Inflation continues its recent path. Core CPI is at 2.1%. Shelter inflation is up to 3.6%. Core CPI inflation excluding shelter is down to 1.1% and the trend is down. Core CPI inflation excluding shelter over the past 9 months has only risen by 0.4%.
The Fed, as expected, raised rates this week. Tim Duy notes that the rate hike came with a bit of a hawkish shift.
At this point, I am cautiously maintaining my expectation that the most likely outcome here is a decline in long term interest rates and some economic contraction, but my certainty is not high, and this could play out over months. If long term rates continue to rise sharply over the next month, then I will be less confident of that outcome.
Here is a graph of the Eurodollar yield curve. Rates had actually started to rise somewhat before the election. Then, there was a jump right after the election. Since then, the curve has risen somewhat. With the rate hike, the short end of the curve moved up, but the long end didn't move much.
With interest on reserves as the new monetary tool, and with the Fed balance sheet more or less stationary, a reaction from the banks of sending more reserves to the Fed would have to come at the expense of currency, if I am thinking about this correctly, so shrinking currency would be a bearish signal, I think.
This new monetary regime seems strange to me. Normally, with the Fed Funds rate target, the Fed would basically be in control of the quantity of currency and reserves, and they could make daily adjustments to purchases around the target. But, it seems like now they have created a situation where the quantity of reserves and currency will be a market function. If they aren't planning on buying and selling treasury bills like they used to, it seems like quantities could shift quite a bit while we wait on the next FOMC meeting. But, I'm not an expert on the nuts and bolts, here, so please tell me if I am incorrect. Maybe it would take more than a few basis points for things to get out of whack, but do we know how elastic the supply of excess reserves is?