Fed Board member reminds us "inflation" isn't just CPI. And it got us the 50-point cut

I thought it was interesting to see Federal Reserve Governor Christopher Waller explain why he ultimately went along with most of the FOMC to have a larger interest rate cut this week.

Financial media had all but written off the chances of a ½ point cut when the Consumer Price Index for August said core inflation (which takes out food and energy prices) was up by 0.3%. But Waller took note of the Producer Price Index (PPI) report that came out the next day, which told him that businesses weren’t facing any inflationary pressures at all.

….Waller said the producer-price index data for August, released the next day, suggested that the core measure of the Fed’s preferred personal-consumption expenditures index will run under a 1.8% annual rate over the last four months.

“Everybody was focused on core CPI, but what they weren’t, really, was looking at how that CPI report and the next day’s PPI report were going to feed into total core PCE inflation,” Waller said in an interview with CNBC.

The two reports showed him that “inflation is softening much faster than I thought it was going to. And that is what put me over the edge to say, look, 50 is the right thing to do,” he said.

Waller added that economic growth is fine, the labor market is solid and the half-point cut was not done out of a concern that the Fed was “falling behind the curve” and seeing the economy weakening too much as it kept interest rates too high.

In fact, “what’s got me concerned is inflation is running softer than I thought,” Waller said, noting that he doesn’t want inflation to get too low.

Sounds odd, but if prices and revenues go lower, it means there is little incentive for businesses to expand, and likely will lead to worker layoffs.

If you need further explanation, let’s go back to Paul Krugman’s history lesson about the last great era of deflated prices in this country.

Another thought for people complaining that inflation may be down, but prices are still high: over the past century, only one president has presided over a significant fall in consumer prices. His name was Herbert Hoover. pic.twitter.com/QpiWBpXQje

— Paul Krugman (@paulkrugman) September 16, 2024

And let me re-up my take from late last week, where I said the tame PPI data as well as a report showing import prices had dropped meant there weren't any economic reasons to bump up inflation any time soon. It makes me glad that Fed Chair Waller actually looked at the reality instead of caving to Trump trash, and did the right thing with a 50-point rate cut that’ll soothe some of the pain American consumers have had due to these excessive interest rates.