by Bryan Perry
December 20, 2022
Federal Reserve Chairman Jerome Powell gave a downbeat outlook at the most recent press conference after the FOMC meeting, stating, “We continue to anticipate that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In addition, we are continuing the process of significantly reducing the size of our balance sheet. Restoring price stability will likely require maintaining a restrictive policy stance for some time.”
This policy of “damn the data, full tightening ahead” has Wall Street very concerned that Powell isn’t seeing the forest for the trees – consumed by inflation and jobs at the expense of embracing the whole situation of ever-weakening economic conditions. The perplexing thing is that Jay Powell laid out in the Fed’s policy statement the very areas where rapid deceleration of growth is underway – consumer spending, the housing market, lower factory and industrial output, and capital investment – all slowing.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Within his own text, Powell stated, “Growth in consumer spending has slowed from last year’s rapid pace, in part reflecting lower real disposable income and tighter financial conditions. Activity in the housing sector has weakened significantly, largely reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed investment.”
The Fed’s fixation with the labor market is a byproduct of too many unfilled jobs, due to a worker shortage in a post-Covid economy where millions of skilled workers never re-entered the workforce.
Early retirement accounted for almost half of those leaving the workforce. Caregiving has prevented great numbers from re-entering the labor markets, and multitudes of folks have started their own businesses, leaving small, medium, and large corporations scrambling to fill essential vacancies. Powell went on to say, “Although job vacancies have moved below their highs, and the pace of job gains has slowed from earlier in the year, the labor market continues to be out of balance. The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases. But it will take substantially more evidence to give confidence that inflation is on a sustained downward path.”
At this point, Wall Street has begun shouting to the Fed, “Give it a rest already!” Specifically, give the seven big rate hikes in 2022 a chance to work through the economy. Last week’s economic data should send a loud and clear message that all this front-loading of rate hikes is already slowing growth. The CPI Index came in below forecast, as did retail sales, Empire State Manufacturing, and industrial production.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Frankly, the only thing that seems out of balance now is the army of so-called scholars at the Federal Reserve that failed to take inflation seriously in the early going, letting it mushroom. Then they reacted too late with several super-sized rate hikes. Current Fed policy appears way too impatient in an economy where 70% of GDP is tied to consumer-driven spending. Also, total debt jumped by $351 billion in the third quarter, the largest quarterly increase since 2007. Collective household debt reached a record $16.5 trillion, up 2.2% from the previous quarter and +8.3% from a year ago. The biggest contribution to that debt came from mortgage balances, which rose by $1 trillion from a year ago to $11.7 trillion (source: https://www.investopedia.com/consumer-debt-surges-at-fastest-pace-in-15-years-6829584).
Credit card debt climbed to $930 billion. Total credit card balances rose over 15% from a year ago, the largest annual jump in over 20 years. According to New York Fed officials, the increase in credit card debt “towers over the last eighteen years of data.” Total U.S. household debt now exceeds $16 trillion, as consumers contend with the higher cost of living while also trying to maintain their lifestyles.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Based on current data, where household debt has soared and savings have tanked, overall consumer spending will contract significantly in 2023. According to data from the Federal Reserve Bank of St. Louis, the personal savings of Americans totaled $626 billion in Q3 of 2022, marking a substantial 87% drop from the $4.85 trillion in Q2 of 2020. Savings are now below even pre-pandemic levels. This is alarming, as it implies not only dramatically slower spending growth in future months, but also a slashing of household expenses to meet the typical family’s now-tighter monthly budget.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The Personal Savings Rate is down to just 2.3%. It’s hard to see how the Fed can keep beating the drum on future rate hikes when household debt has soared to record highs, personal savings have been depleted by 87% and households are barely putting any money away, and retail sales are sliding fast. From an economic perspective, the question of whether the Fed is going to overtighten is not a matter of if, but by how much. Thankfully, the next FOMC meeting isn’t scheduled until February 1, so the data released between now and then should prove that seven rate hikes has more than done the job of defusing inflation.
We’ll see, but this is exactly the message both the bond and stock markets are sending – loud and clear.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Inflation and Treasury Rates are Decreasing – But the Fed Seems Blind to Both
Income Mail by Bryan Perry
The Fed Is Right on Course to Overtighten
Growth Mail by Gary Alexander
My Top 10 “Better Business” Books for 2022
Global Mail by Ivan Martchev
The Bond Market Does Not Believe the Fed
Sector Spotlight by Jason Bodner
Invest Like Signalman Jack – Follow a Simple Playbook and Plan
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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