• However, the Fed has inconsistent data to process
• US monetary authorities in a dilemma
The monetary policy of the central banks is not only aimed at managing currency reserves and issuing banknotes, one of the main tasks of the monetary authorities is to maintain price stability. For this purpose, the Fed & Co. have an important tool for action: the key interest rate. Typically, the base rate is raised when inflation exceeds a predetermined level, and conversely, the base rate is usually lowered when the economic engine threatens to stall or consumer price inflation settles down to a reasonable level.
An adjustment of the key interest rate usually has measurable consequences – in a positive as well as in a negative sense. If market interest rates rise, it becomes more expensive for banks to borrow money from the central banks, which means that they pass the increased borrowing costs on to their customers, which reduces the number of loans concluded. This, in turn, slows down the economy as many consumers defer or suspend borrowing or investing, leading to falling demand and concomitantly falling prices. An interest rate hike is therefore aimed at weakening the economy – but monetary authorities are treading on thin ice. If they stall the economic engine completely, there is a risk of a recession.
The current economic environment makes it difficult for the Fed to act
For the US Federal Reserve, however, the current market environment is quite unusual. Because the data that the central bankers get back from the economy does not provide a uniform picture and therefore makes it difficult to decide on the future direction of monetary policy.
Jim Cramer, former hedge fund manager and market expert, sees the Fed in troubled waters. He told CNBC that the market is being distorted by unprecedented macro factors, making it difficult for the Federal Reserve to stabilize it. If you add up all the biases, it’s insanely difficult to predict consumer behavior.
The US central bank therefore lacks reliable data, and the Federal Reserve is currently unable to get a clear idea of the economy, Cramer continued. “Nothing in this economy works as it should, nothing is predictable. History is a terrible guide at the moment because we have never been in this situation before,” warns the expert. Accordingly, a year after the start of the war in Ukraine, food and oil prices were massively distorted. “Both markets are artificially dictated by geopolitics rather than the natural dynamics of supply and demand.”
In addition, there is strong demand in the automotive sector while at the same time the economy is depressed. That’s because semiconductor supply shortages are slowing auto production and causing a backlog in auto demand, he points out.
Other experts also see problems for the Fed
Torsten Slok, chief economist at Apollo Global Management, also sees the Fed in a dilemma caused by inaccurate economic data that is difficult to interpret. “It is absolutely critical for the Fed and markets that the data coming in is as reliable as possible. For example, is the strong data we saw in January for jobs and retail sales a true description of what is going on? Is it problems with seasonal adjustments or problems measuring employment and consumer spending in the business surveys?” the expert told CNN.
According to Slok, an example of the unreliability of the macro data is the current wave of layoffs in the tech sector. While this would seem “like a big deal,” it is “basically irrelevant when compared to the latest data from the last jobs report for January, where the economy added 517,000 jobs,” the economist said.
Cramer also sees it similarly, who considers some economic data to be of little significance, which is also due to the consequences of the corona pandemic. “The economy has also been muddled by government financial support during the pandemic period, such as unemployment benefits and student loan forgiveness, which has exacerbated inflation.” Recession concerns are now brewing, which in turn is causing buyers to buy 10-year government bonds “at absurdly low levels,” pushing mortgage rates down and causing demand and property prices to soar even as interest rates rise , the professional also sees problems on another front.
Economic outlook difficult
The National Association for Business Economics (NABE), which claims to be the largest international association of applied economists, strategists, academics and political decision-makers, comes to a similar conclusion in its latest survey as Slok and Cramer. “Results from the February 2023 NABE Outlook survey continue to reflect significant differences in the outlook for the U.S. economy,” said NABE President Julia Coronado, President and Founder of MacroPolicy Perspectives LLC. “Estimates of inflation-adjusted gross domestic product, or real GDP, inflation, labor market indicators and interest rates all vary widely and likely reflect a variety of opinions on the fate of the economy – from recession to soft landing to robust growth.” , according to a press release.
Panelists also differed in their assessments of how much the Federal Reserve could hike rates, how long rates could stay at peak levels, when rate cuts would begin, and what the central bank’s actions on each of these fronts would signal, he said Context Dana M. Peterson, Chair of the NABE Outlook Survey and Chief Economist of the Conference Board.
The dilemma in which the US central bank finds itself could explain why the measures taken by monetary authorities so far have not had the hoped-for success. Reliability of the data is an important factor for monetary policy decisions, but at the moment it is “incredibly difficult to predict consumer behavior, which is why the Fed’s actions so far seem to have little impact,” summarizes Jim Cramer.
Editorial office finanzen.net
Image sources: a katz / Shutterstock.com, JStone / Shutterstock.com