In 2022, Federal Reserve Chairman Jerome Powell assured us that inflation was “transitory.” Then, he turned tail and decided it wasn’t actually transitory. Now, Powell wants us to believe that the Fed can thread the proverbial needle by getting inflation down without a large increase in unemployment.
I don’t want to misquote him, so here’s the actual snippet. At a Senate Banking Committee hearing, Senator Tina Smith asked Powell if he saw “a path for inflation to continue slowing without seeing significant job losses and doing harm to middle class families?” Powell replied, “I do.”
Of course, that’s easier said than done. The Fed has two main tools to tamp down inflation: raising interest rates, and halting its quantitative-easing bond-buying program. Both of those measures put enormous strain on an already strained U.S. banking system.
We’ve already detected the signs of a not-so-soft landing in the economy. Major technology companies from Meta Platforms to Microsoft and Alphabet have laid off workers. The unemployment rate recently perked up from 3.4% in April to 3.7% in May.
Courtesy: Wolf Richter
The housing market is crashing, with the U.S. home price dropping month-over-month by the most since 2011. High interest rates means high mortgage payments, so unfortunately many families are forced to rent instead of enjoy the American Dream of homeownership in 2023.
A weakening housing market is another symptom of a deteriorating labor force. Powell put a positive spin on this, however, declaring that the labor market is gradually cooling and “that’s what we would want to see.”
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Fed officials see the unemployment rate rising to 4.5% by the end of 2024. In recent history, whenever the U.S. unemployment rate fell below 4% but then rose steeply, a recession inevitably followed.
The optimists and Fed apologists will undoubtedly counter that “This time it’s different,” and maybe it will be. Harvard economist Jason Furman isn’t so confident, though, as he envisions a “bad scenario” in which the unemployment rate will need to rise closer to 10% to get inflation back to target (which is set by the Federal Reserve at 2%).
Courtesy: Bespoke Investment Group
Another problem that Powell doesn’t seem to want to discuss is that multiple bond yield curves are inverted now. The 10-year/3-month Treasury yield curve has reportedly been inverted for 154 trading days, so it’s starting to look like 2007 again.
Then there’s the ballooning national debt, an issue that apparently doesn’t matter until it does. The U.S. national debt has reportedly increased by $638 billion since the government suspended the so-called debt ceiling, so don’t be too surprised if another round of money printing and quantitative easier occurs sooner rather than later.
But then, that would cause inflation to rise, and the Fed would have to tighten again in order to tamp it back down… This is the conundrum that governments and central bankers must face after years of policy errors, though it’s the citizens who will ultimately pay the price for this.
The funny part is, Powell assured the Senate Banking Committee that the Federal Reserve “is trying to avoid the mistake of going too far.” It’s a good thing I wasn’t on the committee, as I would have told Powell without hesitation that it’s much too late for that.
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