What to Know Before FOMC: Powell's Use of "Disinflation" Causes Risk Asset Rally, Slowing Rapid Rate-Hiking Cycle

The Consumer Price Index (CPI) is a widely recognized measure of inflation, which tracks the price of a basket of goods and services typically purchased by households. The Federal Open Market Committee (FOMC) meetings, on the other hand, are held by the Federal Reserve, which is responsible for monetary policy decisions in the United States. These meetings have a significant impact on the financial markets, particularly in the wake of the COVID-19 pandemic.

Elevated inflation is usually seen as a sign that the economy is overheating, which can lead to the Fed making more hawkish comments. The higher the inflation, the more likely it is that the Fed will raise interest rates to try to put a lid on it. This can cause market volatility, particularly in risk assets.

However, the latest FOMC presser saw a change in this pattern, with Fed Chairman Jerome Powell using the term "disinflation" repeatedly. This led to a rally in risk assets, with the markets interpreting this as a signal that the Fed would pause the rapid rate-hiking cycle.

One area where changes in the economy are being felt is in traditional lagging indicators such as housing. In the past, housing prices would take 12-18 months to reflect changes in prices due to factors such as low liquidity and high transaction costs. However, with the advent of technology and the increasing number of buyers, including real estate investment trusts (REITs), investors, and iBuyers, this time lag may be decreasing.

The availability of information and inflation expectations are also important factors to consider. The free flow of information allows consumers to quickly become aware of changes in prices, which can then influence their behavior. For example, if consumers expect inflation to rise, they may demand higher wages from their employers, leading to further increases in prices. This creates a self-fulfilling cycle, where inflation expectations drive behavior, which in turn affects inflation.

Finally, it's worth noting that a change in the reporting method occurred before the print. This could have implications for how the market reacts to the CPI print and the FOMC meetings in the future. It's important to keep an eye on these developments, as they can have a significant impact on the financial markets.