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Has the Fed screwed the pooch, again? We'll probably know by Election Day
In recent commentary, “The Federal Reserve is making housing more unaffordable and fueling inflation - Something's gotta give soon”, we noted that a recession was becoming much more probable considering that the lagging effects of raising interest rates, which started last year, were beginning to bite. As such, unemployment, particularly in the construction industry, is becoming increasingly precarious.
The stock mini-crash that swept the markets on Monday of this week argues that the Federal Reserve’s complacency about keeping interest rates higher for longer and the corresponding complacency of global hedging strategies are running out of road.
Jeffrey Gundlach of DoubleLine Capital, otherwise known as the "King of Bonds" and regarded as one of the most influential figures on Wall Street, in an interview on CNBC, stated his belief that "when we look back on this time a year from now, we'll say that was the beginning of the recession."
His opinion was called a "bold prediction" by the financial press. Nevertheless, one interesting bit of data that supports it is the long-term trends in full time and part time employment. As the chart below shows, the point when full time employment begins to fall and part-time employment begins to rise historically correlates with the beginning of recessions.
However, this week's stock market swoon seems more reminiscent of the trading mismatches that caused the Long Term Capital fiasco of 1998 than a harbinger of something like the Crash of 2000, but that does not dispute the fact that Federal Reserve monetary policy and lending remain too restrictive.
As noted, the Federal Reserve is living in the past because it continues to rely on antiquated methods of measuring economic activity and statistical data that has zero forward-looking value.
More disturbingly, the Fed is maintaining its course toward having inflation at 2%, when inflation has actually already fallen 25% below that target and 50% below the Fed’s calculation of the current inflation rate.
The Fed’s current inflation data indicates that inflation is at 3%, while the real-time data is half of that. This is a recipe for an unforced error that brings on an avoidable economic downturn, just in time for Election Day.
Some push back on the previous article suggested it was alarmist, that the economy is strong, and that a recession is nowhere in sight. That may turn out to be the case. However, I would offer for consideration that unemployment is starting to trend upward after many years of a downtrend.
Bureau of Labor Statistics
I would also offer another reliable forward-looking indicator, billings by architects. This chart (below) is also not encouraging. The general downtrend of new work commissioned from architecture and engineering firms does not portend good things for the near future of the economy or employment.
CLICK on the IMAGE to enlarge
So, are we at yet another significant economic tipping point? That is still unlikely. However, this does not justify the Federal Reserve making things worse than they need to be.
What is increasingly obvious is that they are wandering in a statistical wilderness of their own making. They need to up their game. Government agencies across the board need to start looking at real-time facts. Otherwise, the Federal Reserve risks making the same mistake they have been making for decades.
They wait too long to raise interest rates when it’s needed then they wait too long to cut interest rates until they see significant economic decline that cannot then be easily stopped, because monetary policy moves typically impact the economy positively or negatively 6 to 9 months later.
Bob Silvestri is a long-time Mill Valley resident, the Editor of the Marin Post, and the founder and president of Community Venture Partners, a 501(c)(3) nonprofit community organization dedicated to bringing the community's voice to government decision-making and funded exclusively by individuals and nonprofit donors. Please consider donating now to support our work.