The date April 25 might not be one that the Federal Reserve, Wall Street, and the White House will look back on with great nostalgia. New government data showed a slowing economy and accelerating inflation that dampened rate cut expectations and triggered a selloff in the stock market.
Renewed inflation pressures were another critical finding in the latest GDP report.
The GDP Price Index, a measurement of prices paid for goods and services by businesses, consumers, and governments, surged to a higher-than-expected 3.1 percent, up from 1.7 percent in the fourth quarter.
The Personal Consumption Expenditures (PCE) price index rose to a higher-than-expected 3.4 percent. Core PCE, which omits the volatile food and energy components, climbed to 3.7 percent.
Bad News for ‘Bidenomics’
President Joe Biden, however, championed his economic record during his visit to Syracuse, New York, where he touted a $6.1 billion grant to Micron as part of his CHIPS and Science Act.
“It’s clear we have the strongest economy in the world, and that’s a fact,” President Biden told a crowd of union workers.
The public has been skeptical of current economic conditions, with 58 percent of Americans disapproving of the way President Biden is handling the economy.
Following the latest GDP numbers, voters might further question the White House’s claims about how great the economy is performing and look to the presumptive Republican nominee to emulate his first-term record heading into the November election.
A recent Reuters-Ipsos poll showed that 41 percent of U.S. voters said former President Donald Trump is better for the economy, compared to 34 percent who chose the incumbent.
The real estate billionaire mogul pounced on the economic news and listed off high gasoline prices, rising energy costs, and slumping equities as a consequence of his successor’s record on the economy.
“This is Bidenomics,” the ex-president said on Thursday. “It’s destroying our country.”
According to the American Automobile Association (AAA), the national average price for a gallon of gasoline has risen about 17 percent year to date, to $3.66.
Federal Reserve Plans
Next week, the policymaking Federal Open Market Committee (FOMC) will hold its two-day meeting. While it is widely expected to leave the benchmark federal funds rate unchanged at a range of 5.25–5.50 percent, market watchers will brace for Fed Chair Jerome Powell’s remarks at the post-meeting press conference.During a panel discussion at the Wilson Center last week, Mr. Powell cautioned that elevated inflation could delay rate cuts until later this year, suggesting higher-for-longer interest rates.
“Recent data have clearly not given us greater confidence,” he said. “If higher inflation does persist, we can maintain the current level of [interest rates] for as long as needed.”
Economists warn that something could break in the economy if the Fed keeps interest rates at 23-year highs amid a potential second wave of inflation.
“In the U.S., higher-for-longer interest rates could strain the balance sheets and debt-servicing capacity of households and businesses, weakening the economic outlook,” the Fed stated in its semiannual report on financial stability. “Financial intermediaries, including lenders with high exposures to CRE [commercial real estate] and consumer loans, could encounter greater losses as a result of higher interest rates, leading to a further tightening in financing conditions.”
But the Fed insists that it must restore price stability first.
Following four consecutive hotter-than-expected Consumer Price Index (CPI) reports, a plethora of Fed officials have indicated the numbers should not be dismissed and, as a result, that there is no hurry to cut rates. Because the economy is still expanding and the labor market remains intact, the institution possesses the luxury of maintaining a restrictive monetary policy and can wait for further inflation-related data, officials contend.
“Given the strength of the labor market and progress on easing inflation seen over a longer arc, I believe the Fed’s current restrictive monetary policy is appropriate,” said Austan Goolsbee, president of the Federal Reserve Bank of Chicago, last week at a business journalists conference. “I think we have to recalibrate, and we have to wait and see.”
Traders have adapted to the sudden change in attitude. The futures market is now penciling in just a single quarter-point rate cut at the end of the year, according to the CME Fed Watch Tool. This is a complete reversal of what investors anticipated in December 2023: six rate cuts beginning in March.
So far, investors have not entertained a rate hike, but market analysts say it is possible.
“Market expectations for a rate cut have fizzled since January, when the markets were exuberantly pricing in up five or six rate cuts during the year,” said Kenny Fisher, a market analyst at OANDA, in a note. “A rate hike, which would have been unthinkable at the start of the year, is a real possibility if the economy remains in good shape and inflation continues to rise.”
Raphael Bostic, the Atlanta Fed chief, recently expressed concern about secondary inflation numbers trending upward and noted that he would not anticipate his colleagues to cut until later this year.
Stagflation Fears
Stagflation—a mix of stagnating economic growth and rising inflation—has returned to the forefront of economic murmurs.Despite the White House announcing a soft landing, the Fed was less adamant about declaring the inflation-fighting mission accomplished. Other prominent individuals in the business community sounded stagflation alarm bells even before the first-quarter GDP report.
“It looks a little bit more like the 1970s to me, and I point out to a lot of people, things looked pretty rosy in 1972. They were not rosy in 1973,” he said in an interview with The Wall Street Journal.
In his annual letter to shareholders earlier this month, Mr. Dimon also alluded to this economic threat, assuring investors that “we would handle stagflation too.”
“Economically, the worst-case scenario would be stagflation, which would not only come with higher interest rates but also with higher credit losses, lower business volumes and more difficult markets,” he wrote.
The hope was that monetary policymakers were engineering a soft landing. However, the tidal wave of data over the last three months might suggest the nation has more turbulence to go, which could include a bout of stagflation.
