February 11, 2025

QuickTakes

Eyeing The CPI

Federal Reserve Chair Jerome Powell's congressional testimony today confirmed that the Fed remains in a dovish pause mode. The FOMC is in no hurry to lower the federal funds rate (FFR). That's even though many of the committee's participants believe that the FFR remains relatively restrictive. So when they finally move again, it will most likely be to lower rather than to raise the FFR. That's the Fed's current message. Tomorrow's January CPI isn't likely to change it anytime soon.

The possibility that annual price resets might boost monthly consumer inflation is widely known. So a cooler headline CPI—something below 0.3% and closer to 0.2% m/m—could boost stock and bond prices. But that doesn't mean it would change the FOMC's posture, especially with so much uncertainty regarding the eventual impact of tariffs on inflation.

Headline CPI has been warming up since mid-2024 (chart). That's in part due to rising energy prices, which have recently stopped climbing. However, it's also notable that inflation tended to pick up in Q1 of each of the last two years. So even a cooler-than-expected January number does not mean CPI inflation will remain cool in February as well.

After several years of focusing on the CPI, the PPI might merit more attention in coming months. Any price increases to front-run tariffs may show up in January's PPI, which is out on Thursday. Both the PPI and CPI feed into the Fed's preferred PCED measure of consumer prices. Considering that goods prices have been deflating for over a year and services inflation has been slow to fall, any pickup in import prices could boost overall inflation quickly (chart).

For now, we are in the none-and-done camp with respect to FFR cuts this year. Economic growth remains solid and might be improving. Consider some recent data from small businesses and banks:

(1) NFIB Small Business Survey. January's survey of small business owners mostly showed that optimism, hiring intentions, and sales expectations remain high. But so does uncertainty, which makes sense with lots of trade dynamics in flux. Interestingly, the difficulty in obtaining credit plummeted to its lowest level since the pandemic, when interest rates were much lower (chart).

(2) Bank lending. In fact, banks are starting to lend again, even to commercial & industrial (C&I) companies (chart). This is important because C&I loans tend to be to manufacturing and construction. This points to a nascent manufacturing recovery and a continuation/acceleration of the overall economic expansion.

(3) SLOOS. Intentions to lend were evident in the Q1 Senior Loan Officer Opinion Survey (SLOOS). The costs of funding for small, medium, and large firms all are falling (chart). These are signs typically seen early in an economic cycle, and they support our growing confidence in the Roaring 2020s scenario.

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