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Financial FAQs

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Treasury Secretary Janet Yellen said in a recent Fareed Zakariah interview on CNN that she thought an economic soft landing was possible, despite warnings that the recent bank failures could cause banks to tighten in their lending criteria, contributing to a slowing economy.

That is already happening. Retail sales in March posted the biggest decline in four months, largely because of lower auto and gasoline sales. Rising interest rates make car loans more expensive, for starters.

Retail sales aren’t inflation adjusted, so it means an even larger drop if inflation is factored in. Restaurants and bar sales also declined, a sign that consumers are spending less on leisure activities.

In fact, the decline in retail sales was widespread. Receipts at auto dealers dropped 1.6 percent. Furniture store sales fell 1.2 percent, while receipts at electronics and appliance stores tumbled 2.1 percent. Sales at building material and garden equipment supplies dealers plummeted 2.1 percent.

It is a sign that consumers are beginning to seriously cut back on spending, which affects other sectors. The Fed showed manufacturing production dropped 0.5 percent in March after increasing 0.6 percent in February. Durable goods lasting more than three years have been down the past two months.

All of this has been hurting consumer sentiment, despite Americans being fully employed and the percentage of working-age adults entering the workforce are back up to pre-pandemic levels. The index, produced by the University of Michigan, rose from 62 in March to 63.5 in April, from a four-month low.

“While consumers have noted the easing of inflation among durable goods and cars, they still expect high inflation to persist, at least in the short run,” said survey director Joanna Hsu.

Inflation is beginning to seriously worry consumers, in other words. One-year inflation expectations increased 4.6 percent in the year ahead, up from 3.6 percent in the prior month, said the Univ. Michigan survey. But in the longer run, expectations were unchanged. Americans think inflation will average 2.9 percent annually in the next five years.

So, when will the Fed pause in its rate hikes? Inflation is now plunging, so effective have been rate hikes from essentially zero percent just one year ago to 4.75 percent today.

In fact, the Producer Price Index for final demand that measures wholesale goods and services declined -0.5 percent in March, as reported last week. Prices for final demand have risen just 2.7 percent for the 12 months ended in March, from 4.6 percent the previous month. It is now approaching the Fed goal of a 2 percent inflation rate for wholesales goods that end up as consumer products.

Is Janet Yellen right, and will it be a soft landing?

Harlan Green © 2022

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Popular Economics Weekly

MarketWatch

The MarketWatch graph above shows why the US Federal Reserve keeps raising interest rates. The US unemployment rate dropped from 3.6 to 3.5 percent in March. It was 14.7 percent in April 2020. It was last 3.5 percent in February 2020 at the on set of COVID-19.

The U.S. added a robust 236,000 new jobs in March, defying the Federal Reserve’s hopes for a big slowdown in hiring as the central bank struggles to tame high inflation. We have never before seen such a precipitous drop in unemployment. It took ten years—from 2010 to 2020—to reach 3.5 percent after the Great Recession. It took slightly more than two years to return to 3.5 percent again, in July 2022.

Average hourly wages are rising at 4.2 percent, and the labor participation rate of working-age adults is 80.7 percent, back to pre-pandemic levels. Where are more workers to be found to keep up with employers’ job openings?

The decline in the unemployment rate to 3.5 percent was despite 480,000 entering the labor force. The separate Household survey from which the unemployment rate is derived showed employment increasing 577,000 last month.

While the increase in payrolls was the smallest in more than two years, the number of new jobs created last month was still stronger than is normal for this time of year.

Leisure and hospitality added 72,000 jobs in March, lower than the average monthly gain of 95,000 over the prior 6 months. Most of the job growth occurred in food services and drinking places, where employment rose by 50,000 in March.

Government employment increased by 47,000 in March, the same as the average monthly gain over the prior 6 months. Only two sectors shrank in jobs—retail trade and construction services.

If the Fed continues to raise interest rates, those workers in the lowest paying restaurant and leisure sectors will suffer the most, who spend most of their incomes.

The standard Fed mantra is that higher inflation harms low-paying sector workers the most. Really? The Fed’s current stated goal is to raise the unemployment rate at least 1 percent. That means the loss of 1-2 million jobs.

I believe workers, given the choice, would rather pay slightly more for their goods and services than lose their jobs!

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Popular Economics Weekly

FREDavghrlypay

In the light of the recent bank failures, and the Fed’s own missteps in fighting inflation, history is telling us that the Fed’s current 2 percent target rate for inflation is too low.

Why? Because Federal Reserve policy since the 1970s has mostly benefited banks and other financial institutions that manage money.

It’s easy to see why. The Fed is in charge of keeping our banking system sound, which is implied in its mandate to maintain price stability and maximum employment. So its primary focus has always been to defend the value of their assets, and inflation diminishes asset values.

But the Fed hasn’t maintained price stability as evidenced by the recent inflation surge and was surprised by three US bank failures, causing doubts as to the soundness of our banking system.

Former FDIC Chairman Sheila Bair highlighted the dangers of such inattention in a MarketWatch interview.

“This is a risk confronting all banks,” she said. “All examiners need to be on alert for how interest-rate risk is being managed. If there is a run, they will need to sell these securities. Those are the kinds of things all-size banks, and all examiners should be worried about in our banking system.”

Current monetary policy has not improved workers’ wages, either, which haven’t kept up with inflation with the wild gyrations caused by the COVID pandemic and some $6 trillion in pandemic aid.

So isn’t it time for Fed monetary policies to focus on bringing down the record income inequality that has prevailed since then and ranked US income inequality the same as Haiti, far below that of other developed countries. per the CIA’s World-Factbook?

Why do we have red and blue states and a divided country, otherwise? Many Americans feel disenfranchised who no longer have jobs that earn what they did in the 1970s when we still had a manufacturing base in the rust belt.

The average hourly earnings of employees has never risen above the 2-3 percent range, per the St. Louis Fed’s above graph of average hourly wages dating from the 2008 Great Recession.

Chairman Powell was explicit in his press conference after the conclusion of the latest FOMC meeting, at which another 0.25 percent rate increase was announced. The labor market is still too hot, he said, and has caused wage growth to accelerate rather than decline, which the Fed deemed was necessary to bring down inflation.

So employees’ earnings have now become the culprit keeping inflation too high, when the latest research has shown excess corporate profits and the Ukraine war jump-started the current inflation surge.

In other words, the Fed has been most successful at keeping employees’ wages at or below the inflation rate since the 1970s as they labored to keep inflation in the 2 percent target range.

This is not a coincidence. Fed Governors since former Fed Chair Paul Volcker have believed conditions that prevailed since the 1970s still rule that caused the wage-price spiral and double-digit inflation of that time.

But globalization policies expanded world trade and developed just-in-time supply-chains that brought in cheaper consumer goods and exported manufacturing jobs to low wage-earning countries. Inflation became so tame during the 1990s that it was termed the Great Moderation.

So why does our Fed have a 2 percent inflation target?

Progressive labor economist Jared Bernstein opined on this matter in the Washington Post shortly after first Bernanke announced the Fed’s decision of a 2 percent target rate.

“The fact is that the target is 2 percent because the target is 2 percent. Were the target 3 percent or 4 percent, you’d be reasonably asking me, why 3 or 4? To the extent that there’s an anti-inflation bias among economic elites (and thus an anti-full-employment bias), and I think that’s often the case, I’d reiterate arguments I made here…that the debates over full employment and Federal Reserve policy are generally dominated by the interests of the minority who worry more about inflation and asset values than those who worry about jobs and paychecks.”

Is there real evidence the current 4.4-4.6 percent average hourly wage increases employees are enjoying that was reported in the February unemployment report inflationary?

No, average hourly wages could be contributing as little as 8 percent to product costs in one recent paper by EPI economist Josh Bivens that I cited above.

There is much that government can do to lessen income inequality, which would in turn lessen the yawning gap between the Haves and Havenots in this country. The Federal Reserve can do its part by lessening the inherent bias of a low inflation target that mainly targets wage earners, which includes 32 million Americans that still live below the poverty line.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Financial FAQs

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The wild fluctuations of the 10-year Constant Maturity Treasury yield portrayed in the above St. Louis Fed graph should have alerted Federal Governors and Chairman Powell to the dangers of raising interest rates too precipitously.

It is the reason three US banks have failed, who wouldn’t either hedge against or reduce their holdings backed by Treasury securities that lost value as interest rates rose.

It’s also why the Fed should begin to reverse course to lower their overnight rate target that is now at 4.5-4.75 percent.

The decline in confidence of our banking system can in part be attributed to the Fed Governors naiveté, or maybe outright ignorance, of the US banking system they are supposed to regulate.

For instance, Fed Governors did not seem to realize the risk to depositors of banks holding deposits worth more than the $250,000 ceiling set by the FDIC for insured deposits. It was 97 percent in the case of Silicon Valley Bank.

The Fed seems to have been its own worst enemy in not realizing the effect of its policy actions, as evidenced by February’s FOMC minutes.

“With respect to the relationship between monetary policy and financial stability, some participants noted that evidence regarding the link between the policy stance and elevated financial vulnerabilities was limited, with a couple of participants further observing that there were not many episodes of persistently low interest rates.”

Yet Silicon Valley Bank had been on the San Francisco Fed’s watch list for more than one year as the Fed Governors charged ahead with their rate hike policy. “By July 2022,” as reported by the NYTimes, “Silicon Valley Bank was in full supervisory review, and was ultimately rated deficient for governance and controls.”

“In addition,” continued the FOMC minutes, “some past episodes of heightened financial vulnerabilities were associated with excessive risk-taking behavior that did not seem to be very responsive to typical changes in interest rates.”

Really? The NY Times and others have reported on the hands-off attitude of Fed regulators in not doing more to demand that banks—particularly those vulnerable to large uninsured deposits—crack down on such risky behavior.

So the Fed might call a halt to its policy of taming an inflation that is mostly caused by factors outside of the Fed’s control, and focus more on banking supervision that is under its direct control.

A 2022 Gallup survey found that just 27 percent of Americans had a “great deal/quite a lot” of confidence in our banks.

At the very least, the Fed should reverse course and begin to bring down interest rates before more banks fail, and more Americans lose faith in our banking system.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen