Wage growth contributes to inflation but it's not the source, says Nationwide's Kathy Bostjancic

Kathy, I want to turn to you because I don't really understand Vostick's point about how he would even see the need to not cut rates in a downturn. I mean, if there's evidence that wages, for instance, are high because the labor market is so tight, do we think they wouldn't come down in a bad recession? Hey, Kelly. Happy to be with you. Well, I think this time is different. Normally after pausing, soon after, the Fed is traditionally cutting rates. And that's usually because we are in a recession or heading into one. I think this time is different because inflation is so elevated and sticky.

And wage growth, we've talked about this before, wage growth isn't really the main reason it went up, but it helps to keep it elevated. So I do think this time is different. The key is seeing inflation slow. If they see that meaningfully and their confidence is going eventually back to 2%, then they can cut rates. I mean, I guess I would take issue with the idea that inflation is sticky or elevated because we don't know yet. We've already seen the CPI retrace almost perfectly a third of its increase. We've seen M2, which was way hot, go way down.

The near-term forward spread, Michael Dardo was writing about this the other day. The Fed itself has said it has some predictive power. It was positive 200, now it's negative 200. It seems like this is going, we're not in a situation where inflation is going to stay high and sticky. I mean, break-evens are telling, maybe only the consumer expectations, but it would make sense those would kind of be delayed. So I just wish Bostic would give more evidence of why he thinks that there will be a case for keeping rates high even as the economy starts to weaken. Well, I think that, I guess we would take a different view in saying it's not clear that inflation is going to decline swiftly.

I think it's going to continue to be on a gradual descent. And it's particularly when you look at the core services number that we all look at, the super core services, and particularly look at transportation services, excluding airfare, you're seeing a lot of still rapid increases, car repairs, which we look at very closely, and maintenance is up almost, it's 17% running around 20% really. So that's a real problem. And that is really related in part to the lack of supply for new cars and also used cars. And that isn't proved, but still far from back to normal. That may actually take until 2025 to get back into better supply and demand balance. So I think the cautious view, little hopspires, that's where we would be as well.

But I guess, Steve, I would say it makes sense that it would take till 2025 because it took us 16 months to get to 9.1% CPI inflation. And it takes a long time. It happens with the lag, right? So we can say inflation is not going to come down till 2025. And that's still consistent with us being able to cut rates considerably. The neutral rate keeps dropping right now. So arguably policy has tightened even without them doing anything further.

Yes, that's true. But it's not going to come down on its own, Kelly. I think it's the idea at the Federal Reserve that, and you've heard them talk about the history of these things quite a bit, which is that in the past when they've kind of taken their foot off the break, inflation has come back. And so they're definitely concerned about that. I do want to underscore a bit of a warning from Austin Gulesby, which was kind of, it kind of said it, laughing and a little joking, but it's kind of serious. He pointed out that SVB had, as part of its outlook in its interest rate stance on its portfolio, the idea that the Fed would cut and you see what happened to SVB. And inside of that is a little bit of a warning of don't fight the Fed.

Take the Fed very seriously when it says it's going to maintain a high rate until inflation comes down. You know, the market has this bias in it for cuts. It's got 75 basis points built in this year. It's got cuts as soon as September. And I keep hearing that's not on and the market has that wrong. And even Gulesby, who as you correctly pointed out is maybe one of the more dovish guys out there saying, you know what, you'd be making a mistake if you bet the farm on it. Right.

And you know, obviously, Kathy, we have the Senior Loan Officer Survey. I mean, that's the Fed's own survey. It just, you know, there doesn't seem to be any emphasis at all on leading indicators here. And I think it's fine to say, look, they're pointing one way, but we, you know, time will tell. The future is never certain. But they, I don't just see a lot of discussion about that at all. I mean, what would you say the message is from the loan officer survey in terms of what the economy is going to look like in two or three quarters time? Yeah, it's definitely tightening.

I mean, it was tightening before the SVB and other bank failures. It maybe didn't, the share, the number didn't rise as much as some people thought. But the cost of funding went up, right? The spread relative to banks funding cost. So there is a significant tightening coming on. And yeah, we don't know the degree. I think that's why they're going to pause. I don't think they're going to raise rates any further.

But they really want to see inflation come down. And as Steve said, they saw the 1970s. They don't want to repeat that. And unfortunately, I think they're going to err on the side of more constrained, slower economy. And these leading indicators are going to watch them, but they're going to really want to see the whites of the eyes of inflation slowing before they even take the restrictiveness out of policy.

cnbc, business, news, finance, investing, the exchange, stocks, economy, politics, breaking news, money, Wall Street, kelly evans, newsroom