NOT LISTENING TO ‘BROKEN RECORDS’ MAY LEAD TO BROKEN HEARTS

Would another increase in the Federal Reserve Bank’s federal funds rate, the interest rate for bank-to-bank overnight loans in the U.S., be Overkill (not to be confused with the Men At Work hit song)? At least some think that the Federal Open Market Committee (FOMC) of the Federal Reserve may have already Gone Too Far.  (I think that the last 3 words were an England Dan and John Ford Coley song title.)

I don’t mean to be redundant redundant (get it?) by sounding like the proverbial broken record, but additional economic data suggest that the U.S. economy may be rapidly losing momentum and heading for a recession, so that a pause in interest rate hikes may be appropriate in May and beyond.  (Is that redundant redundant again (with ‘may’ and ‘May’)?)   The stimulus measures helped substantially.  However, it may be that most people have spent most if not all of their stimulus funds.  They and the overall economy may need something else to provide relief and ‘get things going again.’

The observation that monetary policy has a long and variable lag in terms of its impact on aggregate demand and in turn the price level (and its percentage change, a.k.a. the rate of inflation) and also real GDP, or real output has been long established and is perhaps generally accepted.  My recent blog posts are merely a very small subset of announcements that inflation in the United States may be coming under control.

One of the drawbacks of further tightening of monetary policy now is that we may not know the impact of such a decision for possibly more than nine months, just as we may not know the impact of many if not most (or all) of the FOMC’s past interest rate increases over the last year or so.  Given that it may take a while for the impact of further rate hikes to be felt in the economy by way of possible lower inflation rates, why not try to provide relief to millions of people now?

As for evidence of the US economy slowing down, according to the U.S. Census Bureau (2023, a), seasonally adjusted (SA) retail sales and food services fell 5 out of last 7 months including March 2023. The same series but not on a seasonally adjusted (NSA) basis from the U.S. Census Bureau (2023, b) actually rose in March 2023 but probably less so than normal because the NSA level from March 2023 is less than not only December 2022 but also May 2022 and August 2022! Apparently, the increase in NSA retail sales and food services was so lackluster compared to many if not most previous months of March that when removing seasonal factors, the SA value was reported down for March 2023.

US real GDP NSA was so disappointing in the first quarter of 2023 that it is now below its level from not only 2022q4 but also 2022q3 and 2022q2. That hasn’t always happened when comparing US real GDP in the first quarter of a year with the same variable from the second quarter of the previous year (for example comparing 2020q2 with 2021q1 and comparing 2014q2 with 2015q1).  The percentage change in SA US real GDP at an annualized rate fell in both 2022q1 and 2022q2 and increased by only 1.1 per cent in 2023q1.  Thus, real GDP grew less than 1.2 per cent in three out of the last five quarters. Using the data from the U.S. Bureau of Economic Analysis (2023, a and b) available on the St. Louis Fed FRED website, I estimate that the average annualized growth rate of US real GDP (SA) was a little less than 1 per cent per year over the last five quarters. Clearly, the US economy seems to be cooling off quickly.

The recent financial crisis may not be over based on information last week and today (May 1), with Isidore and Dmitracova (2023) of CNN and others pointing out the failure of First Republic Bank. Raising the federal funds rate higher further increases banks’ borrowing costs (and at least some borrowers’ costs if banks pass on the cost increases) and could lead to more bank failures and even more of a reduction in real GDP growth, if not a recession.

Does possibly overreacting to inflation now correct for the Fed maybe keeping rates low for too long? This could be especially important to consider given that (1) month-to-month inflation may be relatively low and (2) supply factors over which the FOMC has little control may have been the most important factor in the recent run up in inflation.  Given that at least some are predicting at least one federal funds rate cut before 2024, the federal funds rate may be getting “Hi Hi Hi” as Sir Paul McCartney might say (or “Say Say Say”) after a period of surging inflation.  The Beatles might have said in “She Loves You,” “yeah yeah yeah.”

Continuing with the pop music theme, yesterday I heard Gene Cotton’s hit “Before My Heart Finds Out” on an old Casey Kasem countdown and then in the late afternoon/early evening the same day on a satellite radio station. Although I like the song, some may find that redundant if not overkill.  Back to economics, at the risk of being redundant redundant, I would like to see the FOMC keep the federal funds rate unchanged for now.  So far, with the FOMC apparently not listening to the ‘broken record’ calls for a pause in rate hikes, many may be broken hearted by job and real GDP losses that could come with a recession.  As Jimmy Ruffin might have asked if he were still alive, what will become of the broken hearted?  Will they be like “all the lonely people” in Eleanor Rigby? 

If we wind up with a recession, Stevie Wonder might say “You can feel it all over.”  And the Dave Clark Five (and others before) might note that recessions seem to keep happening “Over and Over” again.  Talk about a broken record, I may be getting redundant redundant redundant, and maybe I’ve gone too far with these puns.  But on a more serious note, with the FOMC meeting starting less than 24 hours from this initial posting during the evening of May 1, 2023 (or "Tonight Tonight Tonight" as Genesis might say), we won’t need to wait long to see what the FOMC decides to do.

 

Please note that web addresses for some of my earlier blog entries appear below the References.  Also. Please realize that data revisions may alter the above figures and analysis.  Also, I apologize for any misstatements, misunderstandings, inconvenience, or confusion.

 

 

REFERENCES

 

Isidore, Chris and Dmitracova, Olesya, CNN.  (2023)  JPMorgan Chase to Buy Most First Republic Assets after Bank Fails?  May 1, 2023, available online at:

https://www.cnn.com/2023/05/01/business/first-republic-purchase-hnk-intl/index.html

 

U.S. Bureau of Economic Analysis, Real Gross Domestic Product [ND000334Q], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/ND000334Q, April 28, 2023.

Note that the data used to compare quarterly values in the series were at the website below.

https://fred.stlouisfed.org/data/ND000334Q.txt

 

U.S. Bureau of Economic Analysis, Real Gross Domestic Product [A191RL1Q225SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/A191RL1Q225SBEA, April 30, 2023.

Note that I used data to calculate the five quarter average from the series at the website below.

https://fred.stlouisfed.org/data/A191RL1Q225SBEA.txt

 

https://www.bea.gov/news/2023/gross-domestic-product-first-quarter-2023-advance-estimate

 

U.S. Census Bureau.  (2023, a) Advance Retail Sales: Retail Trade and Food Services [RSAFS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/RSAFS, April 28, 2023 and May 1, 2023.  Note that the file that I used to determine an increase or decrease in the series was at the website below.

https://fred.stlouisfed.org/data/RSAFS.txt

 

U.S. Census Bureau. (2023, b) Advance Retail Sales: Retail Trade and Food Services [RSAFSNA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/RSAFSNA, April 28, 2023 and May 1, 2023.  Note that the file that I used to compare monthly values of the series was at the website below.

https://fred.stlouisfed.org/data/RSAFSNA.txt

 

 

SUGGESTED FURTHER READING FROM MY PREVIOUS BLOG ENTRIES

 

https://harrisonhartman.blogspot.com/2023/04/do-price-retail-sales-and-job-data-show.html

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