The Fed Admits the Next Move Might Be a Hike
There’s a palpable tension in the air as Wall Street is confronted with the once unthinkable: interest rates may not be at their peak.
The minutes from the Federal Reserve meeting that concluded on May Day show that we’re not alone in our view that the Fed’s next move might be an interest rate hike. Indeed, an unspecified number of Fed officials raised the possibility at the meeting.
“Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate,” the minutes read.
In the restrained and measured language of central bankers, this is nothing short of a clarion call. They’re telling us that the dragon of inflation, which many thought had been slayed, is stirring once more.
At the May Day meeting, the Fed elected to keep its benchmark interest rate within the range of 5.25 percent and 5.5 percent—a level steadfastly maintained since last July. Yet, behind this façade of stability, officials are increasingly perturbed by the “disappointing” inflation data, with housing and labor costs refusing to fall in line with their expectations and the benefits from supply-chain improvements having run their course.
The minutes overflow with hawkish sentiments that were more or less absent from the earlier meetings and throw cold water on the soft-landing thesis.
“Several participants commented that growth of aggregate demand would likely have to slow from its strong pace in recent quarters for inflation to move sustainably toward the Committee’s goal,” the minutes note.
That’s Fed speak for the idea that it probably will take a significant economic slowdown for inflation to come all the way down to two percent.
Posen Poses the Possibility of Inflationary Fiscal Policies in 2025
Enter Adam Posen of the Peterson Institute for International Economics. As some economists herald an impending economic slowdown—pointing to lukewarm earnings from retailers like Target and a dip in job openings—Posen thinks growth is likely to continue to be strong because consumer spending remains resilient and the labor market tight.
What’s more, he argues inflationary fiscal policies are likely to be adopted in 2025, irrespective of whether Biden or Trump holds the reins of power.
“Either way, you’re going to get probably an unsustainable boom in 2025, and the Fed is going to have to start raising,” Posen said in an interview Wednesday morning on Bloomberg TV’s “Surveillance” program.
There’s room to disagree with Posen on the inflationary impact of Trump’s policies. Expanding oil production, for example, is not likely to be inflationary. Even if it does push up demand for labor and equipment, that would likely be offset by lower oil and gasoline prices. But Posen may be right that the Fed could view Trump’s policies as inflationary.
Americans Think the Economy Stinks
Meanwhile, on Main Street, the American people are not waiting for economists to tell them what they already feel in their bones. A recent Guardian poll reveals that nearly three in five Americans believe the U.S. is already in a recession, with a majority placing the blame squarely on President Biden’s shoulders. This sentiment is driving pro-Biden media into a veritable frenzy, as they scramble to figure out why the citizenry has not swallowed their optimistic portrayals of Biden’s economy.
The Guardian article describing the poll insists on claiming that Americans are wrong about the economy. “Majority of Americans wrongly believe US is in recession – and most blame Biden,” the headline screams. Why won’t those Americans just do what they’re told and applaud Biden’s economic achievements?
The Guardian points out that the official referees of when a recession starts have not declared one and are unlikely to do so since the economy is growing and unemployment is very low.
“A recession is generally defined by a decrease in economic activity, typically measured as gross domestic product (GDP), over two successive quarters, although in the US the National Bureau of Economic Research (NEBR) has the final say. US GDP has been rising over the last few years, barring a brief contraction in 2022, which the NEBR did not deem a recession,” the Guardian writes.
But there’s no law made by man, markets, or God that says Americans have to agree with the official view of what a recession is. In the view of many people, the definition of a recession is merely an economy that stinks.
How could people think the economy stinks even though unemployment is quite low? Polls show that people are not very focused on employment as a measure of the economy. Instead, they are focused on inflation.
There’s good reason for that. Inflation has eaten away almost all economic gains from nominal growth and low unemployment. Disposable income has grown just 2.9 percent under Biden once inflation is taken into account. That compares with 12.4 percent under Trump and the historic average of 8.7 percent, according to Bloomberg’s calculations. The Wall Street Journal recently pointed out that after adjusting for inflation, total household net worth is up just 0.7 percent through Biden’s first three years, compared with 16 percent through Trump’s first three years.
Is it really so hard to understand why this feels like a recession to a lot of people?
The poll contains the welcome news that Americans are not likely to be persuaded to give up their view that the economy is in a recession. A large majority agree with the idea that “it’s difficult to be happy about positive economic news when I feel financially squeezed each month.” They believe that the economy is worse than the media make it out to be.