Fed's inflation target has long and 'bumpy road' ahead: Economist
While the Federal Reserve's target inflation rate remains at 2%, rising auto prices and energy costs present the biggest challenges to cooling inflation in the short term. Annex Wealth Management Chief Economist Brian Jacobsen joins Yahoo Finance to explain why it may be a long time until the Fed finally achieves its target rate, especially if a "protracted" government shutdown becomes a reality.
Jacobsen explains why "it's really consumer spending" — which has slowed in the third quarter of 2023 — that will be the biggest "pain" in realizing the Fed's ultimate inflation goal.
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Video Transcript
RACHELLE AKUFFO: Looking ahead, we have the Fed's preferred inflation gauge PCE inflation to look forward to on Friday. Now our next guest says we have a long and winding road to the Fed's 2% inflation target. Joining me now is Brian Jacobsen, Annex Wealth Management Chief Economist and Strategist. Thank you for joining me in this morning. So talk about this long and winding road and how it's going to look at this point, given that markets they seem to now be somewhat at least believing the Fed's trajectory from here.
BRIAN JACOBSEN: Yeah, I think that the Fed-- or the markets have really bought into the idea that the Fed is going to hold rates above where they are for the foreseeable future because inflation is going to head towards 2%. Now the problem is that's probably not until 2026 that we get there. So between here and there, it is likely to be a bumpy road. We know that energy prices have already gone up very materially. In the last inflation report, the energy component was up 5.6% for that single month. Now when we look ahead, it's likely not going to continue to rise at that pace, but there is an upward bend towards that type of inflation, that source of inflation.
So you've got energy, possibly auto costs also going up. As far as the UAW strike, what does that do in terms of supply chains, the price of used cars and new cars? So over the next few months, we are likely to see some almost reversal of the improvement that we've seen so far on the inflation front. But we do believe we will get to 2% inflation. It's just there might be a little bit of pain to get there.
RACHELLE AKUFFO: And, Brian, speaking of pain, obviously, you have a looming government shutdown. Some analysts believe that could perhaps take a rate hike off the table depending on how deep it goes. What are your-- what is your estimation of perhaps how the government shutdown might perhaps lessen the load for the Fed going forward?
BRIAN JACOBSEN: I think that it's not necessarily the government shutdown because in the typical one that would only shave off like fractions of a percentage point of GDP growth because oftentimes what happens is people still get paid, they still consume, but then services might get disrupted only in a protracted shutdown. We believe that it is going to be a more protracted shutdown that we see this time unlike the ones that just lasted over a weekend or even just over a week. So this could be a multi week process, in which case, the economic pain could just very slowly build.
Our bigger concern here at Annex on our investment committee isn't necessarily the government shutdown, it is that consumers seem to be moving from what we call profligacy, so kind of spending a little bit more than what they otherwise would to austerity where they're already seeing interest costs rising, pulling back on non-essentials. And so it's really that consumer trajectory going from the profligacy to austerity that has us on high alert for. Maybe the peak of economic activity was in the third quarter. And now it's going to be a slow slide a little bit lower for the next few quarters here.
