From: allin
A recent discussion highlighted the current US economic situation, focusing on inflation trends, employment figures, and the Federal Reserve’s monetary policy. Initial framing of the economy suggested that inflation was “broken” at 3.3%, hiring and wages were surging, and stocks were surging [01:05:46]. However, this framing was met with disagreement by the panel [01:05:48].
Inflation Trends
The latest inflation print (CPI) came in at 3.3%, slightly lower than the expected 3.4% [01:05:54]. Historically, inflation had been cruising around 2% before a “massive spike” up to 9% year-over-year, now returning to the 3% range [01:06:00]. This spike was attributed to “lunatic spending” during the COVID-19 pandemic, which added trillions to the national debt through stimulus checks and PPP loans [01:06:05]. The question remains whether inflation can reach the Federal Reserve’s 2% target [01:06:24].
Employment and Wages
Despite ongoing concerns, the unemployment rate remains at one of the lowest points in recent history [01:06:53]. The Labor Department reported 272,000 new jobs in May, significantly exceeding the 190,000 estimate [01:07:02]. Additionally, average hourly wages were up a “massive” 4% from the previous year, reaching $35 an hour, also topping estimates [01:07:12]. If inflation remains at 3.x% and hourly earnings are at 4.x%, consumers may start to feel better about the economy over time [01:07:21].
However, it was noted that total job openings have decreased from a peak of 12 million, indicating a burn-off of available positions [01:14:06]. It’s argued that a large portion of the economy has run out of savings, forcing people back into the workforce, but companies have been shrinking or adopting defensive postures, leading to rising unemployment claims [01:12:29].
Federal Reserve’s Role and Policy
Interest rates have risen faster than ever in history [01:06:27], with the federal funds rate at a two-decade high of 5.5% [01:10:00]. The explicit goal of raising rates was to cool the economy by slowing the flow of money, thereby reducing demand relative to supply and bringing down the rate of cost increases [01:09:17].
At the beginning of the year, there were expectations for seven rate cuts, which have now dwindled to an expectation of just one, with uncertainty on its timing [01:14:47]. Despite the market’s record highs, this is primarily driven by a few tech stocks like Nvidia, Apple, and Microsoft [01:16:08]. The wider market remains mixed, with most tech stocks in the red [01:15:05].
It is believed that Jerome Powell, the Federal Reserve Chair, aims to protect his historical legacy [01:17:09]. He desires to be remembered like Paul Volcker, who crushed inflation at the cost of a recession, rather than Arthur Burns, who let inflation slip in the 1970s [01:18:11]. In 2021, Powell’s actions were seen as “intensely political” [01:19:30], aligning with the administration’s “transitory” inflation message to secure his reappointment, which led to a delay in rate hikes and exacerbated the subsequent tightening cycle [01:19:03]. Currently, his incentive is to ensure he’s “not wrong again about inflation” and prioritize tamping it down, even if the economy does not perform as well [01:20:05].
Political Pressure on the Federal Reserve
Senator Elizabeth Warren urged Jerome Powell to cut the federal funds rate from its 5.5% high, stating that “sustained period of high interest rates is already slowing the economy and is failing to address the remaining key drivers of inflation” [01:09:50]. She argues that consumers and businesses are suffering under the strain of high rates and inflation [01:10:15].
Despite such political pressure, the Federal Reserve is famously independent [01:20:20]. Powell is unlikely to bow to political pressure now, as he is not up for reappointment, unlike in 2021 when he was seeking confirmation [01:21:21].
Economic Outlook and Concerns
The economy’s GDP growth rate in Q1 2024 was a “lousy” 1.3% on an annualized basis [01:07:56]. With inflation north of 3% and borrowing costs at 4.7%, Freeberg argues that spending power is reducing, and the government’s ability to tax is declining [01:08:07]. The mismatch where the cost to borrow money (4.7%) is significantly higher than economic growth (1.3%) is unsustainable for consumers, businesses, and the federal government [01:08:31]. This situation, where GDP growth is less than the inflation rate, indicates an unstable economy and a “lot of difficulty and strain in the system” [01:11:59].
It is suggested that the US is currently experiencing “stagflation” [01:11:18]. The argument is made that if not for massive government spending and a 6% of GDP deficit, the economy would be in a recession with negative GDP growth [01:22:42]. Many reported jobs are government-created, not private sector, especially in an election year, raising questions about what happens after the election [01:23:05].