Will The Fed Get Their Soft Landing? | Jeff Snider & Bob Elliott

Episode Summary

Executive Summary: The discussion centers on a December CPI report that both guests see as unsurprising and more a confirmation of recent disinflation in goods than a decisive signal on underlying inflation. Bob Elliott argues inflation is shifting toward services and wages, while Jeff Snyder says the CPI mostly reflects supply-shock reversion and that markets are already pricing a recession and significant Fed cuts.

Main Topics: CPI report: disinflation in goods, unresolved services inflation (Priority: 5/5): Both guests say the CPI release largely confirmed trends already in place: falling goods inflation, weaker energy, and no major surprise. The key unresolved issue is whether services and wage-driven inflation remain sticky. Labor market strength vs. hidden weakness (Priority: 5/5): Bob emphasizes resilient payrolls and low claims, arguing labor tightness can keep wage growth elevated. Jeff counters with weak household-survey employment, fewer full-time jobs, reduced hours, and low participation as signs of recessionary weakness. Inflation as supply shock vs. embedded inflation (Priority: 4/5): Jeff frames the last two years as a supply-demand imbalance and reversion, not enduring inflation. Bob agrees some inflation was transitory but says wage growth and services inflation could remain elevated enough to matter for policy. Yield curve and market pricing of recession (Priority: 5/5): Jeff argues futures and yield curves are signaling a high probability of recession and rate cuts, while Bob agrees inversions are powerful recession indicators but stresses their timing is highly uncertain. Fed policy, terminal rates, and uncertainty (Priority: 4/5): The guests debate how high the Fed will hike and how effective rate hikes are. Bob says the terminal rate may exceed market pricing but the economy’s sensitivity is unclear; Jeff says policymakers are behind the curve and will recognize recession only after data deteriorates sharply. Consumer spending, credit, and savings support (Priority: 4/5): Bob sees spending holding up because nominal income growth and household savings still support demand. Jeff sees credit growth and elevated C&I loans as late-cycle caution signs, not strength.

Key Arguments: The CPI report did not meaningfully change the macro outlook; it mainly confirmed disinflation already visible in goods and energy. Recent inflation has been heavily driven by supply shocks and base effects, especially in energy and used cars, rather than a pure demand-driven spiral. Underlying services inflation, especially services ex-housing and labor-intensive services, remains the key unresolved component. Wage growth matters because elevated labor tightness can sustain higher nominal income growth and keep services inflation sticky. The labor market is ambiguous: payroll and claims data look resilient, but household survey, full-time employment, participation, and hours worked look weaker. Market pricing in eurodollar futures and yield curves implies a high probability of recession and future Fed rate cuts. Yield curve inversions are historically reliable recession indicators, but the lead time is highly variable, limiting their usefulness for precise timing. Bank lending and C&I loan growth are interpreted as late-cycle behavior, with companies borrowing defensively ahead of tighter credit conditions. Consumer spending is being supported by income growth and savings, but that support may fade over the next few months. The Fed and economists lack precise visibility into the economy’s sensitivity to rate hikes in this cycle because debt, refinancing, and balance-sheet effects differ from prior cycles.

Data Points: CPI MoM: -0.1% - Headline CPI including food and energy declined month over month on the release date. CPI YoY: 6.5% - Headline CPI year-over-year inflation rate cited at the start of the discussion. Core CPI YoY: 5.7% - Core inflation excluding food and energy. Gas prices: declined - Main reason headline CPI was negative month over month. Core goods / disinflation impulse: large and expected - Bob said used autos, commodities, and energy were producing a substantial disinflationary impulse. Services ex-housing / wage-driven inflation: roughly 4% to 5% - Bob described a stripped-down services measure as flat in this range. Unemployment rate: 3.5% - Used to illustrate tight labor market conditions. Wage growth for job stayers: about 5.5% YoY - Jack cited this as evidence of strong wage gains. Wage growth for job switchers: about 8% YoY - Jack cited this as evidence of especially strong labor demand for movers. Initial claims: secularly low for six months - Bob argued claims data show little labor-market deterioration. Continuing claims: secularly low for six months - Also used by Bob as evidence of resilience. Full-time jobs change: 300,000 fewer than March - Jeff cited household-survey full-time jobs falling versus March levels. Establishment survey employment: barely more than February 2020 - Jeff argued job creation has been weak relative to the pre-pandemic baseline. Job openings (JOLTS): about 10.5 million - Jeff said openings remain absurdly high despite other softening indicators. Terminal Fed funds rate (market pricing): just shy of 5% - Discussed as the likely peak rate in spring/early summer 2023. Fed funds rate by Dec 2024 (market pricing): about 3% - Implied around 200 bps or roughly eight cuts from peak. Yield curve inversion lead time: 9 to 28 months - Bob said inversion timing before recession varies widely. 2006 yield curve inversion to recession: 23 months - Example given by Jack of long lag between inversion and recession. Mastercard holiday spending growth: 7.6% - Spending growth in 2022 versus 2021. E-commerce spending growth: 10.6% - Year-over-year holiday e-commerce growth versus 2021. Consumer credit support to GDP: a few tenths of a percent - Bob estimated credit-supported spending was a small share of GDP growth. C&I loans and leases: well above 2022/2021/2019/2018 levels - Shown as a late-cycle sign of companies seeking liquidity. Eurodollar futures inversion: inverted in Dec 2021 - Jeff used this as an early market signal of future weakness. Germany bund curve inversion: started in Sep 2022 - Jeff highlighted this as unusual and recessionary. Real personal income excluding transfer receipts: slightly down YoY - Jeff said this important NBER indicator has been weak for over a year.

Pivotal Quotes: "Whatever you thought yesterday, you think today, because there's really nothing in the CPI report that changed anyone's mind about anything." — Jeff Snyder: On the limited informational value of the December CPI release "The real question will become... what's going on with like real, like actual services inflation." — Bob Elliott: On where the next inflation battleground lies after goods disinflation "The market says, you're going to hike rates for a little while longer, but then you're going to start cutting, whether you want to or not." — Jeff Snyder: On yield curves and futures pricing recession and rate cuts

Implications: Listeners should expect continued debate over whether inflation is fading cleanly or merely shifting from goods to services. Markets, labor data, and credit trends suggest recession risk remains elevated even if official data lag.