Hawkish Fed signals it may have to raise rates sooner to fight inflation

[progree]

This is the main reason why the stock market tumbled today, Jan 5 -
Total U.S. Stock Market Index down 2.31%, S&P 500 down 1.94%,
At 12:30 A.M. ET Jan 6, S&P 500 futures down 0.45%

Hawkish Fed signals it may have to raise rates sooner to fight inflation, Reuters, 1/5/22
https://finance.yahoo.com/news/fed-may-hike-rates-faster-191254342.html

WASHINGTON (Reuters) - A "very tight" job market and unabated inflation might require the Federal Reserve to raise interest rates sooner than expected and begin reducing its overall asset holdings as a second brake on the economy, U.S. central bank policymakers said in their meeting last month.

In a document released on Wednesday that markets took as decidedly hawkish, the minutes from the Dec. 14-15 policy meeting showed Fed officials uniformly concerned about the pace of price increases that promised to persist, alongside global supply bottlenecks "well into" 2022.

... A "very tight" job market and unabated inflation might require the Federal Reserve to raise interest rates sooner than expected and begin reducing its overall asset holdings as a second brake on the economy, U.S. central bank policymakers said in their meeting last month.

... Those concerns, at least as of mid-December, even appeared to outweigh the risks potentially posed by the fast-surging Omicron variant of the coronavirus, seen by some Fed officials as likely adding further to inflation pressures but not "fundamentally altering the path of economic recovery in the United States."

[WHITT]

1. Once Again

If the spike in inflation was as a result of the national economy overheating, then raising interest rates would help to slow the increase, and allow the economy to moderate and inflation to moderate.

But the national economy is not overheating and the spike in inflation is as a result of other factors.

Therefore, raising interest rates would not significantly impact inflation, but would slow the economy, merely resulting in stagflation.

[unblock]

2. We are in essentially zero danger of stagflation

2021 was a banner year for gdp, even if the gains were not distributed as well as they might have been. I'd be shocked if they raised interest rates enough to cause a recession any time soon.


Inflation is even more muddled. Much of it is due to temporary factors, particularly given the Covid backdrop. But some of it is indeed good old-fashioned growth-led inflation. The shortages due to port congestion, while port traffic is up 25% and breaking records, is classic growth inflation. Prices are going up because demand is through the roof.

As is often the case, the fed is in a guessing game. But with the economy surging as much as it has been, keeping rates at zero certainly seems unnecessary. The question is how high to go. So far they're talking still under 1.0% by the end of 2022. I can't see that causing a recession.

[WHITT]

3. Hmmm

2021 was a banner year for gdp...

That's illusionary.

Negative GDP was greater than during the Great Depression of the 1930s, therefore the subsequent gains in GDP were not from a normal base.

We're also still down millions and millions of jobs and the National Workforce has shrunk significantly.

I'd be shocked if they raised interest rates enough to cause a recession any time soon.

I didn't claim it would cause a recession, merely result in stagnation, as in low growth, but without addressing the inflationary spike.

[progree]

4. Yup, GDP growth in 2020 was minus 3.5%

https://apnews.com/article/joe-biden-business-economy-dabc335017b972b306a05638b9f9f4e6

For the entire year, the GDP shrank by 3.5%, the largest annual decline since a plunge of 11.6% in 1946 when the U.S. demobilized after World War II. The 3.5% drop was unchanged from the previous estimates.

This is the final estimate for Q4 and for 2020 overall, March 25, 2021

I found the official BEA.gov release which said the same thing, but it was the 2nd estimate. (The final estimate is the 3rd estimate). I could dig some more, its in one of the vast tables in any of the subsequent BEA releases.

[unblock]

5. Well 2020 sucked, no doubt. But 2021 was huge.

Here's the inflation-adjusted gdp. Zoom in to 1y or 5y and click each quarter to see the numbers.
Q1 6.3%
Q2 6.7%
Q3 2.3%

https://fred.stlouisfed.org/series/A191RL1Q225SBEA


Q4 number hasn't come in yet but here's an estimate:

Blue chip consensus is 5% and gdpnow estimate is over 7%

https://www.atlantafed.org/-/media/Documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf


This is a huge growth rate and more than covers ground lost during 2020.

[WHITT]

8. I'm Afraid

you're not grasping the economics.

[unblock]

10. well that's certainly convincing and persuasive...

[WHITT]

11. According To The NBER

GDP in 2nd QTR 2020 plunged 31.4%.

~

Say you decided to checkout an old abandoned well by tying off a rope and climbing down. When you attempt to climb back up, the rope breaks, and you're 100ft down. When fire/rescue arrives, they lower down a 100ft ladder. You step up 100ft, and you're back on level ground where you started, you're not 100ft in the air.

[unblock]

15. that's correct, except that the economy is already larger than it was before covid hit.

we hit that point some time in the second quarter of 2021. we've been "in the air" ever since.

[WHITT]

21. Non Sequitur

You're still not getting it.

[progree]

14. The 2 years combined come to a 0.89%/year growth rate (compare to 2.46%/yr pre-pandemic)

The latest Atlanta fed estimate is 6.7% for 2021 Q4, from your GDPNow link.

So Q1-Q4 2021: 6.3%, 6.7%, 2.3%, 6.7% ==> 1.063*1.067*1.023*1.067 = 1.238,
1.283^(1/4) = 1.0548, so an expected 5.48% growth rate for 2021

2020 was a -3.5% GDP growth rate

2 years: 0.965*1.0548 = 1.01788,
1.01788^(1/2) = 1.0089 = 0.89% per year

which is pretty weak, compared to recent pre-pandemic history:

Average GDP growth in last 5 pre-pandemic years, 2015 through 2019, average: (3.08 + 1.71 + 2.33 + 3.00 + 2.16)/5 = 2.46%

Thank you very much for the links, by the way.

[unblock]

16. if we do a similar analysis for inflation,

inflation
11/2019-11/2020 was 1.9%
11/2020-11/2021 was 6.8%

similar math puts that at right around 4.0% annual inflation for the 2-year period. which is on the higher side, but not overly alarming in and of itself.

but people aren't overly concerned about a 4% inflation rate, they're concerned about the fact that it's been 6.8% over the last year and has been generally accelerating.

which, notably, has tracked pretty reasonably with the gdp growth. this economy is confusing and complicated and unusual, but it seems clear that it's trying to grow at an even faster clip and we just don't have the infrastructure to do that properly, leading to such things as port congestion trying to handle the massive throughput.

tempering demand just a little bit to ease up on the strain against the infrastructure doesn't seem unreasonable. when the traffic at the ports eases up and other supply chain issues get resolved, that's probably the time to stop raising rates.

[progree]

17. Actually I was thinking of adding to my #14 that I do the same thing for inflation --

look at the 2 years, latest month over same month 2 years ago, just exactly like what you did, when there are discussions about inflation.

Anyway, just to be clear, I don't believe we are near the STAG in stagflation. As for FLATION, I'm in a wait-and-see attitude. I think Omicron is going to keep us from getting back to normal for awhile.

[unblock]

18. "Normal" is a different question

The current economy is weird because of Covid and the massive shift in working remotely and ordering online while others in more contact-dependent jobs are screwed one way or another.

Omicron is a bit of a wildcard but the very high transmissibility means it won't last long. It will be an ugly 6-8 weeks but I am hopeful it largely fizzles after that. Then we get to worry about the next variant...

Thing is, overall, the economy is doing booming. I get that it's not distributed well, or even as it typically is, but at an aggregate gdp level we're doing fine, even if it isn't "normal".

As the pandemic eases, we'll see more and more of the familiar in-person office working and the economy will feel more normal. Hopefully at that point the inflation pressures ease, as well.

[progree]

19. And I think we are mostly bouncing back from last year's plunge

Edit: yes, we're already ahead of 2019, but just 0.9%/year above that. We can't wave away this year's inflation by looking at a 2 year average, and not do the same with GDP for consistency, i.e. we can't look at 2 years for inflation because it is convenient for us, and then look at only one year of GDP growth because its convenient for us.

I'm not an optimist about Covid either.

[unblock]

6. It's just really hard to justify near-zero rates when the economy is up around 5% for the year.

I agree the inflation picture is messy and there are some causes of it that interest rates wouldn't address, although it wouldn't be a complete failure at reducing inflationary pressures.

But it's hard to say that we really need rates to be as low as they are when the economy is booming as much as it is -- enough to cause records throughout and congestion at our ports, for instance.

Could raising rates to 4% cause stagflation? Ok, raise rates enough, sure. But raising rates up to 0.75-1.00% causing stagflation? Not likely. And it's not like the fed can't stop the process or reverse itself if it works out poorly.

[WHITT]

7. ...

I agree the inflation picture is messy and there are some causes of it that interest rates wouldn't address, although it wouldn't be a complete failure at reducing inflationary pressures.

By slowing the national economy while we're still down by millions and millions of jobs. Great.

But raising rates up to 0.75-1.00% causing stagflation?

The Fed statement was about STARTING to raise interest rates, it would not be limited to '0.75-1.00%'.

[unblock]

9. current estimate is it goes to around 1.0% by the end of 2022:

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html


it's about how much and how fast they raise rates. yes, it's possible for them to go too far. but it doesn't seem likely we'll get to "too far" any time soon. certainly it's hard to rates high enough in 2022 to cause stagflation.

[WHITT]

12. Eh

Raising interest rates by any amount will inversely slow the economy. A slowing economy without any significant reduction in inflation is, by definition, stagflation.

[unblock]

13. uh, no, you had it right earlier

stagflation is low economic growth and high inflation. some definitions require high unemployment as well. some include recession while others call that recession-inflation and reserve stagflation specifically for small growth with high inflation.

raising interest rates might reduce growth from what it otherwise would be, but only by degrees. it doesn't necessarily put us in the low economic growth category and it doesn't necessarily induce high unemployment. all that depends on a multitude of factors, most notably including the fed over-raising interest rates.

most likely is that inflationary pressures are reduced while growth comes back down to more like 4% or 3.5% or so. that's not stagnant growth, that's quite good growth. but merely reducing growth from 5% to 4%, say, is not "stagflation".


again, yes, there are some scenarios where the fed gets it wrong and other factors combine to get us into a stagflation situation, but that's not at all likely in the present circumstance. certainly not anything persistent. the bulk of the inflationary pressures should resolve anyway over the next year or two.

[WHITT]

20. Wrong

Once again, slowing economic growth without much of a change in inflation, is by definition, stagflation. Period.

[unblock]

22. ...

https://www.investopedia.com/terms/s/stagflation.asp

Stagflation is characterized by slow economic growth and relatively high unemployment—or economic stagnation—which is at the same time accompanied by rising prices (i.e. inflation). Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP).

[WHITT]

23. Yep

Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP).

EXACTLY as I've been stating all along, and you've been stubbornly resisting.

You're welcome.

[progree]

24. There was only one quarter of decline in GDP, Q2 2020, which was followed in Q3 by PLUS 33.8%

and the following quarters were PLUS 4.5%, PLUS 6.3%, PLUS 6.7%, PLUS 2.3%, and the Atlanta Fed estimates PLUS 6.7% in 2021 Q4

See #5 for links.

But you live in your own world, apparently.

In the below, the underlining is mine:

Your #23, quoting unblock's definition:

Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP).

EXACTLY as I've been stating all along, and you've been stubbornly resisting.

Nope, you said in #20:

Once again, slowing economic growth without much of a change in inflation, is by definition, stagflation. Period.

There's a difference between a decline in GDP and slowing economic growth.

Period.

[WHITT]

26. I'm Afraid You're Doubly Confused

There was only one quarter of decline in GDP, Q2 2020, which was followed in Q3 by PLUS 33.8%

But negative 31.4% GDP followed by 33.8% GDP doesn't get you back to where you were.

In a simplified example, if you have a bank account with a balance of $100, which then declines by 50%, you now have a balance of $50. If the account balance then increases by 50%, you now have a balance of $75, which is dramatically down from the original balance.

Therefore, all of you're calculations and assertions are from the incorrect base.

~~

There's a difference between a decline in GDP and slowing economic growth.

No there isn't. You're conflating a decline in economic growth with negative GDP, which I never referenced in that regard.

[progree]

29. Aww, the very selective quote technique. And no, "decline" and "slowing" are not the same

You wrote in #26

(quoting me)

There was only one quarter of decline in GDP, Q2 2020, which was followed in Q3 by PLUS 33.8%

But negative 31.4% GDP followed by 33.8% GDP doesn't get you back to where you were.

In a simplified example (blah blah blah)

Quite a selective quote, you very dishonestly left out what immediately followed:

There was only one quarter of decline in GDP, Q2 2020, which was followed in Q3 by PLUS 33.8%
and the following quarters were PLUS 4.5%, PLUS 6.3%, PLUS 6.7%, PLUS 2.3%, and the Atlanta Fed estimates PLUS 6.7% in 2021 Q4

Together that all adds up to a net positive economic growth. I never, ever said or implied the 2020 Q2 + Q3 combined was positive.

Or maybe you read just my post's subject line. No you have to read what follows in the message body too. I couldn't put all those remaining quarters in the subject line, I would if I could but there is a length limitation to subject lines.

Continuing with your #26

(quoting me)

There's a difference between a decline in GDP and slowing economic growth.

No there isn't. You're conflating a decline in economic growth with negative GDP, which I never referenced in that regard.

If you don't know the difference between "decline" in GDP and a "slowing", then neither I nor anyone else can help you.

[WHITT]

33. The Non Sequiturs Abound

You'll need to get your facts straight before I can address why you're wrong.

[unblock]

25. A decline in gdp is a simple definition of a recession

The modern definition also considers other factors such as unemployment. But as I've stated, we've currently got very big growth and we have low unemployment. At the moment, we're about as far away from recession as we can get.

Raising interest rates is not likely to cause a decline in gdp any time soon.

[WHITT]

27. No

1) That is NOT "the modern definition". You might want to check with the NBER, as they are the official arbiters of recessions.

2) You too are conflating a decline in economic growth with negative GDP and recession, neither of which I referenced in that regard.

[unblock]

28. Ok, so the employment factors nber considers are

nonfarm payroll employment and employment as measured by the household survey, and possibly other factors as there is no fixed formula for their determination of business cycles.

So they look at at least a couple statistics from the labor market but not necessarily unemployment specifically.

Were you just trying to make a technical point about which job market statistics they use or was there a more material point?

[progree]

30. "without much of a change in inflation"

From your #20:

Once again, slowing economic growth without much of a change in inflation, is by definition, stagflation. Period.

We've already discussed your error in calling "slowing economic growth" as one of the defining characteristics of stagflation. That would mean, for example, a change from an 8% growth rate to a 6% growth rate -- which is slowing economic growth -- is stagflation if accompanied by, to use your words, "without much of a change in inflation"

Nobody considers a 6% growth rate as stagnant economic growth, or "stagflation" if accompanied by some inflation characteristic.

To be clear, you can have stagflation if you have declining economic growth, AND the economic growth is at a low level or negative, along with some inflation characteristic that we're getting into next. Or you can have stagflation even if economic growth is rising, as long as it is still at a low level.

Rather, in this post, I am questioning your 2nd part of your definition of stagflation:

"without much of a change in inflation"

Who told you that? When we studied stagflation in an economics class, it was high inflation, and particularly when the inflation rate was rising.

But to you, weak economic growth with say a constant 1% inflation rate is stagflation because it is "without much of a change in inflation"

I doubt there is any economist that agrees with you that "without much change of inflation" is a defining characteristic of stagflation.

"Stagflation": does not mean stagnant inflation. But oh well.

And currently, inflation is clearly rising, not "without much change".

Can you name a single economist that characterizes the current U.S. economic situation as stagflation, or nearing stagflation?

[progree]

31. "A slowing economy without any significant reduction in inflation is, by definition, stagflation"

The above is from your #12.

And no, it isn't. An example of that would be an economy that is slowing from a 6% growth rate to a 5% growth rate, while inflation is steady at 1%. Other than you, nobody would characterize that economy as being in stagflation.

Please provide a definition of stagflation from a reputable source, rather than asserting your own bizarre definitions of stagflation. And not one that equivalizes a decline in GDP with slowing economic growth. Economic growth means that you are still having an increase in GDP. That is not a decline in GDP. A decline in GDP is negative economic growth.

[WHITT]

32. The Non Sequiturs Abound

You'll need to get your facts straight before I can address why you're wrong.