Powell made it pretty clear at the last FOMC that they will look past a core PCE level shift driven by tariffs. What they won't look past is second-order effects (further above-target inflation after the tariff price level shift) or unanchored expectations. V unclear if we will get those. - ThreadSky

peark.es • 57 days ago

Powell made it pretty clear at the last FOMC that they will look past a core PCE level shift driven by tariffs. What they won't look past is second-order effects (further above-target inflation after the tariff price level shift) or unanchored expectations. V unclear if we will get those.

Reposted from Metro North

Pricing in aggressive rates cuts when inflation is about to ramp is certainly a choice

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peark.es•57 days ago

Here's what it looks like. The one-time price level shift at T(1) is a one-off (assuming tariffs don't keep rising - but let's leave that aside for now). If at T(2), the inflation rate returns to trend, then there's nothing for the Fed to do, they focus on unemployment/GDP. But if not...can't cut.

peark.es•57 days ago

To be clear: we do NOT know if there will be second order effects or not! This is a very difficult forecasting question! But the Fed will be focused on that to decide how to react, not the mechanical impact of tariffs on core inflation.

dlr723.bsky.social•57 days ago

second order is not the right word...those effects could be huge...you mean subsequent or consequent...and I think you have rosy glasses on when it comes to that...

jmackin2.bsky.social•57 days ago

Just don't say "transitory"

ac74394.bsky.social•57 days ago

This is the main point that I've gleaned from all of this: we do not know the end result.

If we do see knock on effects, the impact to bond pricing could put the institutions who depend on stable FI markets in a REALLY terrible place.

It's as if the guy making the decisions was a serial bankrupter

heaventree.bsky.social•55 days ago

This seems like one of those Wolfram "Computationally Irreducible" problems. The only way the Fed knows how it will play out, is to let it play out. Meaning they will by definition be late w any response.

tripsnek.com•57 days ago

Is the framing here that the initial price shift is really just reflecting higher taxes?

peark.es•57 days ago

That’s the reality from a macroeconomic modeling perspective.

isaiahbishop.bsky.social•57 days ago

Remarkably under priced scenario imo

susanboston.bsky.social•57 days ago

If Powell reacts today (in his speech) to a Trump-caused market selloff and lower Treasury rates (longer than 6 months), after just 2-3 days of carnage, then Trump will have taken over the Fed. I assume Powell knows that.

jeffdavenport.bsky.social•57 days ago

Can you believe this? The drop off from mid February is astounding.

econreporter.bsky.social•57 days ago

I start to think the the use of "transitory" last meeting was an intentional hint, meaning it's a "short term inflation rise that will last longer than most like"

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