Federal Reserve has responded to the latest CPI report and we've got to talk about it because the Federal Reserve's response was honestly. two quick notes: I'm going to be in the air flying today so you can follow me on Instagram to see what I'm up to. I'll be at a special place and you're gonna see a lot of cool stuff, so follow me on Instagram And we did extend the flash sale to the end of the week for those of you who emailed us and for anyone else, 69 off largest percentage basis sale for the programs I'm building link down below. Shocking.

More shocking than getting 69 off on a flash of sale for the Valentine's Day coupon code. Yeah, that's shocking. Anyway, so these responses were great. First of all, we know that inflation came in hotter than expected.

We've matched the month over month numbers. we beat on some of the headline numbers and really, we showed that some parts of inflation were stickier than expected and generally you know, sticky things. You want to kind of clean that up. Okay, so how the Federal Reserve responded to me it was, in my opinion, surprise it because markets would have assumed that on a hot CPI report the Federal Reserve would have responded with well, I guess this begets more hiking.

We're just going to have to keep raising rates and we'll have to stay higher for longer, which that's probably what the markets are already pricing in. Anyway, given that about a month ago, we were pricing at 1.7 in rate cuts and a terminal rate of 4.9 percent. That is now changed to a terminal rate of about 5.26 percent as of right now based on what the charts are telling me in front of me and no rate cuts for the year, those are the expectations, right? That has been a shift in expectation, but what did the Federal Reserve say? So Mr Barkin was the first to talk on Bloomberg about this. and you know what he said about this inflation report, which came in a little hotter than expected.

He said this was expected. Inflation coming down is great, but we expect there to be some volatility because January data reads tend to have huge seasonality adjustments. In other words, the first person from the Federal Reserve which we have multiple responses from the FED, but the first person to respond on this hot CPI report from the Federal Reserve says eh, kind of expected that what you almost expected inflation to tick up again because we almost went higher than we went last month. We certainly did on the month, overnight, month data.

On top of that, you're just gonna kind of like brush over January Is that also what the Federal Reserve believes For jobs it might be? the Federal Reserve might look and go. Yeah, you know, one hot jobs report, one hotter CPI report? Yeah, doesn't really change our forecast. That's pretty incredible. Now, of course, the Federal Reserve still believes that it's important to get inflation under control and that look, there are obviously still Embers that are keeping inflation hot.

We know that it's becoming easier to hire people. Chipotle Starbucks Uber Lyft Right, There's more availability of workers. More availability of workers with a similar amount of demand means lower pricing, lower pricing pressures, lower inflationary pressures, right? Although we did just have retail sales come in ridiculously hot for January Yet another report that maybe the Federal respond to and say yeah, it's January that's what you get in January I Was surprised by that. I was surprised that the Federal Reserve was so sort of.

uh, how should I say this passive about the January jobs and January CPI reports? That's interesting. In fact, Varkan went as far as saying eh, you know, I've got until March 22nd to decide what my projections are going to be for the terminal Fed funds raid or otherwise. And since I have until January to or sorry until March 22nd, I'm actually going to be getting another inflation report and another uh Pce report and maybe even another retail sales report by then. Anyway, I'll get another Employment Cost Index report, right? We're going to get a lot more data.

another labor report. Still going to get a lot of data before the next Fed meeting on March 22nd, which is still five weeks away from today. So here you have the FED Kind of like a few High reports. Doesn't change anything for us.

Oh, it means it doesn't change anything Maybe necessarily to the substantial better side. It's not like all of a sudden they're coming out. We win. Let's reduce rates, but you do have a fed that's kind of like, yeah, whatever.

Kind of expected that. That's really interesting. Lori Logan Came out with sort of of a scripted speech talking about how we may need to raise rates higher than a previously thought. If this sort of data continues.

this is more along the lines of what you would expect, right? You would expect the FED to say look, I mean maybe if the next reports are hot as well and now it's getting a little harder. Well, then maybe maybe instead of a terminal rate of five to five and a quarter percent, we need to be like five and a quarter to five and a half or five and a half to five point seven five, right? That's the potential Again, right now, the curves are showing a Fed term rate. uh, sitting somewhere around. uh, that, uh, that 5.26 level.

Those are the terminal expectations now. and we when we look at World interest rate probabilities. Uh, we are. Yeah, five for that.

that aligns with about the 5.26 as well. And then you expected a pause as soon as July Now originally Markets started pricing at a pause potentially as soon as March that's been delayed to July. Okay, fine. Then we got a little bit of info from Mr Williams So Mr Williams says hey, you know what Uh, we actually think the unemployment rate isn't going to be as bad as we originally thought it was.

We originally thought unemployment might go up to four and a half to five percent, but now we actually think unemployment is only going to go to potentially four to four and a half percent. In other words, they moved from the upper four percent unemployment range to the lower four percent range. and if they continue on that Trend unemployment might not actually ever even hit four percent, which is kind of wild and Fed Williams is suggesting this. He's implying that they're going to reduce their unemployment forecasts even in the face of these hot reports, which these hot reports you would think would imply the Fed's going to hike more and stay higher for longer, which would induce a recession which would lead to more unemployment.

But even after these hot reports, the Fed's like Yeah We actually think we'll end up with less unemployment. Which is a way of saying we think the odds of a soft Landing are improving. Oh, Fed Williams did give us some red flags. He suggested that the two red flags we Face are European resilience that is more demand from Europe leading to potentially inflationary pressures thanks to the warmer winter that we had and less energy pressures.

but also the Chinese reopening. But then again, if you've been watching my Channel at all for the last week, you already know that we're not seeing indications that the Chinese reopening is going to create a boom in inflation. The Chinese aren't really buying uh, and spending the way you would think in other words, spending like Americans and blowing everything. They're way more moderated in their spending.

They have one twelfth of the spending saved up or savings excess savings saved up than we did after our reopening. so we had about six thousand dollars. They have about 500 per person. Uh, we're seeing actually, commodity projections go down because people are buying less goods and spending more on travel and entertainment in China which you would expect.

But also, you're not expecting to see the kind of good spending that would really create inflation in China. Certainly, if anything, it would just be more localized rather than exported to the United States or creating some kind of supply chain crisis which we don't expect. we're not seeing those early signs of. So in other words, Williams is suggesting.

yeah, look, supply chain issues are still elevated, but they're coming down and declines in Commodities and goods are already what we're seeing. Obviously, we need to stay higher for longer to make sure we can get those core Services down. But there's the impression now, especially with people like Muhammad Alerian suggesting that we can avert a recession and Muhammad thinks we're going to probably end up living with like three to four percent inflation and the FED will adjust. Now, most people like Ken Rogoff from the Uh Harvard from Harvard he's a former IMF Chief Economist now he's a professor of red Harvard He thinks we're going to end up getting higher for longer to potentially as high as six percent rates, and that we're going to end up resetting higher than two percent.

Uh, it's unlikely that we'll get to two percent, but it's also unlikely the Fed's going to change their two percent. Target Still though, nobody talks about fate, which is flexible average inflation targeting where the Federal Reserve could be okay with three percent for a period of time on the path to two percent. So they might just say look if it takes until 2030 to get to two percent. Whatever, that's okay, we'll slowly reduce rates on that trajectory.

So these responses from the Federal Reserve were really interesting to me. and I think it's because they're seeing some of these really important charts. One of the first charts that's really important to look at is to look at Liz Young she's over from Sofi and I think she shared a really good chart she wrote this. We know from the last CPI report that Shelter contributed to half of all of the inflation that we saw in the last CPI report.

And if you look right next to me here, uh, right here there we go. That yellow bar represents how much inflation uh is being created from shelter. You can see it's actually most of it. and we actually expect that yellow Bar is going to flip to below the line in the second half of this year and that's going to drag your black line of overall inflation potentially negative.

That's going to be a big, big big deal, and we see that coming in addition to seeing that coming. which is probably why the Fed's actually kind of responding dovish in the face of these hard Uh numbers is we do see that Core Services Inflation Well, it's still high on a month over month basis. It's certainly moderated from what we've seen. This is still in line with about 3.5 percent annualized inflation, but if you look at point Two, nine percent on a month over month basis, certainly a lot lower than what we had seen in December March through June The first half of 2022 had core like Services inflation that was in excess of 0.4.5 percent.

So pretty large bars and those are finally setting settling down. So really critical. Uh response here from the Federal Reserve and I actually am very impressed with the Fed's response in that look I Think they're convinced. As we said earlier we: I Don't think that drawing Powell wants to be known as the guy who forces a recession and creates as his words were a quote tremendous amount of human hardship.

He doesn't want to see people lose their jobs, he just wants inflation to come down. And if he could end up proving that inflation ended up being transitory after a few years and sticks to soft Landing By preventing a recession and a lot of job loss, this guy will go down in history and people will make statues out of them. And I think he's already plotting where he wants his statue because he I think he thinks we can actually pull this off now I Know there's a lot of doubt and skepticism in the markets, but I think that's roughly the direction we seem to be on right now. Barring other really bad news, things are looking up, Not down.

It's pretty good.