All Eyes on Federal Reserve, Interest Rates as Bank Failures, Stagflation Batter Nation’s Economy

After taking a breather in April, the Federal Reserve’s Open Market Committee will reconvene at Washington this week and everyone from the former Treasury secretary, Larry Summers, to tech entrepreneur Elon Musk has an opinion on whether the central bankers should raise interest rates yet again in their quest to tamp down persistent inflation.Analysts are expecting the Fed to increase rates by another quarter-point when its bankers meet Tuesday and Wednesday this week, but a rash of data out last week suggests that the economy is already slowing. Some have even suggested that the Fed might pause its rate hikes following a handful of high-profile bank failures and an ensuing credit crunch that could slow the economy without further intervention by the central bank.In an appearance on Bloomberg television Friday, Mr. Summers — who served as President Clinton’s Treasury Secretary and later as the head of the National Economic Council during the Obama administration — said the Fed should stay course and bump up rates one more time before pausing its hikes given the continued strength of the labor market. Mr. Summer put the odds of a mild recession at about 70 percent over the next 12 months.“I think we’ve got a bit of a stagflationary problem developing where we have a base inflation that’s well above target,” Mr. Summers said, referring to the Fed’s inflation rate target of two percent. “As I’ve been saying for the last year and a half, I don’t think that’s going to get back to target without a meaningful slowdown in the economy.”“I think we’re not looking at an easy situation facing the Fed given these numbers,” he added.Responding to Mr. Summers on Twitter, Mr. Musk suggested that economic data used by the Fed to make its decisions is dated and the central bank should hold off on any more rate hikes. A mild recession is already upon us, he said.“Further rate hikes will trigger severe recession. Mark my words,” Mr. Musk tweeted in response to Mr. Summers. “Between Tesla, Starlink & Twitter, I may have more real-time global economic data in one head than anyone ever.”In addition to the Fed meeting, a slew of earnings reports and an eagerly anticipated report on unemployment for the month of April are on tap for the coming week. Economists expect the Bureau of Labor Statistics’ Friday report to show slower hiring and higher unemployment for the month. Last month’s report showed 236,000 new jobs were created in March, but the unemployment rate dropped to 3.5 percent.Data out last week suggests that the economy is already slowing faster than expected. The Commerce Department reported that America’s gross domestic product, adjusted for inflation, rose at a tepid 1.1 percent rate in the first quarter, lower than many economists had expected. The rate was down from the 2.6 percent rate in the last quarter of 2022. Reports last week also showed that the housing market shrank for the eighth consecutive quarter and investment by businesses in new equipment declined for the second quarter in a row.On the inflation front, data out last week reported that consumer prices rose at an annual rate of 4.2 percent during the first quarter of 2023. The rate was higher than in the last quarter of 2022, and still well above the Fed’s two percent target.When the Fed chairman, Jerome Powell, takes questions at an expected press conference on Wednesday, he will likely face — in addition to questions about the macroeconomic outlook — questions about a string of recent bank failures and their impact on the stability of the overall banking sector.Many on Wall Street thought the worst of a crisis kicked off by the collapse of Silicon Valley Bank was in the rear view mirror, but news at the end of the week that another San Francisco bank, First Republic, was on the ropes and would likely be seized by regulators revived those concerns. A credit crunch in the wider banking sector following those failures is likely to crimp the economy even further.In a note to investors cited by Bloomberg, economists at Goldman Sachs said they expect a credit crunch in the near future but one that impacts smaller banks and their customers more than larger ones. “We take comfort from our economists’ view that this incremental tightening in lending standards will slow down growth but likely fall short of causing a recession,” Goldman’s Lofti Karoui said in a note.

All Eyes on Federal Reserve, Interest Rates as Bank Failures, Stagflation Batter Nation’s Economy

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