Finally, Some Relief on Inflation

Thursday provided no resolutions of the congressional races that will determine the balance of power in Washington next year, and local officials say we’ll have to wait a bit longer until we get final vote tallies in key states including Nevada, Arizona and Colorado. In the meantime, we’re wondering how far the newly announced U.S. men’s soccer team can go in the World Cup, which kicks off later this month.  

We’ll be observing Veterans Day tomorrow and back in your inbox on Monday.

Finally, Some Relief on Inflation – but the Fed’s Battle Isn’t Over Yet

Prices are still rising in the U.S., but they rose less in October than economists had expected, boosting hopes that the Federal Reserve’s campaign against inflation is starting to show results — and that the central bank can achieve the “soft landing” for the economy it’s been targeting.

The Consumer Price Index rose 0.4% in October on a monthly basis and 7.7% on an annual basis, the Bureau of Labor Statistics said Thursday. Analysts had expected to see an annual inflation rate closer to 8%, and the lower number — the lowest since January — came as a pleasant surprise.

The core price index, which ignores volatile food and energy prices, rose 0.3% on a monthly basis and 6.3% on an annual basis. The monthly increase was half the size of that in September, and was driven largely by increases in the cost of housing, with the shelter index rising by 6.9% over the last 12 months.

“This inflation report was a nice surprise,” Edward Moya, a senior analyst at the investment firm Oanda, said in a research note. “Inflation has been very slow to come down, but this report gives up hope that this deceleration with pricing pressures might bring back hopes of a soft landing.”

What about the Fed? The stock market rallied powerfully after the inflation numbers came out, as investors weighed the odds that the report would allow the Fed to begin easing up in its war on inflation. Many analysts think the report makes it more likely that the central bank will increase rates by 50 basis points at its next meeting in December — a substantial increase, but smaller than the 75-point increases approved at the last four meetings.

“Today’s CPI report shows inflation is moving in the right direction,” said Eric Merlis, managing director at Citizens Bank. “The report provides ammunition for the Fed to begin pricing in sub-75-basis-point tightenings. This will be a welcome development for the Fed.”

Joe Brusuelas, chief economist at RSM, said, “While I expect the Fed to lift the policy rate by 50 basis points at its December meeting, the supersize rate hikes are likely now in the rearview mirror.”

Yes, but: Although there was plenty of celebration of the better-than-expected inflation numbers, some analysts advised caution. Noting that the three-month average of core inflation was still running at 5.8%, well above the Fed’s target of 2%, Bloomberg’s Jonathan Levin said that “optimists would do well to take a step back and temper their enthusiasm.”

Diane Swonk, chief economist at KPMG, said there’s no reason to think the Fed is ready to pivot to a dovish stance. “The Fed will be comfortable with half percent, knowing they can go another half percent,” she said, referring to upcoming interest rate adjustments. “That’s not a big step down. They’re still tightening. It was never a pivot.”

RSM’s Brusuelas noted that the Fed will need to see more consistent results before it makes sense to talk of a pivot — and that interest rates could still move considerably higher than the current range between 3.75% and 4% before the bank is finished. “Another 2-3 months of data like that and we can start to talk about a pause in the policy path to restore price stability to ascertain the impact of past rate hikes,” he said, adding his projection that, “For now, 50 [basis points] in December & a peak of 5-5.25% in Q1'23.”

Dallas Fed President Lorie Logan affirmed that general outlook in a speech Thursday. “This morning’s CPI data were a welcome relief, but there is still a long way to go,” she said. “While I believe it may soon be appropriate to slow the pace of rate increases so we can better assess how financial and economic conditions are evolving, I also believe a slower pace should not be taken to represent easier policy.”

Quote of the Day

“The media, the corporate elites, and political establishment has all moved in unison against Donald Trump at their own peril. It’s like they want to recreate 2015-2016. Let them. We are doing it again. Buckle up.”

— An unnamed “senior adviser” to former president Donald Trump, quoted by NBC News reporter Marc Caputo Thursday. Trump is expected to announce next week another run for the Oval Office in 2024, though there are reports that some of his advisers are pushing for him to wait given the weak performance of many Republicans backed by Trump in the midterm elections.

At the same time, there appears to be a growing movement within elite conservative circles to move on from the former president and to instead promote rising GOP star Gov. Ron DeSantis, who won a sweeping reelection victory in Florida on Tuesday. The Rupert Murdoch-owned Wall Street Journal ran an editorial blaming Trump for the GOP’s poor performance this week, while The New York Post — also owned by Murdoch, who launched Fox News in 1996 — ran a cover story about “Trumpty Dumpty” having a great fall.

Still, as the quote above indicates and recent history confirms, it’s unlikely that Trump will leave the stage quietly, even if he does lose the support of Republican elites. The 45th president still commands the loyalty of a huge number of Republican voters and is expected to wage a fierce battle to maintain control of the conservative movement no matter who steps up to challenge him over the next few years.

President Joe Biden on Thursday announced that he will nominate Daniel Werfel, who served in the administrations of Presidents George W. Bush and Barack Obama, to lead the Internal Revenue Service.

Werfel has spent the last nine years at the Boston Consulting Group, according to the White House Before that, he spent 15 years in government, including as acting controller of the Office of Management and Budget under Bush and then as OMB controller and acting IRS commissioner for seven months under Obama.

Current IRS Commissioner Chuck Rettig, appointed by former President Donald Trump, will be leaving the agency when his term expires on Saturday. The administration has previously announced that Douglas O’Donnell, a deputy commissioner at the IRS, will lead the agency until a new commissioner is nominated and confirmed by the Senate. Werfel stepped into the top job at the tax agency at a sensitive time in 2013 and will be doing so again now.

“In the wake of an Inspector General report alleging various forms of mismanagement and bias in the determination of tax-exempt status for non-profit organizations, President Obama appointed Werfel to serve as Acting Commissioner of IRS in 2013,” the White House noted in its announcement. “Werfel provided immediate stability to the IRS, effectively responding to numerous Congressional investigations, successfully launching the Affordable Care Act technology that IRS was responsible for, and navigated the IRS through a multi-week government shutdown. At the end of his tenure, both the majority and minority leaders of the Senate Finance Committee publicly recognized his contribution and performance.”

If confirmed, Werfel will face some major management challenges as the IRS puts to use an infusion of $80 billion in additional funding over 10 years — money approved by Democrats that is meant to help the agency step up enforcement and crack down on tax cheats as well as improve its technology and service. That funding has been the subject of months of attacks by Republicans, who have leveled misleading claims that an army of auditors will come after middle-class taxpayers. House Republican Leader Kevin McCarthy (R-CA), who may be the next speaker, has said his party will seek to roll back the additional IRS funding, and while the chances of that may be slim, the GOP will clearly continue to closely scrutinize the IRS.

Mark Everson, who served as IRS commissioner during the Bush administration, told The Washington Post that Werfel is a good pick. “Werfel is an experienced executive who understands the service and helped out at a critical period in 2013,” he said. “He did an excellent job coming into the agency during a tough period, and so he’s very well suited for the job.”

Top Democrats also praised Werfel. “For years under a [T]rump appointee, the IRS has been mired in chaos and failure,” tweeted Rep. Bill Pascrell (D-NJ), who heads the House Ways and Means Oversight subcommittee and had called for Rettig to be fired. “The agency needs a leader who can answer the phones, get refund checks out fast, and crack down on big business tax cheats. Good move by the Biden admin.”

Senate Finance Committee Chairman Ron Wyden (D-OR) called Werfel an excellent nominee. “Danny is committed to government that works and rebuilding the IRS, with a focus on modernizing decades-old technology and improving administration. He understands that American taxpayers deserve top-rate service, and will work tirelessly to achieve that goal. He’s also committed to being a good steward of taxpayer dollars, as demonstrated by his work in 2012 to recover $4.2 billion in improper health care payments and prevent identity theft by better integrating Medicare and Social Security data.”

What’s next: “It’s unclear when the Senate might take up the nomination,” Politico reports. “There had been chatter Democrats could potentially move it during a lame-duck session of Congress, especially if Republicans pick up enough seats to control the Senate next year. But if Democrats retain the chamber — several key races are still undecided — there will be less urgency to act quickly.”