MW The Fed was more lucky than right in the fight against inflation, these researchers say.

By Steve Goldstein

Inflation was brought down by workers absorbing price hikes

Happy Fed day to all who observe.

Not everyone celebrates. There is of course the debate for this decision, whether the data really supports the interest rate cut that basically everybody seems to think is coming. But taking a broader look, how successful was the Federal Reserve in fighting inflation in the first place?

One research paper says inflation mostly fell for reasons besides the Fed's interest-rate-hike campaign. One measurement that uses the Fed's own model of the economy suggests the hikes were responsible for dampening out 40% of the inflation spike; another using a model from former Fed Chair Ben Bernanke and ex-International Monetary Fund chief economist Olivier Blanchard put that closer to 20%.

So what - even 20% is a help, right? The issue is "larger than just the usual hubris of central bankers" because it props up a "broken macroeconomic model in which the 'inflation-expectations channel' plays the central role in wage-price dynamics. The celebration also distracts from the continuing Fed failures to grapple with, or even to recognize, key factors that are still fueling inflation, especially in services," say authors Thomas Ferguson and Servaas Storm, in a paper highlighted by Panmure Liberum strategist Joachim Klement.

So why did inflation fall without a recession? Part of that was a reduction in global supply-side constraints, as well as the appreciation of the dollar, but a major reason was that the real wages of U.S. workers took a hit, the authors say. "Falling real wages absorbed the shock to the price level, unlike in the 1970s, when U.S. workers (and unions) could still protect their real wages against rising inflation," they say. That can be seen in the employment cost index lagging consumer prices and in the cumulative decline in median real weekly earnings.

And the reason there was a soft landing for the economy in spite of the rate hikes was the rise in labor supply due to immigration as well as productivity improvements, the latter driven by the surge in investment for artificial intelligence, which is "rapidly snowballing into a macroeconomic force." But the point is that the surge in AI-related capital expenditure came despite, not because of, the Fed's interest-rate hikes, and immigration obviously had nothing to do with the Fed.

The authors say that the rich and super-rich, and the wealth effect, is what's sustaining consumption. And that's also exacerbating services sector inflation. "The flow of workers into high end restaurants as day care, nursing homes, and other lower wage industries struggle, offers an especially vivid example, but it is far from alone," they say.

They're not optimistic about the inflation picture - with concerns ranging from feeble antitrust enforcement, climate change that destabilizes insurance and parts of finance, geopolitical tensions and the force of money politics.

They conclude by taking aim at the Fed. "The carnival images at Jackson Hole and elsewhere are not real; central bankers promise to be 'data driven' because their favorite models are far off the mark," they say.

The markets

U.S. stock index futures (ES00) (NQ00) rose early Wednesday, after nine straight losses for the Dow Jones Industrial Average DJIA.

   Key asset performance                                                Last       5d      1m     YTD     1y 
   S&P 500                                                              6050.61    -0.55%  2.26%  26.85%  28.78% 
   Nasdaq Composite                                                     20,109.06  2.14%   5.91%  33.96%  34.03% 
   10-year Treasury                                                     4.408      13.30   -0.10  52.71   55.97 
   Gold                                                                 2663.3     -3.29%  0.35%  28.55%  30.27% 
   Oil                                                                  70.11      -0.38%  1.55%  -1.71%  -5.03% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

The Fed decision comes at 2 p.m. Eastern, with a quarter percentage point rate cut expected. The surprise, if any, may come from the interest-rate forecast and economic projections released at the same time, with the Fed likely to increase its projected fed funds target range for next year.

General Mills $(GIS)$ and Birkenstock $(BIRK)$ report results ahead of the open, and Micron $(MU)$ and Lennar $(LEN)$do so after the close.

Honda and Nissan said they were considering a merger or other collaboration.

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The chart

The 40th annual global exploration and production spending survey, from Barclays, tracked more than 150 oil and gas companies worldwide about their spending intentions for the upcoming year. They expect flat spending for 2025, which they say is a mid-cycle plateau before another leg driven by deepwater starts ramps up in 2026.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   TNXP    Tonix Pharmaceuticals 
   PLTR    Palantir Technologies 
   RGTI    Rigetti Computing 
   TSM     Taiwan Semiconductor 
   QUBT    Quantum Computing 
   NUKK    Nukkleus 
   AAPL    Apple 

Random reads

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-Steve Goldstein

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December 18, 2024 07:02 ET (12:02 GMT)

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