Wednesday, March 15, 2023

What Is the Fed's Next Move?

Popular Economics Weekly


The retail Consumer Price Index rose from essentially zero in May 2020 to 8.9 percent YoY in June 2022. It has dropped to 6 percent in February, per the US Census Bureau’s latest inflation report.

This is what panicked Federal Reserve officials to begin the draconion interest rate increases that have caused at least two bank failures, and maybe more, of mid-size banks whose oversight was weakened with a modification of the Dodd-Frank legislation in 2018.

The largest failure to date is the Silicon Valley Bank, whose depositors withdrew a record $42 billion in a matter of days. Taxpayers might now be picking up the tab because of the promise by the US Treasury and FDIC to make all depositers whole (but not stock and bond holders).

The rising costs of renting and homeownership accounted for more than 70 percent of the increase in consumer prices last month due to the well-documented housing shortage.

The cost of recreation, plane tickets, auto insurance and furniture also rose sharply because the service sector is booming. Leisure/Hospitality, Education & Health had the fastest job growth in last Friday’s February unemployment report.

Some good news was that the cost of energy, including gas and natural gas, declined in February. And grocery prices rose 0.3 percent to mark the smallest increase in 21 months. They are still up 10.2 percent in the past year, however.

The wholesale cost of goods also fell last month in the Bureau of Labor Statistic’s Producer Price Index as well, led by the third straight decline in food prices. Notably, wholesale egg prices sank 41 percent. The cost of eggs had soared since the fall, doubling in price in some parts of the country.

The PPI report captures what companies pay for supplies such as fuel, metals, packaging and so forth. These costs are often passed on to customers at the retail level and give an idea of whether inflation is rising or falling.

Crunching the numbers, it has taken nine months for CPI inflation to drop to 6 percent from its peak last June. It should take approximately six months to return to the Fed’s 2 percent inflation target, if it continues to decline at the same rate that it rose, which is sometime in the fall.

But supply chains are taking longer to recover because of China’s COVID missteps and the Ukraine war that has no end in sight.

So what is the Fed to do? It would be a good time to pause and see if inflation continues to decline, as well as to ascertain whether higher interest rates do more damage to the banking industry that may have invested too heavily in certain assets.

Harlan Green © 2023

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