Wall Street investors and economic analysts have been reacting enthusiastically to every possible signal that the Federal Reserve will soon declare defeat for inflation and stop tightening the money supply. Although Joe Biden and his allies constantly insist that the economy is in very good shape as it stands, the Biden administration wants to cut interest rates to boost the president’s sluggish re-election prospects. Apparently, liberal thinking is perfection Still alive.
But Federal Reserve Chairman Jerome Powell has consistently conveyed the message in recent months that “nothing is going to change.” Not right now, and not anytime soon.
Far from the economy overheating, some signs point to serious economic struggles and further contraction.
The Fed argues that economic conditions are too good to make it worth cutting interest rates and halting securities sales that tighten the money supply. What we should be most concerned about, the Fed says, is a resurgence of inflation.
“I think it’s unlikely that the committee will reach a level of confidence that would justify easing monetary tightening by its March meeting, but we’ll have to wait and see.” Wall Street Journal report After Powell’s press conference in late January.
of Latest Fed Minutes, the report released last week confirms that the Federal Open Market Committee does not intend to begin cutting interest rates in March. Additionally, “several participants noted that the balance sheet drain process could continue for some time even after the Committee begins lowering the target range for the federal funds rate,” CNBC said. report.
Tightening fuels concerns of economic recession
The Fed has been shrinking the money supply for nearly a year and a half. first time since 1949.was there Only 4 such contractions Everything else since the Fed was founded in 1913 led to recession.
By early January, the Fed had already completed more than $1 trillion of monetary tightening through securities sales. reduce assets It has now reached $7.6 trillion, up from a peak of nearly $9 trillion in May 2022. That process will continue.
In addition, bank reserves and overnight repurchase repurchase contracts Both are on the decline This means that monetary tightening has progressed further since the middle of last year.
The market knows this is disruptive. The Fed’s January interest rate decision sent a huge shockwave through the market on the day it was announced. “Stock index” Ends under Wednesdaythe S&P 500 fell 79.32 points, or 1.6%,” the Wall Street Journal reported. report. The index, which closed at an all-time high on Monday, suffered its biggest decline since September. The 10-year Treasury yield fell 0.091 percentage point to end at 3.965%. new york community bancorp report a loss; reduced the dividend, raising new concerns about the health of the region’s financial institutions. ”
The Fed certainly threw a bone to those hoping for lower rates, ending its guidance statement that it was more likely to raise rates than cut them. The newspaper reported that it is currently adopting a neutral position, saying that “the risks to achieving the goals of a healthy labor market and low inflation are moving towards a better balance.” But it was a very small thing, as the sudden plunge in the market shows.
Signs of trouble ahead
Far from the economy overheating, some signs point to serious economic struggles and an impending further contraction.
US layoffs double In January.The average household food cost is a larger share of their income more than any time since the 1990-1991 recession. retail sales collapsed In January. manufacturing output In the same month, it unexpectedly decreased by 0.5%. credit card debt It reached another all-time high in the fourth quarter of 2023. Total household debt Similarly reached an all-time highand Delinquency rate increased. Last year’s home sales amount was Lowest in about 30 yearsand they are now 6.2% decrease compared to 1 year ago. Number of single-family housing starts It fell in January. people can’t afford to buy a house.Contains commercial real estate historical recession.
Unlike the economy itself, I could go on.
The Fed is likely looking for signs that the economy is slowing, a sign that inflation will recede as economic pain sets in. There are many signs of economic decline, but central bank governors somehow continue to overlook them. As a result, the Fed continues to insist that current economic conditions are good enough not to warrant reversing monetary tightening and that artificial central bank stimulus is unnecessary.
Well, we are I never have We need to artificially stimulate the economy. Similarly, there is no need to artificially strangle the economy. But the latter is exactly what the Fed has been giving us for over a year.
If this ends well, it will be the first time in history that this has happened. I wouldn’t bet on that.
