Fed forecast challenges Powell’s pledge on unemployment: Morning Brief

Market Trading EssentialsJune 16, 2022

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Thursday, June 16, 2022

Today’s newsletter is by Myles Udland, senior markets editor at Yahoo Finance. Follow him on Twitter @MylesUdland and on LinkedIn.

The Federal Reserve raised interest rates by 0.75% on Wednesday, the most since 1994.

And beyond the historic move, the central bank gave investors plenty to ponder about how Fed officials see the economy evolving in the coming years.

Specifically: Despite Fed Chair Jay Powell’s protestations on Wednesday, the outlines of a recession are apparent in the Fed’s own forecasts.

In a note following Wednesday’s statement, Renaissance Macro’s Neil Dutta argued the Fed’s latest Summary of Economic Projections (SEP) offer a simple outline: “Slower growth and a more aggressive Fed is a recipe for a recession.”

The SEP published Wednesday showed GDP growth this year is expected to hit just 1.7%, down from the 2.8% forecasted in March. Headline inflation at the end of this year, meanwhile, is now expected to be 5.2% — up from 4.3% in March forecasts — while interest rates are expected to be 3.4% at year-end, up from 1.9% in March’s outlook.

Dutta also highlighted two changes to the Fed’s policy statement published Wednesday.

First, the Fed removed a reference to expectations the labor market will remain strong.

Second, the central bank said it is “strongly committed” to bringing inflation back to its 2% goal. In May, the Fed said it believed “appropriate firming in the stance of monetary policy” would return inflation to 2% with the labor market remaining strong.

“What does that tell you?” Dutta asked. “Unemployment is going up and [the Fed is] good with it to get inflation down.”

U.S. Federal Reserve Board Chairman Jerome Powell takes questions from reporters after the Federal Reserve raised its target interest rate by three-quarters of a percentage point to stem a disruptive surge in inflation, during a news conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, U.S., June 15, 2022. REUTERS/Elizabeth Frantz — U.S. Federal Reserve Board Chairman Jerome Powell takes questions from reporters in Washington, U.S., June 15, 2022. REUTERS/Elizabeth Frantz

The Fed’s forecasts further suggest the central bank will be cutting interest rates come 2024, a move that typically accompanies a softening in the economy.

Economists at Bank of America Global Research said they were “deeply skeptical” of this forecast.

“We continue to believe that when push comes to shove, the Fed compromises, pushing up the unemployment rate more than their forecast assumes and accepting underlying inflation of up to 3%,” the BofA economists led by Ethan Harris wrote in a note to clients. “As we have noted before, even the anti-inflation giant Paul Volcker only brought inflation down to 4%.”

When asked about whether tamping down inflation would require increasing unemployment, Powell demurred on Wednesday, saying the Fed is “not looking to have a higher unemployment rate.”

“We don’t seek to put people out of work,” Powell said. “But we also think that you really cannot have the kind of labor market we want without price stability. We have to go back and establish price stability.”

As if there were any doubt in what motivates the Fed right now, it’s quite clear that bringing down inflation is the primary objective.

In response to a question from Yahoo Finance’s Brian Cheung on Wednesday, Powell said: “Clearly, people don’t like inflation. A lot.” Neither do Powell and his colleagues on the FOMC.

So while the Fed’s own forecasts suggest higher unemployment will be coming to the U.S. economic in the coming years, rising from 3.6% as of June to 4.1% at the end of 2024, Powell argued this would still be a “historically low level” of unemployment. Furthermore, in Powell’s view, inflation coming down towards the Fed’s 2% goal by 2024 would be a fair trade to make for a 0.5% increase in the unemployment rate.

In response, all things considered, Wall Street is suggesting that the Fed chair may be willing to pay a price even higher than that.

What to Watch Today

Economy

8:30 a.m. ET: Housing Starts, May (1.696 million expected, 1.724 million during prior month, revised to 1.823 million)
8:30 a.m. ET: Building Permits, May (1.780 million expected, 1.819 million during prior month, revised to 1.823 million)
8:30 a.m. ET: Housing Starts, month-over-month, May (-1.6% expected, -0.2% during prior month, revised to -3.0%)
8:30 a.m. ET: Building Permits, month-over-month, May (-2.4% expected, -3.2% during prior month, revised to -3.0%)
8:30 a.m. ET: Philadelphia Fed Business Outlook Index, June (5.0 expected, 2.6 during prior month)
8:30 a.m. ET: Initial jobless claims, week ended June 11 (217,000 expected, 229,000 during prior week)

Earnings

Pre-market

Kroger (KR) is expected to report adjusted earnings of $1.30 per share on revenue of $44.09 billion
Jabil (JBL) is expected to report adjusted earnings of $1.62 per share on revenue of $8.23 billion

Post-market