Inflation data reinforces need for Fed to hike by 100 bps, says former Trump economist

Joe LaVorgna argues the Fed needs to raise rates by at least 100 basis points to combat rising inflation, which is moving toward 4%. He believes the economy is doing okay but faces an inflation shock from supply chain disruptions (post-Iran attack) and AI/data center energy demand. The bond market will initially suffer but stabilize with Fed communication.

explicit

implicit

explicit

implicit

explicit

SMBC Americas 7.0
Commercial Bank
Joe Lavorgna 9.0

Inflation data reinforces need for Fed to hike by 100 bps, says former Trump economist

dxy

The dollar is high but not excessively high.

metals

Supply chain disruptions and inflation shock affecting multiple commodities including helium and nitrogen, suggesting broader commodity price pressures.

ndx

Equity averages are at all-time highs while Fed needs to hike 100bp, which would tighten financial conditions and pressure equities.

rut

Small caps are more sensitive to interest rate hikes and tighter financial conditions, which LaVorgna is explicitly calling for.

wti

You've got this inflation shock... not just energy costs, but fertilizer, nitrogen, helium... supply chain disruption... likely to continue to push prices higher.

yields

The curve will bear flatten, so your short rates will move higher than long rates. Long rates maybe you could push back to 475, 480.

Core PCE rose at 3.3% annual rate in April, near three-year high.

Melissa
Joe LaVorgna

Fed needs to hike at least 100 basis points because real interest rates have collapsed by that amount since before the Iran attack.

Equity averages are at all-time highs, credit spreads are tight, dollar is high but not excessively, financial conditions are not tightening, and inflation is moving toward 4% on a 3-6 month basis.
If Fed stands pat for next couple of meetings, would that be a policy mistake?

Melissa
Joe LaVorgna

They could wait short-term because market-based inflation expectations are contained and wage growth hasn't accelerated, but if either changes, pressure to hike by September will be tremendous.

Kevin Warsh's supply-side argument is legitimate, but if economy grows well and inflation moves further from target, why wouldn't you hike?
What happens to the bond market under these circumstances?

Guy
Joe LaVorgna

Bond market will suffer initially, curve will bear flatten, 10-year could push to 4.75-4.80%, but won't go to 5%.

Fed will telegraph well, market will do reasonably okay. Big rally only when Fed is done or reverses course to ease.
Joe LaVorgna

This is not just demand-pull or cost-push inflation, but a supply chain disruption similar to post-COVID, affecting energy, fertilizer, nitrogen, helium.

Was in disinflationary boom camp before Iran attack. Now inflation shock from supply chain fragility plus AI/data center energy buildout pushing energy costs higher.

SignalTube

markets at a glance