(RPT)MNI INTERVIEW: Fed Must Do More Or Accept Long Path To 2%

(Story first published on May 1) The Fed must keep raising interest rates to put inflation on track to meet its 2% target within a reasonable timeframe or accept a much longer path to its goal that could include stagnation in the manufacturing sector, according to Timothy Fiore of the Institute for Supply Management.

"If they want this to go on for three or four years then they can continue what they are doing. If they want to get this over with inside of two years, then you've probably got to step it up," Fiore said of inflation reaching the Fed's 2% target. "It depends on their timing."

Fiore, chair of the ISM Manufacturing Business Survey Committee, said this may not be positive for manufacturers. "This almost supports a stagnation prediction with prices growing and demand declining."

Fed officials are signaling one more rate rise this week to a range of 5% to 5.25%, the highest since 2007. (See: MNI INTERVIEW: Fed To Resume Hikes Later If Inflation Lingers) After that, most market participants expect a pause and, not long after, the start of rate cuts -- even though Fed officials have pushed hard against that possibility.

PRICE OUTLOOK

The ISM manufacturing index contracted a sixth straight month in April, but increased 0.8pp to 47.1, above Bloomberg expectations of 46.8. The ISM measure of new orders increased 1.4ppts to 45.7.

Without seasonal factors the PMI would have "been close to 49," Fiore said, continuing to expect the headline number in a range of 47 to 51 in the months ahead. Survey respondents however were split on the outlook, with one group seeing declines in new orders needed to get inventories back to proper levels and a roughly equal number of panelists looking for “continuing near-term demand declines.”

Fiore said his survey has not received any comments about SVB's failure and recent banking turmoil impacting businesses today.

The ISM measure of prices jumped 4.0ppts to 53.2, while over 26% reported higher prices compared with 18% in January. Readings above 50 indicate expansion. "I don't know that it's an up and down thing. I think the steel prices are probably there to stay for a while," he said.

"Companies have been able to pass price increases through," Fiore said. "From an inflation standpoint, that's not good."

"The Fed is not on a path to its 2% target. We're probably 25% above what our pricing structure was pre pandemic and that's a huge amount and we're not going to get that 25% back unless we have a really serious recession. So I don't think this supports the concept that a soft landing is a good thing."

LATER REBOUND

The employment index rebounded 3.3ppts to 50.2, and Fiore said the labor market appears to have stabilized. The quits rate is the lowest since ISM began recording in July 2021, with 8% in April, down from 15% in March.

Manufacturers are "trying to hold on to a key group of people in preparation for future demand coming back. The estimate from late last year was it would show up in the second half of the year but now it looks like it is closer to the beginning of the fourth quarter," he said.