“We have not yet made enough progress”
In its pursuit of curing the economy of inflation (“an ounce of prevention is worth a pound of cure”), the Fed has been “expeditiously” hiking rates. Now, after last week’s CPI came in softer than expected, Fed speakers have discussed lowering the rate hike ‘dosage’, but this talk has come with the caveat that slowing is not the same as stopping. Brainard emphasized the potential for slowing, saying, “it probably will be appropriate soon to move to a slower pace of increases”, adding that a more deliberate pace will allow the Fed “to asses more data and be better able to adjust the path of rates to bring inflation down”. Boston’s Collins echoed the same sentiment, saying “deliberate and more measured increments make a lot of sense” but explained that her “[estimate of the terminal rate] range has increased on the upside”. Waller was direct about needing tighter policy, stating he believes “that policy is barely in restrictive territory today, so more interest rate hikes are needed to get inflation down”. However, Bullard was the bull in the china shop today, making the rather mundane statement that “to attain a sufficiently restrictive level, the policy rate will need to be increased further” but offering a rather more inflammatory chart in his presentation, shown below, which suggest that Fed funds “may need to rise as high as 7%”. Amidst all of this, Kansas’s Esther George warned that, looking at labor market tightness, “I don’t know how you continue to bring this level of inflation down without having some real slowing, and maybe we even have contraction in the economy to get there”, explaining that she had not in her “40 years with the Fed seen a time of this kind of tightening that you didn’t get some painful outcomes”. Perhaps George is thinking of another Cure, wondering if the Fed “Misjudged your limits/ Pushed you too far”.
“Consumers are showing increasing signs of stress”
Back in February’s “Until Morale Improves“, we noted that “despite the price pressures, the consumer in aggregate appears to be impervious”. Yes, the Michigan survey had seen “consumer sentiment reach ‘its worst level in a decade’, ‘driven by weakening personal financial prospects’ courtesy of ‘rising inflation, less confidence in the government’s economic policies, and the least favorable long term economic outlook in a decade'”.
Now, as sentiment sits near “the historic low“, it appears that the consumer is becoming more vulnerable. At the same time that this week’s retail sales numbers came in above expectations, Jeff Bezos warned about the potential for a recession, and Walmart gave a “conservative outlook for the holiday quarter“. But it was Target that provided the gloomiest forecasts. Along with third-quarter profits that were “well below” expectations, the company warned of “significant change in consumer shopping patterns”. During its earnings call, the company clarified, saying, “specifically, consumers are feeling increasing levels of stress, driven by persistently high inflation, rapidly rising interest rates, and an elevated sense of uncertainty about their economic prospects”. Indeed, “with high rates of inflation continuing to erode their purchasing power, many consumers this year have relied on borrowing or dipping into their savings to manage their weekly budgets. But for many consumers, those options are starting to run out.” This last point was supported by the latest credit card data, which showed that balances “rose more than 15% from the same period in 2021, the largest annual jump in more than 20 years”.
P.S. Weakening in consumer demand certainly won’t help freight carriers, who are furloughing workers, scaling back flights, and preparing for a “subdued peak season”.
