The Week Ahead: Not My Dot Plot

Dominique and Viraj open by reviewing the week's major economic developments. The core CPI came in below expectations, revealing a decoupling from headline inflation driven by energy prices and postal surcharges offsetting declines in discretionary and goods categories. This suggests the economy lacks broad-based inflationary pressure, with household income struggling to keep pace with inflation rather than evidence of strong demand.

Rental inflation shows signs of moderating despite last month's statistical uptick. Rental vacancies are rising above pre-pandemic levels, and market rent indices (particularly Zillow) are slowing below CPI and PCE measures, suggesting continued disinflation in housing. Supercore services also decelerated significantly from 45 basis points to 27 basis points, indicating limited pass-through from energy shocks.

Chip prices represent an important supply shock discussed during PPI analysis. After a decade of disinflation, Moore's Law constraints and AI investment surges lifted chip prices, driving consumer electronics inflation. However, recent months show small price declines, possibly reflecting bottlenecks in AI capital expenditure impacting consumption volumes. The hosts note this dynamic warrants continued monitoring.

The labor market narrative centers on employment growth driven by labor supply rather than demand. Dominique explains that lighter immigration enforcement (following high-profile incidents with ICE arrests) has brought workers back to the labor force after they withdrew out of fear last year. This supply-driven recovery mirrors 2022-2023 dynamics but under worse conditions: job-finding rates are at recession levels, and the economy is less able to absorb new entrants. Real wages have turned negative year-over-year despite continued nominal job growth.

Historically, contractions in real consumer income have preceded recessions in all periods except 2022's reopening dynamics. The risk is that continued labor supply increases could eventually raise unemployment rather than employment. Dominique notes it could take several more months to see NFP readings around 200 thousand as displaced workers return.

Looking ahead to the Fed meeting, Dominique expects policy to remain on hold with a statement shift from easing bias to neutral stance. While the new Chair Walsh has ambitious plans (balance sheet reduction, communication reforms, culture change away from spurious precision), his margin for maneuver is limited. The dot plot (Summary of Economic Projections) will likely show divergence: a median indicating no change this year, but potentially a few hawkish dots projecting rate hikes. Unlike the consensus-based statement, the dot plot captures individual true beliefs.

Dominique anticipates no easing in 2024 with possible cuts in subsequent years. The discussion touches on Walsh's constraints as a new chair seeking consensus among diverse governors (from doves like Williams to hawks like Schmidt). Dominique expects him to forge closer relationships with strong economists like Jefferson (Vice Chair) and potentially Bullard (St. Louis Fed President) who might be persuaded through economic argumentation.

Regarding timing for potential Fed hiking, Dominique suggests September's FOMC will provide clarity on whether sustained employment growth justifies tightening. A Q4 move is more plausible than nearer-term action, though this hinges on data. The discussion concludes with retail sales as a key consumption indicator for the coming week.