Has Chairman Jerome Powell’s Federal Reserve been suffering from a giant inferiority complex, from the fear that its actions are not being taken seriously enough and so it tends to overreact to crises?
That seems to be the case today. As the Federal Reserve of St. Louis (FRED) graph that dates from 1950 and WWII makes plain, the inflation rate had been on a steady downward trend since its 1980 peak of 14 plus percent and five subsequent recessions (gray bars in graph) since then.
Each Fed nudge of higher rates when inflation spiked since then caused those subsequent mild recessions, until the COVID-19 recession that lasted just two months. Instead of plunging after the COVID-induced recession as had the others, inflation soared because the whole world’s economies were shut down while still growing at full throttle. Yet with the aid of governments’ largesse demand returned to pre-COVID levels, but supply-chains had dried up.
Hence the sudden rise in inflation, which is subsiding as supply-chains have begun to play catch up. So it’s easy to see from the graph how unique has been this pandemic-fueled inflation surge that panicked the Fed to raise interest rates so quickly, and is only know easing off the credit brakes with several bank failures.
Wall Street markets rallied this Wednesday with heartening news. Retail inflation dropped to 4.9 percent, the lowest in two years. The Consumer Price Index inflation rate was last at 4.9 percent in May 2021.
“The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in April on a seasonally adjusted basis, after increasing 0.1 percent in March, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 4.9 percent before seasonal adjustment.”
It is still high and consumers’ main concern while weathering the pandemic with its shortages of everything. But FRED’s graph shows clearly it was caused by the pandemic and two-month recession of April 2020, but will continue to abate as we recover from the longer-term effect of COVID-19.
It has now become the concern of the housing industry as well, with a very extreme housing shortage. The NAR’s chief economist Lawrence Yun explained in a recent interview that the Fed’s aggressive rate hikes have hurt regional banks and the housing market. He noted that inflation has already started to calm, but rents on apartments and single-family homes remain elevated that comprise 40 percent of the CPI inflation index.
“Inflation will not reignite – inflation will come down closer to 3% by the year’s end,” Yun stated. “Inflation has calmed down while rents are still accelerating.”
Yun said apartment construction has reached a 40- to 50-year high.
“Rent growth will decrease because apartment construction – entry units coming on the market – is already in the pipeline,” Yun added. “We are already moving in the right direction towards consumer price inflation.”
The inflation rate reached its 9 percent high in June of 2020, when markets began to begin to replenish what was lost with the supply-chain disruptions to food supplies, available housing, and resources in general.
Why does the Fed still think its actions aren’t being taken seriously enough? Wall Street is taking it seriously, which is why financial markets have lost so much value over this year as the Fed continued to raise short-term rates.
With financial markets back in line, the Fed is now picking on the rest of the economy—consumers that make up two-thirds of all economic activity. Consumers don’t seem to be taking the Fed seriously, because they haven’t substantially cut back their spending way, so must be punished by targeting their wage increases as too excessive.
Maybe if the Fed took itself more seriously, believed that its actions have real consequences for all Americans, it might instead pat itself on the back and say it was a job well done.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
No comments:
Post a Comment