Is 3% the New 2%? The Fed’s K-Shaped Economy Dilemma

Just minutes away from the last read on inflation before the Fed's next meeting. Jim Bianco of Bianco Research writing, "The problem with inflation is not it is going to go up. The problem with inflation is it's stuck in the three range. We cannot disinflate back to two unless the economy collapses." Jim joins us now for more. Jim, good morning. >> Good morning. >> Yeah. Begs the question how far this Fed's willing to take things. >> You know, that's a good question because the message of the last 2 years, the Fed was cutting rates from September 2014 to September 2016 and 10-year yields went up 130 basis points. That's the first time in 50 years a rate cut cycle produced higher long-term rates. I think the message from the market was, "You're too easy. We need a little bit tighter policy." And now they're finding another reason in October to not raise rates again. And if they're not careful and they start going down the John Williams path, "Oh, maybe we'll do one more at the end of the year and we're done." You might see a repeat of the last 2 years that the market is trying to tell you rates are too low. >> Is John Williams aligned with the Fed chair? >> John Williams has become kind of the de facto, you know, forward guidance because Kevin Warsh is not giving it right now. And um is he aligned? That's a good question. He's dove. He's the probably one of the biggest doves that there is. So, he's got a a view that may or may not be aligned with him. >> He's in line with the implied forecast and the median dot projected by the Federal Reserve. He doesn't seem to be aligned with the language that the Fed chair was using. And that's what was curious about the last meeting. And Mike McKee picked up on the little bit of the disconnect between what they're saying, a timely return to target, and what they're forecasting, which is not a timely return to target or a big effort with interest rates. Do you see the language winning out or do you see the actual action implied by the dots being where things eventually land? >> Well, I mean that might have been the last dots, too. Let's not forget that. >> after that, yeah. >> Yeah, because of the task force might do away with it. But I I think that the problem is is that it's I would probably go on the side of the dots of what they're what they're saying because the whole idea about forward guidance is the chairman is not giving us forward guidance. The chairman is not giving us an overview of where he thinks things should go. So, like I said, in that vacuum, you're going to get more people like Vice Chairman Jefferson and New York Fed President Williams taking When was the last time they moved markets, especially Jefferson? >> did have a time. He's just outsourcing policy to other people, outsourcing communication to them. >> Right. And we don't know if we're if we got the right spokesman for him just yet. So, we're kind of in this this, you know, mist. And by the way, we're doing exactly what he doesn't want us to do. We're 14 minutes away from the mid number and we're all waiting for the number to decide what they're going to do, and that's exactly what the chairman doesn't want us to be doing. >> Well, that begs the question. Is this almost sanctioned by Warsh or you think internally there's frustration because of how much the other officials are speaking? >> We don't know, but the assumption is that when John Williams or Jefferson come out with a speech that it was somehow a reviewed and approved so that there's some kind of de facto sanction to it. That's the assumption we're making. Now, Warsh is free to tell us that there's that's their opinion, but not necessarily his opinion, but then that begs the question, what is your opinion? And so, yes, we're really kind of floundering around trying to figure out who's the person we're supposed to listen to and what's the message they're trying to give us. >> don't think about ever getting back to 2% which Barkin says it's not a unicorn? >> Right. I think the biggest problem with 2% was what made it work from 2010 to 2020 was uh China joined the WTO in 2001 and gave us constant goods deflation. We don't have that anymore. We have We have deglobalization, we have tariffs, we have wars, we have chronic supply chain problems. Goods prices aren't going to go back to being deflationary like they were in the past. It's a policy choice. So, when the new San Francisco Fed says a lot of the inflation that we've seen in goods has been at the foot of tariffs caused by tariffs, yes, they're right, but that's an intentional choice that we've made. We're not going to go, oh, tariffs caused inflation, we're going to undo the tariffs. We want those tariffs because we are under the guise that we're protecting jobs. >> So, you're fighting the White House. Is that another way of framing things? >> Yeah, I mean, to the extent that the Well, the White House has got a different agenda here. Their agenda is jobs. Their agenda is working-class jobs. That was kind of what propelled Trump into the White House in 2016. And if they're going to push on the working-class jobs argument, then we're going to keep goods inflation sticky, not high, but it's high enough that that's why I said we can't disinflate. It's not that we're stuck at three about to go to four, that would only happen if we Middle East got worse, but we're stuck at three and we can't get back down to two because services inflation isn't going down, and we can't really disinflate goods because we don't want to take the foot off the gas right now when it comes to allowing China to bring in goods into from to the United States. >> Inflation is a choice, the words of the new Fed chair. Does he choose to tolerate 3%? >> Uh if he does, he's going to have a big political problem because we have a K-shaped economy and the bottom half of the K is really suffering from 3% inflation. And if he says three is the new two, he's saying to 50% of the public, "Good luck. I I can't help you with the prices." >> told us that three is the new two? Just through their actions over the last 5 years. >> Through their actions, yes, but not at least through their official statements. They still say at every speech that 2% is their target. >> Can they change the goal post before they hit two? >> Um I don't think they can cuz like I said, I think it's a political decision. I think it comes all the way back to in May of '22, the one meeting that Powell had with President Biden on the couch. President Biden points at Powell and effectively says, "America, that's the guy who's going to take care of inflation." And the Fed has adopted that as their mandate. And so if they go to three, they're kind of admitting that they can't take care of what their primary mission is. >> Let's just say he didn't take care of inflation. >> No. >> Lots of people got super excited about the work that Powell did. I think he's off right in some really difficult moments. He accommodated the fiscal expansion through QE. That wasn't great. Tolerated above target inflation, not fantastic. Delayed doing anything about it to wait to see it to get confirmed for a second term, not great either. All those things. And then this time around, cutting interest rates with little evidence we were sufficiently restrictive. And as for the disinflation we did see, bailed out by really sloppy immigration policy by the previous administration. Where's the bailout coming from this time? >> I don't know at this point because services inflation, you're right. Um the immigration, shutting the border has kept wages a little sticky on the lower end. It has kept services inflation above well above 3%, and that's why without minus half a percent in goods, you're not getting back to 2% inflation. So, you know, this is the world we live in. The The good news is it's a 3% inflation world. It's not three on its way to five. But the bad news is get used to this because I would argue that that would mean that the neutral funds rate is 4.5 and that most interest rates should start with a five, and most of them do, which is why I've become constructive on the bond market. We've finally got to the right level. >> Jim likes bonds. Jim Bianco of Bianco Research. Inflation data drops next