Full audio below:
Jackson Hole Symposium
We expect some sort of loose announcement the taper in purchases is coming over the months ahead. Likely beginning at a pace of $10 billion per month to begin in Q1 2022. However, Powell will offer numerous off-ramps or downside risks capable of stalling or slowing the taper. An official announcement is not likely until further employment reports create a consensus and the debt ceiling debate is in the rear-view mirror.
Ultimately, we have been looking for official Fed speak to reveal the following:
- Low agreement -> disparate views among officials
- Peak in passivity -> less stalling and use of the Fed favorite ‘some time’
- Peak in transitory -> reduction in language believing inflation is temporary
Thus far, only agreement has fallen while passive and transitory communications persist.
We used plain-vanilla time series forecasts (ARIMA) for the major components of core CPI over the next 12 months as a baseline.
In addition, we incorporate the growth of private rents (see Apartment List and Zillow on slide #29) to determine the potential path of core CPI. One series uses the full growth in private rents over the past six months, while the other runs at half speed. We allow private rent growth to recede beginning in January 2022.
Assuming private rents show up one-for-one in CPI, then core inflation could run as high as 6.5% YoY in early 2022 and persist above economist expectations through late 2022. Core inflation under all scenarios is expected to settle near 2.5% YoY.
Maintaining core inflation above 2.0% YoY would generate the first regime shift HIGHER following a recession since the 1980s.
In an odd twist, flexible and sticky inflation have aligned by their greatest degree in history.
Investors are not giving chase to elevated flexible CPI, which is a rarity. All in all, financial markets remain prepared for tranistory inflation.
The US dollar has strengthened as the Delta variant spread (flight to quality) and the Federal Reserve shadow rate hints at rising into 2022.
A rising UST real yields and US dollar is a BIG risk for investors. All major asset classes suffer when both rise more than one standard deviation above average.