More Burns Bumble than Volcker Shock
Posted by: Paul Donovan
Daily update
Daily update
- The US Federal Reserve raised rates 0.75%. This was not a "Volcker Shock" (taking control with a clear strategy). It was more a “Burns Bumble” with external pressures undermining credibility and coherence. For investors, it likely signals volatility.
- The core personal consumer expenditure deflator has been downgraded in favor of headline consumer prices as a price target. Headline CPI is not a superior measure; it is a more political measure. Forward guidance is no longer dependable. Fed Chair Powell suggested the next hike would be 0.50% or 0.75%, but as guidance changes on a whim, why not 0.00% or 1.00%?
- The Fed seemingly wants to increase the scope and scale of current deflation pressures in sectors the Fed can influence (current inflation pressures are largely outside the scope of Fed influence). Inflation has been about pricing power and profits, not labor costs. Thus, profitability is a focus and unemployment is more about influencing consumer demand than wage costs.
- The Fed was not the only central bank meeting—the ECB’s emergency meeting agreed to a strategy of masterful inactivity on government bond spreads. Masterful inactivity is the ECB’s default strategy, but Italian 10-year yield spreads versus Germany narrowed to levels not seen for several days. There are ECB speakers scheduled today.