Despite signs of an economic downturn, inflation is persisting in some of the hardest-to-avoid categories for consumers, like food and housing. The Federal Reserve is expected to continue hiking its interest rate to restrictive territory until inflation comes down significantly, according to minutes of its July session released Wednesday.
While July inflation stabilized month over month, the annual rate of 8.5% is still one of the highest readings in four decades. That said, there are many signs the Fed is starting to destroy demand in its attempt to temper inflation, according to Danielle DiMartino Booth, former Fed advisor and CEO of Quill Intelligence. Still, food and housing are two problematic and weighty categories that haven’t been depressed.
“That suggests that the Fed’s battle is not nearly begun, much less ended,” DiMartino Booth said. “This is no mission accomplished moment. The Fed has a lot more work to do.”
The Fed’s next interest rate adjustment is expected at the September meeting, but some investors are anticipating the Fed will take a pause in hiking the rate following that meeting.
But investor assumptions that Fed chair Jerome Powell may pivot on policy and cut rates next year, given contractions in the economy, may be too optimistic.
“Yes, the Fed has pivoted in the past,” DiMartino Booth said. “And in the past, when the economy has slowed, the Fed has reacted by loosening policy. But all of those past episodes that we refer to for the past 40 years, inflation was less than 2%. Today, it’s more than four times that level.”
“I think investors are underestimating the Fed’s resolution, their will, to continue tightening,” she said.
This year, the Fed has increased its interest rate four times, hiking it from near zero to a range of 2.25-2.5%. During that time, the country has seen two consecutive quarters of negative economic growth, raising recession fears.
Colloquially, people think of a recession as two consecutive quarters of negative gross domestic product, though the official call comes from the National Bureau of Economic Research. What complicates recessionary conditions in 2022 is the tight labor market. Unemployment is at a 50-year low of 3.5% and job growth remains strong.
Now, the term vibecession is floating around, where economic conditions are good but sentiment about the economy is bad. DiMartino Booth disagrees with the call.
“I think that what we’re looking at right now is as plain vanilla a recession as we possibly could have,” she said. “If you look at what’s happening in China and you look at what’s happening in Germany — the third largest exporting nation in the world — and the rest of Europe and the slowing we’re seeing in Asia, you’d have to be blind to suggest that the United States was going to avoid a recession, given the simple pressure coming from the outside of the rest of the world in addition to the slowing that we’ve seen here domestically.”