The Fed misread the economy
The Fed's claims that monetary policy is restrictive are looking increasingly preposterous.
“Preliminary” survey data for the U.S. Purchasing Managers' Index (PMI) released by S&P Global on Monday shows: Economic output is increasing at the fastest pace in 33 months. Growth is accelerating from an already robust pace and expectations are rising for both businesses and consumers.
The S&P Global PMI Headline Output Index rose from 54.9 in November to 56.6 in December; Fastest expansion of business activities since March 2022. The index has been showing growth since the beginning of last year, but growth has accelerated since the Fed began hinting at an easing cycle this summer. New orders increased rapidly for the first time since April 2022.
of The services side of the economy is booming.. Excluding the pandemic rebound, recent service sector expansion was the strongest recorded since March 2015.
“Business is booming in the U.S. services economy, with production growing at the fastest pace since the economy reopened from coronavirus lockdowns in 2021. growth is at its fastest rate in nearly three years, consistent with GDP rising at an annualized rate of just over 3% in December,” said S&P's Chris Williamson.
Consumer and business trust is increasing
The Atlanta Fed agrees. Our reading of the fourth quarter economic data shows that: The economy is expanding at an annual rate of 3.3%up from 2.8 percent in the third quarter and 3.0 percent in the second quarter. This is far higher than the 1.8% growth rate that the Fed considers to be the long-term trend for the U.S. economy, and even higher than the 3% growth rate targeted by Donald Trump's economic team.
National Federation of Independent Business Small Business Optimism Index The index rose 8 points to 101.7 in November, exceeding the long-term average of 98 for the first time in 34 months. This was the highest reading since June 2021, when President Joe Biden's inflation began to hurt the economy. Nine of the index's 10 components rose, one remained flat, and none declined. The percentage of business owners who think it's a good time to expand their business has risen to its highest level since June 2021. The balance of business owners, who are counting on real sales growth, rose to its highest level since February 2020, before the pandemic hit. .
Meanwhile, the New York Fed's survey of consumer expectations improved significantly following President Trump's victory. The percentage of households expecting their financial situation to improve one year from now has risen to a record high. Highest level since February 2020. And the proportion expecting the situation to worsen fell to its lowest level since May 2021.
The manufacturing industry continues to struggle, Biden's industrial policyStressed out by command-and-control, subsidy-filled DEI and ESG approaches that are not only ineffective, but counterproductive. The latest S&P Global survey shows that production has fallen sharply, due in part to weaker exports.
But there are also signs of optimism in manufacturing. “Confidence in the 12-month outlook has risen to a two-and-a-half-year high, suggesting the strong economic recovery could continue into the new year and become more widespread across sectors,” Williamson said. ” reported.
But the Fed fell into a trap. If we end the cuts now, it would be the same as admitting that the previous cuts, especially the huge cut in September, were a mistake. It's also Ask the Fed to Surprise the MarketThe Fed is pricing in a more than 95% chance of a rate cut this week, but the Fed has shown no appetite for it.
Fortunately, Next Trump administration We recognize the risks that the Fed's interest rate cuts pose to the economy and its policies. As we enter the new year, they would welcome the Fed reversing its interest rate cuts.
