Fed Chair Powell on the hot seat as inflation swells in US

It’s certainly not a secret that in the United States inflation is at a forty year high and that from Main Street to Wall Street there are fears and concerns about the increased cost of gasoline, groceries, and nearly everything else. Chicago has seen gas at $6.00 a gallon not far from Los Angeles, and filling the tank, for some vehicles can get to three figures.

The dollar stores are seeing huge influxes of shoppers eager to avoid the high prices at the local chain supermarket, and people are eager to spend less to make sure that meat and eggs can reach the breakfast table. 

In Washington the White House has said that the Federal Reserve with its twinned mandate of keeping inflation at 2 percent, and full employment, has the lead, but it has struggled to gain a foothold on the problem, and last week they raised the interest rates to three quarters of a point, the highest hike in 28 years.

At the September meeting there was another similar rate increase at the same 75-basis points and it seems that rate increase are here to stay until inflation is conquered, with some opining that this will continue at least into 2024, with predictions for 2023 from 4.24 percent to 5 percent.

Fed Chair Jerome Powell, backed into the corner by the Biden administration, was forced to admit that as CNN reported there are external factors that will make it harder to turn the corner, from that “soft landing” that we reported on earlier, and that mitigating forces such as the war in Ukraine, supply chain woes, caused by the coronavirus, were still taking its toll on the US economy.

He is supported by Mark Zandi, chief economist at Moody's Analytics, who has said,  "The primary culprit [of inflation] was higher energy prices, particularly gasoline, and a lot of that can be traced back to Russia's invasion of Ukraine that caused global oil prices to spike," he said in a recent episode of his podcast, Moody's Talks. Inflation should ease, when the pandemic subsides and the market adjusts to new sanctions against Russia.”

While gasoline prices have decrease with an average nationwide tag of $4.50 dollars, rents and food remain sky high.

"So much of it is really not down to monetary policy," said Powell at a press conference last week that those supply chain problems had lasted longer than he anticipated

.

In a recent mandated appearance before the Senate Banking Committee, he added, notably, and perhaps defensively, “We’re not trying to provoke, and don’t think that we will need to provoke, a recession,”  he stressed, “But we do think it’s absolutely essential that we restore price stability, really for the benefit of the labor market, as much as anything else.”

Writing in The Guardian, Clara Mattei, an economics professor at The New School for Social Research, opined that shared pain of rising interest rates will hurt a lot pf people, and to that affect there is truth, if restrictions, such as last week’s surge in interest rates cuts cools down the economy, it will also cause many workers a job loss especially on the lower end, where their jobs will be low hanging fruit, to be quickly cut.

Sen. Elizabeth Warren told Powell at a recent congressional hearing, “Rate increases make it more likely that companies will fire people and slash hours to shrink wage costs,” 

“The cost of borrowing will also increase government expenses for public works and social services, forcing states to further cut their budget, hurting the most precarious parts of society that rely most on these services,”  Mattei stressed, and some other economists have said that intervention measures like more food stamp benefits might help mitigate some of these fallouts.

Mattei added a final warning saying that while, “Higher inflation is eating away at wage increases, but this does not mean lower costs for employers: compensation for private industry workers increased 4.8% over the year. By comparison, in March 2021, employers faced an increase of only 2.8%.”

Powell himself has acknowledged that these compensatory measures such as “lowering incentives for businesses to invest will produce unemployment,” and we see the risk involves planning to determine the correct balance to stem much of the expected  blood letting.

If it seems that the chair is being backed into a corner, his answers seem to make that even clearer. But, there are others that want to look to the future, and take a look down the tunnel for a possible gearing towards a recession.

Federal Reserve Bank President Loretta Mester said regarding both inflation and [a] later recession that, “It isn’t going to be immediate that we see 2% inflation. It will take a couple of years, but it will be moving down,” Mester said in an interview with CBS News this past Sunday.

According to CNBC, Mester also said she was not predicting a recession despite slowing growth; “We do have growth slowing to a little bit below-trend growth and we do have the unemployment rate moving up a little bit. And that is OK, we want to see some slowing in demand to get it in line with supply,” Mester added, referring to forecasts submitted in the past week by participants of the Federal Open Market Committee’s meeting.”

Added to the mix was this from The New York Times: “The Fed needs to hike policy rates more aggressively if it has any hope of bringing inflation down,” said Seema Shah, chief global strategist at Principal Global Investors. “If it’s going to have to tighten even more, then the chance of a recession is higher.”

These were pressures before as we noted in the March Jobs report, when we reported that “Many observers are mentally pushing Powell to increase the interest rate even further than the one-half point anticipated in early May,"

“The tightening from higher policy rates filters through the economy to make borrowing of all kinds — from mortgages to business debt — more expensive. That slows down the housing market, keeps consumers from spending and discourages corporate expansion, “ Shaw added.

But balance is needed since these moves are a ‘’blunt tool”‘ to use Powell’s terminology, and knowing when, and how to calibrate, is very tricky as many economists and academics note.

There are naysayers: “By the time you start to catch it and realize you did too much, you’re going to be deep in a trough,” said Dan Genter, the chief executive of Genter Capital Management, an investment advisory firm. “It’s going to take nine to 12 months before you see the total effects, and it takes that long to get out of it.”

 “All the talk of recessions and bear markets could also — at the margins at least — add to the economic pressure, in part because people see their investment, retirement or college savings accounts shrink and start to pull back on spending,” and with no sign of abatement in college tuition, many families are now becoming increasingly worried.

“The behavioral effect is that people will start to slow down on spending, become much more cautious, start to save more,” said Beth Ann Bovino, the chief U.S. economist at S&P Global. “That’s not a good outcome for the economy. It slows growth.”

The CPI report for July indicated that there was some relief with lowered prices on gas, airfares and used cars, to an increased rate of 8.5, lower compared with 9.1 the month before. And, while this offers some relief it is not the end, say most economists, which much more work to do, and that work is the domain of the Federal Reserve and expectations are for a less aggressive rate of half a point, versus the prior three-quarters.

One source of relief is the detangling of the bottle neck of the supply chain issues that so beleaguered world economies for so long, mostly attributable to problems in transportation and warehousing and shuttered factories, due to Covid.

We are not out of the woods on inflation, and Boston Fed president Susan Collins said, with great understatement, "at the moment, inflation remains too high."

Updated Sept. 27, 2022 at 2:04 p.m.CDT

US Job market slows but shows cautious optimism

The good news from the US Dept. of Labor came on Friday with 390,000 non farm labor jobs setting a 17th month straight streak of job gains, giving a 96 percent gain towards the job losses from the Covid pandemic giving a huge relief to economists, the White House and Main Street, it also, just added more people back to work to give some confidence in the labor force participation number, one that is closely watched in this hot job market, and might, if continued, cool things down a bit and avoid an increase in inflation, and the dreaded specter of a recession.

While the numbers slowed a bit from last month, the consistent gains, over that period do show the US economy is humming along, and the slowdown is welcome, and with the dial moving upward for labor force participation, the  Fed is also keeping a close eye on the number, as we have noted before, to set any needed actions and consist of hikes in the interest rate, actions that have to be carefully calibrated, since too much is just as bad as too little.

The banner rate of unemployment expected to be reduced by 3.5 remained at 3.6 percent, but as we’ve outlined previously, consumer behavior, after the lockdown has seen a swift transition to services rather than goods, and nowhere has this been seen most is in leisure and hospitality which shot up to a whopping 840,000, with 21,000 of that figure in hotels and resorts as Americans who have received the vaccine jab, are jetting away to see families, friends and resorts for a holiday.

While the pandemic is not over, many people feel that it is, and the psychological pull, coupled with more cash in their checking accounts, since 2019 has prodded them to think that the worse may yet be over; and, while virologists and, biologists try to counter this optimism, the cash registers are ringing.

An added impetus are higher wages as employers continue to try and fill slots with qualified people, something they have complained about for months, and offering higher wages and bonuses, has also caused some anxiety among Fed officials who feel that a hot job market coupled with even higher salaries has to be tempered lest inflation become runaway.

Wages are indeed up, and as The New York Times reported, “Economists are also closely watching wage growth, which many say needs to slow in order to bring inflation under control. Average hourly earnings rose 0.3 percent in May, and are up 5.2 percent over the past year. The pace of wage growth has slowed a bit in recent months, although it remains simultaneously slower than inflation and faster than many economists consider sustainable.”

Federal Reserve Chair Jerome Powell noted last month, ““Everyone loves to see wages go up and it’s a great thing, but you want them to go up at a sustainable level,” and furthermore, “These wages are, to some extent, being eaten up by inflation.”

If this feels unfamiliar, or even undesirable, the past is past and the White House has taken an optimistic tone: ““Where we are going to is a period of more stable growth, more resilient growth, that should look different than that historically fast recovery,” Brian Deese, a top economic adviser to Mr. Biden, said in an interview. The administration’s goal, he added, is a more sustainable recovery “that generates more economic opportunities and more economic security for middle-class families than the prepandemic economy did.”

Labor participation came in at “62.3 percent last month, the Labor Department reported — an increase from 62.2 percent in April, but still well beneath its prepandemic level of 63.4 percent,” but also gave push to prime age workers, those from 25 to 54, at 62.2 but still hovering below the prepandemic benchmark of 63.4 percent, they added.

For Blacks, in May, the participation rate grew to 63 percent, but this has pros and cons for job seekers, since as the workforce increases, employers can pay what the market bears and not exceed the budget to lure workers from the sidelines; but, this is a double edged act, and as an old adage in the Black community commonly goes, “the last to be hired the first to be fired.”

For Black women over the age of 20 their employment rose to 5.9 percent, and 4.7 for Hispanic women giving some increased hope despite the timeout on the child tax credit that gave between $150 and $300 to older and younger children.

While the increase was welcome, for white women the unemployment was one half of that at 0.1 percent and “These inequities absolutely existed before the pandemic,” said Elise Gould, a senior economist at the Economic Policy Institute to CNBC.com, and added,. “When we talk about returning to prepandemic levels, sure, we’re getting pretty close to that, but that just bakes in the disparities we had in the prepandemic labor market, and that’s just not good enough.”

“This growth and recovery is not reaching everyone, and it’s not going to reach everyone unless we improve our systems and policies to address those gaps and support these workers,” said Kathryn Zickuhr, a labor market policy analyst at the Washington Center for Equitable Growth. “Really, the time to do that is now because we are in this period of recovery. When things are going is when it’s time to plan for the next period of upheaval.”