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