The big surprise at Federal Reserve Chairman Powell’s latest press conference was despite strong job numbers and inflation still above the Fed’s 2 percent target rate, the Fed governors are acting more dovish.
Why? They don’t want a repeat of the 1970’s stagflationary era, when economic growth slowed but inflation remained high.
The just released minutes of its last FOMC meeting highlighted the Fed Governors’ worries. And Powell at the press conference said, "I think it is unlikely that the next rate move would be a hike…the Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year.”
Powell also said, as quoted on MarketWatch, “I was around for stagflation, and it was 10% unemployment, it was high-single-digit inflation,” he said. “Right now we have 3% growth, which is pretty solid growth, I would, say by any measure, and we have inflation running under 3%.”
“So I don’t see the ‘stag’ or the ‘flation,’ ” he said.
That’s all true. Last year’s GDP growth rate averaged 3 percent and the annual inflation rate with its preferred PCE index had declined to 2.5 percent.
This is big news in an economy still at full employment. The latest JOLTS report showed more than 8 million job openings in April, basically unchanged, according to the latest Bureau of Labor Statistics report. (Black line in graph shows job vacancies.) Whereas the Federal Reserve and financial markets have been hoping for weaker job numbers as insurance that inflation would continue to decline.
“Over the month, the number of hires changed little at 5.5 million while the number of total separations decreased to 5.2 million,” said the BLS.
That means there were 300,000 more hires than total separations, which could mean Friday’s official April unemployment report would be basically unchanged from last month’s 303,000 nonfarm payrolls increase.
The monthly inflation figures have ticked up slightly of late but remain in the 2-3 percent range annually. It has upset some markets (e.g., bond funds are currently losing money.)
Why hope for slower growth, anyway? Isn’t Wall Street supposed to react to corporate earnings? Some 80 percent of businesses reported higher earnings in the first quarter, even though the initial first quarter GDP growth estimate was just 1.6 percent, down from last quarter’s 3.6 percent.
It’s the dilemma that our Federal Reserve has put the markets in. The Fed refuses to concede that there is a soft landing, which means interest rates will remain at record heights for the present, as high as they were in 2008 that caused the Great Recession.
But the Great Recession was also caused by slack or no market oversight by a Republican administration that allowed A+ ratings on junk bond and mortgage securities that ultimately busted the housing bubble.
Powell also cautioned that the economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.
It was a remarkable press conference designed to assure Americans that the Federal Reserve wasn’t going to be the spoiler of this post-pandemic recovery in an election year.
Harlan Green © 2024
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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