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As we navigate the murky waters of global economic changes, it’s always good to have some experienced navigators on board. One such navigator is Blu Putnam, Chief Economist at CME Group. In an interview on the PreMarket Prep Plus show with Joel Elconin, Putnam shared his insights on the current economic scenario, inflation, and market reactions. Here’s a deeper dive into what he had to say.

The Slow Descent of Inflation

In the past year, inflation has been a hot topic. According to Putnam, headline inflation, which was at a staggering nine percent in June 2022, has halved to a current rate of four percent. He characterized this inflation as “sticky,” meaning it is declining, but at a slow pace. The major contributing factor to core inflation, he explains, 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 (CPI) 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, however, are on the rise, but they tend to increase slowly due to the staggered nature of lease agreements.


A Brighter Outlook Than the Federal Reserve

Putnam indicated that he is more optimistic about the progress made in curbing inflation than the Federal Reserve. However, he also made a note that the long-term inflation rate is likely to settle above the Fed’s 2% target, possibly between 3% and 3.5%. According to him, the trend points towards slightly higher inflation rates than in the past, unless a deep recession alters this course.

When the Federal Reserve came out with its recent statements, there was talk about whether it was a “hawkish pause.” Putnam explained that the Federal Reserve Chair, Jerome Powell, appeared hawkish when discussing core inflation, but less so when talking about other data. He also emphasized the lagging impact of monetary policy, suggesting that 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.

Putnam and Elconin also touched on the status of the housing market. Homebuilders such as Lennar Corporation (NYSE: LEN) are currently benefitting from a lack in the supply of used housing, which stands in the face against the common intuition that when interest rates rise, the home-building sector falls.


Addressing the Federal Funds Rate and Debt Serviceability

In the interview, Putnam suggested that the federal funds rate could remain above the core inflation rate for an extended period. He opined that a period of zero rates, like the one experienced from 2008 to 2020, had its costs and did not significantly benefit the economy. 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. However, he believes that the government can afford to service the debt, albeit with constraints on fiscal policy.


In Conclusion

Blu 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 that there are multiple factors at play. For investors, traders and policy-makers alike, understanding these dynamics is essential for making informed decisions. While Putnam’s optimism regarding inflation is reassuring, it is important to approach the economic situation with vigilance. The global economy is in uncharted waters, and as such, constant monitoring and adaptation are required.

In this dynamic scenario, insights from veterans like Blu Putnam become invaluable for investors and individuals alike. His thoughts on the Federal Reserve’s stance, the decline in inflation, and the resilience of the economy offer a more comprehensive understanding of the economic environment. As we sail through these tides, may this knowledge serve as a compass guiding us through the currents and eddies of the markets.