They won’t be dramatic, but it’s a start
By Joe Higgins, Quest 4 Quality
Last week’s Consumer Price Index (CPI) came in at 2.5%, down 0.4% from July and the lowest level we have seen since early 2021.
All eyes are now on the Federal Reserve Board’s next Federal Open Market Committee (FOMC) meeting, where Fed Chair Jerome Powell and his fellow board members will most likely cut interest rates by 25 basis points.
While the Fed has not yet hit its target inflation rate of 2%, economists were betting on a rate cut this past Wednesday, Sept. 18. Investors were looking for a half-point rate reduction, which will not happen now, but it has not been taken off the table if inflation continues to recede. The Fed Funds futures market is now pricing at an 80% chance of a quarter-point drop, up from a 50% chance just two weeks ago.
I believe this will prove to be a good decision, as the last thing we need is an overreaction that brings on a new inflationary cycle. In the current report, food prices were up a slight 0.1% and energy costs fell 0.8%.
Job Concerns
Now, the Fed needs to pay attention to an even more concerning issue: a slowdown in the labor market. In the August jobs report, unemployment has increased by 0.6% this year, from 3.6% to 4.2%. The employment trend has been negative since December 2023, and could quickly escalate into a recession if they are not careful.
Inflation was born during the pandemic when goods were in short supply as factories and businesses shut down. Global supply chains were broken as China went on lockdown and reduced shipments worldwide, limiting availability of crucial products.
In 2020, the CARES Act gave and loaned over $2 trillion to consumers, small businesses, corporations and state and local governments, followed in 2021 by another $2 trillion in stimulus funds under the American Rescue Plan Act. It was an unprecedented amount of money, and while we do not know for sure, it probably kept the economy from going into a depression. The one thing we do know is that it undoubtedly caused rising inflation.
Trouble Brewing
In the wake of COVID-19, Americans stayed home and the price of gasoline plummeted. Restaurants closed and laid off workers, unemployment hit 14.7%, and it felt like our world was ending as the pandemic swept through the country, sparing very few of us from its impact. By March 2022, consumers knew we were in for more trouble when the war in Ukraine broke out and the Fed announced rate hikes to combat inflation, which skyrocketed to 9.1% that June.
Interest rates spiked, prices on nearly everything increased and we dealt with the worst inflation since 1982. The main issue for the home goods business has been mortgage rates and their impact on housing, especially existing home sales.
Existing home sales have slowed so drastically that they are back to levels last seen in 1995. This has been a significant drag on our businesses as consumers refused to sell homes with locked-in mortgage rates as low as 2.6%, only to take on a new loan at over 7%. This is why the rate cuts coming from the Federal Reserve are crucial to our industries and businesses, even though they will be small and initially insignificant. But over the next 12 months, we will finally see lower mortgage rates.
The Bottom Line
There are some downsides to today’s economy, but it still looks like there is a strong possibility that Fed Chair Powell will hit his soft landing. Confidence has increased recently, consumers are still spending, the job market is still OK and gross domestic product will likely end up at over 2% this year.
You cannot have a recession with these indicators looking this positive.
Joe Higgins is a 44-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at Q4QwithJoe.com.
