A headline reporting on Fed Chairman Powell’s latest testimony to congress said the Fed will battle inflation until it is subdued, sounding more hawkish because January numbers for retail spending, employment and inflation were stronger than expected.
The problem is most inflation is being caused by factors outside of the Fed’s control.
So good luck, I say, in continuing to boost interest rates without causing a recession. The last time the Fed was in such a position—battling surging inflation in early 2000 that brought on the housing bubble and was due to circumstances largely beyond its control (The War on Terror)—it resulted in the Great Recession.
The Fed had so over-reacted by raising interest rates 16 consecutive times under Fed Chair Alan Greenspan that it took his successor Ben Bernanke’s emergency Quantitative Easing policies to keep the U.S. and world economies from turning it into a second Great Depression.
The cost this time of the Fed holding to its 2 percent inflation target could be 2 million workers losing their jobs, according to Massachusetts Senator Elizabeth Warren.
Today’s Fed hasn’t seemed to even acknowledge that a major component of the current inflation is record corporate profits from the post-pandemic recovery when corporations took advantage of the supply shortages to goose their profit margins.
Economic Policy Institute economist Josh Bivens estimates that at least half of the current inflation was caused by said increase in corporate profits in a study out last year (see EPI graph).
“Since the trough of the COVID-19 recession in the second quarter of 2020, overall prices in the NFCorporate sector have risen at an annualized rate of 6.1%—a pronounced acceleration over the 1.8% price growth that characterized the pre-pandemic business cycle of 2007–2019. Strikingly, over half of this increase (53.9%) can be attributed to fatter profit margins, with labor costs contributing less than 8% of this increase.”
January’s consumer spending was also boosted by the 8 percent inflation-adjusted rise in Social Security payments in the New Year.
Consumers reacted accordingly with January consumer spending up 1.8 percent, while personal incomes rose 0.6 percent in the BEA’s latest personal income (PCE) report.
Fear of what Fed Chair Powell may say and do next is already affecting what consumers and businesses may do next. The Conference Board Index of Leading Economic Indicators (LEI) already predicts a recession sometime this year.
“Among the leading indicators, deteriorating manufacturing new orders, consumers’ expectations of business conditions, and credit conditions more than offset strengths in labor markets and stock prices to drive the index lower in the month,” said said Ataman Ozyildirim, Senior Director, Economics, at The Conference Board.
Maybe Powell’s Fed is just playing it safe in hinting that more pain is possible if January’s boost in spending and inflation isn’t a temporary glitch as more data from February come in.
Friday’s upcoming unemployment report is one such sign, since January’s red-hot employment report of 537,000 new jobs scared the Fed into believing higher inflation might be prolonged.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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