Fed Leaders Hope To Avoid Repeating The Mistakes Of The 1970s

The Treasury market repriced in the first quarter to better align with Fed guidance. Many market participants and economists consider the historically elusive soft landing — in which the Fed successfully brings down inflation to its 2% target while avoiding a recession — still a likely outcome.

Will it actually happen?

The jury is out, and inflation will have the largest say in all of this. Year-over-year measures of core inflation have come down notably from the peaks of 5%-7% in 2022 but remain well above 2%. At the same time, the Fed’s other mandate, full employment, remains at a satisfactory level, affording policymakers greater patience in pivoting to a more accommodative position.

Some shorter-term measures of inflation have drifted higher in recent months and are likely causing consternation for Fed leaders. The Atlanta Fed produces a sticky-price CPI metric, which tracks 21 underlying components (out of 45 total) that tend to be less volatile over time. Exhibit 1 observes the three-month annualized change in this metric. After reaching a cycle high of 7.5% in June 2022, the index fell to 3.6% last July. However, it has risen during the past seven months to 5% in the most recent February reading.

If you are a Fed leader watching this trend while the unemployment rate is holding near a 50-year low, are you in a hurry to cut rates? The likely answer is no, which most have conveyed in recent speeches and the March 20 FOMC meeting.

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Jason Haley joined ALM First in 2008 and is the firm’s chief investment officer. He heads ALM First’s Investment Management Group (IMG), which is responsible for leading the investment process and investment theme development. Haley also oversees all capital markets activities, including portfolio management, trading, market research and commentary, and execution of hedging and funding strategies for the firm’s depository clients. He holds an MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.