Chair Powell, haven’t you done enough?
In his regular testimony on Capitol Hill last week, Federal Reserve Chair Jerome Powell warned he and his colleagues on the Federal Open Market Committee weren’t done raising interest rates.
Inflation, in Powell’s view, is still out of control. And desperate times continue to call for desperate measures, not least of which Powell euphemistically called “a period of below-trend growth and some softening of labor market conditions.”
That means railroading the country into a recession and driving millions out of work so we all stop asking for raises – raises that, in more than a few cases don’t do much beyond give the recipients a living wage.
Breaking down the consumer price index reports for May, it looks on the face of it that the Fed chair is right, inflation is still high. But that reading misses several important facts.
First, its increase was the slowest since 2021, at only 4 percent on a year-over-year basis, and has been steadily tumbling over the last year. And once housing costs – more on those later – are removed from the picture, prices actually dipped 0.1 percent from April to May. It clearly looks like the Fed’s steady drumbeat of rate hikes has done its work, helped by a big drop prices for the gasoline that’s needed to move the economy’s supply chains.
Second, those supply chains are clearly unkinked, helping ease producers’ costs and retailers’ ability or perceived need to hike sticker prices. The producer price index actually dropped 0.3 percent from April to May.
Third, the housing data the Fed’s preferred inflation measure relies on is grounded in a highly problematic lag. The inflation in shelter costs which shows up in the May consumer price index report is, in fact, from leases largely signed in 2021 and 2022, when record demand collided with decades of undersupply to produce a dramatic increase in rents. But that was a year ago. Indicators closer to real-time measures of rent costs, like Zillow’s Observed Rent Index, show rents are actually falling as lots of supply finally hits the market.
Powell appears to have one trump card in arguing for more rate increases: Labor demand is still outpacing supply. But that observation can’t be made in a vacuum. America is a greying nation. To be sure, we’re not aging as fast as our counterparts in Europe or East Asia, but the biggest generation in our history – the Baby Boom – is at an age where most Americans traditionally retire. That is naturally going to cause significant churn in the labor market as companies cast about for new hires, creating opportunities for new hires to demand wage hikes. But it’s the height of hubris to think monetary policy can enforce its will on demographics.
To solve our biggest problems, housing costs chief among them, businesses need interest rate certainty, not threats of beating the American worker into submission with rate hikes. By holding out for more interest rate increases at this point, Powell and the FOMC are doing more harm than good.
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