AnalysisWhy is the Fed trying to ruin the economy?
Local wages, by one measure, are growing at a 5.6% annual pace. The region’s homes are selling at prices 10% higher than a year ago.
So, why is the
toward a recession?
You see, the Fed’s job is to keep the economy humming while maintaining a relatively stable cost of living. The central bank sharply raised a key interest rate twice within six weeks because it failed badly at managing inflation.
The local consumer price index shows inflation running at a budget-busting pace: 9.4% in the Inland Empire and 8.6% in
Two years ago, the pandemic’s economic wallop prompted various parties, including the Fed, to rescue the briefly shattered economy. Yet “too much good stuff” in these various aid packages means it’s now payback time. Inflation is an economic evil with wealth-cutting effects that must be tamed.
Now restoring economic sanity shouldn’t just be the Fed’s chore, but the nation’s central bank is being forced to be the adult in the room. Throughout 2022, it cautioned anybody who would listen that its gift-giving phase was ending. Some government entities — not all — are still in handout mode.
To cool the economy, the Fed’s deploying its most powerful tool: shutting off the cheap money it previously promoted. And the economy is starting to stall.
“Too much demand because people went nuts coming out of the pandemic restrictions. Too little supply because of just-in-time inventory schedules trashed by the intermittent and unpredictable pandemic lockdowns around the world,” says economist
Closer to home, Southern California’s hiring pace has cooled to 14,000 a month so far this year from 55,000 in 2021’s second half. Home sales in the six-county region are down 20% in a year. And one poll found California’s view of the financial future taking its biggest drop in nearly 14 years.
Tempering inflation requires economic influencers to work toward a difficult-to-swallow goal. Of course, everybody wants higher profits or pay. Yet who’ll cut their price for the greater good?
Let’s consider a dozen hazards the economy must dodge to deftly reduce inflation without a major business collapse.
1. The fed itself
The last time the central bank pushed its key rate up to today’s 2.5% was
So Fed chairman
If inflation cools slowly, how high could rates go? Or if the economy begins to implode, will inflation become a secondary concern? Powell could face an internal battle.
2. The bond market
Short-term rates set by
So will market rates go higher to fight inflation? Or fall to reflect the growing probability that pricier financing will create a recession?
3. Lenders
Rates nearly hit 6% this spring before settling to 5.3% at last count. In the wake of the surge, mortgage making has been pummeled. Refinancing opportunities are gone and homebuying is stalled.
Will lenders, faced with shrinking business, take on more risks with borrowers to keep loans flowing? This works against the Fed’s cooling plans.
Plus, it creates other risks. Remember the loose lending that led to the housing bubble of the mid-2000s?
4. Savers
Gosh, some banks now offer 1-year CDs above 2%.
The old near-zero-rate policies nudged savers to spend and invest in the economy. Rate hikes are designed to get folks to stop shopping and park money in safe places.
Slowing the flow of speculative investments to assets such as stocks, crypto and real estate can cool the economy. Or kill it.
5.
Any verbal flak the Fed gets from the
Putting more cash in taxpayers’ wallets, despite the political popularity, would undermine the Fed’s ability to restrain an overheated economy.
6. Governors ‘helping’
Uncle Sam isn’t the only government with cash. Governors from
Gov. Gavin Newsom’s budget will send most Californians up to
There’s only one problem with this state-level generosity to taxpayers — it percolates an economy the Fed is hoping to slow.
7. The housing market
The Fed’s rising mortgage rates are quickly chilling the housing market.
House hunters nationwide quit looking amid high rates and lofty prices. June’s
Can the nation fix its inflation mess before a house-price collapse?
8. The energy game
The local CPI says gasoline is 50% pricier than a year ago, electricity is up 21% and heating fuels are 39% more expensive.
Yes, Econ 101 says higher prices beget more output that eventually lowers costs. But energy companies don’t seem to mind their current windfalls.
Plus, energy is a geopolitical chess piece. Further international turmoil could spur major oil-producing nations to turn off the spigots.
9. The pandemic
The coronavirus won’t go away, even if most people are tired of its impact on everyday life and commerce.
As tough as it is to admit, fears about new variants and long-term health impacts could help the Fed throttle the economy.
Conversely, health-related business issues might raise doubts about the timing of future rate hikes.
10. The stock market
Well before rate hikes were reality and recession talk common, share prices were slashed.
The worst first-half-year for stocks since 1970 cut values by 20%-plus, creating an “official” bear market.
While that’s a win for the Fed — lowering speculation — further significant drops in stock values could create calls to ease rate hikes.
11. Bosses
Most CEOs spend too much time worrying about the company’s share prices, so a horrible 2022 on
Many bosses will cut costs to boost profits. That penny-pinching could help moderate inflation, particularly surging wages.
Already, employers from online retail’s
12. The supply chain
How goods get made, shipped and distributed isn’t the Fed’s responsibility.
And yet the tangled supply chain wasn’t the only inflation contributor. An overstimulated economy meant the ports of
If rising rates chill consumer demand, the world’s logistics systems could get some relief. But that may not get critical materials produced in time to satisfy factory shortages.
Prime example: Missing chips are still slowing the production of new vehicles, ballooning prices of new and used cars.
Bottom line
The timing is hard to predict, but it’s a good bet fixing inflation will not be painless.
It took three years to get 1980’s nearly 15% inflation rate to under 3%. In 1990, it took a year for inflation to go from 6% to 3%. And one year after inflation hit 5.5% in 2008, the nation was suffering 2% deflation.
All three of those chills to the cost of living came with recessions attached.
Want to rate 12 risks the Fed faces as it navigates this challenging inflation-correction chore? Go to my questionnaire at bit.ly/fedrisks!
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