Thursday, April 13, 2023

The Fed notes recession may loom, but keeps chasing the ghost of inflation. WHY?

News came on Wednesday that in addition to INFLATION WATCH, central bankers think that recession may be just around the corner. But that didn’t stop them from continuing to raise interest rates to their highest levels in 16 years.
“Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years,” the meeting summary said.

Projections following the meeting indicated that Fed officials expect gross domestic product growth of just 0.4% for all of 2023. With the Atlanta Fed tracking a first-quarter gain around 2.2%, that would indicate a pullback later in the year…..

Several policymakers questioned whether to hold rates steady as they watched to see how the crisis unfolded. However, they relented and agreed to vote for another rate hike “because of elevated inflation, the strength of the recent economic data, and their commitment to bring inflation down to the Committee’s 2 percent longer-run goal.”

In fact, the minutes noted that some members were leaning toward a half-point rate rise prior to the banking problems. Officials said inflation is “much too high” though they stressed that incoming data and the impact of the hikes will have to be considered when formulating policy ahead.

“Several participants emphasized the need to retain flexibility and optionality in determining the appropriate stance of monetary policy given the highly uncertain economic outlook,” the minutes said.
Well, we’ve gotten quite a bit of clarity on the inflation side over the last couple of days.

And that 0.1% rise in CPI is even tamer than it looks, with the first monthly decline in “food at home” (i.e. grocery) prices in 2 ½ years, and a 0.2% drop in overall prices if you take out “shelter”, which as we’ve mentioned before, is a misleading factor that is often several months behind reality.
For most goods and services, the process of recording prices is relatively simple: The bureau sends someone to a store, or calls a business, to see what they are charging for a bag of rice or to send a plumber out to repair a leaky faucet. Recording housing prices isn't as straightforward. The bureau measures actual rental rates for houses, and, using that data, estimates how much owner-occupied houses would rent for if they were put on the market.

“It's a little bit of a fuzzy metric,” said Ryan Sweet, chief U.S. economist at Oxford Economics.

OER is effectively the rent that the homeowner is giving up by living in their house instead of renting it out. It’s influenced by housing prices, but not directly tied to it….

As a result of its methodology, the all-important OER measure tends to lag behind movements in nationwide home prices by about a year. It took a long time for the pandemic-era surge in home prices to show up in the Consumer Price Index, and it will likely take a long time for the recent cooling of the housing market to show up as well.
I’ll also note that while the jobs market has been historically strong, there are signs of weakening in the last few weeks, including a recent increase in new filings for unemployment.
The number of Americans filing new claims for unemployment benefits increased more than expected last week, a further sign that labor market conditions were loosening up as higher borrowing costs dampen demand in the economy.

Initial claims for state unemployment benefits rose 11,000 to a seasonally adjusted 239,000 for the week ended April 8. Economists polled by Reuters had forecast 232,000 claims for the latest week.
More importantly, the Department of Labor recently went back to pre-COVID methods of determining seasonal changes in unemployment claims, and it means that there has been an uptick in claims for 2023.
Annual revisions to the data published by the government last week showed claims much higher so far this year than had been previously estimated, aligning with a rush of high-profile layoffs in the technology industries as well as other sectors highly sensitive to interest rates.

Claims however remain below the 270,000 level, a breach of which economists say would signal a deterioration in the labor market. Last Friday's employment report showed a solid pace of job growth in March and the unemployment rate falling back to 3.5%, while wage gains remained moderate.
So we are seeing the labor market bounce back toward balance after heavy labor shortages in 2022, which is what the Fed claims they want to see.

So why would the Fed think that any further rate hikes are warranted, since it’s clear their prior rate hikes are having an effect on slowing the economy and inflation has gone back to a manageable level? And what’s so magical about 2% inflation vs 4% inflation, if wage and income growth for everyday Americans is outpacing that?

Can you explain to me what's wrong with lower-income workers being the biggest gainers in the workforce over last 2 years?

If Federal Reserve members were in touch with the real world or even paying attention to what the data is telling them, they’d at least keep the Fed Funds rate at an above-inflation 5% and give it 3 months to see where things are going.

Which makes me suspicious about the real reason the Fed might hike further, and DC Dems need to be asking a lot more questions about what Republican Jerome Powell and his fellow central bankers really want to see.

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