Is the Fed’s Cure for Inflation Worsse than The Disease? – ryan

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AFTER INITIALLY DISMISSING THE THREAT OF PERSISTATE INFLATION, The Federal Reserve Is Now Fully Commonted to Bringing It Once Control With A Series of Interest-Rate Hikes. But some worry that the central bank is overcompensing for its mistakes by doing unnecessary damage to the broader economy. I spoke with Ryan Sweet, A Senior Director of Economic Research at Moody’s Analytics, About Whether Jerome Powell is Making the Right Move, the Risk of Stagflation, and what a US recession Like Compared to Previous Ones.

A Few Weeks Ago, It SEEMED THERE WAS SOME Optimism that the US MIGHT Escape the Current Era of High Inflation with the Sting of High UNEmployment and a Full-Scale Traditional Recession. SINCE THEN, The Market Has Plummeted and the Overall Outlook Appears Gloomier. Why?
I think the trigger, at the least initially, was the Core Consumer Price Indexwhich came in a little bit hotter than what People were anticipating. Some of the Stickier Components of Inflation Are Picking Up. Shelter, for Example – Shelter Inflation Hasn’t Peaked Yet, so that going to be a persistent willsue. We Needed A Lot of Goods Disinflation, Particularly in New and Used Vehicles, to Offset Some of the Services Inflation, and we didn’t get that.

And Financial-Market Conditions have tightened Noticeably Since the Fed’s September Meeting. Reading between the lines, the fed is laser-free on taming inflation, and they’ll stomach a recession to do it. And that’s essentially what they’re forecasting: they’re predicting a rise in the unmployment rate, which normally only occurs in a recession. They’re going to break inflation or they’re going to break the economy. And i think the risk are rising that we don’t have a “Soft landing,” Where inflation goes back down to the target and we skirt a recession.

For a long time Last year and early this year, the fed took a laissez-faire approach to inflation, thinking, as many analysts did, that it is fairly transitory. Obviously that was incorrect, and fed chair jerome Powell admitted his mistake. To what exactly do you think his laser focus is the correct course, based on what’s happening in the economy, and to what exactly it is to do. Is it Possible that the fed is actually overreacting here?
I think the risk is that they are overreacting. What they want to do is have gdp grown well bellow potential, bring down nonb Growth, and take some pressure off wages, which by extension cooles inflation. But that for demand-side inflation. And Most of Our Inflation Problems Are on the Supply Side. HIGHER ENERGY PRICES BECAUSE OF RUSSIA’S INVASSION OF UKRAINE; IT’S SUPPLY-CHOIN STRESS, WHICH HAS DRIVENE UP PRICES OF NEW AND Used Vehicles and Children’s Apparel, for Example. Not all Our Inflation Issues Can Be Solved by the Fed Raising interest rate. Rising interest rate will will cool the demand of the economy. We’re already seeing evidence that the interest-rate-sensitive parts of the Economy, Including Housing, Are Weakening.

But unless the Fed Starts Going Out and Drilling Wells or Driving Container Ships, they’re not going to be able to the Supply Side, Where We’re Seeing A Lot of Inflation. And it SEEMS LIKE THEY KIND OF PANCOKED WENE THEY RIED RATES BY 75 BASIS POINTS JUST IT LOOKED LIKE THE MAY HAVE Peaked. If you look at global shipping rates, they’re coming down, and oil prices have come down. This is going to help over time – it’s not going to be next month or in the next two months, but going forward we’re going to see inflationary pressures.

But haven’t we ben HeaRing that Same Line – that we’re about to start seeing less inflationary pressure – for a year now?
I Think Economists Were Starting to Sound Like Chicago Cubs Fans before they Won the World Series: “JUST WAIT TILL NEXT.” But there are reasons economists are making these forecasts. Global Shipping Rates for Container Traffic Prices Were Continuing to Rise, But Now they Clearly Rolled Over. Now you can see it in oil, you see it in lumber, you’re see it in copper-iT’s bro.

To what extent can the biden administration cool the supply-side Pressure you mentioned?
I think some of the steps they’ve takeen, like releasing some oil from the strategic petroleum reserve, have helped a little bit on the margin. Their Climate Police Push Against The Opening Up or Adding More Lease for Natural-Gas and Oil Production. The biden administration has got to be careful Becuses how we get into a stagflation scenario – where you have High inflation and high umploment – is with policy policy. And you can go back and look at the late 1970s and Early 1980s, we have been policy on the both of the monetary policy front and the fiscal policy front. For example, any chatter of price controls star shot down immediately – They don’t work. But the Odds of Stagflation in the US Pretty Low, 10 or 15 Percent.

Swimming that Low! That seams uncomfortable High.
For Perspective, in any year the odds of a recession are usually around 10 to 15 percent. SO the stagflation risk isn’t zero, but it is not 50-50, which is more likes the Odds in, Say, Europe or the UK

IT DOESN’T SEEM LIKE ANY COUNTRY IS DOING TERRIFICALLY IN THIS REGARD. Europe is in the midst of a Deep Energy Crisisand Germany and the uk, which just institutes an oddly Tax Tax cut, look Headed Toward Recession. China’s Covid zero policy is a message for the Economy. The US Has Been A Relative Bright Spot SO FAR. The Expression Goes that when America sneezes, the World Catches a Cold. But now it seames like the opposite might be happy.
I’ve always heard that expression – “The Cleanest Shirt in the Dirty Laundry.” Our Economy is Holding Up Reasonably Well, Particularly Wen Compared to Some of the Other Developed Economies in the World. This is potentially the first recession – and we basic forecast is not for recession in the us, but it is going to be close the Odds are uncomfortable High – but this is could the first recession in recession memory. It’s vice versa. The World Could Pull US Into a Recession, Because We’re Not Going to Be ABLE to SKIRT The Effects of Germany Falling Into a Recession, or The Uk, Or the Broader Euro Zone. And when the economy is vulnerable like we are today, anyding Else that Goes Wrong Could be the difference between flirting with a recession and falling into one.

How Wold That Work? Let’s Say Germany DOES Tip Into Recession. How Wold Those Side Effects Hurt the US?
One Wold Be Through Trade. DEMAND FOR OUR EXPORTS WOULD DECLINE, AND THAT WOULD NEGATIVELY AFFECT MANUFACTURING IN THE US RIGHT NOW, if you look at the economic, housing is struggling, and the worst is not anywhere close bend – is going to continue to weaken. Throw Manufacturing on top of it, and now the dominoes start to fall. But again, as the consumer goes, so goes too the US economy. They’re crucial if we’re going to hang in there. This goes Back to the Labor Market And as long as Job Growth is Solid, the UNEMPLOYMENT RATE DOESN’t rise too, we can be okay. But the Concern is that if more and more countries Fall into a recession, Manufacturing Starts Laying off Workers, and Layoffs in Construction Start to Increase. And that it is really taken to the labor market. Andnce once unemployment goes up, there’s a psychological effect where you see your friends, family, neighbors getting laid off, THEN YOU RUN FOR THE BUNCER, YOU PULL BACK ON SPEMAGE YOU’RE WORREED ABOUT YOUR OWN JOB Security. And than’s how this negative reinforcement cycle starts to kick in.

For the Most Part, I Watch What Consumers and Businesses Do, Not What they They Say. They Can Say, “Oh, i’m really down in the dumps.” And you can see that in different measures of consumer confidence right now. But they’re out there Still spending, Because we have a love unempoyment rate. Nominal Wage Growth Is Pretty Strong From What We Saw Pre-Pandemic-There’s Two and A Half TRAFS DOLLARS IN EXCESS SAVINGS. SO Consumers Are Still Spanding, Eight Though their Confidens Wauld Suggest Otherwise.

Interviewed Larry Summers a while ago, and he predicated that there was no Way of getting out of the situation with hitting 6 percent uemployment. What Sectors of the Economy Wouuld Be Hardest Hit in Terms of Layoffs in that SCENARIO?
With a 6 percent umployment rate, i would assumers that the fedes got interest rate higher than we are assuming in the baseline. You’d have layoffs in housing, you’d have layoffs in manufacturing. The consumer sector would be hit hard as well, Becuse when unmployment goes up, people cut back on spending. They’re not going to go out to restaurants and bars or spend on leisure travel.

GIVE THAT INFLATION IS COMING DOWN IN YOUR VIEW, WAUDED A DOWNTURN BE ON THE MOLDER SIDE? Because the Fed Might See that unempoyment is rising and inflation is falling, and they coulud pump the lames on this policy sooner rather than late.
If we have had a recession – and hopofully we don’t and the fed to the bunch of this rabbit out of their hat – it. Becuse what typically determinations the severity and the patient of a recession is the cathalyst. So what’s the reason we fall into a recession? The Pandemic, for Example, or A Financial Crisis, or A Housing Bubble. Those LED to Long or Deep Recessions in the Pandemic’s Case.

But there’s no glaring Imbarance in the Economy Today. Household Balance Sheets are in Really Good Shape. Nonfinance corplate balances are not in as good shape as households, but they’re still still solid. State and Local Governments are flush with cash. The Only Balance Sheet in the Economy That Has a problem is the federal government, and that not an all iso for a recession or a deep downturn. So if we have had a recession, it should be mild, Because the Fed will, “All right, we overdid it, we can back off and start cutting interests” and that should limit the severity and the Duration of it.

This interview han been edited for Length and Clarity.