Second-quarter GDP decline ‘not that serious,’ economist says
Yahoo Finance Video
Dreyfus and Mellon Chief Economist Vincent Reinhart joins Yahoo Finance Live to discuss recession risks, the impact of the latest FOMC meeting on the economy, inflation, and the outlook for traders and investors.
Video Transcript
- Big question. So are we in a recession or not? One central bank official doesn't seem to care about the language all that much. The Minneapolis Fed's Neel Kashkari told CBS, "We have a long way to go in bringing down price pressures. And whether we are in a recession or not doesn't change my analysis," that from Kashkari.
So let's get into all of this with Dreyfus and Mellon Chief Economist Vincent Reinhart. Vincent, what is your expectation? What is your take? Do you believe the words of Kashkari? And I guess, to the question that we raised at the top of this segment, are we in a recession or not?
VINCENT REINHART: So two parts to the question. Will it matter to some Fed officials that we're in a recession? No, not at first. But the longer it gets, the harder it will be on them.
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And there'll be other Fed officials who are much more sensitive. The fact is that the Google search inquiries on recession are going up to match that on inflation.
So that's the first part. The second part, are we in a recession, well, we hit the journalist definition-- two quarters in a row of negative GDP. That's not that serious.
The issue is many of the other measures of economic activity are actually pretty robust. Chair Powell was pretty explicit at his press conference just last Wednesday that we weren't on a recession. That part doesn't really matter.
The economy is slowing. And inflation is still too high for the Fed. They've got to be firming for a while. The recession call is going to matter when political pressure starts mounting on the Fed later this year, next year.
BRIAN SOZZI: Vince, the market has started to already push back, that we will see a 75-basis-point rate hike at the Fed's next meeting. Do you think that's the right call?
VINCENT REINHART: I-- it depends. Are markets right to be guessing what Chair Powell's probably going to do? Yes. Is 75 the right thing to do? Not nearly so clear to me.
Last Wednesday at the press conference, Chair Powell is pretty accepting of current market pricing. And that basically said that the last summary of economic projections they put out, the dot plot, was about right. He also noted if that's about right, they got to slow the pace of tightening sometime soon. Next meeting sounds like sometime soon. And that's appropriate.
Is that the right policy? Probably not. A nominal federal funds rate of 2 1/4 is still negative in real terms when you subtract off inflation. They've got a big inflation problem. And they still have accommodative policy.
They're going to have to do something hard, actually tighten financial conditions. It isn't working, according to their playbook, to firm the policy rate and see financial conditions ease. And that's what's happened.
JULIE HYMAN: Vince, at the same time, we've already seen-- I just mentioned what's going on with that ISM report. Prices do seem to be wavering a little bit, not necessarily staying at the high level. So there are some mixed signs at the very least here.
So does that show that, well, maybe it has nothing to do with the Fed that the prices are coming down? Maybe it has more to do what's going on on the commodity side of the equation. But are we seeing a little bit of relief on that front?
VINCENT REINHART: Oh, there's a big chunk of price developments that have nothing to do with the Fed. That's the relative price range for energy relative to the consumer price basket, commodities, important foods relative to prices of other goods and services. Fed can't pump more oil or harvest more wheat. What they do is affect aggregate demand.
Fed's problem is they were too accommodative to aggregate demand up until now. And that is putting general price levels-- pressures on the general price level. That's what's the Fed's problem.
You're reading the ISM right. Prices paid is very energy intensive. And it's come down a lot. That does probably say we're at a peak of inflation. But being at a peak, a CPI inflation above 9%, is no trophy.
Even if we come off some, it's still going to be well north of the Fed's goal. That's the Fed's problem. But activity is slowing. You are right. Employment below 50. New orders, which is the part that's predictive in the ISM of future activity, below 50. Remember, this is a diffusion in the index. A reading below 50 means contraction.
BRIAN SOZZI: Vince, you mentioned political pressure on the Fed rising. Now, do you think that pressure will be so intense next year that that might push the Fed to start cutting rates or pause? And I understand that the Fed and government are separate entities. But still, they're likely to feel the heat.
VINCENT REINHART: They're separate entities. But they both have offices in Washington, DC. There's two parts to that. The one is the Fed is supposed to care about employment. The Fed's supposed to care if the economy is in recession because Congress gave it a dual objective-- maximum employment and stable prices.
Right now, when inflation is so far above the goal, it's obvious that the Fed's got to be worried about inflation because inflation is well above goal and employment at or above maximum. But six months from now, nine months from now when inflation is coming down and the unemployment rate is going up, the Fed rightly will be more concerned than it is right now about unemployment.
Keep on top of that political pressure. And political pressure is also known as constituency pressure, i.e. pressure from voters, pressure from citizens. They're the ones who the Fed ultimately reports to.
People will be concerned about employment. The Fed is going to be concerned about employment. Politicians are also going to be concerned about interest costs.
When Paul Volcker started raising interest rates back in '79, the government debt was one quarter of the size of nominal GDP it is today. And he still ballooned how much interest the federal government had to pay. Jay Powell could do the same four times more because the debt to GDP of the government is four times where it was when Volcker started raising rates.
- OK, so, Vincent, can you clarify that for me just a little bit more here? Does the midterm election then, given the political pressure that you were mentioning, does that have any influence at all on what the Fed's decision will be after November?
VINCENT REINHART: No, I think the Fed studiously avoids talking about politics within the room. It, however, seeps into the atmosphere in Washington, DC. So the right answer is no. It's never part of their active deliberations.
Yes, it's something they've got to think about in the background. It also influences what's in the newspapers, what you're reporting on your shows, and what the Fed Reserve officials hear when they go out to talk to people.
Later this year, after the midterm elections, the economy will probably have a higher unemployment rate, too. And inflation will be off its peak. Those will be changing the calculus of the Federal Reserve.
JULIE HYMAN: Vince, in your note reacting to the Fed last week, you talked about how one of the perhaps mistaken propositions underlying what the Fed did or what people are talking about generally is that recessions are not messy. Are we being too complacent about a potential recession? And what do you mean by "messy" in this case?
VINCENT REINHART: Yeah, so I'll actually make a couple points. The first is we had two quarters of negative real GDP. That's how we opened this segment.
But other activities are pretty strong. The arbiters of the recessions, the NBER Dating Committee isn't going to call a recession based on the recent data. But if the economy does soften later this year and into next and there is a deep, diffuse decline in activity, I wouldn't be surprised that they actually push the start of the recession to the end of last year.
So we might wind up being in one of the longer recessions on record. Lots of reasons to think it won't be deep. Recessions purge excesses in the economy. We haven't built up a lot of excesses. But they're always messy. We're going to learn something about somebody's balance sheet. We don't know who that is. And we don't know what we'll learn. But it won't be pleasant. That happens every time.
Meanwhile, we're just US-centric right here. Major economies are also triggering flags of recession. And emerging market economies are under enormous pressure and even more so when US interest rates rise some more.
They have been coping with appreciation-- or rather depreciation of their own currencies. It's going to get more complicated for them. So there's going to be a lot of sovereign default. Add up increases in unemployment, poor earnings, higher interest rates, and default experiences abroad, I don't see how that can be not messy.
BRIAN SOZZI: Real good analysis here for us. Vincent Reinhart, Dreyfus and Mellon chief economist, always good to see you. Have a great rest of the week.