On Powell’s Shocking Testimony

Powell says there is almost no disinflation in PCE core services ex-housing. The BEA does not publish a core services index, nor a core services index ex-housing, so markets and the public can’t track what he says is the critical indicator for policy. He is wrong that core services represent more than half of expenditures. Based on CPI data, something like his preferred index peaked in September following the June peak in overall inflation, which since then has come down sharply. Based on all this he threatens to speed up the pace of rate hikes, and admits this will harm the labor market. Markets have built in an extra half rate hike in response, but are still expecting one cut by a year from now. Given the evident strength of the economy this is not likely a recession-triggering development. At this point, following five weeks of strong data, the expectations curve finally believes the Fed. Risks are now to the dove-side, which is to say that the worst is discounted.