ECONOMIC INSIDER: Consumer Confidence in August, Policymakers Fuel Risks

By at 31 August, 2022, 1:33 pm

by Raymond J. Keating –

Consumers have been knocked around by stagflation. After three months of decline, though, the Conference Board reported that its Consumer Confidence Index took a break from this descent in August.

However, matters are far from rosy for consumers, not to mention for small businesses and the overall economy.

Risks and Pain

Lynn Franco, who is Senior Director of Economic Indicators at The Conference Board, stated, “The Present Situation Index recorded a gain for the first time since March. The Expectations Index likewise improved from July’s 9-year low, but remains below a reading of 80, suggesting recession risks continue. Concerns about inflation continued their retreat but remained elevated… Looking ahead, August’s improvement in confidence may help support spending, but inflation and additional rate hikes still pose risks to economic growth in the short term.”

That last point about additional interest rate hikes is worth noting given the statements made by Fed Chairman Jerome Powell last week. Powell made clear he favors “higher interest rates, slower growth, and softer labor market conditions,” which he thinks will “bring down inflation” but would inflict “some pain to households and businesses.”

Well, he’s right about the pain.

Monetary policy has been dangerously disconnected from economic reality since the late summer of 2008, and now we’re seeing some of the harsh consequences of such policy gone awry, combined with other problems brought on by the pandemic economy. Inflation has spiked since early 2021, and the economy is in a recession.

The Fed’s answer? Let’s make things even worse.

But let’s be clear: Crippling the economy further is not the right way to fight inflation. While the Fed is correct to finally start reining in the monetary base (i.e., currency in circulation plus bank reserves), but the monetary base still remains at stratospheric levels, without any link to any kind of historical norm. The Fed shouldn’t be focusing on jacking up interest rates to kill the economy. Rather, it can and should continue to rein in loose money, and leave interest rates to the market.

When consumers look at raging inflation and a down economy; hear the Fed chairman threatening to make matters worse; and see President Biden and Congress undermining growth with more taxes, regulations and spending, there’s little to be confident about in the end.

The U.S. needs pro-growth policies from Congress and the White House. That means the exact opposite of what we’ve been getting.

Specifically, we need substantive, permanent tax and regulatory relief, free trade, and reining in government spending. And the Fed should be redressing loose money. The right policy mix for low inflation and strong economic growth is no mystery. It’s about sound money, low taxes, a light regulatory touch, free trade and limited government.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.


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