The Fed needs more time to determine appropriate rate path, says BofA's Michael Gapen

Now that inline PCE report, well, it may not have moved markets too much, but was there anything in there that could move the needle on the rate cut timeline? That's where we begin this hour. Let's bring in Bleakley Financial groups chief investment officer, CNBC contributor Peter Buchvar, KPM GS chief economist, Diane Swonk, Bank of America's head of US economics, Michael Gapin, and of course, our very own Steve Liesman. Full house here and we appreciate everybody's time. See, why don't you just quickly kick things off? What jumped out to you? Well, I like the real spending being up 03. That was a good number. Incomes are doing well. I the big number is the .1. The big question is does it continue? the Fed is not modeling .1. I'm just actually crunching the number now to get to the 28 that the Fed is forecasting. It's got to be at least on the core. It's got to be they're looking at .2. So the Fed is actually, I don't know if they're more realistic or more pessimistic. Capital Economics seems to think they're more pessimistic than is warranted right now. What jumps out at me is that the core PCE is running 2/10 below right now where the Fed thinks it's going to be by the end of the year. Wow. So we've already, in that sense, we've already hit target. Michael Gapen, should we expect to stay there? I would be really surprised if point ones each month was the new trend. I do think something closer to .2 was probably where we are. Certainly there's good news in this report today just on the numbers overall, as as Steve had had mentioned, there's no question about that. But there were upward revisions to prior months. So it's a, it's a bit trickier of a picture. We, we're now saying we had four months of bad inflation followed by one good month of inflation. So I we can debate on what the new trend is. Either way, I think it means the Fed needs more time to, to see where we where we are. So I don't think point ones is where we are, but obviously we'll see going forward. Interesting. That's a good point about the revisions. Diane, would you say that that's a change worth noting or would you stick with the more emergent disinflationary story? Well, I think there's a wider path to a cut in September, although we're still only at one cut for the year and that's because there are a lot of special factors. The good news is it looks like the shelter costs likely overstated because of an overweight by New York in a poor survey response for the owner's equivalent rent. That's a lot into the weeds, but we should be getting some good news on that in this back half the year, the year over year comparisons in the back half the year are much harder as we get past June. So that's one of the hurdles. But I think more importantly is you really need to see continued goods deflation, drop in goods prices, which we're starting to see and push back by. Consumers are pushing back, but not pulling back. That's good on price hikes and we're seeing retailers respond to that. But you need that to offset what's becoming more structural inflation in the service sector, most notably in insurance costs, everything from vehicle insurance, housing insurance to healthcare insurance and healthcare costs. One of the largest increases in healthcare costs overall since 1983 on a month to month basis. That is really stunning and those are structural factors that the Fed has to offset with declines in prices in the goods sector. We had a lot of goods deflation for several decades, but there are a lot of reasons to believe some of the declines we saw in goods prices might be temporary because there was stocking up ahead of concerns of US port strikes. Everything from storms and geopolitical tensions disrupting flows of goods as we get into the summer. Interestingly, some of that stocking up is already shown up in Halloween promotions before the 4th of July. Absolutely crazy online. But I think we are in a situation where the Fed still needs a lot more evidence and much more importantly, the pulling on inflation in politics is important. Consumers and the research showing up on inflation. Inflation is much more corrosive than many economists had anticipated and scarring to people's psyche as well. And I think that's really important. That's something that's in the Fed's mind as well is that they really need to beat this battle on inflation. And their bias is to over tighten because they're data dependent and the data are lagged. It's interesting. And Peter, she brings up exactly a point you've been hammering about goods inflation or deflation. And so this feels like a little bit of a of a fulcrum for the reports in the months ahead. Do we see goods inflation start to pick up again because some of the pressures that you've mentioned? Or do we see downward pressure because of excess inventories, the early markdowns that Diana's referencing? It feels like we could go maybe be pulled in both directions. Actually I I think the seeds are being sown for a lift up in goods prices. We've had a two year recession essentially in manufacturing and at some point we're going to see inventory restocking. Whether there's end demand to substantiate that or not, we'll still get restocking. And when I'm looking at every single week is what is happening with container prices. We entered the year, the 40 foot container price for a ship from Shanghai to Rotterdam was just under $1700, down from almost 15,000 at the peak, but similar to the level it was in February 2020. This past week it was $7300. Wow. So almost a four fold increase? Three or four fold. Yeah. And we have to remember that every single thing that's made in this country, in this world ends up on a truck, a ship or a plane. So not only are we seeing the rise in container prices, it's flowing now into a sharp increase in air cargo prices. Trucking prices still remain subdued, but that tells me that over the next six months that is going to start to flow back into higher goods prices.