U.S. Economy: A Tale of Two Views

Last Wednesday’s news that the Federal Reserve Bank issued a half-point less than prior interest rate hikes brought some relief to economists and lawmakers, and the White House, and then the news that inflation was lessening brought even more relief, but then as the camera pulled in closer, that sense of optimism dimmed since employment in the US is still red hot and employers are in a bidding war to hire the most talent, and they are doing that by increasing wages, a direct path to higher prices for the consumer, something that has worried the Fed for some time.

The US is still adding 200,000 jobs per month, and that is part of the problem, and it was a concern for the November Jobs Report, and may still be one for December’s but to add to the mix there was the November CPI data, released a few days prior by the US Bureau of Labor Statistics, softer than expected by some traders and financial market analysts, and was described as a “game changer”, according to Marketwatch.com..

Cost of living showed strength and rose only by 0.1% on a monthly basis, which was accompanied by a stock and bond rally, and as reported, “November’s annual headline CPI rate fell to 7.1% from 7.7% in the prior month, marking the lowest level since the end of 2021, after peaking at 9.1% in June.”

“We were all expecting a softer report, but this is pretty significant and makes people question what the Fed is going to do moving forward,” said John Farawell, head of municipal trading at bond underwriter Roosevelt & Cross in New York. “We had been thinking 50- to 75-basis-point rate hikes, but now know that Wednesday’s move will be 50 and the one after that may be 25 in February,” he said via phone to their reporter.

Taking a quick glance at that good news, The New York Times reported: “Fed officials voted unanimously at the conclusion of their two-day meeting to raise borrowing costs by half a percentage point, a pullback after four consecutive three-quarter point increases. Their policy rate is now set to a range of 4.25 to 4.5 percent, the highest it has been since 2007.”

That however does not mean that their cuts will go away, since those pesky prices have to be dealt with, still, and includes higher borrowing prices as a target, as the Times stressed.

“We’ve continually expected to make faster progress on inflation than we have,” Jerome H. Powell, the Fed chair, said during his news conference after the release. He described the Fed’s new expectations as: “slower progress on inflation, tighter policy, probably higher rates, probably held for longer, just to get you to the kind of restriction that you need to get inflation down to 2 percent.”

Recession fears are also a concern, and while part of inflation fighting,  he said, in response, “We have more work to do.”

That decision by the Federal Markets Open Committee to raise interest points by only 50 basis points, “a step down from the 75 basis points seen over the previous four meetings. Of course, 50 basis points is still a historically large increase, and we still have some ways to go, “ Powell reiterated.

“The Fed’s higher rates are expected to cool the economy notably next year. Central bankers predict that unemployment will jump to 4.6 percent from 3.7 percent now, and then remain elevated for years. Growth is expected to be much weaker in 2023 than previously anticipated, pushing the economy to the brink of a recession.”

Those predictions are for three more quarter-point incremental increases, and for 2023, a 5.1 % increase upending the 3.15 percent in September.

All of these moves, aggressive, not so, or even in between, can take their toll on US workers, of grave concern for lawmakers, such as Sen. Elizabeth Warren (D-Mass.) who said, “He’s pushing too hard to get more people fired because he thinks that this is one way to help bring down inflation.” in her remarks to HuffPost, and added, `But it’s sure painful for the families who lose their jobs.”

As noted earlier, while rate increases are the tool to reduce inflation, the balancing act calibration is tricky, and their moves to slow spending though inflation rate hikes means that money can be more expensive to borrow, but if spending slows too much, there will be layoffs, mostly affecting lower-income families as Huffpost noted.

That tip into recession brought a reply, of sorts, by Powell, who said, “I don’t think anyone knows whether we’re going to have a recession or not, and if we do, whether it’s going to be a deep one or not . . . . “It’s not knowable.”

“The central bank’s aggressive stance comes as central bankers worry that inflation will remain high for years to come. Though price increases are already beginning to moderate from the four-decade highs they reached this summer, the Fed’s economic projections make clear that policymakers think it is going to take years to return inflation fully to their 2 percent goal”, opined the Times.

Going a step further, we have this: “And though the Fed expects to keep rates above 5 percent through the end of 2023, investors are still betting that the central bank will stop raising rates sooner and begin cutting them earlier,” bringing market fears.

“Financial markets want black and white, and you’re working in shades of gray,” said Diane Swonk, chief economist at KPMG, explaining that investors are not internalizing the Fed’s nuanced message,” reported the Times.

To make matters worse, “That divergence could be a problem for central bankers. Higher stock prices and lower market-based interest rates make money cheaper and easier to borrow, helping to stimulate the economy — the opposite of the Fed’s goal as it tries to lower inflation.”