Possibility of recession “currency flight” in the midst of inflation, growth slowdown: Strategic

Dreyfus and Mellon Chief Economist & Macro Strategist Vincent Reinhart joins Yahoo Finance Live to discuss the Fed’s move as investors await data on inflation, the risks of recession and the outlook for the US economy.

Video transcription

Vincent Reinhart is chief economist and macro-strategist at Dreyfus and Mellon. And he is with us now.

Vincent, thank you for being here. Economists are looking for an annual increase of more than 8% in this CPI. Will this be the peak of inflation?

VINCENT REINHART: Probably close to him. We learned this morning that petrol prices were down on a weekly basis. As mentioned earlier, oil prices have fallen somewhat. And so we will be close or close to the top.

But the important point to note is that any headline will say that inflation is running at a high of 40 right now because it is.

Vince, you mentioned that it is very likely that we will have interest rate increases of 350 basis points somewhat soon. What is the financial impact of such a thing?

VINCENT REINHART: The Fed is planning a tightening of financial conditions because it needs to slow down the growth of aggregate demand. This means that increases in short-term interest rates – because no one actually trades much in overnight federal funds – will be felt through the rest of the longer-term yield curve. It has and will make it increasingly difficult to borrow with consumer loans, car loans. Mortgage rates are at a recent peak. They will continue to climb. This will limit the availability of credit.

As interest rates increase, the discount rate of future earnings increases, ie their present value decreases. Stock prices are taking a hit. And rather the exchange value of the dollar is rising. All this in combination to tighten economic conditions, slow down overall demand.

But more importantly, what the Fed is trying to deal with is a direct blow to households, their confidence and their inflation expectations. They will want to assure you in as many ways as possible that inflation is anchored around their 2% target. And so being strong in the beginning is essentially a testament to their credibility.

Do you think, however, that even being strong in the beginning will be enough, because, as Fed President Jerome Powell has repeatedly said, monetary policy is lagging behind. Do you think that the everyday consumer will really understand the consequences of what the Fed is doing in the near future?

VINCENT REINHART: No. I think the Fed has a difficult job. The policy choice itself is difficult. The explanation alone is even more difficult.

Remember a few things. Number 1 is, yes, dropping a few basis points 50 and even more increases in the next six 2022 sessions will greatly increase the nominal interest rate on federal funds. It will still be negative in real terms. Inflation is running fast enough that the real policy rate will be negative for 2023.

This does not really sound like a big tightening on monetary policy. As you say, as President Powell says, monetary policy is lagging behind. It will take some time for some interest sensitive areas to slow down. This suggests that the Fed should be involved in the long game.

But in the meantime, we have things hitting the economy fast enough. The coronavirus does not leave, as you mentioned earlier. Oil prices are rising sharply.

It’s not just where they are now when it comes to oil prices, it’s where they were. The rise in oil prices to $ 100 a barrel is significantly higher than households have known in the past three years. This is a real tip. And that’s a distraction from their spending plans.

So the Fed is doing something slow in terms of its impact on the economy. But in the meantime, there are other, faster-moving forces.

I mean, some street economists started predicting a recession in the US later next year. But given what you just mentioned, high oil prices, high gas prices, high food inflation, can be printed tomorrow with a CPI of over 8% in the title – why not have a recession this year at some point?

VINCENT REINHART: So the economy is a slow moving boat. And we have a significant boost in spending. Just look at what GDP growth was in the fourth quarter and what it was ready to be in the first quarter.

Possible? I would say it is probably closer to a currency drop that the economy will move into recession by the end of the year. How come? Mention a few – the yield curve is reversed by many meters, oil prices are significantly higher, the Fed 7 tightened in the last eight eight times the Federal Reserve entered a tightening period, followed by a recession. And we are approaching full employment.

Trees do not grow in the sky. Something prevents an economy from exceeding its capacity to produce. One of the things historically is the recession.

So I think if you look at the next year and a half or so, you should think that the recession is easily a coin toss. Could it have happened a little earlier? Sure.

And by the way, history always reads differently from what he lived. Will historians talk in a few years about the warning signs of the mid-summer recession that were lost in 2022? Possible.

How much stock do you think consumers currently have with their savings and narrow labor market before prices rise to be part of the Fed’s job to do so and reduce demand simply because consumers will no longer pay for them? prices?

VINCENT REINHART: Yes. So you’re really identifying a channel that makes some people a little more confident, especially about the short-term course of consumer spending, which is more than 2/3 of the total total spending. And this is that the government made significant discreet payments to households last year and 3/4 related to coronavirus relief.

By some measures, households have nearly $ 2 trillion in surplus savings. They can start working to save money. And it is.

And this will be an important stock. This stock is important because the government is really putting the brakes on. The federal government’s contribution to spending increases is actually heavy.

So that there is what is left over in the form of excessive savings. But it will eat from higher inflation. And also remember that inflation, especially energy price inflation, is very unfair. It is a retroactive tax. Lower-income households without these reserves spend disproportionately more than their income on energy and food.

This will take a bigger bite out of those households that are more likely to make ends meet.

Some great ideas there. Vincent Reinhart, Dreyfus and Mellon chief economist and macro-general and also former director of the monetary affairs department of the Federal Reserve Board. Thank you very much this morning.

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