest comments on inflation. In May, the Federal Open Market Committee said there had been a “lack of further progress” toward its 2% inflation target. On Wednesday, June 12, hours after the latest inflation report became public, the committee changed the phrase to note “modest further progress.”

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On Wednesday morning, May’s consumer prices came in cooler than expected. Prices were unchanged for the month and up 3.3% for the year, a tick down from April’s 3.4%. Core inflation, which excludes food and energy, was up 0.2% on the month and 3.4% on the year.

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“The economy is in kind of a steady state right now with inflation running 3%, it has been for really close to a year,” former Kansas City Fed President Thomas Hoenig said. “So they really do have to stick to the higher-for-longer scenario in their alternatives and that’s what they’re doing.

“But they don’t want to give the impression that they’re ready to raise or that they are not going to eventually cut so that’s why they put the glimmer of hope in there by looking at the very small improvement so that you don’t spook the market,” he continued.

In the Fed’s latest economic projections, the committee forecasts just one rate cut in 2024, down from three projected cuts in March.

“This is my opinion only, but I think what they’re hoping is that they’re just modestly enough tight that the inflation numbers will come down over time without creating a recession, and they haven’t given up on,” Hoenig said.

While the consumer price index (CPI) gets the majority of attention because it’s the first inflation indicator to be released, the Fed relies on the personal consumption expenditures (PCE) price index for its 2% target.

What’s the difference between CPI and PCE and why does the Fed prefer the latter? Click here to learn more.

Based on the Fed’s projections, it expects core inflation, as measured by PCE, to remain unchanged in 2024 at 2.8%.

“Higher than they want, but they’re also projecting it’s not going to increase and they think it’ll tick down slightly over the course of the year and into next year,” Hoenig said. “And they’ll be satisfied with that. They’re willing to accept that as a trade-off for risking a recession.”

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Simone Del Rosario: Good afternoon and welcome to Live special coverage of decision day over at the Federal Reserve. This is straight arrow news, and I am the business correspondent here, Simone Del Rosario, and I am joined by former Kansas City Fed President, Tom Hoenig. Tom, thank you so much for being with us this afternoon.

Thomas Hoenig: Happy to be with you. Thank you for having me.

Simone Del Rosario: We’re about five minutes away from Fed chair, Jerome Powell taking to the podium. So I want to get right into what the Fed’s FOMC meeting results were today, as we saw from his statement that was released about 25 minutes ago. There is obviously no rate cut. No one was expecting a rate cut this month, but interestingly enough, their projections now are showing just one rate cut for this year, and that is compared to three rate cuts that they were projecting back in March. Now the only difference in the Fed’s statement this time around was a little bit of a glimmer of hope, and I think that has something to do with this morning’s inflation report, which is that last month, they had said there had been a lack of further progress toward that 2% inflation objective, and this month they are saying there is modest further progress. So true to the Fed Tom, and you know more about this than I do that slight word change can mean a lot. What do you take away from what we’re learning from the Fed today?

Thomas Hoenig: I think that the numbers that came in were slight as as is the right word, very, very little change in there. The economy is in kind of a steady state right now, with inflation running 3% it has been for really close to a year. Although it’s come down from highs, it’s still in the 3% range that continues. And so they really do have to stick to the higher for longer scenario in their in their alternatives, and that’s what they’re doing. But they don’t want to give the impression that they’re ready to raise or that they are not going to eventually cut so that’s why they put the glimmer of hope in there by looking at the very small improvement, so that you don’t spook the market, and you don’t have a rapid decline, and you don’t have, you don’t interfere with confidence in the market. So that’s what they’re trying to do, stay the course inflation is still too high. They’re not close to the 2% but they don’t want to scare the market or the financial industry, and therefore they’re giving that ray of hope and for the future, not not as quickly as people would hope. But still, it’s on the it’s on the line of vision, if you will, going forward.

Simone Del Rosario: Yeah, those economic projections I was talking about now, the Fed is looking at higher inflation than they were for the year just than just a few months back. They’re projecting right now that core is going to stay at 2.8% that’s where it is right now. So they’re not foreseeing a lot of movement and inflation for the rest of the year.

Thomas Hoenig: And I think that’s right. I mean, when you when you think about it, they’re in real terms, they’re very modestly tight. People keep thinking that they’re very tight in a historical context, when they’ve come from zero, that’s that’s a lot. But when you look at the economics of it, for example, most people think that the so called Real equilibrium rate for interest rates is about 2% and if you look at that right now, then with inflation of 3% and the interest rate, the policy rate of five, 5.2% they have about a 2% real Fed funds rate. So they’re in the equilibrium rate for a steady state, and that steady state, unfortunately, is around 3% so what they’re what they’re hoping, in my opinion, this is my opinion only, but I think what they’re hoping is that they’re just modestly enough tight that that the inflation numbers will come down over time without creating a recession, and they haven’t given up on. That, and that’s what this is about. So they’re still projecting 2.8 higher than they want, but they know it’s not they’re also projecting it’s not going to increase, and that they think it’ll tick down slightly over the course of the year and on into next year, and they’ll be satisfied with that. They’re willing to accept that as a trade off for risking a recession.

Simone Del Rosario: And Tom, we’ve talked about this before, and I know that based on your comments, that obviously you believe this rate, as you said, is just moderately tight. It’ll take longer for it to come down, but not so much that they want to go ahead and hike rig so they want to keep going on the path that they’re going. We’ve got about a minute before Powell is coming to the podium, so I want you to keep this pretty short if you can, but I wanted to add one more thing in here, and this is this question mark about what is happening in the banking sector. In a Bloomberg interview this week, PIMCO said they expect more regional bank failures in the US because of this very high concentration of troubled commercial real estate loans. Are you concerned that there is trouble in the banking sector that could sway the stability of the economy as it stands.

Thomas Hoenig: Well, there is that risk. I mean, the interest rates rose quickly that puts downward pressure on asset values, and that’s especially true for long term commercial real estate assets. So yeah, they’re under pressure. The banking industry is vulnerable. Number one. Number two, they have a lot of government securities on their books that were at very low interest rates. Those values are down, and that impedes their liquidity. So yes, the banking industry is vulnerable. They know that, and that’s one of the reasons they would be very reluctant to raise interest rates further at this point.