The Fed’s Inflation Projections Make No Sense: Fundstrat

  • Inflation needs to “explode” this month to meet the Fed’s expectations, which is why their estimates “make no sense,” Fundstrat said.
  • The research firm estimated that December inflation projections were likely 60-basis-points too high.
  • That could have been spurred by a cyberattack, which led the Fed to make their projections on outdated information.

The Fed’s inflation projections make no sense, and central bankers could have been misled by a cyberattack ahead of the December Federal Open Markets Committee meeting, according to Fundstrat’s head of research Tom Lee.

Lee pointed to Fed Chair Powell’s remarks after last week’s FOMC meeting, where the head central banker said inflation was still well-above the Fed’s 2% target and signaled interest rates would remain high through all of next year – something that has already weighed heavily on inventory in 2022.

Fears of a still-hawkish Fed in 2023 spurred another investor sell-off after Powell’s speech – but the Fed’s expectation of higher core inflation this year “mathematically makes no sense,” Lee said in a note on Monday. Fed officials projected core PCE inflation, which strips out volatile food and energy prices, to average 4.8% in 2022. That comes after a closely-related measure of price growth clocked in below economists’ expectations in November, with core CPI inflation coming in at 6.0% year-over-year.

To meet the Fed’s projection, core PCE inflation would need to “explode” by 75-basis-points over the next month, Lee said. He estimated the Fed’s December inflation expectations were likely 60-basis-points too high.

That could have been due to a ransomware attack last week on Haver Analytics, which sends real-time economic data out to Wall Street firms. Due to the attack, the analytics firm stopped updating data on Tuesday, the same day the November inflation report rolled out and Fed officials were scheduled to meet on their next policy move.

“Any firm using Haver data would not get the November CPI,” Lee said, suggesting that could have misled officials and caused them to overestimate inflation. “This is a critical data point that feeds into a forecast.”

Other market commentators have warned of the dangers of the Fed overestimating inflation, as that could result in another policy mistake and plunge the US into a recession. Lee previously pointed to falling home prices and other cooling inflation indicators, which could mean the Fed won’t need to be as restrictive in monetary policy as they’ve suggested. The 2-year Treasury yield is also below the Fed funds rate target of 4.25% and 4.5%. That suggests the bond market thinks the Fed’s inflation forecasts are too high, and a pause or cut in rates could be in the cards next year.

A pullback in Fed policy could spur another stock rally, with Lee estimating a 20% rise in equities next year while Wall Street banks warn of a 20% drop. Lee has been bullish on stocks amid the central bank’s aggressive rate hikes, and previously predicted the S&P 500 would touch an all-time high by the end of the year, a 24% jump from current levels.

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