Last week’s news of a hike, or rather a series of hikes, of the Fed interest rate gave some consolation to some people in some places, or to paraphrase Lincoln, to some of the people some of the time. It’s been clear for some time that inflation in the US had come to be the defining economic problem and after the Federal Reserve Bank had their two-day meeting there was rapt attention to what could be done to stem the tide of higher and higher prices on goods, that had been fed upon by consumer demand after the Covid lockdowns across the country.
With most Americans subsequently holding fat checking accounts, by not spending more that they could get from the supermarket, or the internet, and uncertainty abound, the flood gates were then thrown open, after the variants were tamed with vaccinations, and the lifting of mask mandates, the demands for new sofas, food processors, and the like became the norm.
Soon, production could not keep up with demand, as many of the overseas factories had been shuttered for fear of Covid, and ports were clogged with uncharted goods, due to a dearth of warehouse space and workers to unload.
At that time, it was thought to be transitional, and temporary but as the months grew it became a major economic problem, or as Sonai Desai Executive Vice President, chief investment officer, Franklin Templeton Fixed Income, told the Financial Times, “it’s the single most significant issue for America.”
The Fed has prepared to raise interest rates six more times this year, and five times in 2023, subject to change and Chair, Jerome Powell feels confident that the economy is durable enough to absorb these higher rates, designed to slow spending, as well as investments.
Observers, and media analysis, in part from The New York Times, have suggested that Powell is hoping for a “soft landing,” while others have said that this is too little, too late, but with inflation reaching a 40 year high, desperate times called for desperate measures, says the old cliché.
Fueling all of these purchases are higher wages, as employers lure much needed workers. The issue, as seen by others, as well as the chair, is whether unemployment can remain low, with its recent figure of 3.8 percent, and some seeing this as optimistic.
Last fall the Financial Times noted that “labour infiltration” was becoming the norm, and cited Amazon as a major employer who identified the growing trend, along with McDonalds and Starbucks.
For Powell, it’s not only optimism but careful calibration by he, and members, to stave off a recession. And, that is no easy feat.
Another feat is tapering the reserves, or asset purchases, which have long preoccupied GOP lawmakers; taking a look at what consumers can expect to face, is also of interest, for consumer expenditures fuel the American economy.
FT also noted that “higher pay packages” were “showing wages and benefits rising at their fastest pace since 2001.”
As has been noted before, higher wages are offset by inflation causing a conundrum, if Powell wants to keep wages steady, but with the scheduled pay raises, tied to that goal, as well as avoiding recession, this is tricky business, for low to middling incomes, as Diane Swonk chief economist at Grant Thornton noted previously: “The costs for low-wage households to cover their commuting cost, grocery bills and rents are eating into the jump they have seen in wages.”
There is some good news on the financial front for consumers: “current federal student loan borrowers aren’t affected because those carry a fixed rate set by the government,” according to The New York Times; but those holding private loans can “expect to pay more.”
For those dependent on car ownership, that most have seen rise exponentially, can expect to see an increase with average rates taking a rise to 4.39 in February, but some faith in the used car market has taken a decrease in interest rates from 7.83 percent, also, in February, down from 8.25 percent.
Think again about those aforementioned fattened bank accounts, yes, the bank “will pay more interest on deposits,” but not right away, with banking policies increasing rates, when they want increased deposits, and they have tons, ergo no incentive to do otherwise.
In a tilt to online banks they “pay better rates more quickly than larger institutions, according to Ken Tumin, founder of DepositAccounts.com . . ., according to The New York Times.
They also noted that CD’s can be poised to gain higher moves, again, especially with online banks; and, also equally true for money market mutual funds, with a corresponding rise from the feds.
Taking it all in, there are months ahead that will bear watching, taking into account both the expected and the unexpected. What happens, or doesn’t happen, especially with the invasion of Ukraine, is a deciding factor, and with possible shortages of grain, the road ahead for the US economy, not in isolation, but in concert with the world won’t make for an easy road, but this is a 21st century world.
Executive Vice President, Chief Investment Officer, Franklin Templeton Fixed Income
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