Fed's next move is going to be to tighten, says Lindsey Group CEO

Summary

Lawrence Lindsey discusses accelerating core PCE inflation (4.4% annualized over three months) and argues the Fed must tighten. He calculates the neutral fed funds rate is 4.2-4.7%, well above current levels, implying at least 50-100 basis points of rate hikes. He expects traditional rate hikes rather than balance sheet reduction as the primary tool under new Chair Kevin Warsh.

• Core PCE inflation accelerated to 4.4% annualized over the past three months.
• Neutral fed funds rate estimated between 4.2% and 4.7% based on real neutral rate of 0.5-1% and 3.7% six-month inflation.
• Current fed funds rate is far below neutral, requiring at least 50 bps to reach the lower bound of neutral.
• Lindsey expects the Fed to raise rates by 50 bps in the remainder of this year and 50 bps in the first half of next year.
• He downplays balance sheet tightening, arguing traditional rate hikes are the more likely initial approach.
• He refutes the transitory inflation narrative, citing rising core PCE trends.