Inflation flat, incomes up, spending mediocre. So why keep rates so high?

The always-important income and spending report came out on Friday, and if you have a certain point of view, there were good numbers all around.

US May PCE: Big pop in income on the month as disposable income increased 0.5% and savings rate increased to 3.9%. Spending up 0.2%, income 0.5%, & the PCEPI was flat (-0.008%) on the month & up 2.6% (2.563%) y/y while the core ex food & gas increased 0.1% (0.083) and 2.6%…

— Joseph Brusuelas (@joebrusuelas) June 28, 2024

PCE inflation came in even lower than you would have expected from the CPI/PPI earlier this month. Core PCE was up 0.08% and overall PCE actually fell 0.01%.

Core at an annual rate:

1 month: 1.0%
3 months: 2.7%
6 months: 3.2%
12 months: 2.6% pic.twitter.com/IhcYBq7RKC

— Jason Furman (@jasonfurman) June 28, 2024

That increase in savings is a good sign, for both moderate (but not crazy) spending growth, and higher income growth. However, the one down side I saw in this report is that spending was revised down for both March and April, indicating slower GDP growth than we originally thought for Q2 (although there still is growth).

Not surprising that the Boom part of Bidenomics is over after 3 years of stimulus and job growth, and record run of sub-4% unemployment. But steady growth around 2% is fine, especially if income growth continues at a good pace.

Comversely, if you're someone who was looking for signs of what Federal Reserve policymakers may be doing in the near future, you had to like the flat inflation numbers, and the long-term trend it shows as well. Core inflation has been the high 2%s for the last year, and overall PCE inflation is also only up 2.6% over the last 12 months. In fact, since January 2023, we've not had one month where overall PCE inflation has been above 0.4%, and we've had as many months of 0.0% PCE inflation as we have 0.4% (3 each).

That's a big enough sample size to me to show that the main disruptions are over in our post-COVID economy, and if our new normal is 2.6% inflation instead of 2.0%, with solid wage growth and unemployment staying low, that's not a bad thing. The biggest economic headwind is the cost of housing, and I'd argue high interest rates are a CAUSE more than a mitigation of that at this point.

So why does the Fed continue to punish everyday Americans for inflation that peaked 2 years ago? And because I don't think Fed officials are morons, I have to ask what's the real reason the Fed is refusing to lower rates, and does it relate to November's election?

Damn straight I'm going there, especially after they caved to pressure from Donald Trump and dropped Fed Funds rates in the latter half of 2019 when they were at levels less than 1% above the core rate of inflation. That was in a time when unemployment was at similar levels to what we have today, and inflation was just under 2%. If the same rules applied in 2024 (1% Fed Funds rate above core inflation), the Fed should be dropping rates by 1.5% from where they are today.

Friday's report shows we remain in a good, growing economy, but one that isn't booming with a consumer that isn't as willing to spend as much as they did in 2023. We need a Fed that understands that growth is what is endnagered right now and not one that keeps chasing ghosts of the past, and do its job in keeping the economy on the right track.