Did January Inflation Numbers Spark Market Overreaction? 'It's Not That Big Of A Deal,' Says Former CME Group Chief Economist

Tuesday’s consumer price inflation data disappointed equity market investors who were still — despite the Federal Reserve’s insistence otherwise — hoping for the first rate cut in March.

“Jerome Powell already said he wasn’t going to cut rates in March. I think the problem was the markets didn’t believe him. They believe him now — that’s what came through in Tuesday’s market reaction,” said Bluford Putnam, former chief economist at CME Group, during an appearance on Benzinga’s PreMarket Prep on Wednesday.

“The number was a little hotter than I expected. But there’s a decent amount of volatility in the monthly numbers. I don’t see anything really different going on,” he added.

While the year-over-year numbers improved a little, it was the rise — by one-tenth of a percentage point — in the month-over month numbers that surprised the markets.

Indeed, on Tuesday, the S&P 500 index fell by 1.4%, while the NASDAQ lost 1.8%. The exchange traded funds that track these indexes, the SPDR S&P 500 ETF SPY and the Invesco QQQ Trust QQQ fell by similar amounts.

How Will Fed React To Inflation Data?

Putnam believes the Fed will wait until at least June — possibly July — to start cutting rates, he doesn’t think it would have anything to do with just one month’s inflation data. It’s more about Fed confidence.

“If you look at the annual number and you take out shelter, you’ve been under 2% for around six or seven months — and you’re still there. This number didn’t change on Tuesday,” he said.

“The Fed wants to see a few more months of data because it needs to gain confidence.”

He explained that because the Fed was slow to start raising rates, it was seen as policy mistake in hindsight. And now that it looks increasingly like a recession will be avoided, the Fed doesn’t want to make a mistake by cutting too soon and possibly rekindling the fires of inflation.

Putnam said: “If a recession were to develop they’d have to cut rapidly. But if it doesn’t develop, it buys the Fed time, and it really doesn’t want to make a mistake. It would rather be late, because it doesn’t feel urgency here, and I wouldn’t argue with that.”

He added: “It’s not that big of deal to see one-tenth of a percentage point higher in the CPI monthly data. If you’re focusing on that, you’re not paying attention to the volatility of the data. It’s like asking a weatherman to get everything right.”

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Disconnect Between Inflation And Economy

So, why does the Fed act like it’s so far away from its 2% inflation target, yet still talk about cutting rates?

“The PCE core rate — which is the inflation reading preferred by the Fed — is at 2% and it’s been there on a six-month basis for all of one month. The next reading on that comes out at the end of the month, so it could easily tick up one-tenth of a percentage point too,” said Putnam.

“What we saw in the markets on Tuesday following the CPI data, just reminded us of how important rates are to the markets. But rates aren’t that important to the economy,” he noted. “The economy is dancing to a very different tune than the S&P 500 or NASDAQ.”

“What the markets have to consider is, does it really matter whether rates go up or down a quarter point or not, and instead focus on corporate earnings, because the Fed is going to keep the main rate above the rate of inflation,” Putnam added.

Thus, we are at a transition period for the stock market, Putnam believes.

“We’ve got to learn not to be quite so skittish about a small rise in inflation and look at which industries are going to deliver on earnings in the coming years — for example, is artificial intelligence going to disrupt more than any other sectors?

“I think we’re about to emerge into a much more earnings-based conversation, which I will welcome.”

Regional Banks And The Commercial Real Estate Crisis

While Putnam believes the markets, going into the inflation report, were looking for a reason to sell off so investors could take some profit off the table, he thinks regional banks in the big cities with large exposures to commercial real estate loans are in big trouble.

“I can’t believe there are still people who didn’t know there was a problem with commercial real estate — that email’s been out there,” he said.

But is this a financial crisis moment?

“Those regional banks outside the big cities, they’ll turn over their loan portfolios, and they’re not going to have much credit risk, they’re going to be fine — not great, their earnings are going to suffer — but we’re not talking about systematic risk here,” he concluded.

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