The Fed, the Beige Book and Worries about the Economy

By SBE Council at 9 March, 2023, 7:17 am

by Raymond J. Keating –

It’s rarely ever good news when large swaths of the economy are affected by what a government appointee has to say. That’s the case now with Fed Chairman Jerome Powell. It’s even worse when that appointee, and his colleagues, possess enough power to push the economy in the wrong direction, and are intent on doing just that.

Investors and businesses were hanging on the words served up by Powell as he testified before Congress this week. In the Fed’s battle against inflation, how much further will the Fed go in terms of increasing interest rates in the hopes slowing the economy – in particular, these days, slowing job creation and the service sector – which in turn, in Fed thinking, will bring inflation down?

The Fed Gets It Wrong: Then, and Now

To briefly recap, the Fed has been running loose money without precedent since the late summer of 2008. That finally caught up to the Fed in early 2021, in part, due to supply chain issues as the economy struggled to emerge from the pandemic.

The Fed reacted early last year by starting to increase the federal funds rates – its chosen tool to try to manipulate the economy, and engineer a so-called soft landing. That is, the Fed believes that it fights inflation in an under-performing economy by trying to further slow the economy without causing a recession. It would be amusing if not so serious.

As I’ve argued before, the Fed would be better off reining in the monetary base (i.e., currency and bank reserves, and over which it has direct control) and leaving interest rates to the market. At least, the Powell Fed has been slowly pushing the monetary base in the right direction since early last year.

As for how the rest of Fed policymaking plays out, it’ll be more about luck and what the private sector can overcome than anything else.

Fed’s Latest Outlook via the Beige Book

Meanwhile, the Fed’s latest read on the economy in the Beige Book points to a sluggish economy. Consider the following four points from the report:

● “Overall economic activity increased slightly in early 2023. Six Districts reported little or no change in economic activity since the last report, while six indicated economic activity expanded at a modest pace.”

● “Several Districts indicated that high inflation and higher interest rates continued to reduce consumers’ discretionary income and purchasing power, and some concern was expressed about rising credit card debt.”

● “Amid heightened uncertainty, contacts did not expect economic conditions to improve much in the months ahead.”

● “Labor availability improved slightly, though finding workers with desired skills or experience remained challenging.”

Hmmm.

Other than in various states that have implemented real tax relief, if anyone in charge of public policy is doing anything to get the economy moving in the right direction, they are keeping it a secret. Or, in the Fed’s case, loudly announcing that they are working in the opposite direction.

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.