Former Fed Gov. Stephen Miran: It'd be 'weird' to hike rates in light of better inflation data

Summary

Stephen Miran argues that measured core PCE inflation is significantly overstated due to portfolio management services and software quality measurement error, and that BEA methodology revisions should push core PCE lower. He therefore sees no rationale for the Fed to begin hiking in September. He also defends Treasury long-end buybacks as improving liquidity and price discovery, and expects less Fed forward guidance to create more bond market volatility while improving market signals.

• Core CPI is running near 2.5%, historically consistent with roughly 2.1% core PCE, but measured core PCE is elevated by measurement error.
• Portfolio management services adds about 45bp to core PCE by mechanically tracking the stock market.
• Software quality improvements are being counted as price increases, adding further measurement error.
• BEA methodology revisions expected in about a month could cut core PCE by 20-40bp.
• Miran says it would be strange to hike in September after holding in June and July on better inflation data.
• Treasury long-end buybacks should improve liquidity and price discovery in an illiquid part of the curve.
• Less Fed forward guidance may raise bond market volatility but deliver better price discovery.