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Last week, Federal Reserve chair Jay Powell gave a talk at Spelman College in which he declared that “for me, a big, big party, and I mean this is as fun as it gets, [is] a really good inflation report”.
Well, you can’t say the man doesn’t stay on message, though I can’t help but feel sorry for him, and not just because that’s a really sad statement about what fun is for a Fed chair. The US and global economic picture right now is incredibly complicated, because there are so many variables in play. So, will Powell get his wish? Here are the four essential factors we need to consider:
The US economy — consumer spending is slowing, but labour markets seem resilient. I suspect that the uncertainty around politics, supply chains, commodities and markets will actually mean that companies will hold on to more workers longer rather than embarking on big lay-offs. Indeed, I think companies are moving away from the pattern of the past 40 years or so, which involved quick hiring and firing. The world is too unstable right now to count on being able to find people quickly, and the 50-year trend of capital power growing relative to labour is shifting. With major supply chain disruptions happening every 18 months or so, it pays to train and hold on to skilled workers, although wage inflation will diminish. I think the idea of recession in 2024 is overplayed right now — and Powell is trying to pour cold water on the idea that we’ll see the start of new rate cuts by May, if not before. Overall, I suspect inflation may fall a bit more rather than rise next year. No hard landing.
The global economy — this matters a lot in terms of US companies’ performance and also the commodity picture. The global growth picture is meh at best, but there probably won’t be a synchronised global recession because again, falling inflation will raise real wages, and many labour markets remain tight. Also, asset markets — housing and stocks — are still elevated. China will remain troubled, but the government will plough more money into fiscal stimulus (this time in manufacturing instead of housing and infrastructure). This may lead to a bigger scale of dumping of cheap goods. Overall, inflation is a bit higher than normal, but nothing to panic about. The black swan would be the disruption of Middle Eastern oil supplies off the back of the war in Gaza, which could send commodity prices soaring.
The climate transition — I have been concerned that capital investment into climate projects would actually keep short-term inflation higher than it seems to be at the moment. But predictably, foot-dragging and cancellations of some Inflation Reduction Act related projects (which are turning out to be less viable financially than they seemed at first) have mitigated some of that, which is not a good thing. That said, it means that predictions from people such as San Francisco Fed president Mary Daly and European Central Bank president Christine Lagarde about the clean tech boom creating big inflation pressures probably won’t pan out. That will be all the more true if Donald Trump is sworn into office in January 2025 and starts dismantling the IRA (business needs to start thinking long and hard about what Trump 2 would mean more broadly, as I cover in my Monday column).
Technology — as we’ve covered in recent notes, with artificial intelligence disrupting white-collar work faster than we thought it might. That keeps wage pressures in check. Meanwhile, I think that investments into logistics and supply chain technology as well as decentralised manufacturing will be a disinflationary tailwind.
Bottom line — I think Powell may get his wish and keep inflation under control, although I think the party will be a small cocktail affair, rather than a 1999-style blowout. Ed, what do you think? Cuts or not in the year ahead? What factors have I missed in thinking about all this?
I am looking forward to reading economist Guido Alfani’s new book As Gods Among Men: A History of the Rich in the West, the galley of which I received recently. Here’s a preview in his New York Times opinion piece pegged to the book. So much for noblesse oblige!
Meanwhile, I recently plugged into Elmira Bayrasli’s Substack, in which she looks at foreign policy through the lens of female actors and experts. Much needed. Elmira is the director of the Bard Globalization and International Affairs programme in New York and a state department alum. Her take on Kissinger is an important note to sound in a foreign policy world still dominated by men.
Edward Luce responds
Rana, knowing what we know now, which is of course less than the insomniac Powell will know, I do not expect to see a rise in inflation over the next few months. There is so much that could go wrong that the standard economist’s ceteris paribus (all things being equal) seems particularly redundant nowadays. The phrase used to mean that no shocks will occur. I think our world is sufficiently unstable that “all things being equal” now ought to mean that we should price in regular shocks, even if we cannot know when and which ones will happen, or whether they will be disinflationary or inflationary.
The war in Ukraine has contributed a lot to global inflation in the last two years both in terms of rising energy and food prices. The situation could be about to get worse there. What happens on Capitol Hill in the next 10 days will be critical. If Congress passes the $60bn or so in new Ukraine aid before recess, Ukraine will probably be able to withstand Russia’s winter build-up. If it does not, then we should gird ourselves. The fork in the road adds to global economic uncertainty. Likewise, political risk is far greater than it used to be. A further decline in Biden’s re-election prospects in early 2024 ought to scare the markets. Trump 2.0 would aim to kill the Fed’s independence. Powell is among Trump’s culprits for his 2020 election loss. There are all sorts of supply shock risks in the Middle East and in east Asia. The second-most important election in 2024 is the Taiwan presidential election in January.
A lot of people have been over-forecasting a US recession in the last year or two and have embarrassed themselves. I would nevertheless expect a slowdown in 2024, possibly a sharp one. So I would put higher odds than you of a US rate cut before the summer.
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