As Inflation Collapses, the Fed Clings to The Big Lie

This morning’s October PCE data matches CPI two weeks ago: inflation has rolled over. Yet the Fed, in speeches such as Waller’s on Tuesday, continues to fear that strong economic growth represents an ongoing inflation risk. But inflation has collapsed from last year’s peak (when growth was slow) to today’s near-target readings (while growth is fast). This has been the pattern since the trough of the 2020 recession, and over the life of the data of more than 60 years. The theory the Fed treats as an axiom not only doesn’t show up in the data, the opposite does. As the Fed continues to promote this Big Lie, they haven’t acted on it – pausing across the last two FOMC meetings amidst surging Q3-2023 growth. They are using a self-evidently false narrative to keep markets on tenterhooks. But October inflation data points to deflation, and November’s data reported before the December FOMC will confirm it. By March, deflation will be in evidence, and the Fed’s narrative will have to change to preserve credibility. The first rate cut comes in March.