A Resilient Economy Challenges the Fed
The US economy won’t easily buckle under pressure from the Fed’s weaponizing of interest rates and lightening of its balance sheet. Historically, these are sure-fire methods of dousing the fires of inflation and, unfortunately, the economy along with it. So, what’s with all this resilience? Yes, inflation continues to ease from last year’s peak but the pace is uneven and slowing. Record low unemployment, coupled with near-record job openings, could be the reason why personal consumption, housing, autos, and food prices have faded by only a small measure relative to the tight credit markets and reductions of the money supply of the past. This has become cause for concern among the “2% Inflation Now” crowd. They’re the current Fed Board members that see the economy’s buoyancy as proof that not enough has been done to address inflation and are calling for more interest rate hikes.
Thankfully, a more strategic contingent of the FOMC has appeared on the scene. They believe it prudent for the Fed to pause and assess, for a period of time, the effect of its work. That doesn’t assume an end to further interest rate hikes. Nothing prevents the board from resuming aggressive tightening if warranted. That approach explains the recent emergence of the term “hawkish pause” in the vernacular of Fed-watching. FOMC members Neel Kashkari, Patrick Harker, John Williams, and newly-appointed Philip Jefferson are among those favoring a pause or “skip” of interest rate hikes at the June 13-14 meeting. Doing so allows time for the Fed to review and react to the notoriously uneven, lagging data indicative of progress in moving inflation toward its mandated objective. With the risk of recession rising along with rates, it seems sensible to forego scoring points for speed in achieving the 2% goal.
We’re hopeful that the hawkish pause strategy is engaged for a couple of reasons. It would mark a return to tapping the brakes on the economy and likely lessens the probability of seeing something more than a shallow recession ahead. It also could obviate the need for a much-ballyhooed pivot by the Fed to lower rates in response to a deeper recession. To us, that would signal an intent to fine-tune the economy and its markets via a monetary policy that can only do so much. Considering policy-makers’ record of success in the past, both monetary and fiscal, we favor the less-is-more strategy over a “hands-on” tactical approach to steering the economy.
For those inflation-phobes pointing to recent activity in the stock market as a reason to raise rates, worry not. Investors/traders are pouring capital into anything remotely related to “AI”, artificial intelligence technology. While clearly a significant advance, we are a long way from seeing AI as a broad, transformational influence on output and consumption. The froth created in a small number of mega-cap valuations has driven the major indexes to the upper regions of their trading ranges while the underlying majority of stocks tread water at best. That could distort one’s view and create a false impression of the economy’s overall condition. The economy is slowing. Inflation is declining. The “2% Now” crowd would be advised to recalibrate their expectations lest they be accused of inviting deep recession or worse, the polar opposite of inflation. Stay tuned.
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