The Fed chief acknowledged for the first time on May 17 that the central bank’s pivot to tighter policy might result in higher joblessness, though he argued that wouldn’t necessarily deliver a hammer blow. “You can still have quite a strong labor market if unemployment were to move up a few ticks,” Powell told a Wall Street Journal event.
Housing Frontline
Powell also admitted that the central bank’s ability to pull off what he called a “soft or softish” landing of the economy may depend on events outside its control. Russia’s invasion of Ukraine is pushing up food and energy prices and casting a pall over global growth. China’s strict Covid Zero policy is hobbling the world’s second-largest economy and further snarling supply chains.
History is not on the Fed’s side. After examining 15 Fed tightening cycles since 1950, Bloomberg Economics’ chief US economist Anna Wong concluded that “the central bank will be hard-pressed to avoid a downturn and may need to embark on a steeper rate hike cycle than markets currently expect.”
The housing market is on the front line of the Fed’s drive to slow growth by raising the cost of credit. Since the end of last year, mortgage rates have risen by more than two percentage points, the fastest run-up in roughly four decades.
“Housing leads the business cycle and housing is slowing,” said National Association of Home Builders Chairman Jerry Konter, after the industry group reported that confidence among its members slumped for a fifth straight month in May, to the lowest since early in the pandemic.
Doug Duncan, chief economist at Fannie Mae, said he expects the economy to fall into a modest recession in the second half of next year as Fed rate-increases bite. He sees unemployment rising to 4.4% in 2023 -- from a current rate of 3.6%, which is close to a 50-year low.
National Federation of Independent Business chief economist William Dunkelberg also sees a recession coming. A majority of small-business owners surveyed by the NFIB in April expect conditions for their firms to worsen over the next six months, the most downbeat outlook in 48 years. About one-third said inflation was their biggest headache, the most since 1980.
Inflation is top of mind for households as well -- and a key reason why consumer sentiment, as measured by the University of Michigan, has slumped to the lowest since 2011.
Beset by rising prices, Americans are increasingly relying on credit to keep on buying, according to Goldman’s Hatzius -- who reckons that can’t last.
Consumer borrowing “supports spending in the short term but ultimately is not going to be a sustainable source of big increases in spending,” he told Bloomberg Television on May 17. “So it builds in a slowdown, sort of down the road.”
--With assistance from Steve Matthews and Jordan Yadoo.
This article was provided by Bloomberg News.