Today, the Board of Governors of the Federal Reserve System announced another rise in the overnight rates that banks assess each other for borrowing excess reserves. Excess reserves are those amounts that exceed the amount of reserves commercial banks are required to keep on deposit with a Federal Reserve bank. To execute its policy of two percent inflation, stable asset prices, and maximum employment, the Board set a target range of 2.25% to 2.50% for these overnight loans. The Board hopes that this percentage range incentivizes banks to lend less and keep more reserves in the vaults at their regional federal reserve banks.
Jerome Powell, chairman of the Board of Governors, noted that while the United States was experiencing a slowdown in economic growth as indicated by the country’s gross domestic product, he expressed his belief that the United States was not in a recession. When pushed on what he believed the technical definition of recession is, Mr Powell reiterated that the Board’s focus was its statutory mandate of full employment and stable prices and not on defining a recession.
Mr Powell did acknowledge, however, that he and his colleagues will take a close look at the consumer price index scheduled for release tomorrow morning.
For years economists have stated that where the gross domestic product experiences negative growth for two consecutive quarters, the economy is experiencing a recession. But this definition has been dampened down this week by members of the Biden administration where they have pointed out that to obtain a more complete picture of the economy, consumers should incorporate other factors about the economy e.g., employment, instead of honing in on gross domestic product.
The chairman appears in lock-step with the administration on the issue of defining a recession. Mr Powell pointed out that when one takes into account a tight labor market, where unemployment is approximately 3.6%, and there is strong non-farm payroll growth, one cannot draw the conclusion that the US is in recession.
I can understand why Mr Powell and the Biden administration would want to signal that, even in light of a slow-down in output, the economy is strong. Yes, gas prices are falling and a 3.6% unemployment rate falls below the historical full employment target of four percent. However, we are in the silly season. Congressional candidates will spend much of their August break trying to persuade the electorate that issues such as LGBTQ rights, climate change, and increasing the number of justices on the U.S. Supreme Court are more important than a lower middle class struggling to stretch dollars in the grocery store and an upper middle class, while able to pay for necessities, finds itself having to negotiate which leisure activities to cut back on.
Mr Biden and Mr Powell appear to be playing out of the same playbook with tomorrow’s CPI announcement fast approaching, albeit Mr Powell has been able to provide more substantive pages.
Yes, the Board of Governors is an independent government agency that is supposed to maintain a Chinese political firewall between it and the Executive Office of the President. But there is likely more width in the aluminum wall of an Apollo lunar module than between the White House and the Fed.
The coordination is too apparent.
Today, Mr Powell may have signaled some coordination on recession messaging, but if the CPI numbers do not signal some kind of respite for the consumer, Mr Powell may find himself thrown under the political bus.
27 July 2022
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