Critics, second guessers and Monday morning quarterbacks are speaking out en masse since the Fed’s 50 basis point rate hike on Wednesday.
In perusing mainstream headlines and articles since then, I’ve found that 9.5 out of 10 of op-ed writers, economists and other pundits believe that Chair Jerome Powell and his policymaking colleagues are on the verge of sending the economy into a recession.
They say, no ifs, ands or buts about it. The only question is, How deep and prolonged will the downturn and resulting pain be? In other words, forget about any soft landing.
The consensus of the naysayers is that the Fed started their quantitative tightening too little, too late. This side also argues that:
(1) The Fed’s projection of last year’s inflation surge being transitory was naïve (at best) and potentially catastrophic (at worst); and
(2) As a result, they kept interest rates too low for too long and kept buying Treasuries and mortgage-backed securities when they should have stopped that much earlier.
The Fed, the Bank of England and the European Central Bank all raised interest rates this week again to fresh multi-year highs.
They just can’t seem to help themselves.
At the same, they each suggested or explicitly warned that there is more tightening coming plus a willingness to hold their policies at hawkish levels for a while.
They just can’t seem to help themselves.
Let’s focus on the Fed. Inflation and all of its major drivers fell in the last half of 2022.
I’m not going to say it fell sharply, steeply or significantly, because some prices have come down – some even sharply, some just a tad – and some have not at all.
The so-called price deceleration occurred despite the pace of economic growth, which picked up in the second half of the year and unemployment remained fairly static.
We know that the goal of the Fed’s statutory dual mandate is to balance the risks of inflation versus the benefits of solid economic growth and maximum unemployment.
Jeremy Bivens points out that currently, “the benefits of low unemployment are enormous, and the risks of inflation are retreating rapidly.”
Here’s what he wrote before the Fed’s 25-basis point rate hike on Wednesday:
“If the Fed lets the current recovery continue [quickly] by not raising interest rates further at this week’s meeting, 2023 could turn out to be a great year for the economic fortunes of American families.
“It is time for the Fed to stand pat on interest rate increases and wait to see how the lagged effects of past increases enacted in 2022 will filter through to the economy.
“Continuing to raise rates in the early stretches of 2023 will be a clear mistake and pose an unneeded threat to growth in the next year.”
He envisioned a Powell press conference after a meeting at which the Fed decided to leave rates alone, emphasizing these points:
Over the last several months, consumers’ expectations of future inflation have been steadily falling – a sign perhaps that Americans had confidence in the Fed's war on prices.
Courtenay Brown and Neil Irwin, who say that changed last month, pointed out today that for the first time in six months, median inflation expectations of everyday households in the year ahead rose.
They increased, in fact, by a half-percentage point to 4.7%, according to the New York Fed's latest Survey of Consumer Expectations.
The report comes as expectations for the level of price increases for everyday goods and services — like food, gas, rent and medical care — decreased in March.
After 2023's hotter-than-expected inflation reports, the March data suggest that the public now believes inflation won’t fall quite as much as they have been anticipating.
Brown and Irwin caution, however, that one month of new numbers doesn’t necessarily mean that “inflation expectations are becoming unanchored. But,” they add, “more readings of this kind could worry officials.
Median inflation expectations at the three-year-ahead horizon ticked up by 0.1%, to 2.8%, but they fell slightly (by 0.1 percentage point) to 2.5% at the five-year-look-ahead timeframe.
Consumers also pushed up expectations for household income growth and, for the first time since last fall, how much they plan to spend.
Mean unemployment expectations — or the mean probability that the unemployment rate will be higher one year from now — increased by 1.3 percentage point to 40.7%.
The average perceived probability of losing one’s job in the next 12 months decreased by 0.4 percentage point to 11.4%. But the average probability of voluntarily leaving one’s job declines by 1.5 percentage points to 19.3%.
They warned, too, that it was getting harder to get a loan – a point Brown and Irwin say is worth watching in the wake of the recent bank failures and bailouts.
The share of households reporting that it was more difficult to access credit compared to one year ago rose to the highest level in the survey's 10-year history.
Notably, year-ahead expectations about households’ financial situations also improved – with fewer expecting to be worse off and more respondents expecting to be better off a year from now.