Economic Indicators Turn from Confusing to Ominous
Unfortunately, that change may not be for the better, with a conservative September interest rate cut of 0.25 percent being too small and arriving too late to do much good.
Additionally, the central bank said it will continue reducing its balance sheet by selling
Markets have been waiting for an interest rate cut for several months.
Many economists have been predicting a recession for months on end in the wake of the rapid interest rate increases of
The doomsayers are not wrong, though the downturn has been very late in arriving. The bizarre government actions perpetrated during the COVID-19 pandemic distorted the economy so greatly and created such strange conditions that restoration of normal cause-and-effect relationships of government fiscal and monetary policy on the economy has been much slower than expected.
Nonetheless, the laws of economics have not been repealed. The supply disruptions, gigantic infusions of federal spending and helicopter money, enormous increase in consumer dollars spent on services, and other pandemic-related economic mischief grossly warped the price signals that enable markets to create the best possible allocation of goods and services across the economy. It is taking an unexpectedly long time for more-normal conditions to develop.
What has kept a recession at bay for so long is the massive amount of money the federal government and
Meanwhile, banks were reducing their reserves at the Fed between February and May of this year, moving more money into circulation and muting the effect of the Fed's money-tightening. The banks stopped doing that in June.
Economic fundamentals matter. Although it can be very difficult to filter out other highly important factors (liquidity in this case), policy actions will ultimately have their effects. In fact, sometimes those effects will turn out to be even greater, especially the damaging ones, when they finally manifest, because the fundamentals worsened while the problems were obscured by the positive indicators.
That may in fact be happening now, with multiple measurements going south.
Banks may be happy about consumers spending more on debt and less on everything else, but it is a very bad sign for the rest of us.
The federal government bears the entire responsibility for this mess. "My base case has been that we're repeating the 1970s disaster driven by out-of-control government spending and out-of-control Fed money printing. The official numbers are matching that almost to a tee,"
Numerous economic indicators suggest that the
If the Fed starts lowering interest rates in September as expected, it will probably not do much to improve economic conditions: it is likely to be a small cut (0.25 percent), and the markets have already priced it in several times now, on (consistently disappointed) expectations of rate cuts in previous months. If the Fed stops selling securities, having already slowed those sales in recent months, it will have a money-loosening effect. Banks may counter that, however, by increasing their reserves at the Fed, as they signaled in June.
That leaves fiscal and supply-side factors as the big influences on the economy. Those are in the exceedingly clumsy hands of the federal government. Cutting tax rates, spending, and regulation would get the economy going again. Nothing along those lines is going to happen before
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