Complicated, somewhat contradictory economic signals in the past few days show that big-spending lawmakers are putting the Federal Reserve Board in an increasingly tough position. Unless President Trump and Congress suddenly demonstrate fiscal discipline, this autumn’s economy could be at least as unsteady as last fall’s was.
Conventional wisdom says the Federal Reserve should reduce interest rates when retailers are closing and when consumer spending slows. Conventional wisdom says the Fed should maintain interest rates or consider increasing them if inflationary pressures rise. Well, this week come reports that all three things are happening at once, thus giving extremely mixed signals to the Fed.
USA Today reports that a “retail apocalypse” is occurring, such that “six months into 2019, there already have been 20% more store closing announced than in all of 2018,” with 7,000 closures already completed or in the works and another 5,000 quite likely. So does that mean the economy needs juicing via reduced interest rates?
Not if we look at inflation. Prices have been quiescent for years, but that may be changing. The CNBC headline says it all: “U.S. core inflation posts biggest gain in nearly 1½ years.” There were “strong increases in the prices for apparel, used cars and trucks, as well as household furnishings,” and also hikes in costs for health care and rents. So does that mean the Fed needs to maintain or even boost rates to fight inflation?
Not if we look at consumer spending among the part of the population most vulnerable to changes in economic winds. This time it’s the Bloomberg headline that tells the tale: “Bottom 50% of consumers are showing signs of weakness.” Household debts, student loan debts, credit-card delinquencies, and problems obtaining credit all are on the rise. Message to the Fed: Cut interest rates.
Trim the rates. Boost the rates. Trim the rates. Two out of three indicators say “trim.” Unfortunately, there’s a fourth economic report that argues in the other direction. For at least half a day, Drudge had it plastered in huge letters across his screen: “Federal spending smashes records! Budget deficit rises 23%!” When federal deficits and debt are rising, the government must borrow the money from somebody. One way or another, that huge demand for credit, just like any other demand in a free-market system, pushes up prices for the commodity demanded – in this case, credit. In other words, it tends to push interest rates higher. If not that, then debts are paid be devaluing the currency – meaning inflation.
That’s why the Fed faces a conundrum. Even as retailers and lower-income consumers are feeling the pinch, the Fed is at risk of letting the inflation genie back out of the bottle if it reduces interest rates.
The solution, to this problem as well as for many others, is for Congress and the president to stop being profligate with taxpayer dollars. Stop the federal spending increases. Stop them immediately. If deficits are reduced and federal debt stops rising so fast, the Federal Reserve can afford to reduce interest rates without risking major inflation. That would be good for just about everybody.
Otherwise, both inflationary and recessionary pressures will rise simultaneously. Stagflation of the sort the United States suffered during the Jimmy Carter era is quite a ways off, but unless lawmakers exert fiscal discipline, the threat of stagflation will noticeable increase.
Meanwhile, the Fed for now should just sit tight. Sometimes doing nothing shows a real cool hand.
