Well, there was a lot to digest there. He opened up by saying he's committed to moving the Fed forward and then he laid out what that meant with those five consultant task forces, I guess, is what I'd call them. I think he's buying himself some time. But the real phrase of the day without any doubt is 'we will deliver price stability.' He said it more than anything else. And one thing that might be in his favor on that, since he's buying himself some time and he talked about these task forces and that they would probably start working in the next several weeks and that maybe they get around to having some ideas or conclusions or suggestions somewhere in the fall. So that to me suggests that it's unlikely that rates will be changed until the fall. Also, inflation is, by our model which I predicted at our last conversation Scott, I predicted that the May CPI would have a four handle on it and that's exactly what it was. The good news is that our model shows that inflation will be dropping as we move towards the end of the year and based upon the commodity complex today could be as low as three and a half. I thought it was very interesting that Worsh said that he looks to the left of the decimal point on the inflation numbers and he says the one that's left to the decimal point on our target is 2%. Well, what that sort of suggests, I know for years there's been talk about maybe the Fed will raise their inflation target. It doesn't really mean two, maybe two and a half is okay. That's kind of what he said. I mean, if you really want to take it to the extreme, if it goes to 2.99, the number to the left of the decimal point is a two. So, I wonder if we're really talking about that price stability of two.
Also, one of those task forces is about inflation statistic frameworks and he talked about old data is an echo of the past and he wants more real time stuff. What that could open the door to, if you want to be cynical or conspiracy theorist, it might open the door for creating new inflationary views, new inflationary readings, new inflationary techniques which could perhaps, if you're a cynic, facilitate the road towards the proclamation that we've delivered on price stability. It was fascinating that there was like one question on the unemployment rate at least that I heard. I didn't hear the entire press conference, but that last question on the unemployment rate, it's very clear the total package of that press conference, it's very clear that the focus is on inflation and not on unemployment, the employment market having problems. He in fact said that the committee believes that the employment conditions are solid and even that half the committee thought they might be getting better. That further distracts you like a magician's trick distracting you from what's going on in the trick by focusing your attention on the other hand. So, but I really, what a change in tone. I mean, it sounds to me like perhaps the Fed is no longer going to just be following the two-year Treasury. I did a study on this. It goes back about 20 years and of course the Fed followed the two-year Treasury completely for 20 years and maybe that's not going to happen anymore. And I saw this fantastic chart, I think it's the best chart of the present moment from JP Morgan Asset Management. And what they did is they went back 55 years and looked at all of the Fed moves in the Fed funds rate. And they did a scatter chart and they had red dots which were tightenings and blue dots which were easings. And they basically on the x-axis was the ISM manufacturing employment index and on the y-axis was the ISM manufacturing price index. And if either of those are above 50, if the employment index is above 50, then it's strong. And if the price index is above 50, it means prices are rising. So what the scatter chart shows is that as you move from the lower left, when you start in the lower left, you have much more chance of easing because you have weak manufacturing employment and you have weak price movements. And as you move up to the upper right, it's mostly tightenings. Well, what's really interesting is that in the 70s, there were some blue dots in the upper right. That was under Arthur Burns when he was under pressure by Richard Nixon to cut rates for political reasons and he did it. And then, interestingly, in the lower left, there are actually three tightenings. Those are under Paul Volcker. So in spite of the fact there was very weak prices paid and very weak employment, Volcker raised interest rates and he didn't raise them following the two-year at all. You'll remember the people talk about the Saturday night massacre where on a Saturday night he raised rates mightily and he actually, Volcker from June of 79 until June of 83, Volcker was just all over the place relative to the two-year Treasury. When he raised rates for the first time up to 20%, the two-year Treasury never got above 15%. And when the Fed later on in the early 80s when the two-year Treasury was rising above the Fed funds rate and rising, he didn't care. He kept rates where he thought they should be. And I'm wondering if Chairman Worsh is going to be a little bit more agile, as I like to put it, like Volcker was, and not so slavishly tied to the two-year Treasury. I mean, if he was really tied to the two-year Treasury, I know he wants to buy time. He's getting himself settled in, but he would have raised rates today. The two-year Treasury is 50 basis points, more than 50 basis points now, above the median of the Fed funds rate. So, if he's following the two-year, he might have moved. But he knows as our model knows that inflation is going to be coming down into the threes perhaps maybe even three and a half by the end of the year and if oil goes even lower it could even go down to 3%. So, in that way, he's on the track to price stability. And so, he's bought himself some time to sort things out. And now, we've got some consultants that are going to help out, which I'm not really a big fan of consultants, but he wants to put his imprint on the Fed and he certainly has an ambitious agenda. And I applaud him for being original. I felt like the last three times we turned over the Fed chair, it was just a baton being passed and the methodologies basically weren't adjusted or even considered to be adjusted all the way along from Bernanke to Yellen to Powell. So this is a new era and he definitely is making no bones about it. So we'll see what happens. He keeps referencing six weeks from now. So my suspicion is there will be no hike six weeks from now.
I've never been a fan of guidance from the Fed. I've never really followed it. I've always thought it was simply following the two-year. I've said that enough times that everybody knows what my opinion is on that. But I think that what he's doing is he's made a certain sense of a certain type of forward guidance today. And that is he is absolutely telling you that he plans on delivering on price stability. So that means that we're not going to have such easy money policy as everybody thought that maybe Chairman Worsh would do back in the first quarter of this year when everyone was counting on rate cuts because they thought Worsh was a peradov. Well, he doesn't sound like that today at all. So on that basis, I've been negative on long-term treasuries relative to say twos and five-year treasuries, but I think there's a greater reason to own long-term treasuries today now that the new sheriff is in town. Because if you're going to get price stability, and if he doesn't deliver on something that can be characterized as price stability, he's basically announced today that he would be considered a failure. So he's got to get that inflation rate down. So, at least it starts with a two on that left of the decimal point thing. And that means that we don't have to worry about the overly accommodative rates that would put further pressure on the long bond, which was kind of the reason that I was for several quarters relatively cautious on the long bond and favoring the intermediates. Now, I think that the long bond is better supported for the time being as he tries to work towards that lower inflation rate, which means probably hiking. If there's any pause in the progress of the inflation rate, as I said earlier, one thing that he's got in his favor is the inflation rate based upon where we stand right now is coming down. I heard David Kelly talk about that in the pregame show. I guess it's Halftime Report or whatever it is, but I agree with David Kelly that inflation is not really going to lead to tremendous evidence for a rate hike in the months ahead. After that, who knows? But I think we have rate stability and I think you have a better chance. It's funny, everybody talked about how maybe you should cut rates to improve housing affordability. That's just completely wrong. If the Fed were to cut rates, the long bond and the 10-year Treasury might have gone up in yield and not down in yield, which has been the case ever since this cutting cycle started in September of 2024. I mean, long rates are up, mortgage rates have risen from before the Fed started to cut rates. And so I think that actually him staying on hold and perhaps tightening should there be a necessity, that could anchor long rates to a certain extent and keep mortgages more affordable. Still they're at 6.12%. Maybe they could actually drop down to 6.25% or something if the Fed were to gain the confidence of investors that they're serious, as he said repeatedly, about price stability, which means a number that starts with two and we're not close to that because right now we're double that.
Sit tight for a moment. And Jeffrey, you know, how much of what is unambiguously, I'll use it myself. The dot plot being more hawkish, nine members projecting a hike, five seeing two, one seeing three, eight projecting a hold. How much of that do you think is around the idea of jawboning the market a bit rather than actually following through on a hike which would have a much more serious impact on the certainly on equity prices not even counting what bond yields might do.
