Can the Fed read the situation?
It is sending a signal that interest rate cuts are not necessary to keep the economy growing. The question is whether the Federal Reserve is listening.
of S&P Global Flash US Composite PMI It rose to its highest level in seven months in January, indicating that economic growth is accelerating into 2024. The figure of 52.9 exceeded all expectations.
of manufacturing industry The Purchasing Managers Index (PMI) rose to a 15-month high of 50.3, suggesting the sector may be recovering after a disastrous year.of service The index rose to 52.9, the highest level in seven months.
New business expansion 3 consecutive months Additionally, new orders in the manufacturing industry increased for the first time since October 2023. This was the fastest increase in manufacturing orders since May 2022. In other words, the economy appears to be starting to pick up again, surprising analysts.
“An encouraging start for the U.S. economy this year, indicated by preliminary PMI data, with businesses reporting a notable growth acceleration, along with a sharp decline in inflation pressures.” chris williamsonsaid S&P Global Market Intelligence Chief Business Economist.
Although this is an encouraging start in terms of growth, That would greatly undermine the rationale for rate cuts earlier this year.. How many times have Fed officials said that growth needs to slow to “below trend” (which the Fed considers an annual pace of 1.8%) to sustainably return inflation to its 2% target? Please remember that I have also spoken.
“Forecasters generally expect gross domestic product to perform very strongly in the third quarter, then slow in the fourth quarter and next year. Still, this record is expected to sustain the 2% inflation target. “This suggests that a period of below-trend growth and some further softening in labor market conditions will likely be necessary for a recovery to occur,” the Fed chairman said. Jerome Powell Said Back in October.
The economy steadily slowed from the staggering 4.9% pace in the third quarter. However, it is very likely that the slowdown has not slowed enough to qualify as below trend. Wall Street expects the Bureau of Economic Analysis to report that gross domestic product expanded 2% in the fourth quarter. Atlanta Fed GDPNow indicator estimated at 2.4%.
Some of those who want the Fed to cut interest rates early this year argue that the Fed should do so. “Unnecessary recession.“ The argument is that the Fed can afford to cut interest rates to avoid a deep recession because inflation has fallen so far without slowing the economy or significantly damaging the labor market.
This is not entirely without merit. When inflation falls, real federal funds rate rise. At a time when personal consumption spending inflation was 7%, the federal funds rate of 5.4% remained negative in real terms. Currently, the inflation rate is 2.6%, so the same real federal funds are positive and theoretically restrictive.
The problem is that the economy suggests more is possible. allow current real interest rates. Furthermore, long-term real interest rates have fallen significantly. As of October, the real 10-year yield (10-year yield minus PCE inflation) was 2%. Currently it is 1.5%. There's a lot of debate about how real interest rates are measured, but whether you use actual current inflation or a measure of expected inflation, it's very clear that real interest rates have increased over the past few months. has been declining over the years.
In an economy where real interest rates are falling and accelerating, Fed rate cuts risk reigniting inflation.
The era of monodis inflation is over.
As Mr. Williamson noted, inflation pressures did cool in January, but the cooling was uneven. The pace of input price increases slowed for service providers, with the services sector reporting the slowest increase in output prices since June 2020, when the current wave of inflation began.
However, the manufacturer managed Production prices rise significantly for the first time since April 2023. We have also seen a sharp increase in costs. Manufacturers also said production was being hampered by severe storms and transportation disruptions. Supplier delivery times have been extended on average for the first time in his 13 months.
These supply chain problems are red sea conflict The situation will drag on and global shipping will become even more congested. Even goods that would never have passed through the Red Sea may now be affected by the fact that they now have to go through the Red Sea. 20% increase in time to ship goods between Europe and Asia. This could reduce available shipping capacity around the world, increase shipping prices, delay deliveries, and cause shortages and production disruptions.
A cargo ship transits through the Suez Canal towards the Red Sea on January 10, 2024 in Ismailia, Egypt. (Sayed Hassan/Getty Images)
So while inflation pressures may have eased overall in January, as widely expected;Cooling may not last. Businesses and financial markets expected disinflationary pressures from goods to run out of steam early this year, but they did not expect the goods sector to start contributing to inflationary pressures.
The worst outcome is cut and reverse.
Chairman Powell has repeatedly said there is no need to stop and start monetary policy. Federal Reserve led by Arthur Burns In the 1970s, the credibility of central banks on inflation was severely undermined, resulting in inflation becoming entrenched at higher levels and era of stagflation.The legendary inflation fighter paul volcker It loosens too quickly and needs to be tightened again. worse recession.
Former Federal Reserve Chairman Arthur Burns (left) and Paul Volcker. (Getty Images; John Duricka/AP Photo)
The lesson of Volcker's ultimate success is that the Fed must “keep going until the job is done,” Powell said. told us.
This was also the case recently Atlanta Fed President Rafael Bostic and Fed Director Chris Waller.
“We don't want to go into this up-and-down, up-and-down pattern,” Bostic said on Jan. 18.
“The worst thing that could happen is that everything is reversed and the cuts have already begun,” Waller said in an interview with the Brookings Institution.
Given the evidence of economic acceleration in December and January, the Fed will be reluctant to repeat its past mistakes. Interest rates are likely to remain unchanged.
