Fed keeps rate unchanged…
The U.S. central bank’s latest policy statement gave no hint that a rate cut was imminent, and indeed said the policy-setting Federal Open Market Committee “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%,” the Fed’s inflation target.
Healthcare insurance reimbursement related issues complicate the inflation picture, details below. the PCE appears lower than it really is when one accounts for these effects, and therefore inflation is probably still somewhat elevated rather than having reached the 2% target.
As gauged by the core Personal Consumption Expenditure (PCE) Price Index—the Fed’s preferred measure—inflation has stabilized at an annualized rate near the Fed’s 2 percent target for the past six months. Other readings are higher, though. Core Consumer Price Index (CPI) inflation has been running above 3 percent, and services measures near 5 percent. If underlying inflation is closer to these other figures, doves at the Fed could be making a policy error that risks creating fresh upward pressure.
There are numerous drivers of the gap between the PCE and CPI numbers, but health-care inflation plays an outsize role since the measures’ accounting methods for health costs differ in scope and size.
According to the Bureau of Economic Analysis, such differences in health-care scope alone caused 0.5 percent of the 1.1 percent total annualized difference between CPI and PCE during the fourth quarter. Adding the 0.4 percent back in changes the story meaningfully.
This stuff goes way over my head.
Especially explanations like this:
“For instance, medical care commands 8 percent of the CPI bundle but 19 percent of the PCE bundle. When speaking of core inflation, these numbers become, respectively, roughly 10 percent and 22 percent of the bundles.”
That sounds to me like roughly 20% of the Personal Consumption Expenditure index is basically medical care. Do you know many who spend 20% of their expenses on medical care? We never had anywhere near enough to claim unreimbursed medical expenses to get over the 7.5% AGI threshold to claim a deduction.
Even if it were correct in representing what consumers actually spend on health care, why would the contribution to PCE be double that of PCI?
It all sounds like a numbers soup to me that they massage to make it say anything that fits a narrative. Empirically, it feels to me like inflation is pretty much back to what it was prior to 2020.
But it’s not super encouraging to think that these “measurements” - using the term loosely here evidently - are vastly different in assumptions and makes you wonder if they’re not much more than reassuring numbers to back up a gut feeling of when to raise or lower interest rates.
They’re counting the insurance you get from your work in there, or premiums you pay that aren’t directly spent on medical expenses too.
J Powell on 60 minutes tonight
https://www.bnnbloomberg.ca/powell-tells-60-minutes-fed-is-wary-of-cutting-rates-too-soon-1.2030630
said Americans may have to wait beyond March for the central bank to cut interest rates as officials look for more economic data to confirm that inflation is headed down to 2%.
You’re likely right. That’d be the only way to get to that high a portion of expenses. Even then, it feels odd that these same premiums would be excluded from the CPI to make medical costs only 8-10% of expenses in it. These expenses are either part of the inflation people feel or they’re not. Why have numbers that vary so much between them? Isn’t the idea to get inflation numbers that mimic closely what households experience?
It’s just hard (for me) to shake the feeling that the discrepancies between all these numbers simply allow them to pick the one they prefer at any given time to support a decision.
I found interesting his comments on US fiscal path being unsustainable. Whatever people’s feeling about Powell and the Fed’s job trying to control inflation without tanking the economy, it was good to hear that stated pretty clearly. Too bad that doesn’t get more coverage. Especially when these same fiscal policies - too large stimuli during COVID on top of unpaid for tax cuts - were strongly correlated with the inflation spike we just had. In a talking-back-to-your-boss kinda way, I just could hear him saying to Congress + last 2 presidents: “Stop making my job nearly impossible with your irresponsible fiscal policies just to get elected!”
CPI came in higher than expected, both headline and core.
Jan CPI out, 0.3% vs 0.2% expected for the month. That’s ~3.7% annualized vs 2.5% expected rate. Core CPI is running at 0.4% or nearly 5% annually.
Fed comments and market reaction:
We’re slowing coming into the “higher for longer” realization. First cut was going to be March, then not March but 3 more this year in May and June to start. Now probly not May but meanwhile…
The buck stops elsewhere. Biden and his crew blame everyone else, try to spin your higher costs of living as not that bad.
odd, they were focusing on one month data when the data was good.
That’s always the way it goes doesn’t it LOL.
But the brainiac spin doctors at the WH though 
… Hard to imagine more vapid commentary: pointless appeal to corporations to pass savings to consumers; deflation at grocery stores; and complaining about shrinkflation trends. I know WH cannot control the economy much but it’s a bit too frank in admitting all they got as strategy is wishful thinking.
It seems like that’s what a lot of people want and expect (because they don’t actually understand how things work), so politicians do politician things - tell you that they hear you, it’s someone else’s fault, and they’re just as frustrated
PPI came out today, and while I dont really understand it, the market didn’t like it. Stocks fell and rate cut expectations dropped.
more along the theme of “higher for longer” or at least, no rate cuts any time particularly soon. the PPI data, just for reference
Lots of luck on developing a plan to stop this train wreck
The federal government faces an unsustainable long-term fiscal path that poses serious economic, security, and social challenges if not addressed. Our review of the nation’s fiscal health found:
Debt is projected to grow faster than the economy, reaching 200% of GDP by 2050 if revenue and spending policies are unchanged
Large budget deficits drive the growing debt, as Medicare and Social Security spending outpace revenue
Government interest spending as a share of GDP will reach an all-time high by 2030, in part due to rising interest rates
We suggested developing a plan for fiscal sustainability and identified pieces of an effective plan.
So higher 10 yr+ mortgage rates and lower home prices 
unless election policies kick in soon??
That reminds me to accelerate somewhat my Roth conversion schedule. Don’t want to see what the tax rate is going to be on my RMDs if I have to take them some time in the 2040s.
This is actually a big reason why I’ve gone all-in on Roth contributions despite high taxable income at present. Tax rates have only one direction to go given the current state of things.
Combined with the mega backdoor, only about 23% of my 401k is taxable. The rest of it is in a Roth.
After-tax 401k is better than Roth 401k, isn’t it? I’m guessing it’s not a viable option for you?
Aside from higher limit, why would after-tax 401k be better than Roth 401k? I’d think with possibility to do in-service mega backdoor, you’d want to max out Roth 401k contributions first, then contribute any extra through after-tax 401k contributions.
Also depends on what your current tax bracket is compared to your expected tax rate in retirement. If you’re currently in the 32% tax bracket, I’m not sure it’s a slam dunk unless you expect to maintain that level of income in retirement. I can see filling up the 22% or 24% brackets as I don’t imagine that being a terrible deal in the future (unless some of the tax revenues are shifted to a Federal VAT/consumption tax scheme) but it’s hard to think that my planned retirement income would be taxed at higher than 32%.
I do both. I contribute the max to the Roth, which qualifies for the company match.
I then do the after-tax 401k, and have enabled instant conversions to the Roth with Fidelity. I do that until I hit the annual cap across all three contribution types.
I do Roth 403b contributions but I wish I could do in-service distributions to Roth IRA too for after-tax contributions.
I still hesitate to do these after-tax extra contributions because I’d need to wait until I leave my employer to do these mega backdoor distributions and who knows if that option will still be available then.