The Fed leaves its interest rates solid and could end the hikes
Still, the economy is ending the year in a markedly better position than had been predicted almost on Wall Street or in mainstream economic circles, having continuously exceeded almost all expectations. Inflation fell to 3. 1 percent from a peak of 9. 1 percent. The rate stands at 3. 7 percent, in line with the penny, and the economy grew solidly in the last quarter. The Federal Reserve has probably finished raising interest rates and is contemplating cutting them next year. Financial markets are at or near all-time highs, and the S
That strength and stability, which defy even many of the most positive predictions, represent a remarkable progression after likely endless economic crises that began with the 2020 coronavirus pandemic and continued with a surge in inflation that the bank and White House have been slow to acknowledge.
The Federal Reserve and the White House have fought inflation on their own terms and employing entirely different tools. But today, central bankers, Treasury Secretary Janet L. Yellen, and President Biden’s economic think tank cautiously note that they have been vindicated through knowledge and advancements that were thought to be practically until very recently. This month, Biden’s usually calm Treasury secretary delivered an unusually blunt rebuke, telling reporters that economists who predicted lower inflation would require widespread layoffs were now “eating their words. “
Call it the most polite revenge excursion Washington has ever seen.
“So many economists were saying there’s no way for inflation to get back to normal without it entailing a period of high unemployment, [or] a recession. And a year ago, I think many economists were saying a recession was inevitable,” Yellen said at a Wall Street Journal event last week. “I’ve never felt there was a solid intellectual basis for making such a prediction.”
Inflation eased in October in latest sign of cooling economy
A day later, Powell gave his own thumbs up to the pessimists. The Federal Reserve chairman’s tone has been more circumspect, periodically noting that the central bank cannot yet claim victory and that there are many risks to inflation reaching its 2% target. The message held even though the Federal Reserve was planning three rate cuts next year, prompting markets to start pouring champagne.
However, Powell also remained hopeful that it was possible, despite what traditional economics might teach. Since 1961, the Federal Reserve has introduced 10 cycles of rate hikes to combat inflation, adding this one. This was followed by eight recessions.
“I thought from the beginning that there was a possibility, because of the unusual situation, that the economy would calm down in a way that would allow inflation to come down without the significant task losses that are sometimes associated with peak inflation. cycles,” Powell said last week. So far, that’s what we’re seeing. “
Yellen Handles Inflation Cautiously, Once Back Defying Skeptics
There’s still plenty of debate around how the economy’s “soft landing” was achieved. Some deny that it has even occurred, or that either Powell or Yellen deserve credit. Much of the drop in inflation, for example, didn’t come from the Fed’s higher interest rates, but from supply chains clearing backlogs and energy prices cooling.
Plus, many Republicans still accuse the Fed and the Biden administration of exacerbating last year’s soaring inflation — the fastest price increases in four decades — and for the monetary policy interventions that followed. Prices aren’t going up as fast anymore. But they’re still high, and high interest rate hikes have put the dream of homeownership out of reach for millions, a key GOP talking point ahead of the 2024 presidential election.
“All tough touchdowns start with a comfortable touchdown, never that. There was a lot of smart news and everyone deserves to be satisfied with that, but I wouldn’t declare victory too soon,” said Doug Holtz-Eakin, a Republican representative. analyst and former director of the Congressional Budget Office. He noted that the expansion of the personal sector appeared to be slowing in the last quarter, adding, “I see an economy that could just turn gently south, and that would possibly not be a laugh for anyone. “
‘A grim despair’
“U. S. recession forecast a year from now reaches 100%, a blow to Biden,” Bloomberg News headline in the fall of 2022. Larry Summers, a former Democratic Treasury secretary and common critic of the Federal Reserve, said unemployment would have to rise as inflation falls. Companies said they were preparing for a slowdown.
What recession? This summer defies all odds.
It seemed that serious economic hardship would be the value to be paid by the president and the central banker who reacted beyond historic inflation and clung too tightly to the insistence that price increases would be only a transitory incident. An outside White House adviser, who spoke on condition of anonymity to reflect personal conversations, described the environment in the building as one of “dark and melancholy despair” as inflation peaked in the summer of 2022.
“It tested their resolve — we were constantly testing and reaffirming the assumptions that we were operating on, because it was such a brutal time,” said Brian Deese, who served as director of the House White National Economic Council during Biden’s first two years. office, referring to last year’s rise in inflation. “But I think the White House deserves some credit for its consistency and for the president’s confidence that it’s conceivable to move toward a strong, solid expansion without a recession, even if we were constantly questioned and doubted. “
All the while, the Fed and the White House took their own key measures to rein in price hikes. The Fed started hiking interest rates in March 2022, moving at breakneck speed to get interest rates to the highest level in 22 years. It did so despite criticisms from the left that it was slamming on the brakes too hard and risking people’s jobs.
Powell and Biden officials have consistently maintained that they can tame inflation without causing a sharp rise in unemployment. Fed officials have pointed to a glut of job vacancies and job vacancies, arguing that employers can simply cut those jobs instead of laying off workers.
Some economists celebrate Biden’s economy, even if the public doesn’t
But even if that hadn’t happened, the Fed’s purpose was clear. A key moment came in August last year, when Powell threw down the gauntlet at an annual economic summit in Jackson Hole, Wyoming, warning of the “pain” ahead as the Fed struggled to beat inflation.
Seven months later, the Fed’s powers were further put to the test by a banking crisis. The swift demise of Silicon Valley Bank and Signature Bank in March sent regulators into emergency mode, worried that the rest of the financial system — and the economy — could descend into free fall.
The Federal Reserve managed to prevent the contagion from spreading further. But it was slow to announce another interest rate hike a few weeks later. Critics said the monetary formula was already under too much pressure and that officials acted before they were fully aware of the crisis. .
But for Powell and his colleagues, the move was key to staying on message and signaled a lasting resolve.
At this summer’s Jackson Hole forum, Powell made it clear that there was still a long way to go. But at this point, the officials had reached another phase of their campaign, in which they no longer needed to walk to each and every assembly and perhaps simply be more patient.
“As is the case, we sailed through the stars under cloudy skies,” Powell said at the time. (This was also literally true: many central bankers and economists at the convention got caught in a sudden typhoon while walking that afternoon. Here again soaked. )
The White House, meanwhile, deployed a series of teams to respond to Biden’s assertion that fighting inflation is the administration’s “number one priority” as Democrats clamored to rein in prices.
In October 2021, management managed to convince ports to operate 24/7 in an effort to curb delays that were driving up costs. The White House gave the green light to a significant expansion of oil extraction to reduce energy costs and announced the largest—at some point freeing up the nation’s strategic fuel reserves as fuel costs rose, ignoring court cases from climate experts and other allies.
White House Considers Bringing in National Guard to Address Growing Supply Chain Backlog
Biden has pledged not to interfere with the Federal Reserve’s crusade to raise interest rates. He rejected calls from the left for more radical measures that some economists say could have made the problem worse, such as price controls. Meanwhile, the right has demanded that Biden cut government spending. Still, the White House will continue to implement new primary federal programs, arguing that the efforts (in infrastructure, domestic semiconductor production, and electric power) would contribute to inflation by expanding the economy’s productive capacity.
The White House, in particular, has insisted that inflation is due to a malfunctioning supply chain, a surge in demand brought on by its 2021 stimulus package, as many critics, including some Democrats, have insisted. The House Council of Economic Advisers found that “source chains, in one form or another,” have contributed to more than 80% of the drop in inflation since 2022.
“There is a certain amount of mockery and derision towards Joe Biden saying this transition is possible, while we were getting kicked in the teeth with the inflation numbers in May and June 2022,” Deese said, referring to the inflation reports. fairly transparent theory that those inflation figures reflected the peaks of the source shock. “
In fact, this year, despite everything, has brought the long-awaited changes. Energy costs have fallen back to Earth. The uptick in the supply chain has helped reduce the costs of all kinds of goods. A resurgence of personnel, especially immigrants and women have boosted the economy. Wage increases have moderated to a speed that economists see as more consistent with long-term gains.
In the summer, the picture of the booming economy of 2023 emerged. The housing market, one of the sectors most susceptible to higher interest rates, had emerged from a short-lived recession. People were spending a lot on the Taylor Swift craze, movie tickets. , and vacations. The White House’s new systems of government injected more demand into the economy.
Lael Brainard, director of the National Economic Council, said the White House has looked at how badly the blue chip forecasts missed estimates of growth and joblessness as inflation came down, because many forecasters failed to see how much of the inflation was driven by temporary factors. She emphasized that the conventional wisdom gave too little weight to the role of supply chain disruptions.
“People didn’t need to see that the source aspect of the economy played as big a role as it did,” said Brainard, who was vice chairman of the Federal Reserve until February. “If we go back to the forecast from a year ago, we see that it’s incredible. “
Ultimately, the economy would grow at a whopping 5.2 percent annualized rate between July and September, stunning economists who had balked at forecasts in that ballpark. Pile on a string of encouraging inflation reports from late summer, and big Wall Street firms repeatedly slashed their odds of a recession.
Bigger questions remain: how long will consumers continue to consume en masse?Will the U. S. economy suffer a certain number of geopolitical threats?Something completely unexpected?
“We kind of assume that it will get harder from here,” Powell said last week, at his final news conference of the year. “But so far it hasn’t.”