Why have stocks and bonds been gyrating so much this year? It’s partly because a confused Federal Reserve doubts inflation is approaching their 2 percent target, and so won’t signal when they might begin to reduce their sky high interest rates.
Financial markets are confused as well because they still don’t know if we will have higher growth, or a recession. That’s difficult to understand since we have been at historically low unemployment for more than one year, which is hardly a sign of looming inflation.
At least one GDP growth optimist, the Atlanta Federal Reserve, has been putting what it calls its GDPNow estimate of future economic growth very high, predicting a 5.1 percent growth rate in the third quarter, more than double the first two quarters.
Why? It’s mainly because there has been a huge surge in job formation—336,000 new jobs in September alone and higher revisions in the past two months.
The Atlanta Fed in its latest forecast said, “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 5.1 percent on October 10, up from 4.9 percent on October 5. After last week's employment situation release from the US Bureau of Labor Statistics and this morning's wholesale trade report from the US Census Bureau, the nowcasts of third-quarter real gross private domestic investment growth and third-quarter real government spending growth increased from 5.9 percent and 2.2 percent, respectively, to 6.7 percent and 3.0 percent.”
That’s a mouthful to comprehend but other forecasters are also revising their Q3 GDP growth estimates as high as 4 percent.
Another indicator of robust job growth is the JOLTS report on job openings, a measure of labor demand. The number of job openings rose 690,000 to 9.610 million job vacancies on the last day of August. That was the biggest jump in two years. And data for July was also revised higher to show 8.920 million job openings instead of the 8.827 million previously reported, as I reported last week.
Meanwhile, the number of so-called dovish Fed Governors that want to halt further rate increases is growing. Atlanta Fed President Raphael Bostic said the Fed can afford to be patient if inflation continues to slow, speaking at an event in Atlanta.
The goal of the Fed is to reduce inflation to 2 percent a year, Bostic said, but the central bank doesn’t have to get there “tomorrow,” reported MarketWatch.
“I think our policy is sufficiently restrictive at this point to get us to the 2% target,” Bostic said later in a call with reporters.
Another dove is the Minneapolis Fed President Neil Kashkari. Kashkari, who is a voting member of the Fed’s interest-rate committee this year, said the job market has remained resilient even with all the Fed’s rate hikes over the past year and a half.
“We feel like we’re on track for a soft landing,” Kashkari said, with inflation coming down and avoiding a deep recession. “So far, things are looking hopeful, but it’s too soon to declare victory.”
Whereas many Fed officials are being coy about future inflation trends because they fear the economy could overheat once again, leading the Fed to raise interest rates even higher, hance the recession fears.
But what could cause another recession unless we have another pandemic—wars and soaring energy prices? It is not happening at present. But this uncertainty will keep Wall Street in a tither for months, and the Fed from reducing their interest rates anytime soon, unfortunately.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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