Powell warns of ‘some pain’ ahead as the Fed fights to bring down inflation

[Scott]

 

Federal Reserve Chairman Jerome Powell delivered a stern commitment Friday to halting inflation, warning that he expects the central bank to continue raising interest rates in a way that will cause “some pain” to the U.S. economy.

 

In his much-anticipated annual policy speech at Jackson Hole, Wyoming, Powell affirmed that the Fed will “use our tools forcefully” to attack inflation that is still running near its highest level in more than 40 years.

 

Even with a series of four consecutive interest rate increases totaling 2.25 percentage points, Powell said this is “no place to stop or pause” even though benchmark rates are probably around an area considered neither stimulative nor restrictive to growth.

 

https://www.cnbc.com/2022/08/26/powell-warns-of-some-pain-ahead-as-fed-fights-to-lower-inflation.html

 

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The core inflation rate was 5.9% in July. It has been declining but still that's high. So it looks like Powell will have to raise rates again.

[ozimoron]

We've still got a long way to go.

 

in 1979, Volcker and his board of governors through a series of rate hikes increased the FFR to 20% in June 1981. This led to a rise in the prime rate to 21.5%, which was the tipping point for the recession to follow.

 

https://aheadoftheherd.com/1979-vs-2022-why-interest-rate-hikes-are-different/

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6 minutes ago, ozimoron said:

We've still got a long way to go.

 

in 1979, Volcker and his board of governors through a series of rate hikes increased the FFR to 20% in June 1981. This led to a rise in the prime rate to 21.5%, which was the tipping point for the recession to follow.

 

https://aheadoftheherd.com/1979-vs-2022-why-interest-rate-hikes-are-different/

That was a different kind of inflation. Back then, the US economy was far more dependent on petroleum. Natural gas prices in the US, while high, are not near the levels they've reached in Europe. More importantly there is a problem with supply as an aftershock of covid. Still, those supply problems seem to be in decline so inflation should go down too. It doesn't seem that interest rates need to be raised to anywhere near the level that they were raised to back in 1981.

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19 minutes ago, placeholder said:

That was a different kind of inflation. Back then, the US economy was far more dependent on petroleum. Natural gas prices in the US, while high, are not near the levels they've reached in Europe. More importantly there is a problem with supply as an aftershock of covid. Still, those supply problems seem to be in decline so inflation should go down too. It doesn't seem that interest rates need to be raised to anywhere near the level that they were raised to back in 1981.

I forgot to mention that covid's unexpected resurgence also contributed to inflation. I guess that is still something of a wild card.

[ozimoron]

German inflation rose to its highest level in almost 50 years in August, beating a high set only three months earlier, data showed, strengthening the case for the European Central Bank to go for a larger basis-point interest rate increase next month.

 

Consumer prices, harmonised to make them comparable with inflation data from other European Union countries (HICP), increased by 8.8% on the year, following an unexpected 8.5% rise in July, the federal statistics office said on Tuesday. The reading was in line with a Reuters poll of analysts.

 

https://www.reuters.com/markets/europe/german-inflation-rises-88-august-2022-08-30/

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Powell may have quite a battle ahead of him. It turns out job openings actually increased in July.

Job openings top 11.2 million in July, well above estimate and nearly double the available workers

There were nearly 1 million more job openings than expected in July, an inflationary sign that the U.S. labor market is still extremely tight, the Bureau of Labor Statistics reported Tuesday.

Available positions totaled 11.24 million for the month, well in excess of the 10.3 million FactSet estimate, according to the Job Openings and Labor Turnover Survey. The total was about 200,000 higher than the 11.04 million in June, a number revised up from the initially reported 10.7 million.

https://www.cnbc.com/2022/08/30/jolts-july-2022.html

 

I was shocked at not being able to find this story on foxnews.com

[ballpoint]

On 8/30/2022 at 5:01 PM, ozimoron said:

We've still got a long way to go.

 

in 1979, Volcker and his board of governors through a series of rate hikes increased the FFR to 20% in June 1981. This led to a rise in the prime rate to 21.5%, which was the tipping point for the recession to follow.

 

https://aheadoftheherd.com/1979-vs-2022-why-interest-rate-hikes-are-different/

Volcker didn't have to worry about the huge debt to GDP ratio that Powell does, meaning Powell faces a huge predicament, as the Chicago Fed laid out in this White Paper presented at Jackson Hole:

 

"When fiscal imbalances are large and fiscal credibility wanes, it may become increasingly harder for the monetary authority to stabilize inflation around its desired target. If the monetary authority increases rates in response to high inflation, the economy enters a recession, which increases the debt-to-GDP ratio. If the monetary tightening is not
supported by the expectation of appropriate fiscal adjustments, the deterioration of fiscal imbalances leads to even higher inflationary pressure. As a result, a vicious circle of rising nominal interest rates, rising inflation, economic stagnation, and increasing debt would arise."

 

https://www.kansascityfed.org/Jackson Hole/documents/9037/JH_Paper_Bianchi.pdf

 

In short, Powell sees his choice between being Volcker or Arthur Burns (Fed Chairman from 1970 - 1978, whose "president friendly" policies - Nixon appointed him in 1970 and gave him instructions to ensure easy access to credit when he (Nixon) was running for reelection in 1972 - are widely seen to be a major cause of the high inflation over that period).  This White Paper argues that Powell's choice is really between “sustained high inflation” or “depression.”  Or, to put it in terms of previous Chairmen, between Arthur Burns and Benjamin Strong - the Fed Chairman who overtightend the world into the great depression.  He can not be Volcker, and many analysts are still predicting that he will be forced to pivot sooner rather than later.

 

On top of this, the question of political will to must still be considered.  In order to placate the voting public, the right fiscal decisions aren't always (some would argue very rarely, or never at all) made.  A point well made in this brilliant 2007 quote by Jean-Claude Juncker when Prime Minister of Luxembourg:

 

"We know what to do, we just don’t know how to get re-elected after we have done it."

 

 

 

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More bad news for Powell. Jobless claims declined.

Jobless claims unexpectedly fall to 232,000, lowest since June

https://www.foxbusiness.com/economy/jobless-claims-unexpectedly-fall-232000-lowest-since-june

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And the news keeps getting worse for Powell. Another strong month for jobs.

August jobs report: U.S. payrolls grew by 315,000 last month

https://finance.yahoo.com/news/august-jobs-report-september-2-2022-220121393.html

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More woe for the Fed

Dow rises in volatile post-Labor Day trading as investors assess strong data, surging rates

The moves came after August ISM data Tuesday morning was stronger than expected, coming in at 56.9 versus expectations of 55.5. The report follows Friday’s jobs release, which also beat Wall Street’s expectations, showing a more solid U.S. economy than anticipated

https://www.cnbc.com/2022/09/05/stock-futures-rise-after-major-averages-post-third-week-of-losses.html