Good Monday AM from your Hometown Lender,
I hope you had a terrific weekend.
There will be a good amount of economic data this week starting with Durable Goods orders today and ending with PCE on Friday. Durable Goods orders came in super strong on the topline at 9.9 vs expectations of 4.0. when removing the transportation component, the index dropped to a dismal -.2… I suspect much of that transportation component was from the Auto dealership hack which stopped cars from being sold in June/July. Markets haven’t reacted much to it. The Fed rate cut in September is ALREADY priced into rates so unless we see some very weak data this week pushing the Fed to cut more aggressively, we will be in this range for a bit.
More on that from Bloomberg, below.
Before you get there, this graph should tell you a lot about where the economy is… 11% of credit card holders are behind by 90 days…
On Friday, Federal Reserve Chairman Jerome Powell gave his speech at Jackson Hole, and it was a powerful, unambiguous message that it’s time for the Fed to shift its focus. Fighting inflation is yesterday’s story. Maintaining a strong labor market is today’s.
Anyway, I’ll get back to the speech in a second.
One of the things you hear about all the time in discussions of monetary policy or macro-economics is the importance of expectations, particularly inflation expectations. There’s a widespread view that if you want to keep inflation under check then you have to keep inflation expectations in check, or “anchored” as they often say. If inflation expectations become un-anchored (so the story goes), then people will start behaving in a way that manifests in higher actual inflation. People may start consuming more today, on the assumption that prices will be higher tomorrow, and that excess consumption will push demand higher, and that higher demand will cause price increases. Workers will demand higher wages. Companies will raise prices, to cover the cost of their higher labor. And then you get that spiral. You know how it all goes.
If inflation expectations remain well anchored (again, so the theory goes), then this behavior can’t take root. Maybe inflation will jump higher for a few months, but because the public has been trained to know the Fed will fight that jump, they don’t assume that a momentary jump in inflation will lead to something bigger, so that momentary jump doesn’t change people’s behavior, and then it all fades.
Of course, it’s hard to measure inflation expectations directly, though we have various surveys and sentiment measures and market based measures that maybe can give us some idea.
Standing here in August 2024, with inflation measures having cooled dramatically since the peak in 2022, policymakers will point to their unwavering commitment to get inflation back to 2% as a reason that this dreaded spiral never took hold. We were all trained to know it was temporary, and so it ultimately was temporary.
Going back to Powell now, I think one way you could characterize his speech is that it was an attempt to keep Employment Expectations well anchored. Yes, we’ve had this rise in the unemployment rate over the last year, but (per the speech) there is no desire to see any further loosening. U3’s rise to 4.3% should not be viewed by the public as a willingness on the part of the Fed to let unemployment get any worse.
The same logic we use to place importance on inflation expectations can apply to the employment side as well. Expectations of a strong labor market logically lead to expectations of high consumer demand, which creates yet another reason to keep workers on payroll. From the worker perspective, confidence in a persistently strong labor market means less reason to save money (for a rainy day) and that should keep aggregate demand high and robust, which again should serve to keep the actual labor market tight.
When it comes to maintaining full employment, you don’t really hear as much about the Employment Expectations channel for keeping the job market robust. But the logic for it is similar to the popular logic about Inflation Expectations. And so the simple view of what Powell set out to accomplish is that by being so direct, is that he’s operating through this specific channel.
Stay safe and make today great!
