The ultra-dovish Fed surprised markets on September 18 with a jumbo cut (50 bps)… and 3 months later, on December 18, the ultra-hawkish Fed surprised markets in the opposite direction..
So what happened with inflation in those three months (Figure A).
1) Headline CPI rose from 2.59% (SA) to 2.73% - a mere 14 bps.
2) Core CPI rose 3 bps (from 3.27% to 3.30%).
3) Headline PCE inflation fell from 2.47% to 2.31% - a 16 bps.
4) Core PCE rose 12 bps (from 2.67% to 2.79%).
No wonder the markets were surprised by the Fed’s hawkish pivot, it’s hard to expect such a sharp change in policy based on such changes in inflation… In addition, the Fed is also quite wrong in its projections.
Figure 1 and 2 show the median projected Fed Funds Rate.
Figure 3 and 4 show PCE Inflation.
Figure 5 and 6 show Core PCE Inflation.
Figure 7 and 8 show GDP.
Figure 9 and 10 show Unemployment Rate.
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