For the Fed, ‘3% is the new 2%’ when it comes to inflation

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Friday, January 13, 2023

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Inflation slowed for six-straight months in December, data from Thursday showed.

This drop in prices shows that, after all, the Federal Reserve’s interest rate hikes seem to be working.

But this tool is unlikely to be enough to reduce the rate down to levels similar to the Fed’s 2% target. At least not in terms of growing the number of investors.

At an event hosted by Wilmington Trust earlier this week at Electric Lemon – a luxury restaurant atop the Equinox Hotel in Hudson Yards, New York City – CIO Tony Roth opened the discussion in the evenings by arguing “3% is the new 2%,” referring to it. in the Fed’s stock price calculations.

“As the price goes down — and it’s going to go down, it’s already going down — it’s going to last,” Roth said.

“And it’s going to fall because of the actual decline in labor force participation and the impact on wages, it’s going to fall because of the lack of restrictions on cheap manufacturing supplies from China, and it will be stable because energy prices will not go down to the previous levels.”

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Chairman of the Board of the Federal Reserve System Jerome H. Powell attends a panel during the Central Bank Symposium at the Grand Hotel in Stockholm, Sweden, January 10, 2023. TT News Agency/Claudio Bresciani/via REUTERS ATTENTION EDITORS - THIS PHOTO WAS PROVIDED BY A THIRD PARTY.  SWEDEN DOWN.  NO EXPRESS OR IMPLIED IN SWEDEN.

Chairman of the Board of the Federal Reserve System Jerome H. Powell attends a panel during the Central Bank Symposium at the Grand Hotel in Stockholm, Sweden, January 10, 2023. TT News Agency/Claudio Bresciani/via REUTERS

The Consumer Price Index (CPI) for December released on Thursday showed that inflation rose 6.5% year-on-year and four down 0.1% on the previous month. Core CPI, which excludes food and energy, rose 5.7% over the previous year and 0.3% monthly – reflecting inflation.

The Fed currently estimates growth of 2% over the long term as measured by the annual change in the inflation rate for personal consumption expenditures.

But Wall Street increasingly sees this goal as irrelevant in a pandemic world. In a world where 3 million workers have not yet been affected by COVID-19, companies are moving factories closer to home to prevent supply disruptions, and energy prices continues to rise.

“What will happen, as we go through the year, this debate – ‘Is 3 the new 2?’ — will actually be the frontrunner,” Roth said, adding that the Fed’s decision to hold rates higher or cut rates will be more important as time goes on. the inflation rate at 4%.

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And in this view of “3% is the new 2%,” Roth is not alone.

The owner of the Hedge fund manager Bill Ackman is among the other voices of Wall Street who questioned the credibility of the 2% inflation rate of the Fed in recent months.

In December, Ackman tweeted that the goal could not be achieved without a “deep, job-destroying decline.” And during the phone call with investors a month earlier, he said that the company’s opinion is that the central bank will not achieve that goal.

Rising wages around the world, the shift to alternative energy, de-globalization, and the shift to domestic demand and production will all weigh on the Fed’s ability to reduce the price, in the opinion of Ackman, in addition to the risks of production “which was done almost all US. The CEO reconsiders supply chains abroad or far away.”

“Most of these things will be close to home, and it is very expensive to do business here,” he said.

Billionaire Leon Cooperman, chairman and founder of family firm Omega Advisors, said in a televised interview with CNBC earlier this month that if the Fed tries to hit 2% rates instead of not settling for 3% or 4%, the S&P 500 could fall. the minimum 3,000s.

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And BlackRock CEO Larry Fink shared a similar sentiment at the New York Times Dealbook Summit in New York City last month, warning that investors may have to live with rates of 3-4%. and the interest rate of 2-3% – to lead the thing. he called it a period of “malaise” for the economy.

Things to Watch Today


  • 8:30 a.m. ET: Import Price Indexmonth-on-month, December (-0.9% expected, -0.6% last month)

  • 8:30 a.m. ET: Import price index does not include fuelmonth-on-month, December (-0.3% expected, -0.3% in the previous month)

  • 8:30 a.m. ET: Import Price Indexannual, December (2.2% expected, 2.7% last month)

  • 8:30 a.m. ET: Export price indexmonthly, December (-0.7% expected, -0.3% in the previous month)

  • 8:30 a.m. ET: Export price indexannual, December (7.3% expected, 6.3% last month)

  • 10:00 a.m. ET: University of Michigan SentimentJanuary First (60.7 expectations, 59.7 preliminary reading)


  • Delta Air Lines (DAL), JPMorgan (JPM), Citigroup (C), Bank of America (BAC), BlackRock (BLK), First Republic Bank (FRC), Wells Fargo (WFC), UnitedHealth (UNH)

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