The Federal Reserve has gone from cultivating a hot labor market to cutting annual inflation by 7%. This task will require much more than the expected three or even five-quarter point increases in the FF00 federal funds rate,
this year and several more in 2023.
Omicron cemented hybrid work. Pressures will persist on housing prices in suburbs and communities far from major employment centers. Raising mortgage rates by about one percentage point will do little to lower rents or house prices.
The shift in consumer spending from goods to services will persist, and household balance sheets are still teeming with unspent stimulus cash. Supply chains remain fragile and chip shortages will limit manufacturers of motor vehicles, electronic gadgets and other durable goods until 2023.
The combination of buyers with available cash and shortages of critical components will keep inflationary pressures strong.
Restaurants and other services must pass on higher costs for materials, labor, COVID restrictions, and periodic closures or traffic slowdowns imposed by novel COVID strains. Otherwise, they bend.
Better remote collaboration software is coming. Real eye contact and a genuine sense of presence from innovations like Google’s Starline will prove the harbingers of a metaverse that’s more of a workplace than a destination for gaming and fantasy lives. The profits will be significant and technology companies will not need to borrow to invest.
In 1979 Paul Volcker became Fed Chairman and inflation was nearly 12%.
A more powerful figure than his predecessor, William Miller, and less political than President Jerome Powell or European Central Bank President Christine Lagarde, Volcker drove the federal funds rate up nearly 7 percentage points in eight months. The economy went into recession, he slowed to adjust to the recovery, then he raised the policy rate to 19%.
These days, such drastic action is unlikely, but a 1 percentage point increase at every meeting until inflation hits 2% would be more appropriate than what Powell seems inclined to do.
It’s hard to say that the labor market is not at full employment with an unemployment rate of 4% and nearly 11 million unfilled jobs. It is equally difficult to say that we are at full employment with so many people laid off from old service jobs still sitting on the sidelines.
Interest rates will have to be pushed high enough to cause additional unemployment, otherwise inflation will continue to outpace wages, exacerbate inequality for many years to come and tax the elderly who are disproportionately dependent on fixed-income investments. .
Worker availability—and the overall adult labor force participation rate—could be improved through relocation and retraining incentives and subsidies to enroll in Department of Labor apprenticeship programs.
We don’t need another round of additional unemployment benefits that exceed lost wages. Rather, state unemployment benefits should be portable for those moving abroad for training and mitigating relocation costs for those taking on new jobs.
Volcker-style hikes in the fed funds rate could flatten or invert the yield curve and accelerate further bank consolidation
Simply, banks rely on the spread between long rates on mortgages and the like and short rates for what they pay for deposits and other loanable funds. Smaller banks are more dependent on lending income, while larger banks are more dependent on trading fees, electronic payments, etc.
The last thing America needs – other than more COVID shutdowns – is for more community and regional banks to sell out to the giants of Wall Street and reduce competition in the financial sector.
Since 2008, the Fed has been paying commercial banks interest on the reserves they keep at the central bank. Tilting the yield curve could make the interest the Fed pays banks higher than what it collects on bonds and push them into a deficit.
Although the Fed could work around this problem, it would prove quite embarrassing and erode confidence in the dollar BUXX,
The Fed is expected to complement larger increases in the fed funds rate by selling some of its long-term Treasuries and mortgage-backed securities to raise long rates.
It would steepen the yield curve to avoid central bank losses and suck liquidity out of the system where it hurts the most – too much demand for big-ticket items like cars and houses and corporate borrowing in the markets. junk loans and bonds.
Instead, the Fed is inclined to rely primarily on the fed funds rate to effect tightening and to wait at least several months after the start of this process to begin reducing its holdings of Treasuries and securities. mortgages.
It would be better to target a floor – a minimum but not a maximum – for the 10-year Treasury rate TMUBMUSD10Y,
maintaining a suitably upward sloping yield curve for both the health of the banking sector and the effectiveness of monetary policy.
Peter Morici is an economist and emeritus professor of business at the University of Maryland, and a national columnist.
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