According to the Board of Governors of the Federal Reserve’s Beige Book, Atlanta residents should expect to see increases in interest rates occurring over the rest of 2023. Specifically, the Beige Book reported that:
“Banking contacts reported steady loan growth for a majority of portfolios, except for farmland and consumer loan growth remained positive. Yet, institutions cut investments in mortgage-backed securities as unrealized losses in securities portfolios increased. Deposit growth shifted primarily to time deposits as growth in all other deposits declined in recent weeks and institutions increased short-term borrowing to fund ongoing loan growth. Asset quality metrics showed a steady increase in the level of nonperforming assets.” — Federal Reserve Bank of Atlanta
Steady loan growth tells me that there will be an uptick in interest rates as a result of the growth in loanable funds. Reduction in mortgage-backed securities means that in order to spur demand for those securities, interest rates will have to increase. In addition, an increase in short-term borrowing by institutions again means sweetening the offer to buy money with an offer of higher interest rates.
Primary dealers and the Federal Reserve have signaled expectations of a fed funds rate in excess of 5.25% by year end. The findings in the Beige Book only buttress these estimates.
As interest rates increase, I expect consumer price levels to fall as demand for consumer goods and services decreases. As demand for goods and services falls, so too will the demand for employment, at least in theory. As the Atlanta Fed reported, some employers are expected to hesitate when contemplating decisions to terminate employment of their workers. It is expensive to onboard new hires and may be cheaper to hold on to existing employees even if it means reducing employee hours or using automation to pick up the slack.
How would I counsel local government? My first piece of advice to local officials is to dispense with the usual cookie-cutter speeches about getting through the rough times. Neither bond holders nor taxpayers want to hear the boom rah-rah. When I hear that type of talk from public officials, my first reaction is they don’t know what they are doing and are definitely not up on their economics 101.
In fairness, I would not expect local Atlanta officials to be up to speed on monetary policy and have never heard an elected official talk about fed funds rates, discount windows, or repos when trying to solve the problem of property tax receipts and the inability to deliver city services. They should, however, gather enough knowledge to stay out front of economic forecasts.
Present the public with concise facts about causes of economic woes but the causes should not be politicized. Rather lay out strategies and tactics for addressing the city’s woes and act publicly and with intent. The optic of getting something of substance done and ensuring that the public is aware of what is being done should keep the criticisms tamped down while increasing the level of confidence in the city’s public officials.
If the information from the Federal Reserve and the markets is correct, Atlanta’s city officials will get to put their economic crisis management skills to good use over the next few months.
19 January 2023
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