© 2023
Play Live Radio
Next Up:
0:00 0:00
Available On Air Stations

Economist Hugh Johnson On The Fed's Latest Approach

Hugh Johnson
Jim Levulis

In a Friday speech given virtually to an annual gathering of central bankers and academics, Federal Reserve Chair Jerome Powell said the economy had improved significantly this year, with average hiring in the past three months reaching the highest level on record for any similar period before the pandemic. Powell said Fed officials are monitoring the rapid rise in COVID-19 infections from the delta variant, but they expect healthy job gains to continue. For more on Powell’s latest outlook, WAMC’s Jim Levulis spoke with Hugh Johnson, chairman and chief investment officer of Hugh Johnson Advisors in Albany.

Johnson: I'd say he's certainly considering the Federal Reserve reducing their sort of open market buying of securities, treasuries and mortgage-backed securities to try to help the bond markets. He’ll probably reduced that a little bit if he gets good employment numbers. In other words, the August employment number and the September employment number have to be strong and justify the Federal Reserve starting to reduce they're buying of securities. But he's not saying that the Federal Reserve is going to start to raise short-term interest rates. He's saying very importantly, that the decision to raise short-term interest rates is very separate from the decision to reduce their buying of securities. And the end, the decision to raise short-term interest rates is going to depend on let's call it a much higher bar. Employment conditions have to be much better than they are now and even then they will be after the August and September report. So it's probably looking at late 2022, before they raise interest rates, but they may stop or reduce their buying of treasuries and mortgage-backed securities in the late part of 2021 or early 2022.

Levulis: And you mentioned there the need and obviously Chair Powell mentioned the need for some more economic improvement, the need to see that. However, the emergence of the Delta variant of COVID-19 has seemed to add some apprehension back into the economy. What are you seeing in terms of the impact of this latest wave of the virus?

Johnson: Yeah, it's very clear, Jim, it's very clear that the Delta virus, the rise in the number of new cases, and quite frankly, hospitalizations, and death, has a put a crimp in consumer spending. Consumer spending, adjusted for inflation, was actually down for the month of July. And in the month of August, we saw very, very sharp decline in consumer confidence. So it's very clear that consumer spending is very much being affected by the problems of the virus. And so there's no question consumers are very concerned about it. And as a result of that, we're probably going to get a little bit slower economic growth in the third quarter, certainly than the second quarter, but a little bit slower than had been the consensus forecast, say two weeks ago. So there's no question it's taking its toll. And everybody's very, very concerned about the virus. That is the number one issue facing the financial markets, and quite frankly, the economy.

Levulis: And the Fed chair also said there's been clear progress toward the Fed’s goal of maximum employment. But according to a Bureau of Labor Statistics report from August, there were more than 10 million job openings in the US, at the end of June. With expanded federal unemployment aid ending in September, do you expect to see those openings being filled at a faster rate than we're currently seeing?

Johnson: I would certainly cross my fingers and hope so. If you see the benefits, especially the excess benefits start to fade away or to be canceled, to end quite frankly, you're going to see a lot of people come off the sidelines and reenter the labor force. And hopefully, that they'll be employed. You know that you can hear anecdotally from businesses throughout the country, that they're really starved to find workers to come and help them. Now that they see that demand has been to some extent, increasing. So you're going to see the better employment numbers, I think, in the months ahead. But now let's keep in mind that we had a very strong employment number, 943,000 jobs were created in the month of July. I think those numbers will be positive for August, September and beyond. But they're not going to be as positive as the number we saw in July. So we're going to continue to see I think, good jobs numbers, those good job numbers will be in response to the end of some benefits. And as a result of that, I think we'll have good job numbers, but they're not going to be as good as July and you're going to see the economy continuing to expand as measured by employment, but not at the growth rates that we saw in the second quarter or the early third quarter.

Levulis: A lot of the recent Fed meetings have included some discussion of inflation. The Fed noted that inflation rose 3.6% in July compared with a year earlier. But the month-to-month increase slowed from 0.5% to 0.3%. Now, the Fed has a goal of 2% annual inflation over time. How do you think the Fed is going to address this?

Johnson: I really think that this is one thing that the Federal Reserve, amongst other things, that they have right. They say it's going to be transitory, we've got a big surge that we've seen recently in the year over year numbers of the rate of inflation, whether we're talking about consumer inflation or a lot of the sort of technically somewhat more obscure measures of inflation. So the year over year changes have been very, very substantial over 5% when it comes to consumer inflation. But I think if we see numbers, month-to-month changes that are in the neighborhood of what we ordinarily see 0.2, 0.3, maybe even as high as 0.4%, then you're going to see the year-over-year numbers, inflation numbers come down. And I would think, by the beginning of maybe we'll have to say the middle of 2022, you're going to see numbers on a year-over-year basis that are much closer to what the Federal Reserve's long-term target at 2% is. There'll be a little bit above that 2%. And they're not going to go below 2% for I think, a substantial period of time. But I think the Fed will tolerate 2.5, maybe as high as 3%, rates of inflation through 2022 and 2023. And I think that's where we're headed.

Levulis: When welast spoke in June, we discussed the potential of another federal COVID-19 relief package. That was before the widespread emergence of the Delta variant in the US and before the infrastructure package passed Congress. At the time, you said it would be a close call, but I think it's fair to say you didn't think another economic relief package was immediately on the horizon. Given the emergence of delta and the progress on infrastructure, where do you stand on that question today?

Johnson: Pretty much the same place I was. I don't think we're going to see a new package from the federal government to try to give a lift to consumer to consumer first of all incomes as well as therefore their spending. The one thing we have seen is that although spending really slowed down in the month of July, and we think it is also going to be a very slow month for the month of August, largely because of the virus, I think that you're going to see, or you already are seeing that the savings rate has gotten to a pretty high level, the amount of savings, the dollar amount of savings is fairly substantial. And it should be supportive of at least some consumer spending through the remainder of the year. And we won't need that package to try to kind of lift not only incomes but lift spending. I think we're going to get through the year without anything additional. That’s particularly true if we start to see some spending for infrastructure start to roll out. It's a close call. It remains a close call. But I don't think we're going to get a special package from the federal government in Washington and there plenty of moderates that are part of both the House of Representatives and the Senate that are unlikely to get on board supporting any new stimulus from the federal government in Washington in the form of more checks to consumers.

Jim is WAMC’s Associate News Director and hosts WAMC's flagship news programs: Midday Magazine, Northeast Report and Northeast Report Late Edition. Email: jlevulis@wamc.org