The Federal Reserve is looking to tame the worst inflation since the 1970s, raising its benchmark short-term interest rate Wednesday and signaling up to seven rate hikes this year. The Fed’s quarter-point hike in its key rate, which it pinned near zero since the pandemic recession struck two years ago, marks the start of its effort to curb the high inflation that has followed the recovery from the recession.
WAMC’s Jim Levulis spoke with Hugh Johnson of Hugh Johnson Economics about the effects of the hike.
Johnson: You have to be worried about the impact on the economy, because there are some signs that the economy is going to have difficulty or it's going to slow in 2022, slow from the pace of 2021. And so you have to be a little bit worried when you see the Federal Reserve raising interest rates, which is not good news for consumers, it'll make life tough, a little bit tougher for consumers that are already faced with a somewhat tough life with the prices at the pumping being as high as they are and a good chance that they're going to go even higher. So you have to be a little bit worried that the Federal Reserve might be becoming a little bit too aggressive. The second thing, of course, is that, we worry because fiscal policy is not going to kick in the way it did in 2021, which means government spending in the form of some sort of generous job benefits and a number of other things to include checks to consumers, that's not going to be there in 2022 as well. So the lack of help from the Federal Reserve, the lack of help from Washington means it's going to be a tough year. And if you superimposed upon that increases in interest rates, to the extent that the Federal Reserve has told us, you have to be a little bit concerned about the outcome for the economy in 2022, it's clearly going to slow down in 2022. But I might add, importantly, just one comment, and that is the Federal Reserve policy, as announced yesterday is not written in stone, they're going to respond to the economic numbers that they see, economic and inflation numbers that they see as they come in, over the course of the next say, nine months. And my guess is, or hope I have got my fingers crossed, that they'll respond to those numbers in a way that'll be helpful to the economy. So we'll just have to wait and see. But there's no question. It’s a little bit aggressive.
Levulis: You mentioned inflation and particularly gas prices, they in recent weeks reached record highs. In response, some political leaders, both on the federal in the state levels, have called for a possible suspension of state and federal gas taxes to provide some relief to consumers. From an economic standpoint, would that be a smart move?
Johnson: You know, I doubt it'll be a smart move. Every little bit helps, but at the same time, I would say that's nearly not the answer, the real answer is really to increase the level of reserves that are being pumped out. That was supply is really the issue right now. And so I think there's some steps that could be taken domestically to increase production, I think a lot of pressure needs to be put on domestic producers, it takes time for producers to try to increase their production. But nevertheless, with that in mind, we need to sort of put a little bit of pressure on domestic producers. And let's not forget some of our friends, such as Saudi Arabia, there needs to be pressure put on them to try to increase production. This is really a supply and demand issue. It's not so much a tax issue. And I think that you know, what we can do to increase supply in order to meet the demand that we currently see would certainly be helpful. Everything helps, taxes help, the removal of those taxes help, it will help the consumer, but the real answer is the increase in supply. And of course, all of this has to do with what's going on in Ukraine, as well as Russia. Russia is an important producer of oil and natural gas to the world. And to the extent that we could solve the problems in Ukraine, keep your fingers crossed, that also would help tremendously.
Levulis: To inflation overall, which is partially what the Fed is responding to here. The Labor Department said this week that wholesale inflation shot up 10% last month from a year earlier. When’s your anticipation for when it will hit its peak?
Johnson: This was a bad number. It was a very high number, it was a month of February that the number was 4, the month of March is going to be an even higher number. And the chances are that April will also be a high number. And again, it's driven largely by energy prices. I think that you're going to see the peak in March or April, and then you're going to see the numbers come down, whether we're talking about consumer prices or producer prices. And I think they'll come down and then when we start to get to the second half of 2022 and particularly in 2023, we'll start to see lower year-over-year inflation rates. So it's going to take a lot of patience and perseverance. If we have patience and perseverance, I think in time, the numbers have come down and be much more moderate. And that also is important. Because it might mean that the Federal Reserve can take its foot off the brake a little bit, in other words, not move as aggressively towards raising interest rates as they announced yesterday.
Levulis: And despite these increasing prices, your forecast has that consumer spending will remain relatively solid throughout the rest of the year, if I'm understanding your outlook correctly. Why is that prices are going up, yet consumers are still willing to spend, though?
Johnson: It's not going to be easy for consumers are there's no question, prices are going up. And that's not going to be good news for the consumer. I mentioned interest rates, at least as planned now, will be going higher, that's not good news for consumers. And of course, much more importantly, is that the consumer is not going to get the help from generous job benefits and other benefits coming from the federal government, its fiscal policy is not going to kick in. So things are going to be challenging to keep consumer spending doing well in the remainder of 2022. You remember that it's going to depend very heavily, therefore, on job growth and income growth. That's one thing. And the second thing is the savings levels for consumers and their household balance sheets have built up to pretty substantial levels, and they'll have to be used, that savings will have to be used. The combination of savings, job growth and income growth will have to get the consumer through the remainder of this year. And if I do the numbers right, I think it'll help. But there's no question in my mind that even though it'll help, consumer spending is going to slow, like the economy as we move through 2022. It's going to be solid in the sense that it's going to continue to be positive, it's not going to be negative. But believe me, it will be challenging as we move through 2022, things are slowing down.
Levulis: And for folks who have money in the stock market, it has been a turbulent past several weeks. Now, realizing, as you mentioned that the situation in Ukraine is obviously a factor there and is unpredictable, what's your outlook for markets in the coming months?
Johnson: Yeah, you know, that's a great question. And the reason that's such a good question is it's almost impossible to answer. It's very unpredictable and very volatile. I remain somewhat optimistic about prospects for the markets, that's looking well beyond 2022, 23, and 24. Remember, one thing that's very important, try not to get caught up in the certainly the day to day, but I would include week to week and month to month swings in the markets, which can tend to be very volatile, and cause investors to make very foolish decisions. Over a long period of time looking at the record, over a long period of time, these geopolitical crises will end. And when they end, the markets will do well. I've looked at every one of them since the Second World War began. And in each case, one thing they do have in common is they end. The second thing is that we take a look at averages, the average duration is about four to five months, this one's shorter than that. And the average magnitude is about 19%. And this one's been shorter or less than that at about 14%. So I think we might have a little bit further to go in the current geopolitical crisis. It'll affect the markets, they'll remain volatile, they'll remain uncertain. But I think remember, the one thing I said time not timing is the secret to market success and over a longer period of time. I think investors that own equities are going to be just fine. They're going to be well rewarded, but it's going to take a lot of courage and it's going to take patience.
