The Federal Reserve meets one more time this year and it could be the most watched Fed meeting in recent history. Most economists are expecting them to alter their current strategy of raising short-term interest rates at an unprecedented clip of 75 basis points (0.75%) per meeting, like they have done the last four times that they have met. The consensus is that they will raise rates only 50 basis points.
Well, if they need any more evidence that they should stop raising rates at such a fast pace, here are a few things that should convince them.
- Gasoline prices back to where they started in 2022.
Amazingly, the entire gasoline price surge in 2022 has been all but erased.
Although the Fed typically excludes energy prices when watching inflation, rising prices at the pump garner the most attention from the public and the press, so it certainly contributes to the perception of high inflation.
- Rents and home prices are dropping in a meaningful manner.
The Fed uses the blue line, which lags the real-time data by about 6 months. Why they don’t use real-time data for this component is a mystery to me. Regardless, they know rents are coming down, which was one of their arguments to keep raising rates at such a high rate.
- Producer Price Index (PPI) is dropping significantly.
The PPI is basically the inflation measurement at the wholesale level. This is the price of goods and services before they go up for sale to the consumers. It makes sense that if the wholesale prices are coming down, then consumer prices should be dropping as well, especially if a company wants to stay competitive.
If these trends continue, it should be an easy decision for the Federal Reserve to pump the brakes on interest rate hikes when they meet next week.
Please comment or send an email if you have any questions. Thanks!
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
