So much of the current panic about THE FED TIGHTENING US INTO A RECESSION completely misses the point that The Fed Already Stimulated Us Into a "Recession." From now on, if people aren't talking first and foremost about the "Great Inflation" we've been thrown into, and how it now needs to be fixed, quickly, they are talking about the wrong issue entirely.
The "Great Inflation" has already destroyed consumer confidence and fallen heaviest on the lowest-income households who are thronging food banks. My church bulletin has moved up its weekly mention of the need for food donations to the first page, begging in bold letters for help: "We are dismayed by how empty the shelves are...the need has greatly increased...there were only three jars of peanut butter in the entire building and no jelly!" it read this weekend.
The Great Inflation has been a catastrophe, one that could have been avoided if the Fed started tightening much earlier and more aggressively. This isn't about Russia and Ukraine. Inflation was nearly 8% before the war even started. Even worse has been the sharp spike in housing costs and, now, basic services like healthcare and childcare as a result of the overheating labor market.
Gasoline prices can fall pretty quickly, as we've seen over the past six weeks. The same isn't true of other services, unfortunately. And an economy that was functioning before the pandemic broke out now finds itself hamstrung by shortages resulting from the excessive stimulus, with workers missing, costs spiking, and customers behaving erratically.
If you missed it, listen to this interview from yesterday with the CEO of Aptar, a packaging manufacturer. Fifteen percent of its workforce has gone missing, and "job abandonment" is plaguing operations. "We have raised entry-level wages by 30%, have great benefits, healthcare, retirement, pay retention incentives, but it is just not enough," CEO Stephen Tanda told us. "While we would love to bring more manufacturing back to the U.S., we just don't have the workforce to do that."
People act like the Great Inflation is over, but it's not. Forecasters at places like Morgan Stanley are warning that inflation may prove stickier than expected over the next few years because of sharp increases in core service costs. Will slowing the pace of job growth be enough to bring the economy back into whack, and put it on sustainable long-term footing? Hopefully. Will it take a much sharper downturn, with 10% unemployment like Larry Summers has warned? It might.
So to say that the risk of recession now is a reason for the Fed to stop tightening policy, and then blaming only the Fed's tightening for the resulting downturn or economic mess, is to tell only half of the story, and leave out both the fiscal and monetary stimulus that threw us into this mess in the first place. I'm not blaming policymakers for responding aggressively to the pandemic; I'm glad they did. They just didn't throw on the brakes quickly enough after nominal demand started soaring, and they have to own up to that.
"More aggressive interest-rate hikes will cost millions of jobs and won't address the causes of high prices," wrote Senator Elizabeth Warren in a Wall Street Journal op-ed on Sunday. "Powell...is on the verge of sacrificing all this progress in [his] effort to tamp down inflation," she said of the Fed Chair. To highlight only the nine million job gains of the past eighteen months--ignoring that its flip-side is the 13% cumulative inflation during the same period which undermines those job and wage gains--is to completely mischaracterize the post-pandemic economy.
The Fed may not be able to avoid a "real GDP recession" now with its overdue need to tighten and rebalance the U.S. economy. It shouldn't pretend like that's the goal, anyhow. Powell needs to talk plainly about the Great Inflation, what caused it, how they are going to fix it, and how that will benefit the public in the longer-run so that a high-inflation, less productive economy doesn't become chronic. He'll have another chance today at 2:30 p.m.
See you at 1 p.m Eastern!
Kelly
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