Price increases won’t come until ‘probably first quarter of 2023’: Economist – News Couple

Price increases won’t come until ‘probably first quarter of 2023’: Economist

RSM Chief Economist Joe Brosolas is joining Yahoo Finance to discuss the latest FOMC meeting and the upcoming October jobs report.

Video version

Adam Shapiro: – But you might be thinking that we have a Washington, D.C. Oreo here. We got the data from the Fed yesterday. We get the job numbers tomorrow. To help us get a sense of what’s really going on, we’ve brought Joe Brusuelas to the livestream. He is the chief economist at RSM. And he’s one of those people you should know that reporters often call when we’re not on broadcast and say, help us, help us understand this because we don’t. Joe, good to see you.

Joe Prosola: Good to see you too, Adam. Happy to be here.

Adam Shapiro: In your most recent note to your clients, you talked about what the Fed and other central banks are doing. I said speak like a hawk and act like a dove. Watch what they do, not what they say. Help us understand what you mean by it all.

Joe Prosola: certainly. Traditionally, as we emerge from these long easing cycles associated with recessions, central banks want to proceed with caution. They start talking like hawks to enhance their credibility, shape market expectations, and most importantly, shape inflation expectations. But they tend to proceed with extreme caution. And they don’t really start to normalize politics, often, for a year or more.

And I think we’re in one of those situations where we’re getting close to that. Madame Lagarde went out of her way twice this week to dampen market sentiment about a near-term rate hike. Federal Reserve yesterday, brilliant performance by Jay Powell. I mean, strength, the highest score possible where it happens, it happens like a hawk. But he behaves like a dove.

Of course, it wasn’t a huge surprise to me, but to many, the Bank of England stuck to its policy rate and didn’t change the pace of its QE purchases. So it is clear that major central banks are in no hurry to normalize policy.

Sheena Smith: And Joe, we heard from Jay Powell yesterday, that it would now be too early to raise rates. From your metric, from the data you’re looking at, I think, when do you expect us to see a potential rate hike?

Joe Prosola: Well, I don’t expect one, really, until December 2022 at the earliest, but most likely, the first quarter of 2023. I feel like we’re not at full employment yet. There is a real debate to be had about what full employment is – or how we will know that in a post-pandemic economy.

But still, the Fed is not there. And I don’t think, A, they’re going to go to raise rates for a good six months even after they’ve finished their downswing, and B, until they’re very comfortable, we’ve defined what is full employment and we’re here in the US economy.

Adam Shapiro: Joe, one of those questions that a lot of us need to understand is that we’re going to hear a lot of arguments about the Federal Reserve’s balance sheet, which is – is it over 8 trillion at this point? What does this mean, though, if they own it all? Or are they slowly relaxing? And does it take decades to get back to what we knew before the Great Recession?

Joe Prosola: We are not going back to what we were before the Great Recession. It will not happen in your career path. So just put that out of your mind. The balance sheet is a very large, efficient and very important tool.

They tend to dampen modifiers along the maturity spectrum on the curve, especially along the curve. This causes some risk. At the moment, you cannot buy with fixed income. It must be in stock.

How does this work? With a budget of this size and the Fed planning to reinvest the proceeds of the assets they own, this in and of itself is facilitating and catalytic. So even as they wind down their declining operations, they will still be quite accommodating, both in terms of balance sheet policy.

And of course, once you adjust for the nominal rate of inflation, you get deep real negative interest rates, which in itself is convenient.

Sheena Smith: Joe, when we talk about this recovery, of course, one of the biggest headwinds facing us right now is these disruptions in the supply chain. Do you think they have proven to be a bigger barrier than the market initially expected?

Joe Prosola: Well, of course, we all got it wrong. Essentially, Delta, the fourth wave here, the first wave across much of South Asia, was really the last hammer blow that toppled the global supply chain in time.

Although it looks to me like it’s getting better, and we’ve probably done a lot of this, it won’t be what it was before this year. It will be later next year before we have a real good assessment of what’s going on.

Let me say one thing here. I was really trying to go to the stores. I travel alot. I don’t see the empty shelves everyone is talking about. Today, Bank of America released some really interesting credit card statements. Spending outside the graphs. Certainly, it is about high prices. People buy something. I want to know what they buy and where they get it.

What we hear from customers, they are switching from freight to air transportation. They change the composition of the packaging as there is little risk of losses, but they want to get it there. I think there’s something going on here that we don’t notice in real time. And I’m becoming more skeptical by the day of those empty shelves around the holidays, perhaps this is more talk than fact.

Adam Shapiro: You ruin a lot of nights for newspaper and TV editors trying to make noise and scare everyone. Let me ask you this. Tomorrow, we get the job number. Whether it’s an upside or downside surprise, will the Fed be a lot – will they be much affected by what they see, or will they stick with their dot chart?

Joe Prosola: OK, so they’re keeping a close eye on this. Now, I’m expecting an overall employment change of 475,000 and a drop in the unemployment rate of 1/10 percent.

Now, what the Fed is watching here, that really matters. They are looking for the beginning of a return to the workforce for females of adulthood, 25 to 54, who have borne the brunt of adaptation during the pandemic. They are the ones who have suffered the biggest job losses.

Second, when you see the unemployment rate drop below 5% as it is, that’s usually when we started seeing retirees come back into the market. And those who are out of the labor force start popping up in new jobs because wages are rising. Obviously they are. It is clear that they are heading down.

Now, one last thing before I get back to you, we had this big discussion about where all the workers are. I think our friends at the Federal Reserve in St. Louis have solved part of the puzzle. Turns out during the pandemic, 3 million more newborns have retired than the trend rate was suggesting before the pandemic. Now, that’s 60% of the five million missing workers. So the Fed is going to be keeping a close eye on these things, women aged 25-54, and see what the employment-to-population ratio is and the labor force participation rate.

And then any hint that retirees, especially those who haven’t applied for Social Security, are starting to get back into the workforce and take advantage of higher wages, now, we’re not going to see that in real time. That would only be in the rearview mirror. So we will have to watch the Fed’s comments closely over the next six months.

Adam Shapiro: In fact, there’s an article I think Bloomberg has about the boom, people who have retired but are now going back to their old jobs, and different circumstances.

Joe Prosola: Now that could be great. If we see it, well, the market will absolutely adore it, as is the Federal Reserve. I will be happy. I don’t even care what the top line is if we see the bouncing effect going forward.

Adam Shapiro: We will keep our eyes open. Joe Brusolas, Chief Economist at RSM, It’s always a pleasure to see you. Thank you for joining us on Yahoo Finance.

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