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Federal Reserve Chairman Jerome Powell is trying to avoid imitating both the mocked Arthur Burns and the famous Paul Volcker as he faces intense pressure to rein in inflation and avoid a recession.
Former Fed chief Burns let inflation spiral out of control in the 1970s by not keeping monetary policy tight long enough to permanently defeat price pressures. Volcker then conquered double-digit inflation in the 1980s, but that victory came at a heavy price: A deep recession pushed unemployment above 10%.
Vincent Reinhart, chief economist at Dreyfus and Mellon, said: “Powell wanted to write his own page in history as someone who, unlike Burns, didn’t blink and reverse too soon, and unlike Burns. like Volcker, not intentionally causing a recession.” who previously spent a quarter of a century at the Fed.
The result: After aggressively raising interest rates last year to catch up with a rally they initially dismissed, policymakers expect a quarter-point increase in this week as they probe the policy stance tight enough to tame inflation without weighing it down. Depression.
Powell will likely go with that with a promise to keep interest rates high for a while and not ease policy before the Fed is certain it has price pressures under control.
There’s a lot that can go wrong with this hybrid strategy. Oil prices and inflation could flare up again – a clear possibility now that China is reopening the world’s second-largest economy – forcing the Fed to reconsider rate hikes later in the year. now on.
Conversely, unemployment could rise more than the modest rate policymakers expect as they follow a tight policy stance to combat inflation.
upbeat tone
Fed officials from both camps of the recent policy spectrum seem more optimistic about the central bank’s chances of designing a soft landing to correct price gains without causing a crisis for economy.
Vice President Lael Brainard, who is seen by many as a dove, said this month that she sees a “slightly better” chance of achieving such an outcome.
Fed President St. Louis, James Bullard, a hawk, was more definitive: “Prospects of a soft landing have improved markedly,” he said on Jan.
The Biden administration — which has a strong stake in getting the Fed to make the right policy — is also talking about the outlook.
Jared Bernstein, a member of Biden’s Council of Economic Advisers, told Bloomberg Television on January 26 that he sees “a reasonable and credible path to what the Fed calls a soft landing and what we think is a transition to solid, steady growth. “
Behind the optimism: Inflation falls. The personal consumption expenditures price index – the Fed’s favorite gauge – rose 5% in December from a year earlier, down from 7% in June although still well above the central bank’s 2% target. nurse.
Fed officials have also been cheered by signs of a slowdown in rapid wage growth, which they hope will be confirmed by the release of the latest employment cost index, a measure extensive compensation, at the start of their two-day policy meeting. Tuesday.
Recession risk
Even so, most private economists don’t think the Fed will pull through without pushing the US into a recession. Forecasters surveyed by Bloomberg this month put the probability of a contraction next year at 65%.
The housing market has fallen into recession, stymied by a sharp Fed-designed rate hike in 2022.
Doug Duncan, chief economist at mortgage giant Fannie Mae, said while demand has picked up a bit as mortgage rates have fallen from last year’s highs, “we’re probably still not touching it yet.” bottom”.
Manufacturing has also struggled, hit by a slowdown in the global economy and a shift in consumer spending from goods to services.
3M Co., a maker of everything from Post-it notes to touch screens, said last week it plans to cut about 2,500 manufacturing jobs after demand dwindles by the end of 2022.
Consumer spending, the mainstay of the economy, has stood firm in the face of sky-high inflation, as households have pulled out of savings accumulated during the pandemic and seen their incomes rise. they thrived thanks to a vibrant job market.
Mastercard Inc CEO Michael Miebach. 26 statement of the company’s 2022 earnings: “Despite macroeconomic and geopolitical uncertainties persist, consumer spending has recovered significantly .
But there are already signs of decline as 2022 draws to a close. Adjusted for changes in prices, personal spending fell 0.3% in December, with spending on services unchanged, the first month not increasing since January 2022.
What Bloomberg Economics Says…
“Despite a mild headline for December’s personal consumption spending deflation, inflation remained high in core services excluding housing rent… The lack of equals The evidence that the sustained inflation component is moderate means that Powell will maintain his hawkish message of keeping interest rates higher for longer. “
— Anna Wong, economist
To read the full note, click here
“The engine of consumer spending could start to pick up speed,” said Matthew Luzzetti, chief economist at Deutsche Bank Securities.
Moody’s Analytics chief economist Mark Zandi said he expected the US to avoid a recession, but acknowledged that it was a close call.
“To avoid a recession, we’re going to need a bit of luck and some ingenious Fed policymaking,” he said.
–With support from Katia Dmitrieva, Reade Pickert and Ana Monteiro.
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