(Bloomberg) — The Federal Reserve will probably have to inflict much more pain on the economy to get inflation under control.
Growth is already slowing in response to the Fed’s repeated interest rate increases, with the housing market softening, technology companies curbing hiring and unemployment claims edging up.
But with inflation proving persistent at a four-decade high, a growing number of analysts say it will take a recession — and markedly higher joblessness — to ease price pressures significantly. A Bloomberg survey of economists this month put the probability of a downturn over the next 12 months at 47.5%, up from 30% in June.
“We have to curb things domestically to help us get where we want to go on inflation,” said Bank of America chief US economist Michael Gapen, who’s forecast a mild recession starting in the second half of 2022.
After raising rates in June by the most since 1994, Fed Chairman Jerome Powell and his colleagues are expected to approve another 75 basis-point hike this week and signal their intention to keep moving higher in the months ahead. Powell has said that failing to restore price stability would be a “bigger mistake” than pushing the US into a recession.
Fed officials though continue to maintain that they can avoid a recession and execute a soft landing of the economy. They argue that the economy has underlying strengths and have voiced hopes that inflation could ease as quickly as it escalated.
Inflation — as measured by the Fed’s favorite gauge, the personal consumption expenditures price index — was 6.3% in May, well above the central bank’s 2% target.
What Bloomberg Economics Says
“The chance of a downturn in the next 12 months has risen to 38%, significantly higher than zero when we ran the model a month ago. The model sees a 100% probability of recession in the next 24 months.”
— Eliza Winger, Anna Wong and Yelena Shulyatyeva (economists)
— To read more click here
The more popular consumer price index is running hotter: It rose 9.1% in June from a year earlier. Three-quarters of the goods and services in the CPI basket increased at an annualized rate in excess of 4% in June from May.
“Inflation is entrenched and spreading,” said former Fed Vice Chair and Brookings Institution senior fellow Donald Kohn.
The central bank faces a tricky job because at least some of the upward pressure on inflation is not from excess demand – which it can control – but from supply disruptions that it is powerless to affect stemming from Russia’s invasion of Ukraine and the pandemic.
An added complication, according to ex-Fed Vice Chair Alan Blinder: Monetary policy impacts inflation with very long lags of perhaps two or three years.
Traders in the federal funds futures market are betting the Fed will raise rates to about 3.5% by year end, from 1.5% to 1.75% now, before beginning to cut them in the latter half of 2023.
Former Treasury Secretary Lawrence Summers doubts that’s how it will play out.
“My instinct is that you’d not see rates cut as soon as people think,” the Harvard University professor and paid Bloomberg Television contributor said.
“The Fed has to be careful. If you look at the history of the 60’s and 70’s, there were moments when monetary policy eased a bit and things didn’t tend to work out so well,” he added, referring to episodes where the Fed loosened credit before stamping out inflation.
Instead of cutting rates, the Fed will likely raise them to 5% or higher next year to try to bring price pressures to heel, Dreyfus and Mellon chief economist Vincent Reinhart said. That will help precipitate a contraction that increases unemployment to about 6%, from 3.6% now, but leaves inflation above 3%, the central bank veteran said.
Policy makers have little choice but to push rates higher because they can’t afford to allow inflation expectations to escalate, ex-Fed Governor Laurence Meyer said. If that happened, the battle to contain inflation would be lost because companies and workers would begin to act in ways that would push prices ever higher.
Meyer, who heads the Monetary Policy Analytics consulting firm, foresees a downturn that reduces gross domestic product by 0.7% next year, raises unemployment to 5% and returns inflation to the Fed’s 2% target in 2024.
“A mild recession is probably pretty good from the Fed’s point of view, given the situation we’re in and how bad it looks,” he said.
Some analysts contend the US is already in a recession. GDP contracted at a 1.6% annualized pace in the first quarter and may have shrunk further in the second, at least according to the Atlanta Fed’s economy tracker. (Economists surveyed by Bloomberg forecast a rebound).
If the Atlanta Fed estimate is borne out by official data on July 28 — the day after the Fed’s rate decision — that would meet the popular definition of a recession: two straight quarters of negative growth.
Fed policy makers have already pushed back on that narrative, pointing to the strength of the job market. “It’s really odd to think of an economy where you add 2.5 million workers and output goes down,” Fed Governor Christopher Waller said on July 7, while stressing his determination to lower inflation to 2%.
Supply Shocks
In a paper presented to a European Central Bank conference last month, researchers found that one-third of US inflation through the end of 2021 was due to supply shocks.
The shocks “are happening in different sectors, at different times, in different countries,” one of the researchers, University of Maryland professor Sebnem Kalemli-Ozcan, said. “This is not in the central banking playbook.”
While the Fed needs to respond to elevated inflation by curbing excess demand, it should be careful not to overdo it, she said.
Hopes for an end to supply chain snarls keep getting frustrated, especially as China struggles with its Covid Zero containment policy. Two-thirds of companies surveyed by the National Association of Manufacturers last quarter don’t expect supply chain disruptions to abate until 2023 or after.
Blinder said he’s feeling slightly better about the possibility of an economic soft landing given recent drops in energy and food prices. But he’s unsure how durable those declines will be and still pegs the chances of a recession above 50%.
“The odds are against the Fed managing this,” the Princeton University professor said.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
