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A Determined Federal Reserve

September 9, 2022

Could the Federal Reserve go too far in its efforts to address certain economic pain points? Find out in the latest episode of TrendsTalk with ITR CEO and Chief Economist Brian Beaulieu. 



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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hello, I'm Brian Beaulieu, CEO and chief economist of ITR Economics, and thank you very much for joining us for this edition of TrendsTalk. Today we're talking about the Federal Reserve. My concern, our concern, is that they seem to be very determined to raise interest rates at an aggressive pace to fix things in the economy that they really don't have the ability to fix. And that sets us up for them going too far in terms of pushing interest rates higher, and that's not going to be the first time the Fed has done such a thing. They have a history of doing this.

And the irony of all this... and I'll explain the details of why I'm concerned in a moment... is that they're a large part of what got us into this inflation situation. Them, the Congress, and obviously the war in Ukraine. And all that's past. All we can do now is deal with the present and where we are going in the future. And we all know that the US economy is in deceleration mode. We are in what we call phase C of the business cycle. We're slowing growth. It's evident in overall economy. The GDP was slightly negative in the first half of this year. US industrial production is growing at a 4.2% annual clip, but it's slowing down. And the whole world is in this slow down mode.

And that means there's disinflation starting to appear. We're seeing it in commodity prices, whether it's steel scrap, copper, oil is down. Yet that doesn't seem to be enough for the Federal Reserve. Their own cherished personal consumption index, price index, personal consumption expenditures price index is showing disinflation. It's down from its peak earlier this year. Yet they're saying it's not enough. And the scariest thing that I read about was in Chairman Powell's speech that he wants to get this balance right in the labor market, that there's this too much demand for labor relative to supply.

So his solution is to bring down the demand, rather than try and find some way to improve the supply. But when you have a 2:1 ratio of job openings to candidates, and you want to reduce businesses' demand for labor, when we all know that there's a tight labor market, but that's going to mean is that the Federal Reserve is going to set out to dampen businesses' desires to hire people. And that means not a growth recession, which is what Chairman Powell referred to. Because if it's a growth recession, we're still going to want to hire people, because we're still growing. We still know that we're going to need them in the future. The only way he's going to accomplish this is by putting us into an active recession.

That's the threat. I don't see any other way how he is going to accomplish his goal of balancing the labor market. It's not their purview to balance the labor market, given what we've gone through with the global pandemic. It's not even a US issue. It's a global issue. In the meantime, we're making the US dollar get stronger and stronger, which is hurting our allies, hurting our global partners to be quixotic about this task of balancing the labor market. Can't bring down food, Chairman Powell. You can't bring down food prices. You can't bring down oil prices all by yourself, unless you're going to put the world into a recession. Is that your goal? Then you should read a book called the Lords of Finance. And you know that it isn't going to work out very well.

What's that mean for you and me running businesses? We're okay for 2023. The interest rates have not really started to hurt more than emotionally, psychologically, but there hasn't been any real economic causal relationships just yet, but we're running out of time. The lead time between change in mortgage rates, for instance, and a negative impact on housing is on median 15 months. So we're okay for '22, but you start getting into '23 and things start getting iffy.

By the time we get into 2024, business cycle trend becomes very iffy for GDP and US industrial production. So there is no immediate gratification. There is no immediate pain, and that's one of the reasons why the Fed will keep pushing and pushing and pushing because they don't see their desired results until it's a year down the road. And then they're going to go, "Oh, I guess we went too far," and they'll start dropping interest rates like crazy.

Doesn't have to be that way. Do you remember Paul Volcker in the early 1980s? If you're old enough, you do. He deliberately set out to break the economy of inflation by breaking the economy. And I swear, Powell is trying to Volckerize the economy once again.

Just a heads up. Be careful. Watch these interest rates, watch the inverse yield curve along with us very closely. And if we see that the Fed's next move is 50 basis points instead of 75 basis points, breathe a little sigh of relief. It means that there's some reason settling in in Washington. There's always a first time. Sorry it's not a cheerier message, but we need to know when there are storm clouds gathering, as well.

Thanks again for listening. I'm Brian Beaulieu, ITR Economics.



Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.