Did you get the memo? It’s the inflation, stupid

Federal Reserve board chairman Jerome Powell. Picture: Julia Nikhinson / GETTY IMAGES NORTH AMERICA / Getty Images via AFP)

It’s the inflation, stupid.

Back in 1992, when Bill Clinton was running for the presidency, his idiosyncratically pugnacious campaign chief James Carville hung a sign in the campaign office – “It’s the economy, stupid”.

This was to remind everyone, including most particularly Clinton, that the economy – like Australia at the same time, the US was being battered by recession after all the boom excesses of the 1980s – was the number one, indeed the only, issue to focus on to win against the incumbent George Bush the elder.

Fast forward 30 years and every economic, business and investment commentator, along with all the advisors and indeed investors themselves, individual and institutional – in the US, in Australia and indeed around the world – need an updated sign, to keep reminding them of today’s main game.

In 2023 it would of course need be only a virtual reality “It’s the inflation, stupid”.

As I’ve been explaining, Wall St – and so our market as well – rose strongly into the new year on the expectation that the Fed would ‘pivot’: would either stop hiking rates or point to that happening, on the back of sliding inflation.

That was broadly confirmed by the Fed’s first rate decision for the year, a week ago, when Fed head Jerome Powell delivered only a 25-point hike and chose not to lecture Wall St against getting ahead of itself.

Federal Reserve board chairman Jerome Powell. Picture: Julia Nikhinson / GETTY IMAGES NORTH AMERICA / Getty Images via AFP)

But then, the rate optimism got upended overnight Friday – after the Fed’s decision – by a seemingly booming USA jobs report. Some 517,000 jobs were reported added in January.

This took ‘everyone’ by surprise – all the ‘expert’ predictions had been for less than 200,000 jobs – including Powell, who said, who admitted, it was “higher than we expected”.

Suddenly it seemed – again to all the ‘experts’ – that the Fed’s pivot was “no longer operative”, a phrase from yet an earlier presidential era, the Nixon one.

Seemingly simple and straightforward logic: if the US economy was in fact booming, the jobless rate remained at half-century lows, wages would likely be headed higher, the Fed would have to keep hiking.

Wall St wobbled and then went into a frenzy of ‘yes, no’ confusion and uncertainty. With various Fed players feeding the frenzy – the latest being the number two guy, New York Fed Bank president John Williams.

Williams said rates might have to go higher; particularly pungently, he added, they were “barely into restrictive territory”.

So the only thing – the only thing – that matters is what’s really happening to US inflation. If it’s still around 5-6 per cent, yes, a Fed rate at 4.5 per cent is “barely restrictive”. But if US inflation is really more like 2-3 per cent, Williams is wrong, dead wrong.

If the economy is booming, those rates will slow it down. But I wouldn’t take a single month’s jobs numbers – especially not one over the dodgy (for measuring) December-January period, as any sort of meaningful guide.

But even so, a strong economy and 2 per cent inflation would be a Goldilocks outcome. For Americans. For everyone. Especially with the Fed rate already at 4.5 per cent.

In short, the only thing – the only thing – that matters is whether that strong economy, if indeed there is such a strong economy, is pushing inflation up.

Not what various Fed people say, even the top two guys. Not what individual statistics might be telling us.

The next inflation number is next week - a good omen? - on Valentine’s Day.

Critically important for the next Fed rate decisions, there will be two monthly inflation numbers ahead of its next meeting.

I’ve been arguing for months, that a big fall in US inflation has been ‘hiding in plain sight”- if we get two low numbers even a myopic Fed would likely “see it”.