Inflation is cooling, but the progress is exaggerated: Economist

San Francisco Federal Reserve President Mary Daly has suggested in an interview with the Wall Street Journal that cutting rates might be necessary to prevent overtightening as the central bank makes progress in fighting inflation.

Santandar Chief U.S. Economist Stephen Stanley joins Yahoo Finance Live to break down how the market is responding to the Fedspeak.

Stanley believes that the markets “went to town” after the December FOMC meeting, saying investors heard “the green light to pricing in more cuts.”

Looking ahead to 2024, that though inflation is falling, the decent may be “a little bit exaggerated in terms of the progress we’re getting in an underlying basis.” Stanley thinks there is a risk that the Fed cuts too early and that inflation reaccelerates as a result, causing the Fed to have to tight again, a scenario he shrugs off as “not the end of the world.”

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

JULIE HYMAN: Joining us now is Stephen Stanley, Santandar chief US economist. Good to see you, Stephen. Thanks for coming in. So what do we– you know, there’s always what the Fed Chair says and then sort of other Fed speak managing around it. How do we cut through that and figure out what they intend?

STEPHEN STANLEY: Right. Well, I’m not sure the message is totally inconsistent, I just think the markets really kind of took what Powell said last Wednesday and went to town with it. I mean, the projections showed three rate cuts next year. The markets already had well over that priced in and they just went and priced more. I think what they heard was green light to pricing in more cuts. And what you’re hearing now going back is literally very similar to what Powell said but the tone is a little bit different.

JOSH LIPTON: And Stephen, when you think next year and you look at inflation, what does the trajectory of inflation look like to you?

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STEPHEN STANLEY: Yeah. Well, it’s coming down, but in my view, what we’re seeing now is a little bit exaggerated in terms of the progress that we’re getting on an underlying basis because there are certain categories which tend to be volatile and they’ve all been falling lately, right? So it kind of exaggerates the degree of progress that we’re seeing.

So I don’t want to say that the disinflation is going to stall out, but I think it’s going to slow down as we head into the early part of 2024. So I’m not quite in such a hurry as the markets are to think about early 2024 rate cuts.

JULIE HYMAN: So what do you think that is the biggest risk going into next year? It’s that– is it that the Fed sort of cuts too early, or is it that they cut too late at this point?

STEPHEN STANLEY: Oh, that’s tough. I mean, Powell has talked about how those risks are starting to even out I think. You heard all of last year Powell just pounding the table that we’re not going to let inflation get out of hand. We’re going to get it back to 2% no matter what. And now all of a sudden, as inflation is coming down, what we’re hearing is starting to sound more dovish.

So it almost sounds to me like the Fed is ready to declare victory and get on with it and start cutting rates. Everybody loves it when the Fed’s cutting rates, right? It’s not so popular when they’re raising. And so I do think it feels like there’s some risk that perhaps they go a little bit early, and then inflation re-accelerates. But I mean, look, that’s an easy fix, right? I mean, if they cut a little bit and then they have to go back and tighten again, it’s not the end of the world.

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