It seems that many people, myself included, have been calling for a pause in the process of the Federal Open Market Committee (FOMC) of the Federal Reserve System in increasing the target range for the federal funds rate, which is the overnight interbank lending rate. The estimate of Consumer Price Index (CPI) inflation announced April 12 by the US Bureau of Labor Statistics (BLS) could easily support this view. Given that month-to-month inflation was only about 0.1 per cent last month, overall inflation has been slowing dramatically. Readers may want to note that the BLS announced that the monthly CPI increased by 0.4 per cent in February 2023, and the unadjusted annual CPI inflation rate last month (measuring inflation between March 2022 and March 2023) was about five per cent. If my memory is correct, then the US annual CPI inflation rate from June 2021 through June 2022 was around 9 or 10 per cent. For those not familiar, the CPI measures the cost of a bundle of goods in the US that a ‘typical’ household may buy.
Additionally, the BLS announced on April 7 that the U.S. economy added an estimated 236,000 jobs in March 2023 based on the seasonally adjusted establishment survey, compared with an average monthly increase of about 334,000 over the previous six months. This seems to be consistent with the job market cooling in the economy.
On Friday (April 14) of last week, the US Census Bureau announced that estimated US retail sales fell by 1.0 per cent last month. If I saw correctly, then CNBC showed a graph that day implying that US retail sales fell during five out of the last seven months! Moreover, the BLS released information on April 13 indicating that the Producer Price Index (PPI) fell by about 0.5 per cent, where the PPI measures the cost of buying a bundle of goods that a producer might purchase. I think that Steve Liesman of CNBC showed a graph last week reflecting his analysis that PPI inflation spiked up before the CPI started increasing at a noticeably faster rate in this most recent ‘run up’ in inflation, and the decline in PPI inflation or the PPI could be preceding a decline in CPI inflation or the CPI.
The above statistics and analysis support the view that inflation is coming under control (if it isn’t already under control). If that is the case, then because rising inflation was the reason why the FOMC started raising interest rate targets, couldn’t the FOMC pause now to try to (1) prevent the higher interest rates from causing a recession and (2) minimize the severity of a recession if one does occur? Some might argue that the time has already come for the FOMC to reduce rates to try to stimulate the economy. However, such a decision could wind up sparking additional inflation if the FOMC doesn’t quite have the relatively recent inflation problem solved just yet. Following the experience in the 1970s and the early 1980s in the US and elsewhere, many if not most (or all) may conclude that once started, inflation can be very persistent. Thus, a pause may be the best possible policy decision for the FOMC at this point.
However, depending on how one views the data, one could make the case for another federal funds rate hike at the next meeting. Some categories of goods and services in the CPI like shelter increased at a noticeably faster rate last month than the overall CPI. For example, the estimated shelter increase was 0.6 per cent month-to-month. Further, the job market data showing slowing were measured on a seasonally adjusted basis. Data accessed from the FRED website of the St. Louis Federal Reserve Bank imply that the estimated gain from the establishment survey on an unadjusted basis was about 520,000 jobs. By contrast, data on from the household survey on an adjusted basis imply growth in jobs of more than 570,000 jobs in March 2023 in the U.S. and on an unadjusted basis by more than 1 million! All three of these estimates are clearly greater than the aforementioned 236,000 job estimate from the seasonally adjusted establishment survey. Regarding the job market, it could be that because the U.S. economy adds a large number of jobs in March of most years as temperatures warm in the colder weather areas, it may be appropriate in many if not most instances to adjust the data seasonally so that reported increases and decreases are not due only to predictable seasonal factors. That could give a better indication of how weak or strong the economy is compared with other recent times and where the economy is headed.
Moreover, I think that the retail sales estimate release from the US Census Bureau (and perhaps others) pointed out that US retail sales in March 2023 were nearly three per cent higher than they were in March 2022. Thus, many if not most may find that the retail sales report was not so disappointing. However, I would quickly point out that if one assumes that the inflation rate from March 2022 through March 2023 was roughly five per cent, then one would conclude that real retail sales measured in dollars with constant purchasing power (invariant to changes in prices in the economy) fell by very roughly two per cent. Combined with the observation that seasonally adjusted retail sales fell five of the last seven months, these seem fairly if not very disappointing, although retail sales could have been much worse.
It may be worth noting that in at least one of my previous blog entries, subsequent data revisions produced an estimated loss of employment of around 275,000 jobs in the second quarter of last year. My understanding is that the initial data estimates from the BLS are based on a model that makes assumptions about new workplace startups and closures. Will subsequent revisions either reduce or increase job estimates for the US economy? By the way, what should we call the first and second quarters for the US economy last year (2022) if there were two consecutive decreases in real GDP and a loss of employment in the second quarter of that year?
Based on the above, I would recommend that the FOMC keep its target for the federal funds rate unchanged at its next meeting. Although the economy may be getting relatively weak, the FOMC could keep some inflation fighting credibility by not cutting rates but also not increase the probability of a recession and/or a banking crisis by increasing rates. If US inflation is getting relatively low, then would the FOMC want to risk sparking deflation, meaning a decrease in the price level? With retail sales appearing soft and levels of consumer debt surging, does the FOMC want to increase the likelihood of debt deflation, where during a period of deflation (1) borrowers have to reduce spending to repay loans more than lenders increase spending as they are repaid, and (2) borrowers with fixed interest rate loans have increased incentives to default or at least to delay repayments because they must sacrifice more purchasing power than they anticipated to repay loans? Note that both points (1) and (2) increase the probability (and perhaps the severity) of recessions. Millions of people are already hurting financially. I don’t see how losing their jobs would help them to pay their bills.
We’ll have to wait and see what the FOMC decides to do at its next meeting in May. Let’s hope it’s a pause.
Please realize that data revisions may alter the above figures and analysis. Also, I apologize for any misstatements, misunderstandings, inconvenience, or confusion.
REFERENCES (NOT INCLUDING MY PREVIOUS BLOG ENTRIES)
https://www.bls.gov/news.release/cpi.nr0.htm
https://www.bls.gov/news.release/empsit.nr0.htm
https://www.bls.gov/news.release/ppi.nr0.htm
https://www.census.gov/economic-indicators/#retail_sales
U.S. Bureau of Labor Statistics, All Employees, Total Nonfarm [PAYNSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PAYNSA, April 12, 2023.
All of the above cited sources were referenced between April 12, 2023 and April 17, 2023, inclusive.
SUGGESTED FURTHER READING FROM MY PREVIOUS BLOG ENTRIES
https://harrisonhartman.blogspot.com/2023/02/why-are-people-pessimistic-about.html
https://harrisonhartman.blogspot.com/2023/03/half-full-or-half-empty-brief-note-on.html
https://harrisonhartman.blogspot.com/2023/03/3-out-of-4-aint-good-february-us-retail.html
https://harrisonhartman.blogspot.com/2023/03/making-case-for-pause-why-i-would.html
https://harrisonhartman.blogspot.com/2023/02/falling-employment-and-debt-deflation.html
https://harrisonhartman.blogspot.com/2023/01/will-food-for-thought-feed-fed-while.html
