Federal Reserve Chair Jerome Powell has had the unenviable task of trying to tame inflation and keep the mandate of full employment and to hold inflation at 2 percent, and last week’s appearance before Congress gave him the opportunity to explain to lawmakers where he and the rest of the Board stand in their quest to lower prices.
Despite several rate increases, the Chair has to also consider a strong and durable labor market that seems, resilient at best, and stubborn, at worst
Powell’s trademark stoicism and data driven approach have not always gone down well with many, and some Americans still think that the Reserve is a private bank adding problems of perception, and reality, to his mandated report.
At the House Financial Services Committee he noted that the US is far from taming the economic challenges and “wrestling down rapid price increases.”
The good news: “Inflation has moderated since the middle of last year”, but the problem is that even with the decrease to 4 percent, “getting inflation back down to 2 percent has a long way to go.”
Conundrums abound with the most prevalent is the lowered cost of gas and food prices, which has increased consumer spending on leisure and dining out, and as a recovery from the Covid pandemic it is welcome, but does nothing, despite higher interest rates to lower spending.
The Consumer Price Index released in the middle of last month showed the following:
“. . . a rise of 0.1 percent in May on a seasonally adjusted basis, after increasing 0.4 percent in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 4.0 percent before seasonal adjustment.”
The Associated Press noted that, “Yet some positive signs, even in the measures of core prices, suggest that underlying inflation pressures may be receding. The outsize increases in core prices were driven mainly by rising rents and by another spike in used car prices. Real-time data suggests that increases in those categories will soon ease and help cool inflation.”
That however is debatable in some quarters of both the financial community and the academy where many feel that this is a see-saw effect, at best, and not to be relied upon.
Adding to the worries are those of bank solvency, especially after the fall of the Silicon Valley Bank, where there were Depression era fears by some.customers, and local lawmakers. While there were many fathers for that failure, Powell was quite clearly told off by the formidable Massachusetts Senator Elizabeth Warren who said, “At the Fed, you are the one who lobbied, who drafted and who voted for weaker rules, and you were ultimately responsible . . . [for the behavior] of the Fed who fell down on the job.”
He responded by saying that the Fed had “learned some lessons” and added. “I would say we are committed to learning the right lessons from what happened to Silicon Valley Bank. I think there is a clear need to strengthen both bank supervision and regulation of banks of that size.”
To that effect he has appointed Vice Chair Michael Barr as the point person in that efforts and also noted that banks below $100 billion in assets would not “be impacted by any non-capital improvements.
Questioned further by Warren, the Chair added that "more capital means more stable banks and stronger banks, but there’s a trade-off there, you’ve got to make a judgment about where you draw the line.”
That line seems to have been drawn with the increase in interest rates that began last year and after a pause in May have resumed at a current range of 5 percent and 5.25 percent with the expectation that there will be more, and the Chair has said that there will be “at least two interest rate increases are likely necessary this year to being the inflation rate down to the US Central bank’s 2 percent target,” reported Bloomberg.
The Federal Open Markets Committee noted Powell, “that it will be appropriate to raise interest rates twice or more times by the end of the year.”
He added that the FOMC is not focused on “a particular number of rate hikes” but to try to hit the mandated target of 2 percent.
It’s important to note that there has been a cooling of inflation, from its peak of 9.1 percent a year ago, but the cool down is too slow for many economic observers.
Moving away from the Hill, the challenges for many Americans are many, and that the increases hit the pocketbook for higher borrowing costs, and that the rates that the banks have is “passed onto consumers in the form of higher interest rates on things like auto loans and mortgages,” noted Dan Tolomay, chief investment officer of Trust Company of the South, in remarks to Fortune.
With a tight labor market and record unemployment of 3.7 the challenges are many and with core personal consumption at 4.7 percent in May, and in June, it was increased to 0.1 percent deleting volatile food and energy prices, for goods and for services at 0.3 percent, coupled with the lack of affordable housing in the rental market, and higher mortgage rates for home buying the die is set.
Home loan rates are now at 6.57 percent, and in late May Freddie Mac Primary Mortgage Market Survey reported that the average for a 30 year fixed home loan rose nationwide from 6.39 percent within one week.
Wages have seen a decrease, and many working families are feeling the pinch, and for those in New York, Boston, and Chicago, the pinch is almost a punch, especially for minimum wage workers.
A new report from Housing Action Illinois reports that a salary of $57, 600 would be needed to rent a 2 bedroom apartment in Chicago, or $27.69 an hour, or working 85 hours a week for those making the minimum wage; and for people of color, most likely to be renters, the effect is especially pronounced.
Bob Palmer, policy director for Housing Action Illinois in an interview with the Chicago Tribune, last month noted the need for a greater public investment in affordable housing and said, “Obviously, it’s not a new problem, but the cost of housing in the private market continues to go up, and it is out of reach for people with the lowest incomes.”
With the defeat of the Biden Administration's plan to offer student debt relief from the conservative US Supreme Court, housing costs are going to be even more challenging, especially for those workers in their mid 20’s, but with an overall total of 43 million people, or 1 in 8 Americans.
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