AT Interest Rates DA - Michigan 7 2023 STARTER

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AT UQ – Interest Rates
The economy is locked in a wage-price spiral – the Fed will inevitably resume rate hikes
Nicole Goodkind, 6/14/23, CNN Business, “American workers are becoming less productive. That’s bad news for the Fed,” https://www.cnn.com/2023/06/14/investing/premarket-stocks-trading/index.html, mm
Federal Reserve officials are widely expected to announce on Wednesday a pause in their regimen of rate hikes. After 10 consecutive hikes, investors are pricing in a 94% chance that the Fed will leave rates unchanged for the first time since January 2022, according to the CME’s FedWatch Tool. But a pause is not a full stop. The labor market, which policymakers believe to be a key driver of inflation in the dominant services sector of the economy, is still remarkably strong. Now there’s a growing consensus on Wall Street that central bank officials could restart the hikes, meant to fight elevated inflation, as soon as July. But what does the Fed mean when it talks about labor markets and their impact on inflation? A lot of it has to do with a troublesome slowdown in productivity. At its most basic level, labor productivity is a measure of the value of the goods and services produced by a company compared with the amount of labor used to produce that output. Productivity moves in the opposite direction to wages and so if it remains depressed, there will be upward pressure on labor costs — and ultimately on inflation, said Lisa Shalett, CIO of Morgan Stanley Wealth Management. That’s a big deal to Fed officials who have spoken publicly about their fears of a wage-price spiral — the feedback loop that drives inflation higher as people make more money and go out and spend it. “The crosscurrents for the Fed are complex. Big bets about the pace of the hiking path are ill advised,” said Shalett. During the Fed policy meeting in May, participants expressed worry that even though the pace of wage growth has been gradually slowing, it is still “running at a pace that, given current estimates of trend productivity growth, was well above what would be consistent over the longer run with the Committee’s 2% inflation objective,” according to minutes from the meeting. Productivity in the United States has been steadily declining since 2005, but the post-pandemic landscape has accelerated that downturn significantly. Labor productivity decreased 2.1% in the first quarter of 2023, the US Bureau of Labor Statistics reported earlier this month. That was the worst reading since 2007, according to the BLS.
The Fed is still hawkish – more hikes are on the way
Jill Goldsmith, 6/14/23, Deadline, “Federal Reserve Sees More Interest Rate Hikes Coming This Year After June Pause; Dow Dips,” https://deadline.com/2023/06/dow-media-stocks-nosedive-hawkish-fed-interest-rate-outlook-no-hike-for-june-1235417289/, mm
The Dow Jones nosedived this afternoon as the Federal Reserve – which has raised interest rates ten times since last year – held them steady for June but indicated that more hikes are on the way. A pause in the aggressive increases meant to stem inflation was expected, but hawkish commentary in a statement out of today’s Fed meeting wasn’t. A majority of governors are in favor of raising rates again this year and two more increases are expected. The Fed gave a target 5.6% terminal rate, or where it wants the number to settle. Chairman Jerome Powell just wrapped a press conference to take questions on the Fed’s thinking. The DJIA reversed course on the news, turning lower by nearly 400 points midafternoon. It’s off its lows. The Nasdaq and S&P 500 — both off by about half a percentage point on the announcement — also recovered somewhat but were jittery as Powell spoke. In its press release today, the Federal Open Market Committee said, “Recent indicators suggest that economic activity has continued to expand at a modest pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.” Hikes are increasingly controversial, however, especially after some of the nation’s biggest bank failures ever this year starting in March and related to high interest rates. Also, annual inflation cooled in May to 4%, the slowest growth in more than two years, raising market hope the Fed might lay off interest rates beyond June. Still, core inflation is still double the Fed’s target of about 2%. Powell said July would be “a live meeting.” “We have to get it down to 2% and we will. But we just don’t see that yet,” Powell said at the presser, talking of inflation.
More rate hikes are coming this year
Nicole Goodkind, 6/5/23, CNN, “Markets may be overly optimistic about the Fed,” https://www.cnn.com/2023/06/05/investing/premarket-stocks-trading/index.html, mm
The past month’s economic data has highlighted the persistent, sticky nature of inflation and the resilient strength of the labor market in the United States. Economists say that could mean more rate hikes from the Federal Reserve are coming, but investors appear sanguine. May saw payrolls increase by almost double the average monthly gain in the 10 years before the pandemic, while the Federal Reserve’s preferred inflation gauge bounced higher in April. Spending also remains strong. In this good-is-bad economy, strong employment and higher wages mean higher inflation as companies pass on increased labor costs by raising the price of goods. That makes it more difficult for the data-dependent Federal Reserve to justify a pause to interest rate hikes at its June meeting.
The Fed won’t stop rate hikes – more interest rate increases are coming
Bill Conerly, 6/2/23, Forbes, “Strong employment, inflation means Fed has to keep hiking interest rates in 2023,” https://www.forbes.com/sites/billconerly/2023/06/02/strong-employment-inflation-means-fed-has-to-keep-hiking-interest-rates-in-2023/?sh=7e3046906fce, mm
The May employment report shows continued growth in the economy, with no deceleration. Wage inflation has slowed relative to its peak in 2022, but the latest monthly data show it continuing well in excess of reasonable goals. And the April consumer expenditures price index showed little progress in the last few months. The Federal Reserve’s monetary policy committee will meet June 13-14. Officials have been hinting that they may pause the Fed’s interest rate hikes, but they also have stressed that they will consider the latest information. “Looking ahead, we will take a data-dependent approach in determining the extent to which additional policy firming may be appropriate,” said Fed chair Jerome Powell after the May meeting. Some of the Fed decision-makers have wondered whether it’s time to wait, given the long time lags of monetary policy. Common econometric models show that monetary policy affects the economy with a time lag of about one year. They could be in a situation in which their past actions are about to take hold, and further action would go much too far. Time lag analysis is difficult. Historical data show varying magnitudes of effect, with varying time lags. Economists forecasting the economy often use judgmental adjustments to their models to reflect how they believe current conditions differ from the past conditions that generated the average effects and time lags. And although the one-year time lag is a good heuristic, the actual impact is distributed over time, with small effects early on, rising to a maximum effect, then dwindling to small effects much longer than a year later. The time lag for inflation effects is much longer, about two years from Fed action. The Fed now has to weigh the alternatives: risk overshooting because of those time lags, versus not doing enough in the first place. Here there is more consistency. Most Federal Reserve governors and presidents of the regional Federal Reserve banks have voiced support for their “risk management perspective.” They have looked at the cost of a too-easy monetary policy compared to a too-tight policy. Although they would like to make perfect policy, they have gained some humility in the wake of their early projections that inflation would be transitory. Economic history as well as accepted economic theory hold that inflation is much harder to fight when it has become firmly embedded in the expectations of consumers, workers and business decision-makers. So being too tight risks mild economic weakness, but being too loose could require a severe recession to break the inflation psychology. When the Fed is uncertain, they will tighten or at least keep interest rates high. Economists at the Fed have also worried about the impact of recent bank failures, including Silicon Valley Bank. Maybe banking industry distress will slow the economy so no further interest rate increases are necessary. The Fed’s survey of senior lending officers shows banks are tightening their credit standards. But looking at the survey over time shows recent changes are consistent with past eras of approaching economic weakness. That means we are not seeing anything unusual because of the bank failures. However, this survey is a fairly coarse measure. Weighing all of the evidence, the Fed is likely to continue its interest rate increases. If they do pause at the June meeting—not likely but certainly possible—then look for a rate hike in July.
AT UQ – Inflation High – Corporate Greed
Corporate greed is driving the current wave of inflation
Joseph Adinolfi, 3/23/23, Market Watch, “The Fed has it wrong: Corporate greed is to blame for inflation, not rising wages, SocGen analyst says” https://www.marketwatch.com/story/the-fed-has-it-wrong-corporate-greed-is-to-blame-for-inflation-not-rising-wages-socgen-analyst-says-e1236056, mm
Federal Reserve Chairman Jerome Powell has repeatedly said undercutting wage growth for American workers is essential for tamping down the worst bout of inflation in the U.S. in more than 40 years. But a raft of data suggest that robust corporate profit margins — not wages — are having a much bigger impact on rising prices, according to longtime Société Générale strategist Albert Edwards. Edwards calls this dynamic “greedflation”: the notion that corporate price gouging is helping to keep inflation robust at a time when commodity prices, which were initially blamed for the price shock, have actually fallen over the past 12 months. West Texas Intermediate crude oil CL00, -3.82% was trading at roughly $77 a barrel on Thursday, compared with $115 a barrel one year ago, according to FactSet data. Prices of other important industrial commodities, including copper, have also declined during the same period. In his latest note on the topic, shared with MarketWatch Thursday, Edwards questioned why the Fed has been so insistent on targeting wages instead of pointing the finger at corporations: “the primary driver of this inflation cycle is soaring profit margins. Rather than calling this out as the primary cause of high inflation, central banks have instead chosen to focus on rising nominal wages as threatening to embed higher inflation – the so called ‘wage/price spiral’.” Often, corporations are raising prices of goods and services not because they need to due to rising labor and raw materials costs, but because they can get away with it by blaming inflation, something that consumers have been primed by media reports to expect, Edwards said. Blaming wage growth for inflation seems particularly misguided considering that workers’ wages haven’t even kept pace with rising consumer prices, Edwards said. Meanwhile, corporate profit margins have climbed to near-record highs. Profits for non-financial companies rose to nearly $2.1 trillion in the third quarter, a record high on a nominal basis, according to Commerce Department data. They have risen sharply since the onset of the COVID-19 pandemic in March 2020. This isn’t the first time Edwards has explored this topic in his research shared with Societe Generale clients. He examined the issue of price gouging in a note published back in November. The chart below, which shows how corporate profits as a percentage of GDP have risen to record highs, is from that previous note. While workers’ earnings have generally increased, they haven’t kept pace with rising consumer prices, which means that, when adjusted for inflation, workers’ earning power has actually declined. Average hourly earnings increased by 4.6% year-over-year, according to the latest monthly jobs data released by the Department of Labor. That’s less than the headline year-over-year increase in the consumer-price index, which stood at 6%. Moreover, Edwards showed that U.S. workers’ earnings compared to the costs of the goods and services they help to produce had been declining for years, tracing the start of the trend to when China joined the World Trade Organization in December 2001. Using an example taken from Howard University economics professor William Spriggs, Edwards pointed out that if wages truly are the driving inflation, then the cost of food at restaurants should be rising faster than the cost of food consumed at home because of the cost of labor. But the opposite is true, according to the consumer-price index, a closely watched gauge of inflation produced by the U.S. government. The cost of food eaten at home has risen by 10.2% during the year through February, according to the latest CPI data from February. By comparison, the cost of food consumer away from home has increased by 8.4%. “If wage inflation was pushing prices higher, food at home would exceed food away from home,” Edwards said. Therefore, “wages are not the problem.”
AT UQ – Inflation High – Long-Term
Climate change and aging populations will lock-in high inflation for decades
Matthew Klein, 5/10/23, Vox, Why inflation isn’t going away anytime soon,” https://www.vox.com/future-perfect/23717600/high-inflation-cpi-climate-change-population-aging, mm
The inflation surge of the past two years is a warning about what can happen when sudden changes in the things we want collide with massive disruptions in our ability to make them. While current inflation slowed to 4.9 percent in April according to Labor Department data released today, after more than a year of Fed interest rate hikes, it’s likely to fade eventually as the Covid-19 pandemic and its associated policy responses continue to normalize. But this victory may ultimately prove fleeting: compared to the relative stability we’ve come to take for granted over the last few decades, price changes in the decades ahead could be far more volatile, while underlying inflation could be faster and more persistent than in the recent past. That’s because we’re poised to endure at least two major social transformations this century that will reshape the economy — and heighten inflation risks. The first is the compounding effects of climate change, which will require massive investments in everything from sea walls to electric transmission lines to clean power generation. We’ll also need to find replacements for traditional plastic and discover greener ways to produce cement, steel, and meat economically. It’s a transition that, all together, will require trillions of dollars in new investment. And we will have to do all of this as worsening fires, droughts, and floods — along with climate-related migration flows — threaten to destabilize many societies and destroy productive capacity. This “green transition” is set to coincide with another unprecedented threat to social and economic stability: an aging and eventually shrinking population. By the end of the century, high-income countries and China, which together have consistently produced about 80 percent of the world’s economic output since at least 1960, are projected to lose more than 40 percent of their working-age populations — even as their elderly populations are poised to rise by roughly 60 percent. This “gray transition” will be extremely costly, requiring fewer people to work harder and longer to support a growing number of non-working retirees. Handled badly, either of these transitions alone would be enough to generate years of unwelcome price increases as businesses and consumers struggle to adapt to massive changes in the mix of goods and services we need, changes to the ways we produce, and impairments in our overall ability to produce anything. Together, they’re a recipe for prolonged and painful inflation.
AT UQ – AT Fiscal Restraint
The debt ceiling didn’t create fiscal restraint – continued fiscal stimulus is inevitable
Armstrong Williams, 6/10/23, (Williams is the owner and manager of Howard Stirk Holdings and the 2016 Multicultural Media Broadcast Owner of the Year), The Hill, “The debt ceiling deal ignored the real problem,” https://thehill.com/opinion/white-house/4042853-the-debt-ceiling-deal-ignored-the-real-problem/, mm
Politics is largely the art of theatrics and illusions. Crises are manufactured to enable both parties to claim to be the firefighters who extinguished the fire. But the underlying problems remain unaddressed, guaranteeing a new crisis in a never-ending cycle. The recent debt ceiling deal, suspending the debt limit for two years, is emblematic. The crisis was created by government spending extravagance that had sent the national debt surging past $31 trillion and incurring carrying costs approaching $1 trillion even with record low interest rates. The Congressional Budget Office projects the national debt at a staggering $50 trillion by the end of the next decade. If interest rates on Treasury securities climb back to historical averages, that means the lion’s share of the federal budget will be devoted to paying the carrying costs of the debt, with crumbs left over for everything else, including defense, Social Security and Medicare. Our financial doomsday clock is approaching midnight. And the president and Congress, like the ostrich, stick their heads in the sand. In but 14 years, Social Security trust funds necessary to pay benefits are projected to become exhausted. The Medicare Hospital Insurance Fund is projected to be depleted by 2031. Annual trillion-dollar budget deficits are projected as far as the eye can see. National security spending is out of control, despite the elimination of any danger of foreign aggression against the United States. We are the safest country in the history of the world by orders of magnitude, yet we are spending more than $1.6 trillion annually and climbing in preparing to fight the last war — more than 50 percent of all discretionary spending. A national defense strategy of invincible self-defense could be sustained by a fraction of the current $1.6 trillion. The battlefield is moving to space and cyberspace. We now sport a Space Command. Cyber-attacks can easily cripple a nation’s infrastructure and military communications. Military technologies, including drone warfare, are changing at warp speed. Traditional weapons systems that gestate long years before coming to fruition are commonly obsolete before deployment. The F-35 Lightning II Joint Strike Fighter program is the Defense Department’s most expensive weapon system program. The Department estimates it will cost nearly $1.7 trillion to buy, operate and sustain the aircraft and systems over its lifetime. I would wager that the F-35 will never be used to defend the U.S. against foreign aggression. Entitlement programs must also be arrested or terminated in favor of a single national safety net for the truly destitute. In fiscal year 2022, entitlement programs gobbled up 52 percent of the budget. In the prior fiscal year, the number reached an astronomical 66 percent because of one-time Covid payments. There are six major entitlement programs based on various thresholds of need: Social Security, Medicare, Temporary Assistance for Needy Families, Medicaid, unemployment, and economic support. These entitlement programs should be phased out favor of a national safety net to ensure all have acce

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