MNI INTERVIEW: Fed Must Do More To Get On 2% Price Path-ISM

The Fed must keep raising interest rates to put inflation on the path to its 2% target, according to Timothy Fiore of the Institute for Supply Management, whose factory price index has risen 12 percentage points over the last two months.

Fiore's concern comes even with the US central bank already lifting the fed funds rate 450 basis points in the last year to a range of 4.5% to 4.75%. "Is that enough to get the 2% inflation target? I don't think so," Fiore told MNI on Wednesday. Fed officials are signaling more rate rises and a longer pause, while ex-Fed policymakers expect even higher interest rates. (See: MNI INTERVIEW: Fed Could Hike Rates More Than Expected-Hoenig)

"Given that we're not having large scale layoffs and demand is coming back, it raises the question of whether you want to get inflation over with right away and shorten that cycle and make it really painful or do we want to bring it down over a longer period of time," he said. "It looks like we're going to be living with it, with interest rates that are maybe still marginally accommodative and are not restrictive."

The ISM manufacturing index contracted a fourth straight month in February, decreasing 0.3pp to 47.7, below Bloomberg expectations of 48.0. The prices sub-index jumped 6.9ppts to 51.3, while almost 25% reported higher prices compared with 13% in November. Readings above 50 indicate expansion.

ROAD TO RECOVERY

"Companies still feel that they can pass whatever price increases they took in the last couple of years and what sellers are looking for today," Fiore said.

The Fed's efforts to bring supply and demand into balance and regain price stability also look challenged as the ISM report shows manufacturing indicators on a better footing. "If you ignore the inflation piece this is a good report," Fiore said.

The ISM measure of new orders pulled back from the lowest in more than two years, increasing 4.5ppts to 47.0. China's reopening contributed to more new export orders, Fiore said.

The employment index fell 1.5ppts to 49.1 but continued to hover around the 50-threshold between expansion and contraction. Survey respondents noted they aren't actively looking to lower headcount, a sign the labor market remains tight at a time when unemployment is hovering around record lows.

LUMPINESS

The quits rate at 13% is also the lowest since January 2022 when ISM began tracking the number at 33%, Fiore said.

"If you are a demand advocate, this is a strong report," he said. "If you are an advocate for tamping down inflation, getting to that 2%, this is really not supportive of that," Fiore said, suggesting some in the industry see the path of inflation around 4%.

"Indications in some of the foundational commodities are that prices are going up again," he added. New York Fed President John Williams last week pointed to work at his bank to say goods prices may not decline as quickly as some hope.

Fiore noted stronger inflation pressures may add to more volatile growth this year. "There are indications from the panelists that maybe this lumpiness will now carry into the second half of the year," he said.