CME Group's Blu Putnam On Navigating The Tides Of Inflation: Why He's More Optimistic Than The Fed

As we traverse the murky waters of global economic changes, it’s always good to have some experienced navigators on board. One such person is Blu Putnam, chief economist at CME Group.

In an interview Tuesday on the "PreMarket Prep Plus" show with Joel Elconin, Putnam shared his insights on the economic scenario, inflation and market reactions. Here’s a deeper dive into what he has to say.

Related Link: Fed Is Focused On 2% Inflation Goal Despite June Pause In Interest Rate Hikes, Powell Tells Congress

The Slow Descent of Inflation: In the last year, inflation has been a hot topic. According to Putnam, headline inflation, which was at a staggering 9% in June 2022, has halved to a rate of 4%. He characterizes this inflation as “sticky,” meaning it is declining, but at a slow pace.

The major contributing factor to core inflation, Putnam told Elconin, is shelter, which constitutes about 40% of the core statistic.

Putnam expressed skepticism about the practice of selectively removing items from the Consumer Price Index to manipulate inflation numbers.

He highlighted the concept of “owner equivalent rent,” wherein an increase in house prices and mortgages is akin to raising rent on oneself, which seems rather abstract.

Real rents are on the rise, but they tend to increase slowly due to the staggered nature of lease agreements.

Putnam's Outlook Brighter Than The Fed: Putnam indicated he is more optimistic about the progress made in curbing inflation than the Federal Reserve. The long-term inflation rate is likely to settle above the Fed’s 2% target, possibly between 3% and 3.5%, he said.

The trend points toward slightly higher inflation rates than in the past, unless a deep recession alters this course, the economist said. 

When the Federal Reserve came out with its recent statements, there was talk about whether it was a “hawkish pause.”

Federal Reserve Chair Jerome Powell appeared hawkish when discussing core inflation, but less so when talking about other data, Putnam said. He emphasized the lagging impact of monetary policy, suggesting the effects of the Federal Reserve’s actions might not be immediately visible.

According to Blu, the economy is now less sensitive to interest rate changes than it was a few decades ago, primarily because financial institutions have learned to manage interest rate risks.

He also cited artificial intelligence as a labor-saving technology that could support long-term profit margins.

Putnam further noted that companies have been doing a better job of maintaining profit margins than anticipated, which is a positive sign for equity prices. The stock market is influenced by a variety of factors, not just the actions of the Federal Reserve, he said. 

The Housing Market: Putnam and Elconin also touched on the status of the housing market. Homebuilders such as Lennar Corporation LEN are benefitting from a lack in the supply of used housing, which stands in the face of the common intuition that when interest rates rise, the homebuilding sector falls, Putnam said.

The Fed Funds Rate, Debt Serviceability: In the interview, Putnam suggested the federal funds rate could remain above the core inflation rate for an extended period.

A period of zero rates, like the one experienced from 2008 to 2020, had its costs and did not significantly benefit the economy, he said.

Regarding the ability of the U.S. to service its debt at elevated rate levels, he acknowledged that interest expenses are a rapidly growing component of the federal budget. Yet Putnam said he government can afford to service the debt, albeit with constraints on fiscal policy.

The Last Word: Putnam’s insights provide a nuanced perspective on the economic landscape. With inflation taking its time to come down and an economy that is showing signs of resilience, it’s clear there are multiple factors at play. For investors, traders and policymakers alike, understanding these dynamics is essential for making informed decisions.
Watch the full interview below: