MacroResearchBoard

Even More Asset Inflation Ahead – September 23, 2024

The Fed started its rate-cutting cycle with a bang last week, even as signs of above-potential economic growth persisted and asset inflation is flourishing. While the BoJ is headed in the opposite direction, it is only normalizing policy at a glacial pace, and the aggregate DM policy rate is expected to meaningfully decline over the next 6-12 months.

It was notable from a longer-term perspective that the FOMC last week still slightly lifted its estimate of the equilibrium rate. However, our research has highlighted that it is still far too low, as is the Fed’s long-run nominal GDP growth projection, as we concluded in a just-published report. In due course, both will be revised (a lot) higher, and bond bulls are in for a rude awakening. For now, however, the Fed is strongly pro-growth and will stoke even more asset inflation.

Meanwhile, last week we updated the MRB CPI Diffusion Indexes for each of the major economies. These indicators measure which items in the CPI basket are above the central banks’ targets, and our indexes signaled that “above target” inflation is still fairly broad based, which is consistent with our view that DM inflation will remain higher than it was last decade. A return to a low and stable inflation world is far from assured.