The years of our discontent are over. We are in a new era, discussing the when and how many of interest rate cuts rather than increases. Three such reductions seem to be what Federal Reserve Board policymakers have in mind. Typically, the recital of this news by chairman of the board Jay Powell was presented in the safe, calm manner in which he announced the fastest increase in rates to the highest level in 22 years. As estimable CNBC economist-commentator Steve Liesman put it, “There were no balloons, no party hats, no kazoos.”
Fed Forecasters Replace Their Old September Edition
Fed officials now expect the Bank’s benchmark rate to fall from 5.4 per cent at the end of this year to 4.6, 3.6 and 2.9 per cent in each of the next three years. The gurus are projecting inflation this year will clock in at 2.8 per cent, compared to the 3.3 per cent forecast as recently as September. There’s more, and even better.
The chairman pointed out that because policy changes take time to have an effect –the reason given for holding rates steady now to study the effect of recent increases — the Fed would not wait for inflation to hit its 2 per cent target before “reducing restriction in economic activity…. We’re aware of the risk that we would hang on too long.” The target remains, but hitting it will be announced while the arrow is still en route.
Add to this Powell’s skeptical view of the theory that the low-hanging fruit has been picked, and further reductions in the rate of inflation will be hard to come by. We assume, conceded the chairman, that to be the case “but so far it hasn’t.”
The word Goldilocks is heard in the land.
Inflation down, the labor market continuing to provide jobs for the expanding labor force, supply constraints easing, the Fed set to cut rates even before inflation falls to its 2 per cent target, soft landing. Powell sensibly covers his, er, reputation by saying that declaring victory would be premature, the economy often behaves in an unexpected way. Fair warning, but overwhelmed by the good news. Share prices hit a record in a fit of what investors hope will prove to be rational exuberance.
Only a practitioner of the dismal science, or a skunk at the lawn party would rain on this victory parade, to mix more metaphors than one should. But start with the fact that Fed’s past forecasts have not often survived confrontation with reality. Recall, the forecast now being relied upon is a reversal of one the same team issued in September.
Events Have No Respect For Forecasts
Proceed with a reminder of the role of events, dear reader. Putin is now winning in Ukraine and eyeing the Baltic states; Xi Jinping is preparing an assault on the dollar’s primacy and on Taiwan; Iran is threatening to destabilize the oil-rich Middle East; the Red Sea is being by-passed by shippers worried about pirates, the Black Sea is a war zone, and drought is threatening the Panama Canal.
Neither Does A Changing Labor Market
Then there is the labor market. Powell reports that “FOMC [monetary policy] participants expect the rebalancing in the labor market to continue, easing upward pressures on inflation.” But we no longer have the labor market with which Fed officials are familiar. President Biden has converted moribund trade unions into a market force, capable of fomenting strikes of more than five weeks in the health care, entertainment, and hotel industries, and at a major university. Strikes and fear of strikes have produced
- pay rises, benefits increases and restorations of cost-of-living clauses (COLAs) in the auto industry;
- the largest wage increases in the history of the Las Vegas casino industry;
- an 11.28 per cent wage increase and a bonus pool for actors in streaming shows;
- pay increases over the next few years totaling 34 per cent to 40 per cent for airline pilots, plus improved retirement benefits and vacation policies;
- annual pay for delivery workers headed to $172,000.
These will eventually take their toll on jobs. GM has already announced that it will cut 1,300 hourly jobs at two Michigan plants as part of a four-year program to cut some of the $9.3 billion costs created by the wage deal.
A Tight Labor Market Might Get Tighter As New Factories Come Online
With Biden appointees interpreting labor law to favor union organizers, and emulation being the highest form of flattery, even doctors and baristas are considered potential recruits by organizers, and existing unions are under pressure to do more for their members.
That’s not all. Ground is being broken for a record number of factories in response to incentives provided by the administration. The value of new manufacturing construction projects hit a record $102 billion in 2022, three times higher than in 2019, the last pre-pandemic year. “Now comes the hard part – finding people to work in them,” reports The Wall Street Journal. That should put upward wage pressure on a labor market Powell concedes remains “tight”.
The Red Ink Flows
There is also the small problems of federal deficits as far ahead as the crystal ball can see, of a level of interest payments on the rising debt that will force the Treasury to paper the world with its IOUs, pushing interest rates up
unless there is an outbreak of responsibility among politicians, resulting in substantial increases in taxes.
Yellen and Consumers Don’t Behave As Expected
Unless, of course, none of this matters and the economy remains too hot for the Fed’s taste. Immediately before Powell took to the podium, the treasury secretary told an interviewer that spending is “solid … consumers still have a buffer stock” of cash, and “the economy can handle” developments in the labor market. The day after Powell had looked upon the Fed’s work and was pleased that the economy was cooling, retail sales surprised economists by rising in November after falling in October. The Fed could not have found that cool. And the Atlanta Fed’s GDPNOW is clocking in at around double the growth rate recorded last year.
The Good Economy Trundles Down The Wrong Track
Still, 2024 should be a good year for the economy of a nation which 70 per cent of adults believe to be on the wrong track. Which for Biden, like Yul Brynner’s King of Siam in the Broadway musical, “is a puzzlement.”