Day one of FRB Chair Powell’s congressional testimony about the state of the economy and monetary policy was largely a nonevent. Powell reiterated the message he delivered in January—that interest rate cuts are likely this year provided that inflation data continue to show improvement.
His remarks left intact expectations that the Fed will deliver three quarter point rate cuts this year, with the first one in June or July.
Equites climbed taking the remarks as a “no news is good news” development.
Treasuries also advanced nominally.
Wading carefully into politics, the proverbial third rail where any comment will alienate someone, one cannot separate the economy from politics as they are interconnected.
Government data released yesterday indicated that since President Biden’s inauguration, there has been an 18% increase in overall prices and a 5% real loss in paychecks. This is a hallmark of boomflation…strong nominal GDP that produces high inflation that erodes households’ real income.
It is Economics 101. Economic growth is strong but so is inflation. The Administration is correct that based upon government statistics unemployment is around historical lows, and economic growth is consistently around the highest levels [ex COVID distortions] of the millennium. These favorable statistics, however, are overshadowed by rising cost push inflation.
Cost push inflation is wage inflation. The demand for higher pay causes a negative feedback loop as these higher costs are passed onto the consumer until the cycle breaks. [Think $25 minimum wage and $18 for a Big Mac and a Coke]
Moreover, service inflation, propelled by OER or what someone can rent their home for if it is indeed rental, is further exacerbating the situation.
The Administration altered the manner as to how OER is calculated believing the Federal Reserve’s forecast that OER would decline in 2022 and 2023. It is continuing to accelerate given the incessant rise in housing prices.
Tonight, the President delivers his State of the Union Address (SOTU). It is largely expected to be a non-event with the Administration potentially placing blame on rising prices on “greedy corporations and shrink inflation,” while calling for an increase in overall wages including the minimum wage and the corporate tax rate.
As noted, the economy is experiencing its first bout of cost push or wage inflation since the 1970s. It is a systemic issue and historically takes dramatic policy to overcome.
Inflation is indeed an ugly phenomenon.
Changing topics, the markets had little reaction to the JOLTS Job Openings which largely met expectations. There was also little reaction to the Biege Book given the FRB Chair’s testimony.
Last night the foreign markets were mixed. London was down 0.19%, Paris up 0.14% and Frankfurt up 0.04%. China was down 0.40%, Japan down 1.23% and Hang Seng down 1.27%. Dow and NASDAQ futures are flat and up 0.25%, respectively. The 10-year is up 1/32 to yield 4.10%.
