“ Fed Chairman Jerome Powell is essentially telling us that monetary policy may work its wonders if we are just patient.”
A Federal Reserve decision to keep interest rates steady, as the U.S. central bank seeks to tame inflation while avoiding a recession, has support from policy doves like Chicago Fed President Austan Goolsbee. But following this path is risky.
Higher U.S. interest rates would cast a damaging spotlight on the federal government’s ballooning borrowing and debt service — and the headaches it will bequeath the next U.S. president. This would create political pressures that recent Biden administration Fed appointees might prefer to avoid.
Moreover, the slow process of bringing down inflation risks that consumers’ and investors’ inflation expectations will remain well-above the Fed’s 2% target. It also limits the Fed’s flexibility for dealing with other challenges in the country’s banking and financial systems.
U.S. GDP growth should slow by the end of the year, after a strong third quarter. Restarting student loan payments is expected to drain $100 billion from consumer spending. The excess savings households built up during the COVID shutdowns, from government aid that has pumped up consumer spending, is finally running out.
Overall, U.S. recession fears have moderated but have not been extinguished. Year-over-year the Consumer Price Index is advancing at a 3.7% rate, but core inflation remains at 4.1%. Both are well-above the Fed’s 2% goal.
Fed Chairman Jerome Powell told us inflation was transitory when prices began to surge in 2021 and delayed acting until President Joe Biden nominated him for a second term. Now Powell is essentially telling us that monetary policy may work its wonders if we are just patient.
In recent months, the services component of core CPI has been much more important than goods. U.S. households stocked up on computers and desks during the pandemic shutdown and now revenge travel, concerts and hunting for homes and apartments — shelter is considered a service in the CPI — is the preoccupation.
Shelter in the CPI is the rent on houses and apartments actually paid and the imputed rent on owner occupied houses, with former much affecting the latter. Shelter, in fact, totals 45% of the core CPI, and Powell has repeatedly pointed out that falling rents observed in industry surveys work their way into the CPI with a lag. So the dip of last fall and winter in apartment rents should have shown up in the CPI by now, but has not.
Inflation expectations…
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