The Fed’s “This is Fine” Moment

Month’s end is usually a pretty slow time for economic reports. You get things like Durable Goods orders, a few real estate numbers and maybe a few Fed speeches from various venues. 

But this month is gonna be a little more exciting.

This week the FOMC is meeting to once again hike interest rates. And with headline inflation still screaming 9.1%, you can bet they’re sweating bullets.

They spent the better part of last year promising that rising prices would be “transitory.” Now their backs are to the proverbial wall. In just a little over three months, they’ve raised their fed funds target by 150 basis points. And they haven’t been able to put a dent in skyrocketing prices yet.

You can pretty much bet the farm another 75 basis point move will be announced on Wednesday after this week’s meeting. 

The danger, of course, of raising interest rates so quickly is that it could put a noose around the neck of the economy, and slide us into a recession. (A “hard landing” in euphemistic Fed jargon.)

It’s something the Fed’s been known to do in the past. But apparently this time’ll be different…

Nothing to Worry About

A rapidly tightening monetary policy is not something we should be worried about, according to Fed Chair Jerome Powell. 

Why not?

He believes the Fed can continue to aggressively hike rates thanks to a strong labor market (in “Fed-speak” that means they believe the economy is doing great!)

He said so on June 15 right after the FOMC meeting:

The American economy is very strong and well positioned to handle tighter monetary policy.

On June 22 The Hill wrote:

Powell cited an unemployment rate of 3.6 percent, an average monthly gain of 408,000 jobs over the past three months and other signals of a strong labor market as signs of a strong and resilient U.S. economy.

On June 29 Bloomberg reported: 

Federal Reserve Chair Jerome Powell said the US economy is in “strong shape” and the central bank can reduce inflation to 2% while maintaining a solid labor market, even though that task has become more challenging in recent months.

So we’re good to go?

This is Where Things Get Interesting

The day after tomorrow, we’re getting another major economic release. The advance GDP report for the second quarter.

The first quarter didn’t end so well. After what appeared to be encouraging GDP “growth” of 5.7% for all of 2021, Q1 2022 ended up contracting 1.6%.

The current consensus is that the economy grew at 0.9% in the second quarter, but the Atlanta Fed has a different opinion. 

They publish a report called “GDPNow” which they describe as “a running estimate of real GDP growth based on available economic data for the current measured quarter.” It’s a “real time” version of GDP instead of the official reports that take three months to calculate and revise.

And where are they calculating Q2 GDP? 

As of July 25… –1.6%! (There’s one more update to their estimate tomorrow.)

The rule of thumb is that two consecutive quarters of negative growth constitute a recession (although recessions are actually determined by a bunch of economists at the National Bureau of Economic Research — usually months after the fact). But whatever officially determines a recession is beside the point. It’s clear the economy is struggling under exploding inflation.

What will be fun to watch is how Chairman Powell changes his tune once it hits the fan. 

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily