What the Fed's Leaker JUST Said!

hey everyone me Kevin here over the past

a few days Nick T from The Wall Street

Journal also known as the federal

reserve's mouthpiece or leaker has

tweeted a few different articles that I

thought would be worth going through uh

in fact he said tweeted quite a few he's

tweeted a Bloomberg piece here we've got

a Wall Street Journal piece we've got a

Kansas City fed piece and what I thought

is why not just give a very quick

consolidation of what the goodies are

within this so the first argument that

they make is in the Wall Street Journal

Central bank's website which usually you

have to pay a lot of money to access

this is like two thousand dollars a year

but uh for some reason the link he

shared was a freemium link so let's get

into it I used to be subscribed to them

but it didn't think it was worth it all

right wsj anyway consumers expect

inflation to stay high over the coming

months but decline in the years ahead

and so this piece really Nails on

inflation expectations and what I think

is so great about this is I think

there's a chance you've got Nick T here

sort of on behalf of the FED going hey

you know know as long as expectations

remain like this and people actually

think inflation is going to continue to

fall then we're on the right trajectory

and maybe there's a limit to how high

ultimately we need to go it's just a

matter of how long are we going to stay

here but what's good also is to see that

consumers now expect inflation to be 4.1

percent a year from now and that is the

lowest reading that we've had in the

last two years which is great by the way

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below okay so uh then more important for

the FED consumer is expecting inflation

to ease to three percent in three years

and 2.7 in five years now this ends up

being a very important number this three

percent number and I'll show you where

that comes up in the Kansas City piece

in just a moment but keep your eyes on

this uh which ultimately that's gonna be

good but take a look at this this is

probably the first time I've actually

seen mention of this ever since I've

been pounding on the table for the last

three years talking about fate fate fate

flexible average inflation targeting

which is a fed's policy to pay attention

to average inflation over time this is

the first time I've seen it used it

Reese like in the past couple years here

and it's from a piece Nick T shout it

out and it says here that uh inflation

expectation would average out to 2.8

percent and it Compares that three

percent three-year inflation expectation

to the average of 2.8 percent we we had

in the five years before the pandemic

now that's crazy I didn't realize this

but in the five years before the

pandemic inflation was always sitting

around 1.7 1.8 percent something like

that but expectations for inflation

three years out were actually

2.8 percent now that's remarkable I

don't know that any of us have really

thought about that before if inflation

was constantly sitting around 1.7

percent why would consumer expectations

be 2.8 percent that seems a little

bizarre but I guess that's what it was

well what's crazy is if we're trying to

get to two percent and expectations are

roughly about three percent then we're

pretty dang close to what we had before

the pandemic in terms of expectations

now why do expectations matter well it

says here the FED thinks the psychology

of people thinking inflation is going to

be kind of nearly what the levels were

before 2019 is a sign that people might

not rush to spend money in anticipation

of rising prices inducing inflation in

other words you can take your time to

buy stuff because prices will be

relatively stable and that prevents the

supply distortions and the unstable

prices problem fed is trying to fight

long and short this out of the three or

four pieces we're going to look at this

one right here really incredible not

only did it reiterate that we're at the

lowest inflation expectations in two

years but this idea of inflation

expectations being pretty dang close to

their pre-covered levels uh in in terms

of an average remarkable had no idea

which is great this is pretty neat as

well because it shows you those

inflation expectations you can see the

one year ahead plummeting and then of

course you have the three and five year

right here which is relatively stable

what else did Nick T tweet well he

tweeted about used a cars and new car

prices and here's something that I

thought was fascinating as well it

wasn't just that the pace of new car

sales Rose to 15.6 million in June

that's way up from the pace of 13

million a year ago which is great still

below the usual that we see around 17

mil or at least saw before the pandemic

but take a look at this they give this

example over here of basically somebody

who comes in who comes with a three-year

lease that's up on a ram truck pickup

truck so he's got a three year lease the

three-year lease is up goes in and he's

like yo my lease payment is 394 dollars

a month I need a new truck I need to

renew my lease and the Dealer's like

well great news you're now going to be

at 687 dollars for the same damn car and

at that point people are like what the F

this sucks 300 more a month for the same

freaking car so what they do is as the

article says they don't just go buy a

new car or release a new car instead

they go into the used car market which

the used car market is really important

because it could be a leading indicator

for what's going on with CPI Consumer

Price Index inflation and see Goldman

just released a piece saying that used

car auction prices declined another 3.3

percent to 27 above pre-pandemic levels

in the first half of June in English

we're seeing this continue disinflation

on used car auction prices and that

takes a few months to really show up at

used car prices in CPI but now for the

July CPI report that's coming out on

July 12th which is in eight days they

actually expect used car prices to drop

1.2 percent and this tends to be a hot

segment both new and used cars that

could drive up inflation we don't want

that we want to see that inflation come

down and since we're on the Goldman

piece here I have to say the fact that

Goldman is titling this core

disinflation picks up speed absolutely

phenomenal usually these folks are

bearish on inflation and they're

actually lowering their core inflation

forecasts for both December 23 and

December 24 to 3.7 and 3.4 percent

respectively this is fantastic and

remember Howie doesn't actually think

we're going to be back at two percent

inflation until 2025

which is great because that means

they're willing to be patient which is

something we've been looking for the

idea of like okay how patient is Jerome

Powell willing to be it was on the panel

with Sarah Eisen where he revealed I

don't think we're going back to two

percent until 2025. that to some extent

is a level of patience and I think

that's why the market is now mostly

pricing in just one more hike and not

two remember there was a lot of talk

that we might see two raid hikes what

instead we have is now an 88 chance of

one in July and then a 71 chance which

has actually been rising over the last

week uh that is the odds of us actually

sticking to just one more rate hike

between July and September has been

rising it's up at 71 so really it's

probably like if we're gonna get more

hikes with the data we're getting it's

one more and done now it's not just the

used car piece though that he tweeted

out and the expectations piece he also

tweeted out this piece from the Kansas

uh fed and the most important part here

is really just this argument that the

fed's level of policy hasn't gone too

restrictive

since the first quarter of 2023 which

means they really just became

restrictive and that means it's probably

going to take some time for that to

really impact markets now remember why

does that restrictive level matter and

that three percent I told you to

remember earlier remember okay well it

matters because of the formula remember

inflation expectations three years out

what was it before uh the pandemic well

before the pandemic it was about three

percent so you add a three percent level

inflation expectations three years out

then you have the restrictive or the

accommodative uh level and that depends

on what inflation is doing so before the

pandemic inflation was running below two

percent so they were actually

accommodative now they have to be

restrictive and we believe that

restrictive level is somewhere around

two percent restrictive where they have

to be to get inflation down what does

that add up to it adds up to five

percent If the Fed thinks that

restrictive level needs to go up to say

2.25 guess what we go to 5.25 that's

where we get an extra rate hike look how

fun this is though fun it's math anyway

if you go to accommodative like we had

before the pandemic maybe you're

negative one percent here so Pop Quiz

what's the fomc rate if the expectation

is say 2.8 percent which was the prior

right 2.8 percent and uh and then you

have a an accommodative level of you

know what let's call it 0.8 what is the

Fed fomc rate going to be

which is basically where we were before

the pandemic so this shows you how the

FED can accommodate

with that three-year inflation

expectation of around 2.8 percent and

it's crazy to me that that 2.8

three-year inflation expectation doesn't

actually have to be two percent to get

two percent inflation that's crazy uh

okay crazy so uh now we put these pieces

of the puzzle together what do we have

well bottom line great news more vehicle

disinflation the analysts are finally

rolling over indicating that core

inflation is disinflating it's going to

take time the fed's willing to be

patient we're only pricing in one more

25 BP height Kevin's got a secret flash

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bundle up email us at snap atmecaven.com

and you know what I just wish you a

happy fourth this is all like good news

again I'm looking for bad and bearish

news I'm not trying to be a Perma Bowl

you know this I have concerns about the

summer travel spending really pushing up

core temporarily that has not changed I

still have those concerns I'm not sure

that it's worth trading on those

concerns that's the part that's the

really hard part is evaluating like okay

we might see a popping core but what if

that's already being expected or priced

into seasonal adjustments I don't know

so we'll see but anyway appreciate you

being here and we'll see you all soon

thanks so much goodbye have a great one

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