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Inflation, Employment Concerns Among Issues For Latest Fed Meeting

Marriner S. Eccles Building
https://www.federalreserve.gov/aboutthefed/aroundtheboard/history-buildings.htm
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Marriner S. Eccles Building

The Federal Reserve is holding its latest policy meeting Wednesday amid concerns over inflation and employment figures missing expectations. WAMC's Jim Levulis spoke with Hugh Johnson, chairman and chief investment officer of Hugh Johnson Advisors in Albany, about what he’s expecting from the meeting.

Johnson: Well, of course everybody's looking at the Fed meeting and asking the question is the Fed going to start to sort of move towards restraint? You know, we've had some very high inflation numbers recently. And everybody's kind of asking the question is the Fed going to start to do something about the high inflation numbers or start to get a little bit of cold feet and start to raise interest rates or do something to lean towards restraint? In my view, that's the most important question, and I think the consensus view is that they're not going to start to lean towards restraint. But they may say very, very carefully, and I think this is what you've got to watch for, is very carefully that they may indeed start to sort of move in that direction or announced that they're going to keep a good eye on the inflation numbers, they’re going to watch the employment numbers carefully. And at some point, they might begin to, let's say, taper, which means to reduce their active buying of treasuries and mortgage-backed securities in the fixed income market. So they’ll be sort of giving us a forward look. And the forward look will tell us that at some point in the future, particularly if inflation stays as high as that is, they'll start to do something about that. And that really means reduce their buying of securities or start to lean a little bit towards restraint. There'll be very careful to say, they're not going to start to raise short-term interest rates now, particularly when employment conditions are not where they would like them to be.

Levulis: And is that because of the word “transitory”? We talked about this back in March, and at the time, that's what Fed Chair Jerome Powell was saying that the upward pressure on inflation would be transitory. Do you expect that will continue to be the message?

Johnson: Yeah, I really do. And I think that the case that it’s transitory or the rise in inflation that we've seen more recently, the big numbers that we've seen on a year-over-year basis between say, 4 and 5%, those are transitory, there's a lot of reasons for it. But really, we're comparing the current level of prices, with prices in really March, April and May of 2020. And in March, April and May of 2020, prices were declining, there are lots of discounts, prices were really low. So the comparisons right now are such that you're going to get big year-over-year numbers. That's going to change in the next few months. And that's going to make all of the stuff that we're really worried about. It's going to really tell us that indeed, the Fed’s probably right that the increase in inflation year over year, inflation is indeed transitory. So I think they will restate that that's transitory. But that's not to say that they're going to relax or take their eye off the inflation numbers. They'll be very clear that they're going to continue to monitor to watch very carefully inflation numbers, which at some point may require them to start to move, but certainly not now.

Levulis: And when we're talking about inflation…what also comes into play area consumer prices, such as gas and food. Is that upward pressure countering the economic impact of those pandemic stimulus checks? You know, there was an influx of money going out to consumers, but now the prices of some goods are going up.

Johnson: Yeah, to some extent that's true. But let's keep in mind that you know that there's a lot of checks that went out and there's a lot of price increases, you certainly see price increases and things like used car prices or car rental prices, or airline fares or hotel room rates. These are things that were the prices were, quite frankly, unusually low. And they were unusually low during the pandemic during the worst part of the economic conditions associated with the pandemic. So, yes, there are price increases now. And yes, that's making things a little bit more difficult for consumers. But quite frankly, we're getting prices back to levels that existed just prior to the pandemic really hitting the US economy. So it will, to some extent, affect consumers. It will be a little bit pretty painful for consumers, you certainly see that in oil prices and prices at the pump. But it's not going to be overwhelmingly, I think painful to consumers. And it'll have an impact on consumer spending to some extent, but not a great extent. I don't think it's going to derail the slow recovery that we're experiencing in the US economy. I don't think it's going to shut down consumer spending.

Levulis: You mentioned employment early on in the conversation. And so far the job numbers have fallen short of what Fed Chair Jerome Powell was predicting earlier in the year. The national unemployment rate is now at 5.8%. And there are a record 9.3 million job openings, back in April. So looking at those numbers and what the Fed might do, what's your economic growth forecast for the rest of the year?

Johnson: Yeah, that's a great question. And the reason it is, is because you're right, the employment numbers, we've had positive employment numbers, but the employment numbers have been disappointing. They haven't been up to the expectations of the chairman of the Federal Reserve Powell. And they're not up to the expectations of most private economists. So we've got now 3.7 million unemployed, more unemployed than we had in February of 2021, when the pandemic really hit the US economy. And that's just simply not acceptable. And until we start to recover, recover most of those 3.7 million jobs, you're not going to see the Federal Reserve start to lean towards restraint, it's been very disappointing. At the same time, let's keep in mind what's going on in the US economy. And the US economy is recovering. Now the recovery will continue and it’ll continue through 2021, it'll be a strong recovery in 2021 6.6%, would be my forecast for the US economy. And that's an unusually strong growth rate. But the recovery is going to start to it's going to continue to recover, but it's not going to recover as fast, it's going to lose a little bit of its momentum as we go through 2021 and 2022. 2022 will be closer to about 4%. And then when we get back to 2023, it's going look like the normal numbers we saw in 2018-19, it'll look like 2% to 2.5%. So recovery is going to continue continuing 21, 22 and 23. But the recovery is going to slow and it's going to slow down the recovery and earnings as well, and probably stock prices – well, they may go up, but it won't be as kind of spectacular, as we saw in 2020.

Levulis: And are all the pieces in your mind there for that recovery to continue? Or is there a need for another sort of stimulus package?

Johnson: Yeah, that's a really good question. And I'm sort of crossing my fingers and saying, look, we gave out a lot of checks in December of 2020 and in March of 2021. We've really gotten a lot of liquidity and put it in the hands of individuals. Household balance sheets are very, very strong. They've got lots of cash and that cash is being used or spent as we move through the remainder of 2021-22. And the question is, is it going to be dissipated so much that we need another stimulus package? More money from the federal government? I don't think so. But I'm crossing my fingers when I say that. You know, it's going to be a very, very close call. I think quite frankly, the economy will have enough momentum as we get to the end of 2021 that’ll carry us through 2022. But you can't be sure. Remember, we're going to have a lot more spending coming from the federal government. And that's going to be in the form of, at least I think there's going to be additional spending in the form of some spending on infrastructure. And that's going to provide enough liquidity I think to help this economy continue to move this economy back towards the kind of economic conditions we had in 2018 and 2019. But it's a great question. And quite frankly, it's a close call. And it's one that gets us all everybody on sort of the edge of their seat watching very carefully.

Levulis: You mentioned infrastructure there, and I want to touch on that next. What are the ramifications if a deal doesn't get done? And on the flip side, what happens in your mind if the infrastructure deal is reached?

Johnson: You know, that's another good question. These are all great questions. And the infrastructure deal is a little bit up in the air. But I quite frankly think, right now it looks as though, it looks to me as though and I'll know more when I touch base with Washington later, but quite frankly, it looks to me now that a deal gets done. It will not be as large a deal as the president really initially wanted. I think he will get the sort of 10 important Democrats on the Democratic side onboard with some sort of a deal or a transaction. They're not going to get a bipartisan agreement. I don't think that's in the cards, I think the president has pretty much dismissed that possibility. But I think they will get an agreement. But it won't be as large as what we saw what the president initially wanted. And I think they're going to have to go through what's called technically the reconciliation process to get it done. Keep in mind that the $1.8 trillion or the numbers that we're looking at right now, not all of it is a new spending only about half of its new spending, but even so, it's a fairly substantial package. So that's part of the deal. And then the other part of the deal is how's it going to get paid for, and we're having lots and lots of discussions and lots of difficult discussions on how it's going to get paid for what are going to be the form of the tax increases to pay for the increased spending on infrastructure. It's really still much up in the air, but I think there's a really solid chance that we're going to get through the reconciliation process. We're going to get the infrastructure deal and we're going to get it within the next month.

Levulis: And finally Hugh, the last time we spoke, we discussed individual investors and their influence on the stock value of companies like GameStop. One of the latest companies involved in these, now I think they're so called meme stocks, was the AMC movie theater chain. You said back in March that you were very worried and concerned about these as they create swings and price levels in the stock market, which have nothing to do with underlying fundamentals. Do you still feel the same way?

Johnson: Yes, I do. When I see stock prices depart from what I call economic and financial reality, it starts to worry or concern me. There are clearly pockets of speculation in the markets. You always worry as being a sort of a student of financial market history, about pockets of speculation that they could spread, and they could be difficult for the market. I don't think quite frankly, that the levels of speculation are widespread enough to say that it's going to contaminate the entire market, but you've got to watch it very carefully. And in the case of AMC, or other examples of that sort, it's fairly clear to me that it's speculation and I would not advise any investors to get caught up in it. Yeah, you can make some money as a part of speculation, a lot of investors often do but I think that's not sensible investing. I think that most investors would be wise to avoid that level of speculation where quite frankly, price increases just depart from financial and economic reality. They clearly do.

Hugh Johnson is the chairman and chief investment officer of Hugh Johnson Advisors in Albany. By way of disclosure, Graypoint LLC is a holding company for Hugh Johnson Advisors. Graypoint is a WAMC underwriter.

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