Kevin Hassett expands on his point about markets, recession, and inflation.
In an article last week for Capital Matters, Kevin Hassett wondered why markets appeared to be pricing in substantial rate cuts at a time when the economy was showing no signs of entering a recession (in fact, the opposite), and at a time when inflation is by no means vanquished.
Hassett:
There are lots of different ways to measure inflation, but the Fed made news last year when it signaled that its preferred measure was something called “supercore inflation,” which tracks services excluding energy and housing. But look at what supercore is telling us. The increase over the past twelve months was 3.9 percent. Over the past six months, this increased to 4.6 percent. If we take the latest month, December, and annualize it, then the rate of increase is 4.9 percent.
This acceleration is visible in the top-line number as well, with the twelve-month change in overall inflation climbing from 3.1 percent in November to 3.4 percent in December, and “core” inflation continuing to hover around 4 percent.
But, if economics cannot explain a policy change, could politics?
Hassett:
While Jay Powell, a man of courage and character, was nominated by President Trump, the majority of bank presidents and governors are now Democrats. And the staff that gives the Fed the outlook that they base their decisions on is profoundly left-leaning, with 97 percent of their political contributions going to Democrats in the last presidential cycle. Might the staff push a recession narrative that moves the Fed to juice up the economy in an election year? Of course.
In this day and age, losing our institutions to woke partisans seems par for the course, and markets appear to have decided that the Fed is lost as well. If the data stay where they are, and the Fed starts cutting rates, then we will all have to agree with them. My bet is that the markets are wrong, but we shall see.
Kevin discussed this further on CNBC here.