Why Does Fed Want To Lower Rates?
More Signs of Economic Strength Over Past Week
SriKonomics has previously discussed the path that Federal Reserve Chairman Jerome Powell and his senior colleagues have followed in providing “Forward Guidance” to markets. The Chairman, in particular, has suggested more than once since December that a reduction in rates was imminent, only to pivot away from that position when inflation data failed to conform to his expectations.
A similar effort to provide guidance persisted last Monday when Powell spoke at the Economic Club of Washington, DC. Although not offering a precise date for the first rate cut in over a year, the Chairman provided indications that the central bank’s priorities have shifted from inflation mitigation to recession avoidance. And that calls for a rate cut. Markets have interpreted this to mean that policy easing will begin in September, an expectation that Fed officials have done little to discourage.
Consider what economic data suggest since Powell spoke early in the week. Retail sales figures that came out the following day showed a flat performance in June from May compared with the 0.3% decline that the consensus had anticipated. Furthermore, the May figure was revised up to show a 0.3% increase. The numbers were all the more remarkable in that they occurred despite gasoline sales being down by a hefty 3% last month prompted by falling prices. (Retail sales figures are not adjusted for inflation.)
What prompted the overall retail sales figures? A 1.9% surge in online sales that made up for reduced gasoline transactions. Retail sales are an important marker for consumer spending which accounts for two-thirds of US gross domestic product. And those numbers suggest that the US consumer is still in a healthy state despite sharply higher interest rates.
That was not all. On Wednesday, we found from US Census Bureau figures that housing starts rose by 3% in June from May, coming above expectations. Building permits, an early indicator of future construction activity, rose by 3.4% to a 1.45 million annual rate compared with expectation of 1.4 million. Clearly, the housing sector is not crying for lower interest rates either!
Finally, also on Wednesday, Federal Reserve data showed that US manufacturing output rose by 0.4% in June over the previous month, exceeding market expectations. In addition, the figure for May was revised up to a 1% monthly increase.
Indications of strong consumer spending, and data from the housing and manufacturing sectors, all just over the past week, put paid to Powell’s stance at the Economic Club of Washington that the economy is weakening sufficiently to require lower interest rates. Strength in the economy witnessed last week is likely to put upward pressure on overall prices before too long.
What about the weakness in the labor market suggested by the 20,000 increase in initial jobless claims to 243,000 during the week ending July 13? The latest figure was above the 229,000 forecast in a Bloomberg survey. The claims figures have fluctuated from week to week and were last at 243,000 — same figure as the latest week — during the week ending June 8 before declining in subsequent weeks. Despite some softening in the demand for labor, there is little to indicate that employment is falling off a cliff.
Yes, the rise in continuing jobless claims to 1.867 million in the latest week suggests greater difficulty for workers finding employment but the figure is still close to the recent high of 1.856 million in the week ending June 22 — after which it fell in the following week. Also, the latest employment figures published by the US Bureau of Labor Statistics show an increase in the participation rate (share of the population working or looking for work) from 62.5% in May to 62.6% in June. Increased competition for jobs, rather than just employers becoming choosy about who they want to hire, may have been the factor in the higher continuing claims number.
The Federal Reserve under Powell’s leadership has repeatedly suggested that it does not have a preset path for monetary policy but is “data dependent”. If officials believe their own message, they should wait for more signs of weakness before easing policy.
The young shepherd in Aesop’s Fables discovered that crying wolf repeatedly had big disadvantages. In suggesting again and again that inflation has been conquered while the economy is weakening, the Federal Reserve finds itself in a similar position. This is especially the case after having conducted policy in 2020 and 2021 based on expectation of “transitory inflation” which turned out to be grossly inaccurate.
Dr. Komal Sri-Kumar
President
Sri-Kumar Global Strategies, Inc.
Santa Monica, California
srikumar@srikumarglobal.com
@SriKGlobal
July 20, 2024
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