Thursday, June 29, 2023

Solid growth, low unemployment, inflation dropping. So more rate hikes? WHY?

Usually the 3rd reporting on GDP levels is anti-climactic and somewhat irrelevant. Most data has already been reported in at this point, and you’re talking about economic events that happened 3-5 months ago. But today was an exception.

Gross domestic product increased at a 2% annualized pace for the January-through-March period, up from the previous estimate of 1.3% and ahead of the 1.4% Dow Jones consensus forecast. This was the third and final estimate for Q1 GDP. The growth rate was 2.6% in the fourth quarter.

The upward revision helps undercut widespread expectations that the U.S. is heading toward a recession. A separate economic report released Thursday showed layoffs running well below expectations, indicating that labor market strength has held up even in the face of the Federal Reserve’s 10 interest rate hikes totaling 5 percentage points.

According to a summary from the department’s Bureau of Economic Analysis, the change came in large part because both consumer expenditures and exports were stronger than previously thought.

Consumer spending, as gauged by personal consumption expenditures, rose 4.2%, the highest quarterly pace since the second quarter of 2021. At the same time, exports rose 7.8% after falling 3.7% in the fourth quarter of 2022.
Sounds pretty good to me. But not for Federal Reserve Chairman Jerome Powell, who now is saying more rate hikes are likely to come in the near future.
"We did take one meeting where we didn’t move," Powell said during an event held by the Spanish central bank in Madrid. "We expect the moderate pace of interest rate decisions to continue."

The labor market, with unemployment at 3.7%, is very tight, Powell noted. Underlying inflation, while down from its peak last year, is still running at more than twice the Fed's 2% target.

"Inflation pressures continue to run high, and the process of getting inflation back down to 2 percent has a long way to go," Powell said.

I’ve asked this before, and I will ask it here. What is so magical about a 2% inflation rate? I know it was the general pre-COVID baseline after George W Bush took over in 2001, taxes were cut for the rich, and real wages stagnated between then and 2019. But was that such a great economy in Real America?

That’s what this is really about, isn’t it? Instead of having a wide mass of desperate workers willing to take any garbage wages that they can, the labor market is tight, and workers can actually grab more money for themselves. Job openings and job quits may be down from where they were 12 months ago, but are still high. New jobless claims are higher than they were in late 2022, but are still only between 235,000 and 265,000 a week – basically the same as they were a year ago.

In addition, real hourly wages have been gaining since inflation peaked in June 2022 - up by 5% in the last 12 months, while CPI is only up 4.1%.

Side note - when unemployment claims were that low in 2018 and the Fed was raising rates from 0%, then-President Trump threw a fit because it was increasing interest on his massive debts it threatened the continuance of (pre-COVID) economic growth.

Powell’s reaction to Trump’s whining? The Fed stopped hiking at the start of 2019, when Fed Funds rates weren’t even half as high as they are today. But now Jerome Powell keeps saying that 5% wage growth, 4% inflation, 4% unemployment, and 2% growth is a bad thing, and requires more rate hikes to try to change?

I’m not seeing the downside in where we stand today, and given June’s big rise in consumer confidence after the debt ceiling BS subsided, most honest Americans seem cool with it as well.

The only people not cool with it are rich Republicans that want to see Joe Biden and other Dems lose in 2024, increasing the chances for you and your fellow oligarchs to get away with even more larceny and even lower taxes.

But wanting a GOP win wouldn’t be Jerome Powell’s motivation for saying we should keep tightening. Would it?


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