Powell already draws fire

Investment Analysis Clubs Macro Economic Trends and Risks
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… even though he is far from done yet. Will support remain in place?

One of Powell’s biggest critics, Senator [], was quick to fire off a tweet decrying the “extreme” hike, which the Fed itself expects will push unemployment up to 4.4% from 3.7% currently — amounting to more than 1 million jobs.

“Chair Powell just announced another extreme interest rate hike while forecasting higher unemployment,” [] tweeted. “I’ve been warning that Chair Powell’s Fed would throw millions of Americans out of work — and I fear he’s already on the path to doing so.”…

https://edition.cnn.com/2022/09/21/business/nightcap-fed-pow…

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That senator was clearly dozing during High School Economics - or is just grand-standing to attract voters who were also asleep in school or who are too young (or too senile) to remember our last bout with double digit inflation and the pain it took to bring that down.

Jeff

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There is a better way to address wage inflation. Fix immigration. Raise the number of work visas permitted each year. We’re currently short about 6 million workers. Let people come and work! We don’t need to create unemployment to address inflation.

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She is right it will cause pain for some.

But her angle on populism is always off kilter.

The thing that needs to be addressed more readily is economic growth after the recession. Putting that on the FED is wrong. It wont work. It is an abdication not to take that on in Congress.

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… even though he is far from done yet. Will support remain in place?

I have a thesis that Powell is a lagging indicator. He was late on doing anything, I believe he is going to be late on letting up.

The indicators I have seen tell me that inflation is about to cool, which is the time to ease up, not after you’ve already crested the hill and are heading over the cliff. That’s what Volker did (not a criticism, most of it was necessary in 1980).d But if you want a “soft landing”, then you have to ease off before the crash, not after.

Given the lowering of gas prices, the easing of most of the housing market, the other indicators (like Syke’s post yesterday) and others, I’d say the time to cut back is now. That doesn’t mean stop, it means lighten up, make the next one a half point as a signal “We’re still on top of it, but lightening up”, and see where that takes us.

I see inflation slowing. I know it hasn’t shown up yet, and there will be some overhang (rents increasing, wage demands) but I’m hoping not to have to go through the dual recessions of 1980 and 1982 to get it back under control.

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Goofy,

The FED is working towards a shift from monetary policy leading the US economy to fiscal policy leading the US economy. This is the FED bowing out on some levels. This is a normalization in the market place of interest rates to be conducive towards the banking sector. It is yet to be seen if the banks are in trouble with this downturn. That should get interesting. In the 1948 bottom the banks were not in all that much trouble.

This report from closer to the time, 1947 to 1949 downturn, charts the main major fall in GNP was y/y between 1948 to 1949. At the bottom investment dropped off. Growth into 1950 was extreme.

https://www.nber.org/system/files/chapters/c2798/c2798.pdf

This also marks that worries over unemployment are probably overdone. In late 1948 layoffs did show up.

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GH: “Given the lowering of gas prices, the easing of most of the housing market”

My first question is, given the much higher cost of fuel overseas (pick any of the seas), how much of that reduction is caused by the US subsidy of releasing the strategic petroleum reserve into the domestic market. At some point, that will have to be replaced at taxpayer expense.

The easing of the housing market is nearly all a derivative of higher interest rates and is a sign that things are moving in the right direction, but since housing prices are in a bubble, there is quite a bit of room for a correction before we get to a rational level again.

Jeff

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My first question is, given the much higher cost of fuel overseas (pick any of the seas), how much of that reduction is caused by the US subsidy of releasing the strategic petroleum reserve into the domestic market. At some point, that will have to be replaced at taxpayer expense.

The SOR release is about 50m bbls; we import about 10m bbls a day, so to me this is more “virtue signaling” to the market than real solution to anything. Of course it’s not a full replacement at all, but spread over time it’s what, a couple million bbls a week? OK at the margin that might make a little difference, but hardly enough to change the market dramatically.

“Repaying at taxpayer expense” is a non-issue for me. Eventually, someday, sure. When prices are lower. Or not, when the Pentagon finds a couple billion they can spare (as they did to build a wall that wasn’t built) or whatever. Peanuts.

The easing of the housing market is nearly all a derivative of higher interest rates and is a sign that things are moving in the right direction, but since housing prices are in a bubble, there is quite a bit of room for a correction before we get to a rational level again.

“Bubble” is the operative word. Once popped they take a long time to re-bubble. Since we agree they’re already correcting, I don’t find it necessary to beat the sector with a stick until dead, a course-correction is all that’s necessary, and it’s already having a dramatic effect, it appears to me. The house-flippers are pretty much done, people are finished “moving up” unless they must (rather than “I feel like it” as has been true), companies are watching new builds, so a smaller increase - and tapering - is in order.

Unfortunately I am not on the Fed committee, but I hope they’re reading the signs and not being bullied into using a steam shovel when a tablespoon will do.

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While I don’t disagree with you on principle, Sticky Price Inflation is still rising.
https://fred.stlouisfed.org/series/CORESTICKM159SFRBATL

So are the Median CPI and the PCE index (with a tiny fall, could be noise).
https://fred.stlouisfed.org/graph/?g=chLp

Depending on the September and October print, the Fed may ease off to a 0.5% raise in the fed funds rate at their next meeting.

Their stated intent is (1) control inflation to 2% over several months so they are confident and (2) maintain a neutral fed funds rate that isn’t stimulating or slowing the economy.

They are far from either goal.

Powell has learned the Arthur Burns lesson from the 1970s: tapering off fed funds increases too early will result in renewed inflation.

Wendy

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My first question is, given the much higher cost of fuel overseas (pick any of the seas), how much of that reduction is caused by the US subsidy of releasing the strategic petroleum reserve into the domestic market. At some point, that will have to be replaced at taxpayer expense.

===================================================

The fossil fuels gurus and conservatives said that US releasing the strategic petroleum reserve into the domestic market will have negligible impact on prices.

Why do you think we need to replace all of it? With the economy getting out of oil in the long term we are not in any rush to replace it.

Jaak

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Powell has learned the Arthur Burns lesson from the 1970s: tapering off fed funds increases too early will result in renewed inflation.

I hope not because that’s the wrong lesson.

Burns didn’t “taper off”, he totally reversed course. As quickly as rates were raised, they were lowered again thanks to the pressure that Nixon applied because of the approaching election. Nixon always thought the mini-recession in his run with JFK was the cause for his losing that election *(and the widely suspected cheating, of course.)

But if you watch the trend lines, Burns’ rate raising does seem to have arrested the first inflationary spike, inflation retreats and then comes back full throat. While I can’t prove that the twin phenomena of “rate increase” and “inflation taming” ran causally in perfect tandem, I have long proposed that the real inflationary problems of the 70’s were caused by the sudden and dramatic increase in oil prices (over 1000%!) in 1973, while Nixon was still President.

Now there’s a lot of economic noise in that period: Bretton Woods, OPEC, Nixon’s Wage & Price Controls, even Watergate, which presaged a period of mistrust in government. But I hope it’s obvious I am not advocating a swift decline in rates, as happened when Burns knuckled under to Nixon.

What I hope for is a gradual diminution of increase , i.e. the next meeting a 0.5%, perhaps another 0.5%, then a quarter point, and then hold the line , not send it shooting back down to the level where it has been during one of the most unusual periods in our history. I have never thought the rates during the past decade, while necessary because of the near-depression of 2008, were “normal” and I don’t think we should look for them again any time in the future.

Slow and steady. I’m just afraid Powell and the other Fed heads are now running scared, and likely to over-react, just as they under-reacted earlier. I hope I’m wrong.

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