The Fed still seems determined to bring about a recession
The Fed still seems determined to bring about a recession
– by New Deal democrat
As I wrote on Saturday, several coincident indicators have stabilized in the past several months (for example, Redbook consumer sales, which has been at roughly 5% YoY for 8 weeks; and payroll tax withholding, which was only up 1.2% YoY for the last 4 months of 2022, but is up 4.7% YoY for the first 9 weeks of this year). This has led to increased speculation that the US will avoid an economic downturn, and maybe even avoid a slowdown altogether.
But unless the Fed changes its perspective, I find it difficult to see that happening.
First of all, Fed Chairman Jerome Powell as well as other Board members have expressed concern about the continued elevated level of inflation in their favorite metric, the “sticky” price index for core PCE’s. Here’s the long term historical view of that in comparison with the Fed funds rate:
And here is the close up since the end of the pandemic recession:
For most of the past 60+ years, the Fed funds rate was higher than core PCE inflation. While that wasn’t the case for most of the last 15 years, it is certainly the case that the 5%+ difference during 2021 was the most by which PCE core inflation exceeded the Fed funds rate. Given the historical comparisons, the Fed probably feels that they should hike at least another 0.50% so that the Fed funds rate at very least is equal to the inflation rate.
And as I’ve noted a number of times before, this is the steepest rate at which the Fed has hiked interest rates since 1982:
Only in 1974, 1980, and 1981 did the Fed hike rates more rapidly. Since it takes time for the effects of Fed rate hikes to spread through the economic system (for example, as I have recently pointed out, housing under construction is less than 1% below its all time record set in October), the downward pressure put on the economy from those rate hikes is far from abating.
Further, some members of the Fed have been transparent that they want to see sharp deceleration in wage growth, which as of January was down from its 2021 peak of 7.0%, but still at 5.1% YoY, an extremely strong rate of gains compared with the last 40+ years:
In order to do that, they are going to have to bring the game of “reverse musical chairs” to an end. By this game I mean the cycle by which the lowest paying employers at any given time find themselves being unable to fill positions, leading to competition to escalate wages on offer, so as not to be the unlucky loser. So long as the cycle continues, there are always employer “losers,” and so ongoing pressure to continue to raise wages.
And that means bringing down the number of job openings compared with actual hires:
the latest number of which we will find out in Wednesday’s JOLTS report for January.
Another way of looking at the same thing is that the trend line of sales vs. employment, as to which the former has completely outperformed the latter since the rounds of pandemic stimulus:
must be brought back into equilibrium. Unless there is going to be a renewed surge in employment gains (*extremely* unlikely), that means bringing down real sales. And in the past, brining down real consumption has *always* meant recession:
Under these circumstance, I just can’t see how we can avoid a real downturn in consumption and employment.
Inflation is decelerating substantially towards the Fed target ADDENDUM: the huge impact of shelter, Angry Bear, New Deal democrat
Breadlines. Jerome wants to see the long queue of the unemployment waiting for bread.
or a depression? i do think they believe that they can slow inflation down by reducing jobs (which can lead to death), and that this will solve the supply chain crisis? i dont see how an economic adjustment can fix a physical problem (i,e, supply crash is because of an abrupt and large drop in demand for years, leading companies involved shutting down shipping and moth balling resources, and in other cases, changing to new markets). non of these can interest rate fix, course one could be cynical and think that its business community wanting help in slowing wage growth, even if causes their businesses harm from slowing or rapidly drop in demand. course they did have it good for a long time, in that wage growth wasnt even keeping up with inflation, and allowed the job market to shrink
Fed and GOP determined to cripple US economy?
Debt Default Would Cripple US Economy, New Analysis Warns
NY Times – March 7
As President Biden prepares to release his latest budget proposal, a top economist will warn lawmakers that Republicans’ refusal to raise the nation’s borrowing cap could put millions out of work.
The U.S. economy could quickly shed a million jobs and fall into recession if lawmakers fail to raise the nation’s borrowing limit before the federal government exhausts its ability to pay its bills on time, the chief economist of Moody’s Analytics, Mark Zandi, will warn a Senate panel on Tuesday.
The damage could spiral to seven million jobs lost and a 2008-style financial crisis in the event of a prolonged breach of the debt limit, in which House Republicans refuse for months to join Democrats in voting to raise the cap, Mr. Zandi and his colleagues Cristian deRitis and Bernard Yaros wrote in an analysis prepared for the Senate Banking Committee’s Subcommittee on Economic Policy.
The warning comes at a moment of fiscal brinkmanship. House Republicans are demanding deep spending cuts from President Biden in exchange for voting to raise the debt limit, which caps how much money the government can borrow.
That debate is likely to escalate this week when Mr. Biden releases his latest budget proposal on Thursday. The president is expected to propose reducing America’s reliance on borrowed money by raising taxes on high earners and corporations. But he almost certainly will not match the level of spending cuts that will satisfy Republican demands to balance the budget in a decade. …
well, the GOP has been pushing that things are falling apart, so it fits their need to actually show that it is (course people might notice that they caused it and punish them). The Fed seems to have only 1 tool (they think to address inflation raise interest rates! though some question if the Fed knows it will be responsible for millions of job losses, and many deaths, when the job market tanks. not that they will care
Biden Budget Will Propose Tax Increase to Bolster Medicare
NY Times – March 7
The president’s plan targets Americans earning more than $400,000 a year in an attempt to increase the program’s solvency by 25 years.
President Biden, as part of his budget set for release on Thursday, will propose raising a tax on Americans earning more than $400,000 as part of a series of efforts to extend the solvency of Medicare by a quarter-century.
The president will also propose expanding that tax, which helps fund health care programs, to cover a wider swath of income, including some earnings by business owners that currently are not subject to it, White House officials said in a fact sheet released on Tuesday morning. Mr. Biden will also seek to broaden a measure, passed last year entirely with Democratic votes, that allows Medicare to negotiate the price of certain prescription drugs with pharmaceutical companies, which is projected to save the government money.
His plans are unlikely to become law. They are almost certain to be rejected by Republicans, who won control of the House in November and roundly oppose tax increases.
But in focusing on Medicare in the budget and before its release, Mr. Biden is seeking to sharpen a contrast with Republicans and cast himself as a protector of cherished retirement programs — both for his likely re-election campaign and for a looming congressional battle over raising the nation’s borrowing limit that centers on taxes, spending and debt. …
this seems to be best way to fix the problem with Medicare/Medicaid. but i doubt it will pass, as mentioned the GOP has control of the house (just not total control), and while GOP members might vote for it (cause they dont want to loose the next election), would still have trouble getting through the senate. i suppose if they at the same also changed how SSN taxes works, but eliminating the CAP and lowering the rates. today, if you make more than 160,00 a year, your contribution to SSN could end as early as January
Dealing with inflation by boosting interest rates continues to seem like treating a disease by attacking its symptoms, doesn’t it?
it does. shades of how medical care in 1400?