By Michael O’Neill
The Fed hiked rates by 0.75% on July 27. Forecasting such a move was the equivalent of conceding a three inch putt in a golf game. That’s because the officials telegraphed the move when they pushed back against calls for a 100 bp increase after the 9.1% June inflation print on July 13.
The FOMC statement repeated, “the Committee will continue to monitor the implications of incoming information for the economic outlook.” Well, doh! Isn’t that why they exist?
Fed policymakers used to say data dependence did not mean reacting to every rise or fall in economic statistics. Not anymore. Now they plan to be “nimble.”
There a two more CPI and employment reports released before the next FOMC meeting (Sept.21), and those reports will determine whether the Fed hikes 50 or 75 basis points.
The prospect of sharply higher rates fueled speculation that the US is falling into or is already in a recession.
President Joe Biden declared, “The US is not in a recession.” Biden is focused on the mid-term elections (November 8) and keeping his government’s razor-thin majority, so of course, the economy is booming.
Treasury Secretary Janet Yellen (and former Fed Chair) is shaking her “No Recession” pom poms on the sidelines of the FOMC meeting. She explained, “A recession is broad-based weakness in the economy. We’re not seeing that now.” She added, “We have a very strong labor market. when you are creating almost 400,000 jobs a month, that is not a recession.” She works for Biden, so her view is a tad biased.
Jerome Powell agrees with his former boss. “I don’t think the US is currently in a recession.” Then he cited the strong labor market as proof.” However, Mr Powell did note that forecasting is difficult, stressing that “these are not normal times.”
The Biden Administration, Ms Yellen and Mr Powell may not believe the economy is in a recession, but plenty of other economists think that if it has not arrived, it soon will. If the looming recession was a commuter, the car just turned into the driveway.
The International Monetary Fund (IMF) and JP Morgan suggest the world is heading into a recession.
The IMF’s July World Economic Outlook is subtitled “Doom and More Uncertainty.” They cut their 2022 global GDP growth forecast to 3.2% from 3.6% in April. They noted that the risks to their view were overwhelmingly tilted to the downside due to rising inflation, slowing growth in China, and the war in Ukraine.
JP Morgan’s view is leaning towards a global recession as well. They point out that the global economy lost considerable momentum this year, citing rising inventories and shrinking purchasing power which could easily magnify into a recession.
Betting that the Fed will be able to drive inflation down to its 2.0% target while avoiding a recession is probably a mistake. Jerome Powell and the FOMC Committee members lost a boat-load of credibility when they failed to react to rising prices in a timely manner, so it is hard to believe the Committee suddenly has a good grasp on the outlook.
Policymakers want you to believe things are different this time, and they are, but not for the reasons Mr Powell and colleagues believe.
They are different because this cohort of Fed policymakers is not as good as their predecessors. Perhaps they were too busy trading for their own accounts to keep their focus on the economy.
At least one former central banker agrees.
Graeme Wheeler, a former governor of the Reserve Bank of New Zealand, co-authored a study titled “How Central Bank Mistakes After 2019 Led to Inflation.”
The title says it all. The introduction notes that “A persistent theme is that of central bank hubris; a trust in policy frameworks, models, assumptions and their own professional competence that would eventually prove to be unwarranted. The authors conclude that central banks can restore their lost credibility, as guardians of price stability, only by admitting their errors and specifying clearly how they intend to improve their performance in the future.
It would be a bit of a stretch to believe that the Fed (and other central bankers) will be able to lower inflation to target levels by merely raising interest rates 1-1.5% above the top of the neutral rate range of 3.0%.
Recession or slowdown. Either way, the Fed and most analysts believe the landing will be a soft one; although it could be so soft, you won’t even know you are drowning.