THE FAITH OF THE FED IS FAULTY: BRACING FOR A HARD LANDING

Unsurprisingly, talk about money and how far it goes is all the rage. Not a day, much less a week, goes by without some space, both digital and printed, being carved out and devoted to sustained ruminations on money, how far it goes (or doesn't), and whether the central bank, the Federal Reserve, can tame inflation without causing a recession and bringing the real economy to its knees-- that is, whether the Fed can restrain an ever increasing price level without evoking a hard landing, a "landing" that, amongst other things, is characterized by a jacking up of joblessness and a concomitant increase in overall human misery. Indeed, this question--whether the Fed's current strategy can restrain inflation without causing a recession-- is likely to remain a top line query for the rest of the summer, if not for the remainder of 2022.

Before going any further, let me say this from the get go: Absent some public policy intervention, I believe that the Federal Reserve's strategy (FRS) is a) more likely than not to result in a recession, b) likely to contribute to stagflation--that is, a nasty combo of high prices and elevated rates of joblessness, and that c) all of this will have a pernicious effect on the status of workers, especially Black and Latino workers.

THE CURRENT FEDERAL RESERVE STRATEGY

Unless you've been hiding under a rock, you'd know that, on average, prices are rising. The Bureau of Labor Statistics (BLS) most recent report on inflation notes that during the month of May the average price level, as measured by the Consumer Price Index (CPI), rose by 1.0 percent, which is up considerable from April 2022's monthly rise of .3 percent. What's more, the BLS estimates that during the 12 month period of May 2021and May 2022, the average price level soared by 8.6%. That's the largest 12 month increase since the period ending December 1981. So, prices are popping, and it's been a minute since we've seen anything like this.

The Fed has been trying to constrain inflation by raising the interest rate, with its most recent increase of 75 basis points-- 3/4 of a percentage point--occurring in June 2022. That 75 basis points increase is the largest jump since 1994 and, furthermore, the Fed's chair, Jerome Powell, has made it clear that we ought to expect another 50-75 percent basis point increase at its July meeting. By the end of 2022, the Fed's game plan is to have its benchmark interest rate somewhere in the neighborhood of 3.5% to 4%. Again, Chairperson Powell is convinced that this feat of cooling the economy off can be pulled off without sending the economy into a recession. Or, as he recently put it: "It does appear that the US economy is in a strong position, and well positioned to deal with higher interest rates."

The economic plane, in other words, is "well-positioned" for a soft landing. Or, at least that's the deal, according to the FED.

The problem, though, is that the faith of the FED is misplaced. Just think about it. To date, there's been three interest rate hikes: a 25 basis point (one quarter of one percent) in March 2022, and larger hike of 50 basis points (one half of one percent) in May and, most recently, a 75 basis point (3/4 of 1 percent) in June 2022. Yet, the average rise in the price level has not been stalled, much less stopped in its tracks. That's because, contra popular wisdom, the current bout of inflation is not being primarily juiced up by increasing demand. But that's precisely the side--the demand side-- that the Fed's strategy is directed toward.

The faith of the Fed encourages us to believe that the increased costs that accompany rate increases will put a choke hold on consumer demand and consumers, having less spending power, will then purchase fewer items and exert a depressing effect on the "demand-side" of the economy. But the Fed's faith is faulty because the upward surge in the average price level is coming less from the demand side, and more from broken supply chains, price gouging by firms with monopolistic power, and by straight up gambling by speculators in commodity markets.

This is why I say absent some immediate and bold policy initiatives, the Fed's strategy is likely to engineer a hard, not a soft, "landing."

Get your cousins, and tell them to brace themselves.

The faith of the Fed is faulty.

I'll have more to say about all of this in Part II.

Doc Greene