The advance estimate of gross domestic product — call it the economy for short —in the third quarter that ended September 30 was a 2.8% annualized real GDP. A slight slowdown from the second quarter’s 3.0% is still growth. As for inflation, it may well hit 2.0% when the Personal Consumption Expenditures (PCE) price index comes out tomorrow, as Goldman Sachs projected earlier in October.
Good news if accurate, and even if not, given the rate at which inflation has been dropping, hitting 2% should be in the immediate future if not tomorrow. With growth continued and the labor market where it seems to be, this seems like the definition of a so-called soft landing.
But then what? Should the Federal Reserve keep cutting interest rates? Are they actually fine as they are? What will consumers and businesses face from lenders?
These are the questions that come together under the greater umbrella of what happens now. As Mary C. Daly, president and chief executive officer of the Federal Reserve Bank of San Francisco, said in a recent speech, it’s necessary to look beyond a soft landing to see what is needed going forward.
“Recalibrating policy,” the phrase that Daly used, should be clear as a concept, though it goes beyond monetary theory. Both the Fed and the federal government reacted strongly across the stretch of the pandemic. Congress pulled back on fiscal actions, but it has taken the Fed longer. The latter’s decision of what is now normal is more complicated.
High inflation took a big bite out of the “real incomes and purchasing power” of all Americans, as she noted, particularly those in the lower half to 60% of the economic stratum. Even as the rate of inflation has lowered, the prices of things in general have increased.
The shift has put ever more pressure on the lower end of the scale — meaning, people who on the whole are poorer than those who are wealthier. The graph below, using data from the Federal Reserve Bank of Atlanta through the St. Louis Fed’s site, shows nominal wage growth (without considering inflation) of the 25th percentile, 75th percentile, and median with inflation then subtracted for a sense of how people are doing with an estimate of real (after inflation) wage growth.
[graph]
The assumption that inflation hits everyone equally is wrong. If you have higher education or medical bills, you’re hit harder. Your housing costs have risen faster than the overall inflation number if you rent, though if you own your home with a low mortgage rate, you’re in far better shape. Unless there’s deflation, which economists fear because it can drive buying habits that keep waiting for better deals, prices aren’t going to drop relatively for most people. How will the economy help put people back together? Or is this a one-time de-escalation of personal economic strength that will negatively affect most of the country?
As Daly said in her speech, “[T]he burden fell particularly hard on low- and moderate-income families, who spend a disproportionate share of their resources on shelter, food, and fuel, where price increases have been especially large.”
Now, on to interest rates, which affect consumers and businesses of all sizes, although not equally. Again, consumers are at historically high uses of credit as the graph below shows.
[credit use]
That’s not necessarily a problem unless real income hasn’t kept up, which for more than half the country it hasn’t.
Don’t expect interest rates to return to the ultra-low levels they occupied for about 15 years since the Great Recession. From a view of monetary theory, if the economy is growing, the labor market is strong, and inflation is falling, there doesn’t seem to be a reason to keep lowering interest rates. The country may be back to how the economy worked for many years before the entire housing market blew apart in 2008 and 2009 because of gross systemic mismanagement and greed.
Daly said, “The expansion just prior to the pandemic was especially impressive: nearly 11 years, 10 years and 8 months to be precise, the longest on record.” Yes, and that was after the entire global economy took a nosedive and the U.S. one took at least a decade to get back to where it had been. In had a long way to crawl back. But if things are starting to look like pre-pandemic times, expecting roaring prosperity, at least below the upper quarter, might not be realistic.
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