In an excellent piece in MarketWatch, Jeffry Bartash quoted Fed Chair Powell on remarks he made last week in a 60 Minutes interview. Why do Americans still seem unhappy with the economy in many surveys?
“People are going to the store, and they’re paying much more for the basics of life than they were two years ago, three years ago. And they’re not happy about it. And it’s fine that inflation is coming down,” he added, “but the prices they’re paying are still high.”
Bartash showed the reason why consumers still complain in a chart, though they see inflation improving in the New Year. Among commodities; flour, steak and butter prices are still high; sporting events and care insurance highest in the service sector.
The University of Michigan’s sentiment survey, for instance, reported consumers much more optimistic about their finances and the inflation outlook.
“Consumer sentiment confirmed its early month reading, surging 13% to reach its highest level since July 2021, reflecting improvements in the outlook for both inflation and personal incomes,” said survey director Joanne Hsu. “January's gain has been exceeded only five times since 1978, one of which was last month at an even larger increase of 14%. Consumers expressed gains in their views on their personal finances as well as the macroeconomy; the short-run business outlook soared 27%.” (my bold)
She said year-ahead inflation expectations eased to 2.9 percent, down from 3.1 percent in December and 4.5 percent in November. The current reading is the lowest since December 2020 and is now within the 2.3-3.0 percent range seen in the two years prior to the pandemic.
Maybe this is why Fed Chair Powell was so ambiguous at his last post-FOMC press conference, reporting the Fed Governors decided no more rate hikes were warranted. But they needed to be more confident that inflation had been tamed before actually cutting their Fed Funds rate.
Can the Fed really hope to bring down the inflation rate(s) down much further (there are several inflation indicators to choose from) without causing a recession? There have only been three ‘soft landings’ since the 1960s—i.e., when the Fed’s credit tightening didn’t cause a recession.
Why? Because it would in fact take a serious recession for prices to fall back to pre-pandemic levels in the time frame the Fed Governors would like. Businesses would then begin to lay off their workers as their profit margins fell. It happened in Japan with their busted real estate bubble that set economic growth back for decades, and from which the Chinese economy is now suffering.
Actual deflation: when prices fall rather than rise more slowly, is a terrible thing to avoid as past history has shown.
This is why financial markets are now beginning to push back at Powell’s Fed Governors seeming indecision on when to cut interest rates.
Mohamed El-Erian, chief economic adviser at Allianz, said in a Wall Street interview: “What consensus has been expecting, has gone from a soft landing to hard landing, to no landing, back to hard landing, to crash landing, back to hard landing, back to soft landing. That's an incredible sequence and it tells you that we've lost our anchors. We've lost our economic anchors, we've lost our policy anchors, and we've lost our technical anchors.”
And the Philadelphia Federal Reserve in a just-released survey of top economists, has upgraded their forecast of healthy 2024 economic growth.
It said the near-term outlook for the U.S. economy looks better now than it did three months ago. The 34 leading economists’ forecast predicted the economy will expand at an annual rate of 2.1 percent this quarter, up from the prediction of 0.8 percent in the last survey.
What is the Fed to do with such conflicting data? Will it lower inflation without creating deflation?
Harlan Green © 2024
Harlan Green on Twitter: https://twitter.com/HarlanGreen
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