The Deeper Dive: Summer Storms without Rain

Economic drought is in the air almost everywhere.

With less and less Fed liquidity, dry times are in store.

On the job front, as noted earlier, layoffs are finally lowering available jobs enough for the dwindling pool of available workers to start to feel the heat. It’s been over a year since the Fed started one of its most rapid interest-hiking schedules in history and the only time in history where it combined such a rapid rise with a major reduction in its balance sheet, which the Fed has estimated in the past has the effect of adding about one percentage point to its interest hikes. This, then, is its most aggressive tightening ever. Of course, it started at zero interest, so this is not the highest interest-rate level it has ever hit. Still, we have seen the damage lesser rate hikes did when coming off years of being near the zero bound, and those times happened during almost zero inflation.

Unemployment has been slow to rise, but the needle is now wavering. Here is the thing to consider with those Fed rate hikes, though: The Fed anticipates it will make two more 0.25% increases over the remainder of the year. From there, the Fed says there is, at least, a half year lag between its major policy changes and their full impact on the economy. That would put us all the way out to a year from now before we know how much economic damage they are going to wind up causing because they overheated the economy severely, causing scorching inflation, and then cooled it rapidly. Sort of like heating a glass bowl until it is glowing and then plunging it in cold water but in a slow-motion play.

From there, keep in mind that when things actually break in the economy, versus just settle down, they fall into other things. Defaults here cause financial losses there, and those cause someone else to default, and those defaults aggregate to cause a bank to default and so on. So, the economic damage can and likely will play out longer than just another year.

That is a true best-case scenario because it presumes the Fed is right in saying it has only two rate hikes to go and assumes the hints of unemployment in the labor market continue to grow so that the Fed has the liberty to back down from its inflation battle, and it assumes core inflation, which the Fed says hasn’t moved at all (and which is the number the Fed looks to), finally does as the Fed hopes it will and starts to wind back down. So far, the Fed has had to upwardly revise every projection it has made for what its top interest rate will be.

So, there is not much likelihood that things actually go better than what Powell is now projecting; however, if everything doesn’t cooperate with what Papa Powell says he and his buddies believe will happen, then … well, you do the math because, for this article, I’m just going to stay with what we actually know to date. The above is what we know about the Fed’s clearly stated plan and what we know about jobs. What do we know about the rest of the economic data that came in this week and what is it pointing to? Keep reading to find out.