MAKING A CASE FOR A PAUSE: WHY I WOULD PREFER THE FOMC TO KEEP THE FEDERAL FUNDS RATE UNCHANGED

 

Maybe it’s time for the Federal Open Market Committee (FOMC) of the Federal Reserve Bank of the United States to pause its round of interest rate hikes, somewhat similar to hitting the pause button on a CD player – a compact disc player, not certificate of deposit player.  Over the past year or so, the FOMC has increased its target for the federal funds rate eight times, according to Kristina Partsinevolos (2023) in discussion with Jose Diaz-Balart on MSNBC.  The rate increases, implemented to reduce U.S. inflation rates, have now accumulated to an increase of more than four percentage points based on data from the Board of Governors of the Federal Reserve System (US) (2023).  While the rate increases may have been the most important contributing factor in what seem to be decreases in the rate of inflation in the U.S., they may also have had a negative impact on the banking system and the overall economy.  A pause during which the FOMC would keep the federal funds rate unchanged for a bit could allow the FOMC to gather more information and hopefully allow the banking system to stabilize.  Continuing the CD analogy, this blog post will allow me to present some of my ‘greatest hits’ (or maybe people would say my ‘least terrible flops’ or something like that).  Internet addresses for some of my earlier blog posts appear in the References Section.

Concomitant with increases in the federal funds rate, access to credit has tightened.  Many are noting that higher interest rates led to a decrease in asset values for Silicon Valley Bank (SVB) and others.  Although questions may remain about the exact situation of SVB, at least some believe that SVB and other regional banks would not have encountered the grave problems that they faced had interest rates not risen so much and so quickly.  Josh Brown on The Halftime Report on CNBC stated that a financial crisis could be developing.  If I heard him correctly, then he argued in favor of a pause and predicted that the FOMC would pause at least for a bit, noting that, at least in his view, rate hikes caused the stock market crash of 1987.

Additionally, in my previous blog post with the short title “3 Out of 4 Ain’t Good” [Hartman (2023, a)], I noted that U.S. retail sales on a seasonally adjusted basis have fallen in three out of the last four months through February 2023.  I also pointed out in that post that (because the U.S. retail sales data probably are not measured in constant buying power dollars) we may question how much real retail sales (measured in constant purchasing power dollars) increased between February 2022 and February 2023.

In an earlier blog post with the short title “Half Full or Half Empty” [Hartman (2023, b)], I noted that U.S. jobs data may be emitting mixed signals.  While the establishment survey with seasonally adjusted data had a strong gain for February 2023 and the household survey for February 2023 with data not seasonally adjusted had a remarkable gain, comparing unadjusted household survey data from February 2023 with the number for July 2022 implies a relatively modest average monthly gain, with data from August 2022, September 2022, November 2022, December 2022, and January 2023 all below the estimated value from July 2022.  On top of that, wages and salaries probably are not keeping pace with inflation, and the U.S. unemployment rate increased slightly last month.  In light of these observations, how strong is the U.S. job market?

I called at least implicitly for a pause in my blog post with the short title “Why Are People So Pessimistic about the Economy” [Hartman (2023, c))].  In that post, I noted that some of the U.S. retail sales data have been soft for months.  Further, households have been having difficulty paying bills.  In “Falling Employment and Debt Deflation [short title, Hartman (2023, d)], I mentioned that both credit card debt and delinquencies may be surging.  I also pointed out that due to data revisions, employment in the second quarter of 2022 may have fallen by more than a quarter of a million jobs.

In “Will Food for Thought Feed the Fed” [short title, Hartman (2023, e)], I stated that I probably would have preferred that the FOMC would have kept the federal funds rate target unchanged.  The FOMC understandably was and is concerned about inflation.  That was perhaps the main reason why I thought and still think that a pause may be appropriate rather than a cut.

What would be a more serious mistake for the FOMC in March 2023—(a) leaving the target for the federal funds rate unchanged and perhaps creating a minor spark in inflation, or (b) raising the rate and perhaps causing more defaults and additional deterioration in the stability of banks?  I clearly think that risking another financial crisis is much worse.  Further, although the Federal Reserve of the U.S. (the Fed) has a dual mandate for promoting growth in employment and price stability (the latter often interpreted as meaning low and perhaps stable inflation rates), the Fed was initially created as a lender of last resort.  Thus, its original function was for promoting stability in financial markets.  Due to a long, variable lag associated with monetary policy, we may not how much U.S. inflation rates will fall for a while. Given (1) an inability to know how much further inflation will fall due to monetary policy already implemented,  (2) the potential for a financial crisis, debt deflation, and a severe recession; and (3) millions of households needing relief, I hope that the FOMC holds off on March 22 and waits for more information before considering another rate hike. 

Rahel Solomon of CNN and others have noted that most believe that the FOMC will raise the federal funds rate by 0.25 percentage points when meeting tomorrow (3/22).  What will the FOMC decide to do?  Now, anyone for some vinyl?  😊

 

NOTE: I apologize for any misstatements, inconvenience, or confusion.  Additionally, data revisions announced after this blog entry could change the above analysis.  Thank you very much for your understanding.  Constructive comments are welcome at my Twitter account (@HarrisonCHartm1).

 

 

REFERENCES

 

Board of Governors of the Federal Reserve System (US) (2023).  Federal Funds Effective Rate [DFF], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DFF, March 21, 2023.

Hartman, Harrison C.  (2023, a)  “Three Out of Four Ain’t Good:  February US Retail Sales Cast Doubt on Economic Stength.”  Posted online March 15, 2023, available at https://harrisonhartman.blogspot.com/2023/03/3-out-of-4-aint-good-february-us-retail.html

Hartman, Harrison C.  (2023, b)  “Half Full or Half Empty:  A Brief Note on the US Jobs Report for February 2023.”  Posted online March 10, 2023, available at https://harrisonhartman.blogspot.com/2023/03/half-full-or-half-empty-brief-note-on.html

Hartman, Harrison C.  (2023, c)  “Why are People Pessimistic about the Economy:  A Closer Look at the Data.”  Posted online February 15, 2023, available at https://harrisonhartman.blogspot.com/2023/02/why-are-people-pessimistic-about.html

Hartman, Harrison C.  (2023, d)  “Falling Employment and Debt Deflation:  Two Possible Problem Now and Beyond Valentine’s Day Due to Tight Monetary Policy.”  Posted online February 3, 2023, available online at https://harrisonhartman.blogspot.com/2023/02/falling-employment-and-debt-deflation.html

Hartman, Harrison C.  (2023, e)  “Will Food for Thought Feed the Fed While People Try to Feed Their Families.”  Posted online January 22, 2023,  available at https://harrisonhartman.blogspot.com/2023/01/will-food-for-thought-feed-fed-while.html

3 OUT OF 4 AIN’T GOOD: FEBRUARY US RETAIL SALES CAST DOUBT ON ECONOMIC STRENGTH

 

Many if not most (or all) of you know that Meatloaf sang the Jim Steinman-written 1970s song, “Two Out of Three Ain’t Bad.”  But what about three out of four?  Besides being a great winning percentage over an extended time period (i.e., decades) for a major college football program (0.750 or 75 %), three out of four represents the number of times in recent months in which seasonally adjusted U.S. retail sales were estimated to have fallen by the U.S. Census Bureau.  Using this measure, retail sales in the United States fell in November 2022, December 2022, and February 2023.  On a seasonally adjusted basis, U.S. retail sales (including food services) fell by 0.4 per cent in February 2023 when compared with their level from January 2023, which was a strong month in the adjusted data.  Despite the decrease last month, the Advance Retail Sales report from the Census Bureau points out that U.S. retail sales from February 2023 were up more than five per cent from February 2022. 

However, U.S. retail sales are measured in U.S. dollars with buying power that fluctuates with changing prices in the economy.  If we would subtract an approximate annual inflation rate of, say, 5% or 6%, from the growth in U.S. retail sales from February 2022 to February 2023, then how much higher would U.S. real retail sales be, with real retail sales measured in U.S. dollars that have constant purchasing power, which is the buying power of the U.S. dollar in the base year or the base period. 

Readers should realize that retail sales clearly do not represent all consumption spending in the economy.  Further, U.S. real GDP includes not only consumption by households but also investment in physical capital (largely by firms), government purchases by the various government sectors, and net exports, where those in other countries buy the exports that count toward net exports.  Although I’m not sure, retail sales could include at least some imports, while GDP includes no imports (but the value added within US borders should count toward U.S. GDP).  Thus, although we should expect a positive correlation between retail sales and real GDP, they are definitely not the same, given that retail sales are not measured in constant buying power currency and real GDP includes more items.  In turn, decreases in retail sales could mean but do not necessarily mean decreases in real GDP.

Additionally, the US Bureau of Labor Statistics announced this morning that the Producer Price Index (PPI) fell by 0.1% in February 2023.  If my memory is correct, then on the screen CNBC printed that the market pre-announcement estimate was for an increase in the February PPI by 0.3% rather than the estimated decrease.  I think I heard that year-over-year CPI inflation has been trending downward since around June 2022, and my usage of the inflation calculator on the BLS website confirms this.  With year-over-year inflation trending downward and the PPI falling unexpectedly last month, this could indicate weakening demand in the economy and a recession looming for the United States.  So too could the fact that, as I pointed out in my previous blog entry [Hartman (2023)], data not seasonally adjusted from the household survey imply average monthly employment gains over the last seven or so months that could be considered as modest.

Readers should note that when using data not seasonally adjusted, U.S. retail sales increased in November and December of last year, as was likely expected, probably largely due to holiday shopping. But in turn, given that seasonally adjusted retail sales fell in those two months, this could suggest that the holiday shopping season was not as strong as would normally be expected.

After usually strong retail sales growth in November and December in most if not all years based on data not seasonally adjusted, retail sales normally plummet in January of the following year.  A quick look at data from the FRED website of the St. Louis Federal Reserve Bank website shows that starting with February 2009, estimated advance retail sales each February not seasonally adjusted posted only three month-to-month gains.  The years with month-to-month February increases in retail sales starting with the year 2009 were 2011, 2012, and 2016.  Each one of those three month-to-month gains in unadjusted retail sales followed a loss of retail sales of more than twenty per cent!  This might help to explain a rebound in the following Februaries.  Although some earlier Januaries during this period also posted losses in unadjusted retail sales of more than twenty per cent, each January starting with January 2019 had a month-to-month loss of less than nineteen per cent.  In light of the fact that U.S. retail sales unadjusted are likely to fall in February, the decrease in seasonally adjusted U.S. retail sales in February of this year seems to underscore weakening demand in the economy.

In past years, March has often shown strong rebounds for retail sales based on data not seasonally adjusted.  Looking at the retail sales data both adjusted and not adjusted for the current month, March 2023, could provide very useful information about how strong the U.S. economy actually is.  However, that is a luxury that we don’t have now.  This could make the FOMC’s interest rate decision next week all the more challenging.

 

NOTE: I apologize for any misstatements, inconvenience, or confusion,  Additionally, data revisions announced after this blog entry could change the above analysis.  Thank you very much for your understanding.  Constructive comments are welcome at my Twitter account (@HarrisonCHartm1).

 

REFERENCES

 

Hartman, Harrison C.  (2023)  “Half Full or Half Empty:  A Brief Note on the U.S. Jobs Report for February 2023.”  Posted online March 10, 2023 at the web address below.

https://harrisonhartman.blogspot.com/2023/03/half-full-or-half-empty-brief-note-on.html

 

U.S. Census Bureau, Advance Retail Sales: Retail Trade and Food Services [MARTSMPCSM44X72USN], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MARTSMPCSM44X72USN, March 15, 2023. Data accessed from https://fred.stlouisfed.org/data/MARTSMPCSM44X72USN.txt

 

https://www.bls.gov/data/inflation_calculator.htm

https://www.bls.gov/ppi/

https://www.census.gov/retail/sales.html

HALF FULL OR HALF EMPTY: A BRIEF NOTE ON THE US JOBS REPORT FOR FEBRUARY 2023

Much if not most of the focus on the announcement of the data from the U.S. Bureau of Labor Statistics (BLS) today for data from February 2023 has been on the gain in the establishment survey on a seasonally adjusted basis.  The reported gain of 311,000 jobs exceeded forecasts made prior to the announcement and is considered to show labor market strength.  However, considering at least some other measures of employment and unemployment presents a different picture.  It reminds me of the old cliche about whether a glass is 'half full or half empty.'

If my understanding is correct, then the above job gain of more than 300,000 jobs from the establishment survey in part reflects the results from a model that makes assumptions about the number of new workplaces added and the number of workplaces that cease operation.  By contrast, the household survey uses a sample of  households to project the total number of people in the labor force, not in the labor force, working, and unemployed.  The household survey by the BLS indicated that the unemployment rate in the U.S. increased from 3.4 per cent to 3.6 per cent in February 2023.  This could largely reflect an increase in the labor force participation rate last month.  I think I heard that on CNBC this (Friday) morning that the labor force participation rate has now returned to about where it was before the start of the COVID-19 pandemic.  Even so, the modest increase in the unemployment rate may be viewed less favorably that the aforementioned jobs gain.

Using the household survey seasonally adjusted, the BLS found a job gain of only about 177,000 jobs added in the U.S. last month as shown in Table A, only somewhat more than half of the jobs gain found by the establishment survey.  But, when looking at the household survey in Table A-1 from the BLS with data not seasonally adjusted, I estimate  employment growth of over one million jobs!  Is some of this growth due to warmer temperatures and sampling issues?  If not, then what is the cause of this discrepancy?  Readers may want to note that based on U.S. BLS data from the FRED website of the St. Louis Federal Reserve Bank, (a) the net gain in jobs from July of 2022 through February 2023 for the household survey not seasonally adjusted was very roughly 650,000 (which could indicate relatively modest monthly average gains) and (b) before February 2023 but after July 2022, the only other month with a higher count of jobs from this survey than in July 2022 was in October of 2022.

I think I heard on CNBC this morning that wage gains recently in the U.S. on an annuallized basis were up by about three per cent.  That's quite a bit lower than recent year over year estimates of U.S. inflation.  Why are many paychecks failing to keep up with inflation?  Combining this with the observation that unadjusted household employment in November 2022, December 2022, and January 2023 was lower than in October 2022 raises questions about how strong the U.S. jobs market really is.  On top of that, with banking problems coming to light, this should give the Federal Open Market Committee of the Federal Reserve a lot to consider when deciding on its target for the federal funds rate soon. 

Note:  Subsequent data revisions may change the above analysis. Please accept my apology for any misstatements, inconvenience, or confusion.

REFERENCES

U.S. Bureau of Labor Statistics, Employment Level [LNU02000000], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/LNU02000000, March 10, 2023.  However, data were accessed from https://fred.stlouisfed.org/data/LNU02000000.txt

https://www.bls.gov/news.release/empsit.nr0.htm

https://www.bls.gov/news.release/empsit.a.htm

https://www.bls.gov/news.release/empsit.t01.htm