Fed Watch: Supercore, Super Hawkish

Discussion

As discussed ad nauseam on these pages, Mary Daly’s post-July CPI report interview revealed precisely what the Fed means when it says that it will not begin cutting interest rates until it is “confident” inflation is on its way back to 2% on a sustained basis:

YoY “supercore” PCE inflation falling to its pre-pandemic average.

If you take the Fed literally, the pre-pandemic average going back to 1960 is 4.11%. But it’s more likely they’re looking at something like the pre-pandemic average since the Great Moderation started circa 1990, which is 2.74%.

As of today’s July PCE report YoY supercore PCE inflation ticked up to 4.69%, just 27 bps below its cycle high of 4.96% printed in November 2021. If you just sit back and eyeball the history of the supercore time series, it becomes abundantly clear just what exactly the Fed needs to do in order to wring inflation out of the economy once and for all. It’s not pretty, especially given the projected reacceleration in supercore over the next 6 months, per Goldman.

It’s not a coincidence that Bostic revealed the Fed’s new R* estimate the day of this supercore reacceleration.