Feds keep rate, but creates a "new normal" for mandate

 

With the conclusion of the Federal Open Markets Committee on Wednesday, the resulting virtual press conference focused on answering questions on tapering the trunk fulls of asset purchases designed to keep money in the US pipeline.

All eyes had been centered on this question, for days, preceding the announcements and the $120 billion in government backed bonds, and $40 billion in mortgage backed securities gave economic pundits and economists a run to press on Thursday.

Set against the background of inflation which had hit record highs of 5.4 percent in a year over year comparison; it was the highest figure since 2008, and created a sense of urgency among the FOMC and increased pressure on Chair Jerome Powell, whose sense of caution gave alarm amongst those whose confidence in him was weakening.

With consumer spending driving the economy as usual, there was a heightened sense that there might be an overheating, with people sitting on piles of unspent cash during the nationwide lockdowns, and federal stimulus checks fattening those reserves.

Sandwiched between the inflationary worries, and the actions of the FOMC, observers were also concerned as consumers switched from spending on goods to services, and with the increase of vaccinations for Covid, travel and leisure, further increased inflationary fears.

Powell had the unenviable task of going in one direction, tapering the pile, or defining a new direction. With the latter he defined a new normal of accepting higher inflation, to make up for the periods when it was less, and the decision to stall tapering towards the Fall, or even later.

This gave him, and other members, who might have been uneasy about the timeline, a softer cushion to land on; and, one that allowed the Fed to be consistent with its twin mandate: keeping inflation, at or near 2.0 percent, and focusing on full employment.

Taking the virtual bull by the horns, at the press conference, Powell added that “the economy has made progress to all two goals.”

As predicted there were some fears that the past might be prologue with the memory of the 2013 model of tapering “in modest, equal amounts over the course of 10 months,” according to the Wall Street Journal, but noted the subsequent reaction: a spasmodic market..

No one really expected the Feds to raise its key interest rate, from its current 00.25 %, and Powell declared, “it's’ not something that is on our radar screen right now.”

Much like a Greek Chorus, there were the cries by some to do an equal reduction of both Treasuries and mortgage backed securities, to stem the tide of high home costs homes.

That appeal was nixed when Powell said buying long for these assets was the key. And, if that was disappointing to some, then his reaction to the increasing bottle neck of the supply chain and its attendant problems; (for example, the dearth of semiconductors), had him stating that in time, these problems would resolve themselves, proved to be equally dispiriting to many economists.

Hovering in the background was King Covid, but now its cousin The Delta Variant became an increasing concern for many, especially as the Fall was expected to bring workers back to the office and their children back to in person learning.

His reaction? “We’ve kind of learned to live with [it].” 

In a veiled remark Diane Swonk, chief economist of Grant Thornton said to the Journal if that was the case then his leadership should compel him to consider “tapering by year’s end.”

Consistent with his prior remarks, but further urging caution, Powell said, “there’s absolutely no sense of panic.”

Asking all to accept this, including the new normal of higher inflation, he said, simply, that it, “will be more persistent.”

Was this enough to stem the fears of the American public who in a recent poll said that 54 percent of Americans felt the economy was tanking? That said, only time will tell.

"I" is for inflation and that causes concern for US

 By now, many of you have noticed higher prices, be it the humble hamburger at McDonald's, gas at the pump, to even mid level restaurant menus, as they steadily erode our budgets, And, on the larger scale those tasked with keeping inflation at bay are finding a barrage of suggestions, criticisms, observations and even sly commentary.

Reaching consensus, or even understanding what the future might bring to both the US economy, as well as consumers. And, for those that are depression era survivors, a shrinking population, the days ahead may seem less daunting as memories of high prices and hoarding come to mind, but for Generation Xers, those skills and methods are unknown.

Some have opined, such as Chicago Booth School of Business, Michael Weber that "Central banks and shoppers are living, to some extent, in different worlds," and their focus is different and are "forming expectations on the basis of those."

With uncertainties about returning to the offices of pre pandemic America, this is another worry for those burdened with school debt and mortgage payments, especially those living in large urban areas, dealing with survival in a changed America where 7 million jobs were lost due to Covid. 

Recent reports have showed, however, that some consumers, after months of lockdowns, are not complaining of higher restaurant costs, so overjoyed they are at being able to gout and dine, and socialize with others.

On Wall Street as well as Main Street the key word is "transitory, but The New York Times noted recently that the "word is losing traction." But, it also stated that "inflation is running at a 13 year high" and while the White House claims that the rise in inflation is temporary, others are not so sure.

Jamie Dimon of JP Morgan Chase said recently, to the Times, that it's " a little worse than the Fed thinks"; still others say that the time has come to accept a higher level of inflation, beyond the targeted and mandated 2 percent that the Federal Reserve has, and in that respect a 2014 survey did cite that income inequality, the new normal has forced economists to take a long range view.

Consumer spending, the driver of the American economy hit the headlines with an increase of 5.4 percent, according to the Consumer Price Index, a feat in and of itself.

Weber notes, while seeing higher prices, and with some complaining, many in America aren't watching the inflation ball; and in fact, he and others "surveyed more than 20,000 Americans in 2018 and asked what they expected the Fed's inflation goal to be.Fewer than 20 percent answerd correctly, while a whopping 40 percent thought that the Fed was targeting 10 percent inflation."

The correct answer is 2 percent, a standard in an undergraduate macroeconomics course, as part of the twinned mandate of the Federal Reserve, the other being full employment.

Spreading out a bit, is Avraham Shama writing in an opinion piece for The Hill said that setting a “monetary or fiscal policy based on it could hurt the economy” and as a contributing factor to understanding the dilemma points to the pandemic both pre and post as the tipping point for understanding both the process, and his warning.

If the temptation is there, then changes in consumer behavior from dining out, plane travel and moving to the burbs are in order, then taking a look at Federal Reserve policy points and reliance on judgement, and an ability to change course might be the better course.

Tacking somewhat to the right is Axios who gives some sly digs to the Biden Administration and also Fed Chair Jerome Powell, and sees him as both indecisive and naïve in his handling of inflation, and hints at other matters, in its short estimation, and characteristic bullet points, seeing him as not knowing where to look next for the future, which it labels as “evolving.”

From the corporate side there is Conagra Brands and Pepsico, says Bloomberg who have “signaled that higher costs will be more than a blip,” and that costs “from raw ingredients to labor to remain substantially more expensive in coming months.”

Just behind these words consumers can expect the higher costs to be passed onto them. The bottom line as it were.

While there has been some relief in the used car market, it’s not hard to reckon that higher prices, or shrinking packages, and deceptive packaging to be the norm, so that the consumer may think that they are getting more than they get..

In their Dealbook analysis the Times offered some opinions that give some weight to the future, with most saying we have to deal with it, to others saying that accepting a higher level of inflation may be the course, with others using a historical trajectory to give some sense of direction towards policy action.

Austan Goolsbee, professor of economics also of the Booth School of Business favors temporary, and is a believer in the “potential” of the economy, or in other words what it sustains at full employment, citing the 1960s as the fulcrum for overheating.

He also sees the US as closer to the 1990s through the mid 2000s and “?none of which ignited sustained inflation despite unemployment rates well below today’s.

Add to his optimism a gain in jobs, then his opine takes the fright out of some observers.

Going in an opposite direction was Jason Furman, a professor of economic policy at Harvard University who questions the long term who sees inflation longer term than others, but sees a it settling “down at something more like 2.5 to 3 percent, but cautions against Fed overreaction, causing a recession, and subsequent market adjustment to right the ship, but notes that economic hurts could occur.

If this all seems too wonky for you, then consider that an increase in job and wage gains is a good event, and indexing can help for those on the lower wage scale;  some economists and academics see signs of 7 percent for the 3rd quarter, and as demands shift, a downward wave of 3.3 percent in the second quarter of 2022, reported the Wall Street Journal, with Treasuries yielding downward, trends could be far worse, with caution being our watchword.

Updated 13 August at 4:15 p.m. CDT

 

 

 

 

Time to rejoice: June Jobs report hits 850,000

 

Exceeding and in some cases, surpassing predictions for a robust job gains for the month of June, Friday’s report from the US Labor Department, gave most observers and economists a high, with the figure of 850,000 nonfarm payroll jobs, a jolt in the arm for the American economy, and salve for the worried nerves of all, from the White House to the Federal Reserve who feared another moribund report, like April, that sent many economists and politicians reaching for painkillers.

Instead many are now reaching to pop a cork of bubbly for news that sent the US recovery on a straight path towards a recovery, albeit slower than many might have wanted. But, some say that reach may be too soon, with many employers still panting for employees; even with some cities hitting a $15.00 per hour minimum wage.

As we have seen before, many potential workers are waiting for in person learning to return for schools, to avoid the headaches, challenges and expense of child care, while others are fearful of working in tight spaces, and taking crowded public transportation to the workplace; while still others are afraid of the new Delta variant that is spreading across the country, especially in the South, where vaccination rates are much lower than the rest of the country.

There was good news since there was a drop from those who said Covid was a factor in looking for a job, with 1.6 million in June, down  from 2.5 million in May.

This is reflected in the labor force participation rate of 61.6 percent; and, an unemployment rate, the marquee rate, as we prefer to call it, of 5.9 percent, yet that does not reflect a total picture that includes those that want to work full time, but are stuck in part time jobs. 

”These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or they were unable to find full-time jobs,” the report noted, and were up 229,000 since February 2020.

The report also shows an uptick from 6.4 million not seeking a job in June, from 5 million before the pandemic baseline of February 2020.

Previous months have shown the dramatic decrease of women in the workforce, as they were forced to leave their jobs for child care and remote instruction supervisors for homebound learners, but in June, there was no significant increase in female workers, staying at 56.2 percent versus 67.5 percent for men.

Black workers stayed at 9.2 percent unemployment, higher than those of whites at 5.2 percent.

Nevertheless there is hope amidst the clouds: "This strong labor market performance – despite persistent hiring strains – is likely the start of a series of stellar reports that will underpin the strongest US economic performance since 1951 this year," Lydia Boussour of Oxford Economic, said to The Hill.

All things being partisan, the GOP has blamed President Biden’s policies of extending financial help to those in need, but there is no clear evidence that this is a factor in those hard to find employees and the fear of inflation. And, while prices have increased due to consumer demand, the tradeoff between goods and services reflects increased rates of vaccination and local government pushing vaccination.

The effect of withdrawal cannot be seen for June, since the report has a cut off, meaning that those twenty six states whose governors cut the benefits, won't be seen until the July report, so the blame game can continue with Republican opponents.

Along with the overall increase certain areas showed dramatic increase and leading again, was the leisure and hospitality field, with a gain of 343,000, showing a near phoenix like rise in an area that was devastated in the early days of the pandemic,

With the increase of vaccinations many are abandoning their bread machines and cake pans plus homemade cocktails to go to restaurants and bars, which can be seen with 194,000 of the increase in June for bars and restaurants.

The arts also showed promise with 74,000 jobs and by fall should show a dramatic increase with promised Broadway and theater openings, thrilling investors and audiences alike.

That old catchall category of professional and business services showed 72,000, and social services showed some gains, with glimmers of hope for 25,000 in children’s day care.

Possibly related for some, is the desire to “work remotely at least some of the time,” reported The New York Times, And, they cited “a Randstad survey of more than 1,200 people, 54 percent say they prefers a flexible work arrangement that doesn’t require the to on site full time,” nodding in the direction of Covid fears and, as of yet, an uneven return to in person learning, especially for elementary school students.

Previous reports, such as ours, have also shown that many “would-be workers” are re-evaluating their options from labor intensive, and physically challenging jobs, such as restaurant servers and cooks, to hotel maids and maintenance workers.

In fact the report shows that “job leavers” -- “those that left their previous jobs, that is, unemployed persons who quit or voluntarily left their previous job and began looking for new employment—increased by 164,000 to 942,000 in June.”

For temporary workers there was good news reported by Tom Gimbel, founder and CEO of LaSalle Networks, in Chicago who told CNBC that he has seen a fast change from temp to perm in “areas of accounting, admin, clerical and human resources,” and that “it’s happening at a 50% higher rate than it was preCovid.”

Incentives abound, including sign on bonuses ,once reserved for executive and high  earning professionals, but now seen in restaurants, and, in June, “Southwest Airlines plans to raise minimum pay to $15 an hour for about 7,000 employees citing the need to attract and keep workers as the airline industry continues fro recover from the pandemic,” according the the Associated Press, and taking effect on Aug.1.

AP also noted that many “companies are making adjustments to their offices to help employees feel safer as they return to in person work, like improving air circulation systems or moving desks further apart.”

The bottom line for most workers is pay, but concerns are across the board, with those looking at both the Fed and the rise in inflation, as concerning. But, they may have to wait a bit, because, as Labor noted:

“Average hourly earnings for all employees on private nonfarm payrolls rose by 10 cents to $30.40 in June, following increases in May and April (+13 cents and +20 cents, respectively). Average hourly earnings of private-sector production and nonsupervisory employees rose by 10 cents to $25.68 in June. The data for recent months suggest that the rising demand for labor associated with the recovery from the pandemic may have put upward pressure on wages. However, because average hourly earnings vary widely across industries, the large employment fluctuations since February 2020 complicate the analysis of recent trends in average hourly earnings.”

It’s easy to hum, “we’ve only just begun” as Karen Carpenter once crooned, but that seems to be the reality for a country that struggles with post pandemic reactions, as well as vaccination fears.