Is Powell Too Dovish? One Strategist’s Perspective

Investing.com — The upcoming meeting of the Federal Reserve on November 6-7 is anticipated to reflect a more assertive approach from monetary policy hawks, according to strategists at Yardeni Research, following unexpectedly high inflation figures for September.

This development poses challenges for Fed Chair Jerome Powell and other dovish members of the Federal Open Market Committee (FOMC), particularly after they implemented a 50 basis point rate cut last month in response to concerns about an economic downturn. Yardeni strategists believe that the credibility of these dovish members has suffered, especially in light of the recent jobs report indicating a further decline in the unemployment rate and record-high payrolls.

“Today’s CPI data supports our position that the Fed should refrain from cutting the federal funds rate at its two remaining meetings this year,” the strategists noted in a Thursday update.

Bond market indicators seem to support this perspective. Following the Fed’s 50-basis-point rate cut on September 18, the 10-year Treasury yield has increased from 3.63% to 4.11%, signaling rising inflation expectations.

Stock markets have only experienced a minor dip from the new record highs achieved recently. Yardeni suggests that any additional rate cuts could heighten the likelihood of a significant stock market surge.

The research firm outlined several critical data points from the latest CPI report, indicating why the Fed may need to reconsider its dovish approach. In late 2022, Powell emphasized the significance of supercore inflation (core services inflation excluding housing) in forecasting future core inflation trends. The latest CPI report revealed that supercore CPI inflation has risen from 4.3% to 4.4% year-over-year, which Yardeni terms “a far cry from ‘mission accomplished.'”

Notably, transportation services—a major contributor to services inflation—saw a steep increase from 7.9% to 8.5% year-over-year in September. This category encompasses costs associated with car leases, rentals, auto maintenance, insurance, and public transit. The strategists highlighted that rising expenses, particularly in auto insurance, which surged by 16.3% year-over-year, are disproportionately impacting lower-income households.

Additionally, shelter inflation, which was anticipated to decline, continues to be a concern as recent increases in three-month annualized rates indicate persisting pressures, despite a slowdown in rent price increases.

Energy inflation fell by 6.8% year-over-year in September, while CPI goods decreased by 1.3%. However, Yardeni strategists caution that geopolitical risks in oil markets and a weaker dollar may drive headline inflation higher as the year progresses.

Furthermore, unemployment claims surged to 258,000 during the week ending October 5, primarily due to strikes and severe weather conditions. Continuing claims also rose by 35,000, totaling 1.861 million.

Yardeni also noted that layoffs at automaker Stellantis in Michigan, linked to negotiations with the United Auto Workers, as well as hurricane-related claims in North Carolina and Florida, are likely to skew employment reports for October.