Greg Ip

1/ The founders created a democratic system that helped make America prosperous today: checks and balances that constrain arbitrary rule/confiscation, and trust in the individual as agent of his political and economic fate. Both are at risk today: wsj.com/economy/americ…

@EricWHickman This makes my point. If you think CPI is a more accurate read of inflation than PCE, there's no need to tighten.

@greg_ip Using 2.3% for inflation (Core CPI YoY minus 0.3%) would prescribe Fed Funds about 1 cut below where it is now. Alternative 1 would be 3.41% and alternative 2 would be 3.37%. Happy to send my sheet if it helps you.

Core CPI inflation is 2.6% which would normally translate, with the historical wedge, to 2.3% on core PCE inflation, more or less on the Fed's target. Instead, core PCE is north of 3%. Not saying we should substitute CPI for PCE, but we should at least use it as a check.

@fcastofthemonth I get that we don't want to extrapolate from a few outlier moves. But core CPI has generally come in soft this year (in contrast to PCE), so when outliers tend to be to the downside, maybe that is telling us something (just as when outliers on PCE are to the upside)

KW is right not to say “mission accomplished” b/c this core print was flattered by a nearly -0.2pp drag from 3 items that won’t repeat (I.e., not broad-based). Median CPI of 0.17% is moderate, though, so still warrants patience from the Fed.

5/ This is where it really helps for the Fed to communicate its reaction function. Without that, market response to data is less informative to the Fed because markets don't know what weights to assign to the Fed's two objectives.

4/ Squeezing inflation back to 2% in such circumstances can be quite costly in employment. So the Fed pledging fealty to 2% inflation is not that informative; the question is, over what time frame and at what cost in employment?

1/ Today Fed chair Kevin Warsh a) Reaffirmed commitment to 2% inflation b) dual mandate and c) no disclosure of forward guidance / reaction function. However, there are tensions between these positions brought about by today's economic circumstances.

@EricWHickman What happens if you replace PCE in your Taylor rule with CPI minus 0.3?

@greg_ip Taking the spread as it is (PCE>CPI), even if the core PCE deflator YoY% fell the same as the core CPI today, the Fed would still be about 4 hikes too loose by the Taylor Rule.

On balance sheet, Warsh says he doesn't think Fed can go back to 2006 (the era of scarce reserves). Another implicit nod to keeping the ample reserves regime.

On balance sheet, Warsh emphasizes his concerns on assets is the duration. In principle, he can get duration down (via bills only assets) while maintaining ample reserves regime.

The solution to high oil prices, the saying goes, is high oil prices. It's still true: oil prices are endogenous to Trump's reaction function. Before extrapolating the latest rise, recall that higher oil prices increase the incentive for an off ramp, which Iran also wants.

@scottlincicome 20% of what?

So much for Freedom of Navigation: "Trump Says US Will Be Reimbursed 20% Rate for Hormuz Traffic" bloomberg.com/news/articles/…

Mamdani attacks Hayek and Vance attacks Friedman a few days apart. This is how you know you have all the right enemies.

@greg_ip Here's what that chart should look like.

@greg_ip The problem with that chart is that the Taylor rules end in February and compress the Y axis to make it look like the Fed doesn't have a problem. Brought up to date, the Fed is a solid 5+ hikes below Taylor prescriptions. atlantafed.org/research-and-d…

Taylor rule and all other policy rules tracked in the Fed's monetary policy report prescribe a higher interest rate than currently. That said, the gap is comparable to 2019, and a lot smaller than in 2021-22.

"Chairman Warsh has released an undeniably impressive roster to lead his monetary policy task forces. A Bill Pulte as DNI situation this is not." --@RenMacLLC 's Neil Dutta

.@jasongay: "it appears [Trump] is turning into a sports cooler: inside MSG for the only Knicks Finals loss; at Bethpage for a Ryder Cup rout; even watching his handpicked strongman, Derrick Lewis, pummeled ... at the White House cage match. Now this." wsj.com/sports/soccer/…

My column here: wsj.com/economy/americ…

"The Democratic Socialists of America ...want to smash and expropriate, not administer and adjust. That makes full, unapologetic presidential control of the regulatory state a better fit ..." Great column by @jawillick, aligns w/my view on Scotus ending independent agencies.