Image: Marco Verch (Flickr)

Debt Servicing Costs are Rising for the U.S. Treasury – What Does that Mean for Investors?

The U.S. Treasury will be spending far more to service the nation’s debt with the recent increase in interest rates. This rise in borrowing costs could put a damper on government spending in other areas that more directly fuel growth. Each month the Treasury rolls (refinances) a large amount of its maturing debt at current rates; in the case of most maturities, the interest rate is more than double the level from a year ago.

 

The Situation

Spending by the U.S. Gov’t on interest in the fiscal year that began in October 2021 adds up to about $310 billion through the end of May. This is a 30% increase from the same period a year earlier, using data from the Treasury Department. The federal deficit has actually shrunk somewhat within the year, and higher debt servicing costs in the form of interest rates are an increasing expenditure for the U.S. at a time when other federal spending has many competing priorities.

Interest rates (as measured by the USTN 10 yr. benchmark) declined from October 2018 (3.22%) up until July 2020 (0.53%). It has been trending higher since then and is now equal to the October 2018 level (3.20%).

Image: U.S. Treasury 10 Year note Yield (Yahoo Finance)

Economic Impact

Analysts say an increase in the cost of the federal government’s borrowing could pull from spending on anticipated initiatives and add to the overall U.S. debt servicing paid for by taxpayers. This burden is projected to reach its highest-ever levels as a share of the economy over the next decade, according to estimates from the nonpartisan Congressional Budget Office. “Rising interest costs simply grow our debt and increase the burden on the next generation, forcing them to pay more for our past than for our future,” said Michael Peterson, chief executive of the Peter G. Peterson Foundation, a nonpartisan group that advocates for deficit reduction.

Treasury yields have been held down by extraordinary purchases by the Federal Reserve. This was ramped up after the 2008 financial crisis and was revved up again in response to pandemic efforts. The cost, in part, from some of these stimulative actions, have caused inflation levels to be running well ahead of rates paid on bonds. The Fed has announced they would be letting their yield-controlling bond purchases roll-off at a  specified pace, which will cause rates along the curve to move higher. Less money in the system and Treasuries drifting toward a more natural market rate will shift the entire curve upward. This shift is anchored at the Fed Funds overnight rate, which the Fed more directly orchestrates. The Fed has signaled it expects to notch up rates more in the coming months.

Since March, the Fed has raised the overnight Fed funds rate three times from near zero to a range between 1.5% and 1.75%. Most projections are for overnight rates to reach 3% to 3.50% by year’s end. Farther out on the curve, the 10-year treasury peaked as high as 3.50% this month and is currently (June 29) priced to yield 3.17%. The 10-year note is used as the benchmark from which lenders spread 30-year mortgage levels.

Treasury officials have indicated a large part of the increase in the government’s debt service costs so far this fiscal year has been tied to U.S. Inflation-Indexed Securities (TIPS). But as outstanding, lower-yielding securities are matured and replaced with higher-paying issues, the average interest rate across government securities gets locked in at higher levels. This will be gradual but impact government costs for an entire generation.

The Numbers

The U.S. has about $30 trillion in total public debt outstanding. As of late March, about 29% of outstanding Treasury securities were set to mature in one year or less. That debt, when refinanced, would quickly raise interest rate costs.

The Congressional budget office (CBO) has projected that in 2022, federal spending on net interest costs would reach $399 billion, compared with $352 billion in 2021. The average yield on the 10-year note from January through December they projected to be 2.4%, up from 1.4% last year.

Interest costs are expected to increase in each fiscal year through 2032 and total roughly $8.1 trillion over the next decade, which was completed in early March when interest rate forecasts were lower than today.

A CBO rule of thumb for scenario analysis uses a parallel shift of the curve upward by 0.50% to equate to $19 billion in higher interest costs over the year. Taking the scenario analysis out into the future, if the full curve of interest rates were 0.5 percentage points higher each year between 2023 and 2032, borrowing costs would be $1.3 trillion higher throughout the period.

Impact on
the Fed

The Fed holds a massive amount of securities it obtains through implementing monetary policy. Paul H. Kupiec, a senior fellow at the American Enterprise Institute estimates that, between December 31, 2021, and the end of May 31, 2022, the Federal Reserve lost $540 billion in market value on its massive portfolio of investments in Treasury bonds and mortgage securities. To put the loss in perspective, $540 billion is equivalent to 60 percent of the value of the Federal Reserve System’s entire asset holdings on September 1, 2008, just prior to the onset of the financial crisis.

Take Away

Markets participants have been hopeful that spending on many of the nation’s initiatives would significantly increase. This would provide opportunities to invest in infrastructure revamping, advances in health care, reduced carbon emissions, and other items laid out in the administration’s, American Rescue Plan.

Rescuing the country from higher and higher prices may put a damper on some of these initiatives, as higher debt servicing will take up a growing part of the budget as rates rise.

On the positive side, fixed income investors will receive higher interest payments which could stimulate and provide additional opportunities in other areas of the economy.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.gao.gov/blog/larger-federal-deficits-higher-interests-rates-point-need-urgent-action

https://www.wsj.com/articles/u-s-paying-more-to-borrow-as-fed-raises-rates-inflation-stays-elevated-11656165602

https://www.washingtonpost.com/business/2022/06/27/fed-rate-rises-interest-national-debt/

https://www.marketwatch.com/story/feds-daly-sees-another-big-hike-in-interest-rates-in-the-fight-against-inflation-11656101975

https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny

https://mises.org/wire/who-owns-federal-reserve-losses-and-how-will-they-impact-monetary-policy

https://www.whitehouse.gov/omb/briefing-room/2022/03/28/fact-sheet-the-presidents-budget-for-fiscal-year-2023/

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Inflation Will Give Way to Deflation But it Will Take Some Time Says Cathie Wood

Cathie Wood thinks we’re in a recession and said she admittedly underestimated the severity of inflation. The hedge fund manager, known for her optimism and bullishness on innovative and disruptive technologies, spoke on CNBC’s Squawk Box this morning (June 28) and backed off her usual balls-to-the-walls approach to investing in tomorrow’s technology. In fact, it was shocking to see her usual style of pushing through adversity and unrelenting advice that “truth will win out,” succumb to relent.

Instead, The Founder, CEO, and CIO of ARK Invest, which has seen portfolios under management shrink this year by as much as 66%, backed off. She even outdid the current mainstream pessimism saying the U.S. is already in an economic downturn. And while she had recently pinpointed deflation as the greatest risk to economic growth, she told the CNBC host she underestimated the severity and persistence of inflationary pressures.

“We think we are in a recession,” Wood said. “We think a big problem out there is inventories… the increase of which I’ve never seen this large in my career. I’ve been around for 45 years,” were some of the comments from the Wall Street veteran who will be 67 in November. Wood blamed the hot and dogged inflation on supply problems and the geopolitical crisis. “We were wrong on one thing, and that was inflation being as sustained as it has been,” Wood said. “Supply chain … Can’t believe it’s taking more than two years and Russia’s invasion of Ukraine, of course, we couldn’t have seen that. Inflation has been a bigger problem, but it has set us up for deflation.”

Wood said consumers are feeling the rapid price increases. She pointed to the University of Michigan’s Survey of Consumers, which showed a reading of 50 in June, the lowest level ever.

The traditional definition of a recession is two consecutive quarters of negative GDP. The U.S. experienced a negative quarter during Q1, so a second-quarter would officially define the current period as “in a recession.”

Gross Domestic Product, 2nd Quarter 2022 (Advance Estimate) will be released on July 28 at 8:30 AM. This first look at second-quarter growth will be the morning after the end of the two-day FOMC meeting and the accompanying announcement on monetary policy.

Cathie Wood, who is widely followed, especially by technology investors, remarked that her clients are mostly sticking with her, and money flow is positive into her funds. She attributes some of it to investors seeking diversification in a down market. ARKK had more than $180 million in inflows in June. “We are dedicated completely to disruptive innovation. “Innovation solves problems,” Wood said. “I think the inflows are happening because our clients have been diversifying away from broad-based benchmarks like the Nasdaq 100.”

Cathie Wood was early to put bitcoin in her funds and held high-flying names like Tesla and Zoom before they were on the radar of others. Lately, she has been accused of being out of touch. Most of her funds are well defined, leaving the discretion for the CIO to names, not broader sectors. The ARK Invest CIO may have found her hands tied by prospectuses and may continue to be challenged with this. But her economic calls are all her own, and she has backed way off what up to this point could have been seen as cheerleading economic releases and keeping her fingers crossed.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.cnbc.com/video/2022/06/28/ark-invest-ceo-cathie-wood-says-u-s-is-already-in-a-recession.html?jwsource=cl

https://www.cnbc.com/2022/06/28/ark-invests-cathie-wood-says-the-us-is-already-in-a-recession.html

https://www.bea.gov/news/schedule

https://www.marketwatch.com/story/cathie-wood-warns-u-s-is-already-in-a-recession-11656424710

https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

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Image: FOMC participants gather for a two-day meeting held on June 14-15, 2022. (Fed Reserve)

Will a Third Mandate be Added to the Fed’s Challenges?

The House of Representatives just passed a bill that would add to the Federal Reserve’s monetary policy mandates. Currently, the Fed’s dual mandate is to seek maximum employment and maintain stable prices. If H.R. 2543 passes the Senate, the Fed mandate would also include “exercise all duties and functions in a manner that fosters the elimination of disparities across racial and ethnic groups with respect to employment, income, wealth, and access to affordable credit.” 

With the current mandates, the central bank is thought to be able to act independently to achieve stable prices and maximum employment. However, the Federal Reserve is always accountable to Congress. As we saw in late June, The Fed Chair testifies and reports to Congress on how the Federal Reserve is managing policy. They can be quite critical at these hearings, and there is often significant disagreement about how the economy should be handled.

The House bill passed last week 215-207 with little media notice. But it deserves attention because it may add a new layer of difficulty in implementing monetary policy.

Among those in the House that voted the amendment down is Congresswoman Stephanie Murphy of Florida. In her statement, she wrote, “The Federal Reserve’s dual mandate for monetary policy is to pursue price stability and maximum employment. At a time when Americans are facing the highest rate of inflation in four decades, the Federal Reserve’s priority should be to combat inflation without causing undue harm to economic growth and employment. By giving the Fed a new mandate, the bill could divert the Fed from its main mission and therefore cause harm to the very people it seeks to help. Those who stand to benefit the most from successful Federal Reserve action—and to lose the most from unsuccessful Fed action—are working families, including communities of color, struggling to afford gas, groceries, and other necessities.”

Supporters of the effort look at the broader implications beyond monetary policy, “I was proud to support the Financial Services Committee’s legislation today and thank Chairwoman Waters for her leadership.  As we address inflation and work to bring costs down for American families and small businesses, Congress must ensure that Americans aren’t losing money as a result of discrimination in lending, ”  said House Majority Leader Steny Hoyer.

The White House, which does not always comment on legislation, has thrown its support behind the bill. “The Administration strongly supports efforts to promote equity for underserved communities and increase access to safe and affordable financial services, wealth, and economic opportunity for all

Americans.” Earlier this month the President met with the Fed Chairman Powell, promising not to interfere with Fed policy and leaving the Federal
reserve responsible for Fed policy and outcomes. The rare meeting between a Fed Open Market Committee (FOMC) chairman and a sitting President seemed to highlight the autonomy under which the Fed works to achieve its mandates. Biden openly told Powell prior to the closed-door meeting that addressing inflation was his “top priority” and added that his plan “starts with a simple proposition: respect the Fed.”

If passed by the Senate and signed into law H.R. 2543, would raise some challenges for the Federal Reserve. An example of the challenges could be that by stimulating to promote employment,  asset prices rise, which makes them less affordable; by not stimulating, employment can be lackluster.

We can see how the Fed is in a box now. If they fight inflation, they could weaken an economy to the point of causing a recession. If they don’t, inflation may continue to be a problem. If a third mandate is introduced, they would find themselves even further constrained by competing priorities. The Bill is now moving to the Senate. Sign up for Channelchek emails to stay updated on this and other important market-related information.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.warren.senate.gov/imo/media/doc/Final%20Federal%20Reserve%20Racial%20and%20Economic%20Equity%20Act%20One%20Pager2.pdf

https://www.federalreserve.gov/aboutthefed/files/the-fed-explained.pdf

https://www.wsj.com/articles/a-woke-mandate-for-the-federal-reserve-racial-equity-congress-house-joe-biden-11655659047

https://www.federalreserve.gov/faqs/why-is-it-important-to-separate-federal-reserve-monetary-policy-decisions-from-political-influence.htm

https://murphy.house.gov/news/documentsingle.aspx?DocumentID=2032

https://www.whitehouse.gov/wp-content/uploads/2022/06/HR-2543SAP.docx.pdf

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Image Credit: Frankieleon (Flickr)

US Household Saving Rate Vanishes, Credit Card Debt Soars

The United States consumption figure seems robust. A 0.9 percent rise in personal spending in April looks good on paper, especially considering the challenges that the economy faces. This apparently strong figure is supporting an average consensus estimate for the second-quarter gross domestic product (GDP) of 3 percent, according to Blue Chip Financial Forecasts.

However, the Atlanta Fed GDP nowcast for the second quarter stands at a very low 1.9 percent. If this is confirmed, the United States economy may have delivered no growth in the first half of 2022 after the decline in the first quarter, narrowly avoiding a technical recession.

The evidence of the slowdown is not just from temporary and external factors. Consumer and business confidence indicators present a less favorable environment than the expectations of an optimistic market consensus. According to the Focus Economics aggregate of estimates, the United States economy should grow a healthy 3.6 percent in 2022, helped by very strong third and fourth quarters, at 4.9 percent and 5.5 percent growth, respectively. The main driver of this surprisingly resilient trend is the unstoppable consumption estimates. However, there are important clouds on the horizon for the American consumer.

About the Author: Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020), Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and  Life in the Financial Markets (2014). Daniel is also a professor of global economy at IE Business School in Madrid.

We cannot forget that consumer figures have been relatively solid, but at the same time, there has been a collapse in saving, with the personal saving rate falling from 8.7 percent in December to a fourteen-year low of only 4.4 percent in April.

The United States personal saving rate is now 3.3 percent below its prepandemic level, and in early May, the University of Michigan consumer confidence index fell from 65.2 to an eleven-year low of 59.1, deep into recessionary risk territory.

The plummeting saving rate is deeply concerning. It proves that consumers are suffering from elevated inflation as real wages remain in negative territory. From April 2021 to April 2022, seasonally adjusted real average hourly earnings decreased 2.3 percent, according to the Bureau of Labor Statistics.

Put these two figures together—real average earnings down 2.3 percent and the household saving rate almost halved. Families are struggling, wages are dissolved by inflation and savings are being wiped out. Consumer credit card debt is almost at all-time highs. Balances rose to $841 billion in the first three months of 2022, according to data from the Federal Reserve Bank of New York.

We cannot forget that consumer figures have been relatively solid, but at the same time, there has been a collapse in saving, with the personal saving rate falling from 8.7 percent in December to a fourteen-year low of only 4.4 percent in April.

The United States personal saving rate is now 3.3 percent below its prepandemic level, and in early May, the University of Michigan consumer confidence index fell from 65.2 to an eleven-year low of 59.1, deep into recessionary risk territory.

The plummeting saving rate is deeply concerning. It proves that consumers are suffering from elevated inflation as real wages remain in negative territory. From April 2021 to April 2022, seasonally adjusted real average hourly earnings decreased 2.3 percent, according to the Bureau of Labor Statistics.

Put these two figures together—real average earnings down 2.3 percent and the household saving rate almost halved. Families are struggling, wages are dissolved by inflation and savings are being wiped out. Consumer credit card debt is almost at all-time highs. Balances rose to $841 billion in the first three months of 2022, according to data from the Federal Reserve Bank of New York.

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Powell Caught Between Competing Political Agendas and Economic Reality

Twice a year, the head of the Federal Reserve goes before the Committee on Banking, Housing, and Urban Affairs, of the U.S. Senate. The Chair delivers prepared remarks and then answers questions from members of the attending committees. Over the years, the Fed has gone from tightly guarding monetary policy plans to being as transparent as possible. In either case, as the nation’s top economist, they know if they say one wrong word during questioning, there can be significant shifts in the markets, and changes in all-around confidence globally. It’s perilous, and the challenge is even greater as they are economists that understand their role at a very high level, but they are taking questions from politicians that may have other priorities.

Chair Powell spoke about the overall economy, monetary policy, inflation, recession, and the terminal rate, or the highest rate expected during this tightening cycle.  He was unequivocal in his resolve to bring down inflation. In his opening remarks he began with, “At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.”

The Federal Reserve Chair believes it is possible to effectively reel in inflaton without entering a recession, but it became clear through the question and answer session that he would allow a recession if that is the solution to the inflation battle.

Overall Economy

Inflation remains well above the Fed’s longer-run goal of a modest 2%. In the 12 months ending April 2022, Powell pointed out that inflation, as measured by the PCE deflator, rose 6.3 percent. He indicated he believes the pace has held and that consumer demand is strong. The supply problems he admitted have been larger and longer-lasting than expected. He also noted that price pressures have spread to a broad range of goods and services. The surge in crude oil prices and other commodities from Russia’s invasion of Ukraine is also boosting prices for fuel and is placing even greater upward pressure on inflation.

Additionally, new Covid-19-related lockdowns in China will add to global supply problems.  Powell pointed out that the U.S. is not alone in dealing with inflation,  prices also increased rapidly in many foreign economies.

He believes GDP measured growth which was negative over the first quarter has picked up during the second quarter. Consumption spending remains strong, and the job market is on firm ground. He said he sees signs of business fixed investment slowing, and activity in housing softening. These were not characterized as bad during his testimony as tempered demand can better match supply and lead to a sustainable balance.

The Fed takes particular comfort with strong labor markets, it gives them room to work. The unemployment rate is near a 50-year low, job vacancies are at historical highs, and hourly earnings are up. Labor demand is very strong, while labor supply remains subdued, with the labor force participation rate little changed since January.

Monetary Policy

The Fed’s monetary policy actions are guided by its mandate to promote maximum employment and stable prices in the U.S. economy. Fed Powell said in his prepared remarks, “My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation. We are highly attentive to the risks high inflation poses to both sides of our mandate, and we are strongly committed to returning inflation to our 2 percent objective.”

In orchestrating lower inflation The Fed chair said he expects further rate increases will be appropriate, and the pace of the increases will depend on incoming data and outlook. During the last FOMC meeting, the Fed hiked the overnight lending rate by .75%, this was higher than earlier Fed guidance, it is presumed that increasing inflation conditions drove the higher than foretold increase. It sounds as though Powell is warning that they will continue to do what’s appropriate when they feel it’s appropriate —  situations change.

“Setting appropriate monetary policy in this uncertain environment requires a recognition that the economy often evolves in unexpected ways. Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We, therefore, will need to be nimble in responding to incoming data and the evolving outlook. And we will strive to avoid adding uncertainty in what is already an extraordinarily challenging and uncertain time. We are highly attentive to inflation risks and determined to take the measures necessary to restore price stability. The American economy is very strong and well-positioned to handle tighter monetary policy,” Powell said in opening remarks.

 Inflation

The Federal Reserve Chair believes it is possible to effectively reel in inflation without entering a recession, but it became clear through the question and answer session that the Fed places inflation concerns and the impact on the economy, ahead of recession risks.

As part of the discussion, members of Congress, especially those with more conservative leanings, hammered the inflation issue, pointing to stimulus spending sanctioned by the White House, and energy decisions that have reduced supply. Conservative members of the Senate also criticized the Fed for delaying drastic action on curbing inflation.

Other members of Congress dwelled more on outside issues that have impacted inflation and asked whether interest rates could have an impact on the increasing price of food, and energy. “A Fed increase won’t bring down these prices,” said Sen. Elizabeth Warren. “And why? Because rate hikes won’t make Vladimir Putin turn his tanks around and leave Ukraine. Rate hikes won’t break up monopolies, rate hikes won’t straighten out the supply chain or speed up ships or stop a virus that is still causing lockdowns in some parts of the world.”

Powell doesn’t believe the economy has “seen the full effect” of Covid-19 lockdowns.

 Recession

Some members of Congress see a political advantage in faster monetary-policy tightening. For some, a more hawkish Fed up front could put out the fire sooner and reduce damage from inflation. This would likely mean an upfront recession. For those that can’t resist viewing any activity as political, the November mid-term elections may be won or lost on the pace of the economy and the rate of inflation. The party in power in both Congress and the White House would not benefit from rising rates and a weakening economy.

For Powell’s part, what is most telling is that he did not seem overly concerned about the risk of slower or negative economic growth. He continued to emphasize inflation, fighting the price increases, and doing everything possible to avoid prolonged weakness while prioritizing bringing inflation down to a 2% target.  

 Terminal Rate

At Wednesday’s testimony, Powell estimated the longer-run neutral rate for Fed funds should be about 2.5%. He also continued to emphasize that in his estimate it would be appropriate to raise rates to a restrictive level to curb inflation. There was some talk about the Taylor Rule, which is a theoretical formula that suggests the Fed should adjust overnight rates by an amount equivalent to the spread between measured inflation and the desired inflation rate (presumed to be 2%). To this, the Fed’s Chair indicated that economics is more of an art than science. The current situation according to Powell is unique and has its own dynamics that include the war in Ukraine supply issues, Covid-19 lockdown effects, and stock and bond markets that benefitted from injections to stimulate during the pandemic.

Paul Hoffman

Managing Editor, Channelchek

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Image Credit: Federal Reserve (Flickr)

The FOMC’s Big Decision on Rates

The Federal Open Market Committee (FOMC) voted to raise overnight interest rates from a target of 0.75%-1.00%. to the new level of 1.50% – 1.75%. The monetary policy shift in bank lending rates was greater than originally telegraphed by the Fed, but in line with many Fed watchers’ expectations that were swayed after the CPI release last Thursday. The Wall Street Journal and many primary bond dealers increased their forecast on Monday of this week to a 75bp increase from 50bp (nearly double the target rate at the time). The early reaction from the US Treasury 10 year was to increase by 2 basis points to yield 3.43% after trading 8bp lower most of the day (2:15pm EST).

The statement accompanying the policy shift also included a discussion on U.S. economic growth being stronger in the second quarter compared to the first. The central bank said overall economic activity appears to have picked up after edging down in the first quarter. Also, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.

The release discussed inflation risk and shaped an understanding of the many places higher prices are coming from. The release stated, “The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions.” It added, “The Committee is highly attentive to inflation risks.”

There was no change in quantitative tightening. It will follow the exact schedule outlined earlier. For Treasury securities, the cap of securities allowed to roll off the balance sheet will be set at $30 billion per month and, after three months, will increase to $60 billion per month. The decline in holdings of Treasury securities under this monthly cap will include Treasury coupon securities and, to the extent that coupon maturities are less than the monthly cap, Treasury bills.

For agency debt and agency mortgage-backed securities, the cap will initially be set at $17.5 billion per month beginning June 1, and after three months will increase to $35 billion each month.

Take-Away

Higher interest rates can weigh on stocks as companies that rely on borrowing may find their cost of capital has increased. The risk of inflation also weighs on the markets. Additionally, investors that would prefer the “known” result of investing in the bond market or other interest rate products may pull assets out of stocks if they are attracted by the fixed income alternative. Investor money leaving the stock market reduces demand.

The next FOMC meeting is also a two-day meeting that takes place July 26-27. If the pace of employment and overall economic activity is little changed, the Federal Reserve is expected to again raise interest rates.

Paul Hoffman

Managing Editor, Channelchek

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Five Things to Know About the Fed’s Interest Rate Increase and How it Will Affect You

The Federal Reserve is expected to raise interest rates for the third time this year, on June 15, 2022, as it seeks to counter inflation running at the fastest pace in over 40 years. The big question is how much it will lift rates. Before the latest consumer prices (CPI) report on June 10, most market watchers and economists expected a 0.5-percentage-point hike (50 basis points). But now, more are anticipating a 0.75-point increase – which would be the largest in nearly 30 years. The risk is that higher rates will push the economy into a recession, a fear aptly expressed by the recent plunge in the S&P 500 stock index, which is down over 20% from its peak in January, making it a “bear market.”

What does this all mean? Brian Blank, a finance scholar who studies how businesses adapt and handle economic downturns, was asked to explain what the Fed is trying to do, whether it can succeed and what it means for you. His thoughts and advice are packaged neatly in answers to five questions many people are asking.

 

1. What is the Fed Doing and Why?

The Federal Open Market Committee, the Fed’s policymaking arm, is currently pondering how much to raise its benchmark interest rate. The stakes for the U.S. economy, consumers and businesses are high.

In recent weeks, Fed Chair Jerome Powell has signaled that the U.S. central bank would likely increase the rate by 0.5 percentage point to a range of 1.25% to 1.5%. But markets and Wall Street economists are now anticipating a larger 0.75-point hike because the May consumer price data suggest inflation has been unexpectedly stubborn. Some Wall Street analysts suggest a 1-percentage-point hike is possible.

Since the latest consumer price index data came out on June 10, the prospect of a faster pace of rate hikes has led to financial markets plunging 5%. Investors worry the Fed may slow the economy too much in its fight to reduce inflation, which if left unchecked also poses serious problems for consumers and companies. A recent poll found that inflation is the biggest problem Americans believe the U.S. is facing right now.

 

2. What is the Fed Trying to Achieve?

The Federal Reserve has a dual mandate to maximize employment while keeping prices stable.

Often policymakers must prioritize one or the other. When the economy is weak, inflation is usually subdued and the Fed can focus on keeping rates down to stimulate investment and boost employment. When the economy is strong, unemployment is typically quite low, and that allows the Fed to focus on controlling inflation.

To do this, the Fed sets short-term interest rates, which in turn help it influence long-term rates. For example, when the Fed lifts its target short-term rate, that increases borrowing costs for banks, which in turn pass those higher costs on to consumers and businesses in the form of higher rates on long-term loans for houses and cars.

At the moment, the economy is quite strong, unemployment is

low, and the Fed is able to focus primarily on reducing inflation. The problem is, inflation is so high, at an annualized rate of 8.6%, that bringing it down may require the highest interest rates in decades, which could weaken the economy substantially.

And so the Fed is trying to execute a so-called soft landing.

 

3. What’s a ‘Soft Landing’ and is it Likely?

A soft landing refers to the way that the Fed is attempting to slow inflation – and therefore economic growth – without causing a recession.

In order to stabilize prices while not hurting employment, the Fed is expected to increase interest rates rapidly in the coming months – and it currently forecasts rates to be at least 1 percentage point higher by 2023. It has already lifted its benchmark rate twice this year by a total of 0.75 percentage point.

Historically, when the Fed has had to raise rates quickly, economic downturns have been difficult to avoid. Can it manage a soft landing this time? Powell has insisted that its policy tools have become more effective since its last inflation fight in the 1980s, making it possible this time to stick the landing. Many economists and other observers remain uncertain. And a recent survey of economists notes that many anticipate a recession beginning next year.

That said, the economy is still relatively strong, and I’d say the the odds of a recession beginning next year are still probably close to a coin flip.

 

4. Is there Any Way to Tell What the Fed Might do Next?

Each time the Federal Open Market Committee meets, it seeks to communicate what it plans to do in the future to help financial markets know what to expect so they aren’t taken by surprise.

One piece of guidance about the future that the committee provides is a series of dots, with each point representing a particular member’s expectation for interest rates at different points in time. This “dot plot” has previously indicated that the Fed will raise interest rates to 2% this year and 3% soon.

Given the inflation news since the last meeting, investors are now forecasting an even faster pace of rate hikes and expect the target rate to be over 3% by 2023. Long-term interest rates, such as U.S. Treasury yields and mortgage rates, already reflect these rapid changes.

And so investors and economists will be watching to see how the Fed’s dot plot changes after it announces its rates decision on June 15, which will determine how quickly committee members expect to lift interest rates in the coming months.

 

5. What Does this Mean for Consumers and the Economy?

Interest rates represent the cost of borrowing, so when the Fed raises the target rate, money becomes more expensive to borrow.

First, banks pay more to borrow money, but then they charge individuals and businesses more interest as well, which is why mortgage rates rise accordingly. This is one reason mortgage payments have been rising so rapidly in 2022, even as housing markets and prices start to slow down.

When interest rates are higher, fewer people can afford homes and fewer businesses can afford to invest in a new factory and hire more workers. As a result, higher interest rates can slow down the growth rate of the economy overall, while also curbing inflation.

And this isn’t an issue affecting just Americans. Higher interest rates in the U.S. can have similar impacts on the global economy, whether by driving up their borrowing costs or increasing the value of the dollar, which makes it more expensive to purchase U.S. goods.

But what it ultimately means for consumers and everyone else will depend on whether the pace of inflation slows as much and as quickly as the Fed has been forecasting.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It was written by and represents the research-based opinions of D. Brian Blank, Assistant Professor of Finance, Mississippi State University.

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The Fed May be Orchestrating for Both Rates and Stocks to Climb Following the FOMC Meeting

Fed Chair Jerome Powell is following in the footsteps of the two Fed heads that came before him. That is to say, he is very transparent about his future actions. The Fed hasn’t made a surprise move in over 20 years. Remarkably they have telegraphed most everything in advance. So it came as a surprise to see broker-dealer shops like Goldman Sachs and Jeffries say they expect the Fed to tighten by 75bp rather than the 50 bp that Powell reiterated just a week ago. Do they know something, or is this conversation part of orchestrating an orderly return to 2% inflation without roiling the stock market?

We all want the Fed to succeed. Annual consumer price increases of 6%-9% would put a lot of households in jeopardy. While the stock market is not a direct mandate of the Fed, a market decline of an additional 10% would place retirement portfolios and businesses in harm’s way hurting even more households.

Since the FOMC last met and raised rates 50bp on May 2^nd, Powell has consistently indicated that we should expect 50 basis points following the June meeting (June 15^th). In the last set of minutes and through public engagements of other Fed Governors, there are indications that some would prefer a more aggressive pace of tightening. I’ve been paying close attention to FOMC meeting outcomes since the end of Paul Volcker’s last term, this is what I know; the Fed Chair does not get outvoted by other members. And, this Fed Chair hasn’t ever acted to surprise the markets. There have been times when Powell could have moved sooner or more aggressively than previously stated, especially in the early days of the pandemic, but he has instead given lead time for the markets to adjust. He showed the same patience with tapering.

After new inflation data was released last Thursday in the form of a CPI report, a likely 75bp rather than 50bp hike is being reported on all the major financial outlets. This would not seem very likely, even if the FOMC members feel they are behind the curve. The reason is simple; they want the market to trust what the Fed tells them. However, the other tool the Fed uses to control markets and even interest rates is very strong. It’s referred to as jawboning.

A more likely outcome of tomorrow’s meeting is a 50bp rate move with a much firmer message. If the desired outcome is to apply the economic brakes more firmly, not scare the stock market, and keep to its word, the FOMC is more likely to go 50bp and talk about 75bp in the message and messages following the meeting.

Consider this, a 50bp move after the market now expects 75bp is likely to cause investors to rejoice. Perhaps even cause a substantial rally.  A more hawkish verbal stance going forward would cause the bond market to take heed and move up in yield, and the door would then be open to go 75bp in late July after the stock market already becomes accustomed to the idea. In fact, market participants would remember the rally after the June meeting and be less fearful of future tightening moves.

Is this just a fantasy? It’s another forecast to consider; in my experience, it makes more sense than anything else. It does imply the Fed may have intentionally let a 75bp expectation slip to accomplish a goal – it would not be the first time.

Paul Hoffman

Managing Editor, Channelchek

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Inflation at 40-Year High Pushes Fed to Get More Aggressive – the ‘Beveridge Curve’ Should Give it Courage to Act

Inflation surged at the fastest pace in over 40 years in May 2022, pushing the Federal Reserve toward a more aggressive pace of interest rate increases to slow it down. While there’s concern it could cause unemployment to spike, a little-known economics indicator suggests the Fed can do so without causing too much economic pain.

The Fed has already raised interest rates twice in recent months – including a half-point hike in early May – in an effort to tame inflation. Yet the consumer price index rose to an annualized rate of 8.6% from 8.3% in April, the Bureau of Labor Statistics reported on June 10. That’s above economic forecasts of 8.2% and the highest reading since December 1981, which is the tail end of the last time the U.S. economy wrestled with ferocious inflation.

In other words, the actions by the central bank so far don’t appear to have had much of an effect.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It was written by and represents the research-based opinions of Veronika Dolar, Assistant Professor of Economics, SUNY Old Westbury.

But lifting rates further could come at a cost. Economists fear that raising rates too fast and too steeply would likely put the brakes on economic growth, resulting in an economic recession and soaring unemployment. Yet as an economist who studies inflation, I believe there are several reasons the Fed can more fiercely fight inflation without worrying so much about unemployment.

Slow at the Switch

Economists and investors have been urging the Fed to get more aggressive for many weeks.

Their main argument is that soaring inflation is at least partly the fault of the Fed – and the federal government. U.S. policymakers pursued very aggressive stimulus programs to cushion the economy-pummeling effects of COVID-19. The roughly US$4.6 trillion in stimulus money eventually led to an increase in overall demand for goods and services, which drove up prices at the same time that supply chains were a mess.

Compounding matters, Russia’s invasion of Ukraine has caused a spike in oil and gas prices.

Meanwhile, the Fed has been accused of being slow to take policy actions that could have helped tamed inflation sooner. Even the 0.5 percentage point rate increase in May seems weak in retrospect.

Reasons for Caution

In the Fed’s defense, it has good reason to be cautious. The Fed has what is known as a dual mandate to not only keep inflation in check but to promote maximum employment.

The trouble is, actions intended to reduce inflation can cause unemployment to rise.

And so the Fed has been focused on executing a so-called soft landing, in which it raises interest rates enough to slow inflation but not so much it sends the economy into recession – which would likely result in fewer job vacancies and more Americans without work.

But I think the Fed now has two big reasons to throw its caution to the wind.

Introducing the ‘Beveridge Curve’

The first is what the latest inflation data tells us. Runaway inflation is terrible for an economy, and very painful for consumers, and so the Fed has no choice but to bring it down at whatever cost.

The other has to do with what is known as the Beveridge curve, a tool economists use to analyze the labor market and one increasingly being monitored by Fed Chair Jerome Powell and others.

The Beveridge curve looks at the statistical relationship between the level of unemployment and the number of open job vacancies. The idea behind this curve is pretty straightforward: When there are many unfilled vacancies, the labor market is extremely tight, and it is easy to find work, leading to an extremely low level of unemployment. On the other hand, in a slack market, the number of vacancies is low and it is more difficult to find jobs and the unemployment is high.

In May, there were 11.5 million job vacancies in the U.S. for 6 million unemployed people. This nearly 2-1 ratio is wildly high – the highest ever recorded. In contrast, before the pandemic, when the labor market was in very solid shape, there was one vacancy for every two unemployed people. The Beveridge curve uses rates, so it currently shows a 7.3% job opening rate over a 3.6% unemployment rate.

Historically, a drop in job openings – prompted by a slowing economy, for instance – corresponds with a rise in unemployment, and vice versa. But the pandemic has changed the existing pattern dramatically, and it looks as if unemployment is less responsive to changes in the job opening rate. This means the Fed could get more aggressive about hiking interest rates to curb inflation without worrying so much that a drop in job vacancies due to an economic slowdown will cause unemployment to jump dramatically.

That said, we should also keep in mind that the latest numbers represent a lagging indicator. It takes time for the Fed’s policies to be seen in the data, and for all we know the rate hikes are already having an effect.

Still, I believe the Fed has a strong case for more aggressive action – so don’t be surprised if the U.S. central bank lifts rates by 0.75 percentage point at its next meeting in mid-June. That would be the biggest increase since 1994.

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As Fed Promises to Orchestrate a Painful Bear Market for Bonds, Stocks Could Benefit

Occasionally I catch conversations on TV, in the press, and on blog sites questioning the Fed’s resolve to fight inflation. Many still wonder if an ongoing weak stock market will cause Chairman Powell to temper his proposed tightening pace. The Fed actually has no official concern over stock prices; however, it does formally try to maintain the stability of the financial system and contain potential crises. Since the value of the financial markets impacts wealth felt by households and capital available for businesses, an argument can be made that sinking the stock market runs counter to one of its three mandates. The fed’s other two mandates are to manage inflation and supervise and regulate the banking system.

This conversation came up the other day as I heard from my son-in-law after he was being advised to allocate more money into fixed-income investments and less to stocks. The reason given by his big-name advisor is that “stocks are entering a long-term bear market.” I personally don’t know if stocks are entering a prolonged bear market or not, but neither does his advisor, such things are not knowable except in the rear view mirror — months from now. 

Source: Koyfin

What is knowable is that the institution that controls the most investments on the planet has stated they are going to crush bond prices. Actually what they said was they will be raising interest rates for the foreseeable future until they bring inflation to less than one-fourth of where it is today. Higher rates are mathematically the exact same as crushing bond prices. And the Federal Reserve has an excellent record of keeping its promises over the past two decades. Transparency and clarity while doing exactly what they say they will do have been the Fed’s M/O under Bernanke, Yellen, and now Powell.

Why then, with negative returns like we see in the chart above, and promises that we are only at the beginning of the bond bear market would an advisor suggest interest-bearing securities? If the Fed does nothing you make 3%, if they do as promised you could easily lose 10% or much more in value. 

At the start of 2022, the 10-year US treasury bond (UST10) had a yield of 1.70%, as of Friday (June 10) it hit 3.15%, which calculates to over a 13.3% decrease in price. Inflation was reported this week to be 8.60%, since we now have had a half year’s worth of data to know that inflation isn’t transitory, bond buyers will require a return of at least future expectations of inflation as their return. Is double the current yield of UST10 within the realm of possibilities? If inflation does not show signs of dropping dramatically it would be a historical oddity if it doesn’t rise to compensate investors for any loss in purchasing power while their money is tied up. 

My son-in-law showed me the exact options that were recommended to him, they were bond funds, which have an even greater set of concerns, including taxes, coupon payments, and total return. I came to realize that I am making an argument for stocks. I’m not bullish on the stock market, there are companies I like, and industries that I’m exposed to, but the market as a whole mid-year 2022 is more uncertain than normal.

The returns shown above are for various bond proxies. Inflation-linked bonds are down 6.60% which means they have underperformed inflation by 15.2%. The poor retiree that bought these has reduced their purchasing power by over 15%. Municipal bonds are down a little more than TIPS, but not as much as government bonds which is interesting since the credit rating of US Treasuries is better. US Treasuries should continue to underperform as the Fed is conducting quantitative tightening along with monetary tightening. This directly impacts treasuries to the tune of  $30 billion fewer held by the Fed each month for each June, July, and August. Then in September, they will begin reducing their treasury holdings by $60 billion each month. Hundreds of billions fewer treasuries will be held by the Fed by year-end, every dollar in par value looking for a new buyer. The treasury lost its biggest customer. 

The last on this list is an ETF I used as a proxy for corporate bonds. Corporate bonds have been loosely tracking the stock market. Up in price when stocks are up, down when stocks are down. Corporates are quoted off their similar maturity treasury (spread to treasury yield), so the overall downward pressure on treasuries is a massive headwind for corporates even if stocks should begin to take flight in the second half of the year. The additional concern with the price movement in corporates is back when rates approached were near 1% in treasuries, many fixed-income buyers, including institutions and retirees, took on more risk to get more yield. As treasury yields rise, they can upgrade the overall credit quality of their portfolio. 

Take Away

If we listen to what the Fed is telling us, and they have given us no reason not to trust them, bond yields will rise. Investors, particularly those in ETFs and bond funds, receive price changes as their return. When interest rates rise, prices go down. So far this year prices have sunk over 10% in US Gov’t bonds, and over 6.50% in TIPS, so-called Treasury Inflation-Protected Securities.

Anyone with money they want to invest that is avoiding the stock market or other asset classes like real estate, or commodities should consider that the bond market is the only asset class the very reliable Fed has told us they plan to beat up. A more advisable plan would be to selectively monitor companies and industries outside of fixed-income while they are cheaper than they have been in a while. Use Channelchek as a resource for evaluating small and microcap names, if you haven’t signed up for access to research, video content, and related articles here is the link to do it for free. 

Paul Hoffman

Managing Editor, Channelchek

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Source

www.koyfin.com

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Belt Tightening Not Necessary as Top Strategist Sees No Long-Term Economic Malaise

The possible long-term economic decline that the market fears may be unwarranted, says a top strategist at JPMorgan Chase. Most importantly, he backs his case up with compelling data. This comes just before the economy has 21 days to prove it is not in a recession. As a reminder, the textbook definition of a recession is two consecutive quarters of economic growth as measured by GDP. The GDP growth rate for the first quarter of 2022 is reported to have shrunk by 1.5%. As we approach the end of the second quarter, the economy seems to continue to fade. Since investors, workers, and business owners all have a stake in the economy’s overall health, they may take comfort in the projection of Mike Bell, a global market strategist at JPMorgan Asset Management, on the future of the U.S. economy.

What He Said with Context

“Our base case is not that we get a recession in the US in the near term,” Mike Bell, the global market strategist at JPMAM said at a conference on Wednesday. Bell explained the key economic ingredient that reduces the chance of prolonged decline in the US economy is that Americans are harboring higher than usual amounts in savings. This level of savings grew during the pandemic-economy. The post-pandemic economy, Bell believes, will also benefit as this will help prevent price shocks with high inflation.

The global market strategist backed up his argument, using a Chase Bank homegrown chart showing deposits. JPMorgan Chase is the world’s sixth-largest bank, and the largest in the U.S.

Consumer Savings Increase

Internal JPMorgan data demonstrates Americans have built up a cushion of savings. The statistics show that households have double the amount of savings they had at the start of the pandemic (using February 2020 as base). Discussing the above chart, Bell pointed out, “See in the U.S. how much the stimulus checks boosted savings, particularly for the lower income group,” and continued, “Part of the reason we had a lot of booming economic growth and inflation over the last year was that some of that got spent. But they’re still sat, on average, on somewhere like double the amount of savings they had at the beginning of the pandemic.” He believes the consumer will continue to consume and not retrench to a level tha causes severe economic impact.

However, Bell said there’s still a chance the Federal Reserve raises interest rates so far it would trigger a recession. And he said central bankers and finance ministers face a trade-off. If there’s no recession, then inflation is likely to stay above the central banks’ 2% target for a lengthy period.

Take Away

Economics is not an exact science. Most economists are accused of saying, “on the one hand this, on the other hand, that…” There are so many inputs, that predicting a month out is far more difficult than predicting the weather a month out. And no one expects any weatherman to be correct.

The global strategist at JPMorgan Chase is using insight that is different than those clamoring about inflation, a tight job market, or interest rates. Investors may benefit from understanding the more positive data and crossing that with everything else they are digesting. In this case, the thought is that the consumer won’t retrench because they do not have to. Their savings is above previous periods.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.doughroller.net/banking/largest-banks-in-the-world/

https://markets.businessinsider.com/news/stocks/us-recession-unlikely-jpmorgan-prediction-consumer-savings-stimulus-economy-slowdown-2022-6

https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/notes-on-the-week-ahead/

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Michael Burry Tweets About the Weak Dollar While Mainstream News Discusses Dollar Strength

The US Dollar ($USD) has been strengthening against most major currencies of late. But, it can be argued, the currency strength directly against other currencies may not be a useful test for investors or consumers. Michael Burry, the fund manager of “The Big Short” fame, took to Twitter Tuesday to transform this talk of a stronger dollar. His tweet argues that those thinking the $USD is strong are using the wrong yardstick. US currency, he suggests, is only strong on a relative basis to other weakening currencies, and rampant inflation is actually eroding its purchasing power and its value.

Cheeseburger in Pandemonium

Burry’s words are reminiscent of The Big Mac Index. This is a measure lightheartedly created in 1986 by The Economist magazine to show currency misalignment between nations using a Macdonald’s menu item as the control. Over 36 years, it has devolved into a more simplified version called Burgernomics. Burgernomics shows the change in a currency’s direct purchasing power and, therefore, value change based on the cost of a cheeseburger.

Burry tweeted on June 7th, “When you see mention of
the strong dollar, the almighty dollar, please remember this is only in
relation to other fiat currencies,” he said. “The dollar is not at all
strong, and it is not getting stronger. We all see it every single day in
prices of everything.” Burry has been very vocal since early 2020 about his concerns about the economic impact of steps taken at all levels in Washington.

Through May and continuing into June, the US dollar, measured against other currencies, hit 20-year highs. Its accelerated strength against other currencies is said to demonstrate its appeal as a haven in a volatile world. It also has gained natural strength from rising interest rates available in dollar-denominated assets.

Source: Koyfin

Burry’s point is that a dollar may be worth more in euros or yen than before, but it buys far less due to the soaring prices of food, gas, housing, and many other goods and services. The expression “picking the cleanest dirty shirt” was used by many economists after 2008 to explain why foreign assets were invested in the US despite US troubles. The expression doesn’t suggest the US economy was at all good, it instead emphasizes that it was just best.

Source: Twitter

This thinking is not out of line with another widely followed investor, Warren Buffett. At the Berkshire Hathaway annual meeting, the Oracle of Omaha was quoted as saying. “Inflation swindles the bond investor … it swindles the person who keeps their cash under their mattress, it swindles almost everybody.”

Further Warnings from Burry

Burry, who is known to go on a tweeting frenzy only to delete them by day’s end, has left the above tweet available on his account. He recently highlighted that Americans are saving less, borrowing more, and could virtually exhaust their savings before the end of this year. He explained, that trend threatens to slash consumer spending and pile more pressure on corporate earnings.

Take Away

The well-followed hedge fund manager and founder of Scion Asset Management, LLC took to Twitter to give a different view than most often shown in financial news. Burry had frequently called out the economic cheerleaders and irrational speculation in the markets during the pandemic. He once discussed at length with Bloomberg how the reaction to coronavirus would eventually be worse
than the disease. He has compared
index funds to the real estate crisis. And he also bemoaned the “greatest speculative bubble of all time in all things” last summer, and warned owners of meme stocks and cryptocurrencies that they were headed towards the “mother of all crashes.”

He is never on CNBC or FOX Business News, but his thoughts and tweets are worth paying attention to. Channelchek will selectively highlight those thoughts when they seem relevant to our subscribers.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.economist.com/big-mac-index

https://www.reuters.com/business/buffett-says-inflation-an-issue-berkshire-it-swindles-almost-everybody-2022-04-30/

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Powell is Told by President that He is the Face of Inflation

President Biden made clear on Tuesday (June 1) that Federal Reserve Board Chairman Jerome Powell is the person responsible for handling the inflation fight. Inflation had hit a 40-year high this year while GDP retreated, yet jobs remain strong. The Fed’s new quantitative tightening and Fed Funds increases run the risk of spurring a recession. The President’s message seems to have been Powell’s in charge of the outcome. The rare meeting between a Fed Open Market Committee (FOMC) chairman and a sitting President would seem to highlight the importance of allowing the nation to understand there’s a separation of powers when it comes to the economy. Biden openly told Powell prior to the closed-door meeting that addressing inflation was his “top priority” and added that his plan “starts with a simple proposition: respect the Fed.” This places Powell in the national spotlight as being the face of whatever comes next.

Biden’s top White House economic adviser, Brian Deese, held a press briefing after the meeting related to the Fed’s mission to reel in price spikes. A reporter asked Deese if he thought the Fed has moved too slowly on inflation. The response takes responsibility away from the White House; Deese said, “what the President is doing is acknowledging and underscoring the pivotal role that the Fed plays institutionally and that monetary policy plays in the process of bringing prices down.”

This is the second effort this week to calm discussions about what has been unfolding economically. The President published an op-ed in the Wall Street Journal on Tuesday. The op-ed discussed inflation as well as the  $2 trillion Build Back Better initiative, which stalled in Congress because of its expected impact on inflation, lowering the high cost of shipping, renewable energy subsidies, a social spending initiative, raising taxes, and deficit reduction. Biden also wrote that “the Federal Reserve has a primary responsibility to control inflation” the 46^th President then spoke of his efforts, including releasing oil from the national strategic reserve to lower gas prices.

The annual US inflation rate declined slightly to 8.3% in April after hitting a 40-year annual high of 8.5% in March, according to the CPI report released by the Bureau of Labor Statistics. Meanwhile, a poll released last month by CBS found that 69% of US adults disapprove of Biden’s handling of inflation. Separating oneself in the public’s eye from an economy that is fraught with the kind of risk that voters dislike, or even marrying oneself to strong economies, is what Presidents have done through the years.

Does the intent to show separation suggest the Administration fears there may be a hard landing? Lower inflation and sustainable growth can be considered building back better. The economic pain to get there, timed with the mid-term elections, may be the biggest concern addressed this week.

Let us know what you think, comment under this article on Twitter.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.whitehouse.gov/build-back-better/

https://www.wsj.com/articles/my-plan-for-fighting-inflation-joe-biden-gas-prices-economy-unemployment-jobs-covid-11653940654?mod=opinion_major_pos6&mod=article_inline

https://nypost.com/2022/05/31/joe-biden-hands-inflation-response-to-jerome-powell/

https://www.washingtonpost.com/us-policy/2022/05/31/inflation-economy-timeline/

https://www.cnsnews.com/blog/michael-w-chapman/cbs-news-poll-51-us-adults-say-biden-incompetent

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