Southern California bosses have added 400,000 jobs over the past year.
Local wages, by one measure, are increasing at an annual rate of 5.6%. Homes in the area are selling at prices 10% higher than a year ago.
So why is the Federal Reserve determined to undo the good times and push the nation into a recession?
You see, the job of the Fed is to keep the economy running while keeping the cost of living relatively stable. The central bank abruptly raised a key interest rate twice in six weeks because it failed to manage inflation.
Which president has done the best job with inflation?
The local consumer price index shows inflation at a blistering pace: 9.4% in the Inland Empire and 8.6% in Los Angeles and Orange counties. Nationally, the CPI rose at an annual rate of 9.1% in June, a 40-year high.
Two years ago, the economic punch of the pandemic prompted various parties â including the Fed â to rescue the briefly shattered economy. Yet âtoo much good stuffâ in these various aid programs means that now is the time to pay back. Inflation is an economic evil with effects of reducing wealth that must be tamed.
Now, restoring economic sanity shouldn’t just be the Fed’s chore, but the nation’s central bank is forced to be the adult in the room. Throughout 2022, he warned anyone who would listen that his gifting phase was ending. Some government entities â not all â are still in distribution mode.
To cool the economy, the Fed deploys its most powerful tool: shutting down the cheap money it once promoted. And the economy begins to stagnate.
âToo much demand because people went crazy coming out of pandemic restrictions. Too little supply due to just-in-time inventory schedules trashed by intermittent and unpredictable pandemic lockdowns around the world,â says economist Mark Schniepp of the California Economic Forecast. âThis has created higher prices that ration goods to the highest bidders. The job of the Fed is therefore simple: to lower the demand for goods. Â»
A key measure of corporate strength – the country’s gross domestic product, adjusted for inflation – has fallen for two consecutive quarters. Let’s politely say that this is an economic distress signal.
Closer to home, Southern California’s hiring pace has cooled to 14,000 a month so far this year, from 55,000 in the second half of 2021. Home sales in the six-county area fell by 20% in one year. And a poll found that California’s outlook on the financial future had seen its biggest decline in nearly 14 years.
To temper inflation, economic influencers must work towards a hard-to-swallow goal. Of course, everyone wants higher benefits or salaries. Yet who will reduce its price for the greater good?
Consider a dozen dangers the economy must dodge to deftly reduce inflation without a major corporate meltdown.
1. THE FED ITSELF
The last time the central bank raised its benchmark rate to 2.5% today was in December 2018, as it tried to rein in inflation from the 3% peak of this cycle. Yes, only 3%!
So Fed Chairman Jerome Powell needs to get his rate-setting partners at the bank to have the same “tough love” logic for today’s steep inflation problem.
If inflation slows slowly, how high could rates rise? Or if the economy begins to implode, will inflation become a secondary concern? Powell could face an internal battle.
2. THE BOND MARKET
The Fed only controls some interest rates, with the rest decided by bond traders. And these people seem to have a very divided opinion.
Short-term rates set by Treasury bill exchanges â but heavily influenced by Fed actions â rose to around 2.5% from 1.75% last month. Meanwhile, 10-year rates â a benchmark for mortgages â fell to less than 3% from around 3.5%.
Inflation versus recession: can the Fed avoid bringing the economy down?
So will market rates rise to fight inflation? Or drop to reflect the growing likelihood that more expensive financing will create a recession?
The Fed used its checkbook to stimulate a once struggling economy with mortgage rates as low as 2.65% at the start of 2021, according to calculations by Freddie Mac.
Rates nearly hit 6% this spring before stabilizing at 5.3% at last count. In the wake of the surge, mortgage manufacturing has been pummeled. Refinancing opportunities have disappeared and home buying has stalled.
Will lenders, faced with shrinking business, take more risks with borrowers to keep loans flowing? This goes against the Fed’s cooling plans.
In addition, it creates other risks. Remember the loose loans that led to the housing bubble of the mid-2000s?
Gosh, some banks are now offering 1 year CDs above 2%.
The old near-zero rate policies pushed savers to spend and invest in the economy. The rate hikes are designed to get people to stop shopping and put their money in safe places.
Slowing the flow of speculative investments into assets such as stocks, crypto, and real estate can chill the economy. Or kill him.
Any verbal criticism the Fed receives from the White House or Congress is not really of concern.
But politically motivated economic worries or partisan necessities could motivate some sort of additional federal stimulus.
Putting more money in taxpayers’ wallets â despite political popularity â would hurt the Fed’s ability to rein in an overheated economy.
6. âHELPINGâ GOVERNORS
Uncle Sam isn’t the only government with money. Governors from California to Florida are approving aid programs to help residents affected by the rising cost of living.
Gov. Gavin Newsom’s budget will send most Californians up to $1,050 as early as October. His arch-rival, Governor Ron DeSantis, has provided many Florida families with $450 per child just in time for a statewide sales tax “holiday” that ends Aug. 7.
There’s only one problem with this state-level generosity to taxpayers â it seeps into an economy the Fed hopes will slow down.
7. THE HOUSING MARKET
The Fed’s mortgage rate hike is rapidly cooling the housing market.
Home hunters nationwide have stopped searching amid high rates and high prices. U.S. June pending sales â escrow deals â fell 20% year-on-year, slipping at the slowest pace since September 2011, just after the Great Recession ended.
Can the nation fix its inflation mess before any house price crash begins?
8. THE ENERGY GAME
The local consumer price index shows that gasoline is 50% more expensive than a year ago, electricity is up 21% and heating fuels are 39% more expensive.
Yes, Econ 101 says higher prices lead to more production which ultimately lowers costs. But the energy companies don’t seem to care about their current windfalls.
Moreover, energy is a geopolitical chess piece. Further international turmoil could prompt major oil-producing countries to turn off the taps.
9. THE PANDEMIC
The coronavirus will not go away, although most people are tired of its impact on daily life and commerce.
As difficult as it may seem, fears about new variants and long-term health effects could help the Fed strangle the economy.
Conversely, health-related trade issues could raise doubts about the timing of future rate hikes.
10. THE STOCK EXCHANGE
Long before rate hikes became a reality and talk of recession became commonplace, stock prices were discounted.
The worst first half for stocks since 1970 reduced values ââby more than 20%, creating an âofficialâ bear market. The Fed is probably grateful for this economic warning signal.
While this is a victory for the Fed â by reducing speculation â further sharp declines in stock values ââcould create calls to ease rate hikes.
Most CEOs spend too much time worrying about the company’s stock price, so a horrible 2022 on Wall Street undoubtedly overhauled C-suite thinking.
Many bosses will cut costs to increase profits. This penny-pinking could help moderate inflation, especially rising wages.
Already, employers from Amazon of online retail to Google of technology to Netflix of entertainment to auto salesman Carvana to Compass of real estate are in layoff mode.
12. THE SUPPLY CHAIN
How goods are manufactured, shipped and distributed is not the responsibility of the Fed.
And yet, the tangled supply chain was not the only contributor to inflation. An overstimulated economy meant the ports of Los Angeles and Long Beach made record shipments â 16% more than before the 2019 pandemic.
If rising rates cool consumer demand, global logistics systems could be relieved. But this may not allow the production of critical materials in time to satisfy factory shortages.
First example: Missing chips always slow down the production of new vehicles, causing the prices of new and used cars to skyrocket.
The timing is hard to predict, but it’s a safe bet that fixing inflation won’t be painless.
It took three years to reduce the rate of inflation from nearly 15% in the 1980s to less than 3%. In 1990, it took a year for inflation to drop from 6% to 3%. And a year after inflation hit 5.5% in July 2008, the country was suffering from 2% deflation.
These three cost-of-living chills were accompanied by recessions.
Want to assess 12 risks the Fed faces as it navigates this difficult chore of inflation correction? See you on my unique questionnaire on bit.ly/fedrisks!
Jonathan Lansner is the business columnist for the Southern California News Group. He can be contacted at [email protected]