PIMCO's Tiffany Wilding Talks CPI, Rate Hike Debate

Tiffany Wilding · PIMCO

Waller, not Chair Warsh, now sets the Fed's signalling; a 50bp December hike is on the table.

Wilding says Chair Warsh has stepped back from guidance on the framework or forward path, so Governor Christopher Waller has stepped in to provide a guiding light on what the central bank may do. Waller's pre-CPI warning that a 50 basis point hike in December is on the table is the signal she is watching. She expects other Fed officials to echo his message, so the next thing to watch is whether their language stays consistent with his and how they read the report.

“chair [Warsh] has stepped back from any kind of guidance... that Christopher Waller has sort of stepped in and, you know, provided a bit of a guiding light on what the central bank may do.”at 4:00

Tiffany Wilding · PIMCO

The Fed is not behind the curve as it was in 2022; policy is near Taylor-rule prescriptions.

Wilding argues the Fed is not behind the curve as it was in 2022. In 2022 the early inflation was more transitory and then broadened, and the simple Taylor rules implied policy was far below where it should have been. Now the Fed's own Taylor rules are not far from what monetary policy rules would prescribe. She therefore sees the current move as an adjustment, while still finding it concerning that inflation is broadening.

“we don't think the Federal Reserve is sort of behind the curve like what it looked like in 2022. ... if we look now, at, you know, the Fed's own Taylor rules, for example, they're not that far away from what monetary policy rules would suggest they should be”at 4:48

Tiffany Wilding · PIMCO

October CPI shows inflation broadening beyond energy pass-through, which is disappointing for the Fed.

Wilding argues the October CPI report shows inflation broadening out. She attributes the first-round effects to higher energy costs passing through into diesel and shipping costs, but says core goods prices were unanimously strong and services ex-shelter and recreation services were accelerating, with public transportation increases beyond airfares offsetting energy costs. She concludes this is a print that is disappointing for a central bank that wants price-level adjustments not to spread into broader inflationary pressure.

“It does look like we are seeing a broadening out of inflation. Now we think that it's related to passing through of higher energy costs, diesel, shipping costs, things like that. If you look all across core goods prices, they were just unanimously strong.”at 2:34

Tiffany Wilding · PIMCO

Higher prices weigh on some consumers; K-shaped economy persists as high earners benefit from equity gains.

Wilding says higher prices are weighing on the consumer, at least certain consumers. She points to the so-called K-shaped economy, in which higher-income households are doing well because they have enjoyed several years of equity market gains. She says this dynamic is still in place, which means the consumer picture is split rather than uniformly weakening.

“higher prices are certainly, you know, weighing on the consumer, at least certain consumers. We've been talking about the so called k shaped economy for quite some time where you have, you know, higher income that's doing quite well because they are enjoying the equity market gains”at 6:00

Tiffany Wilding · PIMCO

US demand is incredibly strong despite shocks, so the Fed wants to keep financial conditions tight.

Wilding argues US demand is incredibly strong despite the energy shock, tariffs and other headwinds, with consumption and AI-related investment both holding up. Combined with inflation that looks stickier than the Fed would like, she says the central bank is concerned about an economy that looks strong on final domestic demand. That is why the Fed wants to keep financial conditions broadly tight and avoid easing to reduce the risk that inflationary pressures broaden out.

“I think what we're seeing is just that demand in The US economy, you know, is incredibly strong. ... you have an economy that that looks incredibly strong from a demand perspective, final domestic demand, and you have inflation that looks, stickier than they would like here.”at 6:29

Tiffany Wilding · PIMCO

AI-related investment has been very strong but should cool from Q3's breakneck pace in Q4 and Q1.

Wilding cites investment tied to the AI buildout as one of the pillars of incredibly strong US demand, alongside consumption. She expects some of this investment to cool from the breakneck pace seen in the third quarter, with that cooling happening in the fourth quarter and the first quarter of next year.

“and also, obviously, investment, which is related to the AI build out that's been incredibly strong. Now, we think some of it cools from the the kind of breakneck pace that we saw in the third quarter”at 6:42