This Week in Bidenomics: The Fed Killjoy

If Donald Trump were still president, he would be trashing the Federal Reserve. President Biden, for his part, keeps his mouth shut. But he can’t be content with a gloomy Federal Reserve that refuses to celebrate steadily improving inflation.

On December 13, markets rejoiced when the monthly inflation report showed a better-than-expected drop from 7.7% annualized inflation in October to 7.1% in October. The details were largely encouraging. The price of goods was stabilizing as Americans shifted spending toward services, in a return to pre-COVID norms. Gasoline prices fell and are likely to fall further. Used car prices, which rose at a crazy 41% rate in January, have finally started to fall.

Stocks rallied on the inflation news, as it suggested the Fed may ease up on its rapid tightening a bit sooner. Since its first rate hike in March, the Fed had raised rates by almost 4 percentage points, one of the fastest tightening cycles in its history. The Fed had wired another half-point hike on December 14, which is what happened. So far so good.

But the Fed’s public statement and Chairman Jerome Powell’s comments after the hike suggest the Fed is the last group in town to find the inflation news encouraging. The Fed’s rate-raising committee has forecast rates higher for 2023 than they were just weeks earlier, saying it doesn’t think a new round of interest rate cuts will start until 2024. That’s a more aggressive stance from what the markets anticipated. “Restoring price stability will likely require a tight policy stance for some time.” Powell said on December 14.

Markets dipped for the rest of the week, with the S&P 500 (^GSPC) is down more than 5% from the time Powell began speaking on Dec. 14. Disappointment is becoming familiar. Since the summer, a gradually improving outlook for inflation has led the market to hollow rallies that the Fed quickly drowns out with its next interest rate move. “This has to end soon,” Mr. Market seems to think, before the Fed steps in and says, “No, this won’t end anytime soon.”

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The risk is not just a long wait for inflation to normalize and for the Fed to stop raising. The Fed’s militancy could end up causing a larger-than-necessary economic slowdown, or a full-blown recession, or a worse-than-necessary recession. “Stocks Fail as Recession Fears Mount,” blared the Wall Street Journal’s lead headline on Dec. 16, capturing pessimism among investors.

Forecasters are now downgrading their outlook for 2023 and beyond, based on a Fed that doesn’t seem to care if it triggers a recession, if that’s what it takes to lash out at inflation. In a December 16 report, Bank of America predicted a “policy error” caused by excessive interest rate hikes by the Fed and other central banks, leading to a “hard landing on Main St.” The B of A economists said: “It looks like unemployment, savings, delinquency and delinquency rates will rise sharply.” They also noted that while the current unemployment rate is 3.7%, the 50-year average is 6.2%, and the Fed might not mind raising it that high again to slow wage growth. and depress spending.

The outlook for the Fed now is another half-point rate hike in February, followed by a quarter-point hike in March. Then the Fed could pause for a while to see if it has tamed inflation for good or caused too much damage. The image becomes murkier after that. Many forecasters believe the Fed will slow the economy so sharply that it will have to start cutting rates again in late 2023, as a new form of stimulus. The Federal Reserve doesn’t see it that way yet, but it might change its mind if conditions warrant.

Triumph harangued the fed every time he got out of step with his “me first” policies by raising rates to slow growth when Trump wanted a dynamic economy that would increase his re-election chances, for example. By one count, Trump criticized the Fed 100 times on Twitter alone, even though the Fed’s tightening under Trump was mild and short-lived.

Biden has pledged to leave the Federal Reserve alone and not subject him to political pressures. But you should be wondering if the Fed is going too far, as many economists do. “The US economy will need a lot of luck to avoid a recession next year because the headwinds are about to intensify,” Oxford Economics warned clients on December 16. [rates] more than we or the financial markets anticipate.”

There are already signs that higher rates are depressing growth. Retail sales are slowing. Consumers are spending the savings they accumulated during the COVID recession. Industrial production has declined for four months in a row. A few more months of this could signal a de facto recession.

You can’t tell in real time if the Fed is tightening too little, too much, or just the right amount, because it takes months for the Fed’s rate hikes to dose the economy. Inflation can be pernicious, so the Fed may have decided it’s safer to risk overreacting than not. The next time inflation seems to be on the mend, remember that the highest referee may see things differently.

Rick Newman is a feature columnist for yahoo finance. Follow him on Twitter at @rickjnewman

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