Saturday, August 27, 2022

Powell chooses inflation > growth. But inflation is already slowing down in Real America.

After a sizable leap of 5.4% in the Consumer Price Index in the first 6 months of 2022, inflation seems to have calmed down quite a bit in July and August. Gas prices have consistently fallen since peaking in mid-June, and AAA says the nationwide cost of a gallon of gas is now $1.15 below those record highs.

And Friday began with more evidence that inflation was leveling off, in the income and spending report for July. This led one of President Obama's top economic advisors to respond with (cautionaary) optimism .

We also saw signs on Friday that the calmer inflation figures were getting the attention of policy-makers, although with caution that we need to see more of it before entirely backing off on tightening money.

Atlanta Federal Reserve President Raphael Bostic said Friday he's leaning toward a half a percentage point interest rate hike in September following the better-than-expected inflation data released earlier in the morning.

"I'm leaning a little more towards 50 [basis points]," Bostic said, during an interview on CNBC.

Bostic said the July personal consumption expenditure index data, which came in better than the market expected, made him "happy."..

The Atlanta Fed president said there was "still a long way to go" on rate hikes.

Bostic said he would like to see the Fed raise its benchmark rate to a range of 3.5%-3.75% by the end of the year and then sit still.
A 50-point hike would be lower than the 75-point hikes we've seen in the last 2 Fed meetings. But Bostic’s 3.5%-3.75% range would also be 1.25% above where we are today, which indicates another 50 points in September, and then likely 50 more points in November and 25 in December.

But it also puts the end of tightening in sight, which is good to hear. And the University of Michigan’s consumer sentiment also reflected a more upbeat mood from the lower inflation.
U.S. consumer sentiment improved further in August and households' near-term inflation expectations fell to an eight-month low amid declining gasoline prices, a survey released on Friday showed.

The University of Michigan's final August reading on the overall index on consumer sentiment came in at 58.2, up from 55.1 earlier this month and 51.5 in July.

The survey's one-year inflation expectations fell to an eight-month low of 4.8% from 5.2% in July, while the survey's five-year inflation outlook was unchanged at 2.9%, holding within the range that has prevailed for the past year.
Everything was going in a good direction. And then Federal Reserve Chair Jerome Powell decided to open up his mouth in front of a bunch of bankers and oligarchs later on Friday.

Speaking at the annual policy speech at Jackson Hole, Wyoming, Powell said in a very short speech, that “restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” according to a transcript of his remarks.

“Reducing inflation is likely to require a sustained period of below-trend growth,” he said. “Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

“In a speech of just 1,300 words, Powell says “price stability” nine times and he builds the case that a strong labor market is predicated on price stability,” Jeffrey Roach, Chief Economist, LPL Financial, told GOBankingRates. “In essence, Powell is clearly stating that right now, fighting inflation is more important than supporting growth. One glimmer of hope from the Chair’s comments is his view that inflation expectations appear well-anchored.”

And here's Friday's result of Powell's statements, which came about an hour after the market opened.

I understand the idea of trying to crush out the chances of a wage-price spiral, but this seems to be overdoing it. We don’t need to be trip-wired into a recession by the Fed jacking rates to high levels when it looks like a lot of these issues are sorting themselves out.

We have a labor imbalance because of high demand and because we have had over 1 million people DEAD and many others that have left the work force in the last couple of years. But that has already been reflected in higher wages and prices, and price pressures are less extreme as consumers adjust and supply disruptions clear.

That’s not just true domestically, but also with imports.

It's possible that Powell telling the oligarchs what they want to hear (they have this thing for “sound money” and "confidence in the Fed" in allowing profits to beat wages). And maybe we only see a couple of ½ point moves between now and the end of the year, with the Fed then standing back and seeing where prices and the overall economy goes from there.

That would be my preference, as it lessens the chances that our already deflating housing market doesn’t become a full-fledged crash that causes damage to most other sectors of the economy.

Unike the Fed, I believe that 5% inflation is MUCH better than 5% unemployment. And if we see unemployment go from our current 3.5% to 5% because the Fed is still operating in a 1970s mentality instead of dealing with the reality of the 2020s, and it screws up our politics in 2022 or (more likely) 2024, I will be quite angry.

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