Why the market takes Powell’s “soft” economic language so hard

Roger Ferguson

Michael Nagel | Bloomberg | Getty Images

Anyone who reads a Fed chair who coined the term “soft” for an economic landing, like Jerome Powell did Wednesday as a bullish signal, has a passing understanding of how much importance must be placed on a single day’s trading movement. Stocks tumbled Thursday after rallying in recovery, giving up all gains after the FOMC meeting and more for the worst day of 2022 for stocks.

Now back to the harsher economic reality: On Main Street, small business owners probably weren’t fooled at all by the store manager fake. They have a sobering view of the rest of 2022. More than 80% of small business owners tell CNBC the US economy will be hit by a recession this year. The main business problem they face is inflation, which drives up prices for commodities and other inputs, while they are increasingly afraid of passing further price increases on to consumers.

Main Street is not very confident in the Fed’s fight against inflation right now. According to the just-released CNBC|SurveyMonkey Small Business Survey for Q2 2022, only 27% of small business owners are confident in the Federal Reserve’s ability to control inflation, while 70% say the Fed’s current rate-hike plans will have a negative impact their business over the next six months.

For Roger Ferguson, a former Fed vice chairman and former head of investment giant TIAA, the Fed is doing what it can, but there is only so much it can do, and the downturn in market and economic sentiment will not reverse quickly. He recently told CNBC that the risk of a recession is very high.

The causes of inflation, including supply chain disruptions, geopolitical shocks from the Russian war in Ukraine, and strong US consumer demand fueled by pandemic fiscal and monetary policies, can be explained by a Fed raising interest rates increased, mitigated, but not fully controlled.

Even the Fed’s forecast points to inflation above 2% for at least a few more years, Ferguson, who is now vice chair of the Business Council and a distinguished fellow on international economics at the Council on Foreign Relations, told CNBC’s Small Business Playbook virtual event on Thursday. “So there should be an expectation that inflation will be a bit of a challenge,” he said.

He cited some financial market indicators as saying that inflation will remain “stubbornly high” for several years to come, and while he’s not in that camp, he added: “It would be nice to say that inflation is behind us relatively quickly but it will be an issue, albeit of diminishing importance, for more than a year, maybe two years.”

He sees signs that inflation may be peaking but doesn’t expect it to fall dramatically.

“We have to get used to slightly higher inflation, which isn’t getting any worse, but it’s not getting better either,” Ferguson said.

For small businesses this means that there will continue to be certain materials and commodities where supply remains constrained and inflation is high, and while inflation appears to be improving marginally, in a macro sense this will be incremental and not be the case with each individual input cost. Labor costs will remain high, although wage inflation should also slow.

“Powell noted in his post-meeting conference that the Fed has what he described as ‘famously blunt’ tools,” Ferguson said.

And while Powell was clear that some factors might be out of his control (like the functioning of the supply chain, Covid and war), “it was clear to him that he sees a credible path to bringing inflation back to the target of around 2% , and a smooth or ‘soft’ landing,” Ferguson said.

Inflation isn’t going back to 2% anytime soon, and the Fed has no illusions about it either, but it will slow down and become less of a factor in business decisions, just not everywhere or soon.

For small businesses looking to start or already running a business today, Ferguson says it’s “a pretty volatile time” to expect.

Small businesses are a huge driver of the economy and job growth, he added, and from supply issues to the workforce, the long-term outlook is positive if the Fed is successful in fighting inflation. But before we know the answer to that, the next 12 to 18 to 24 months are going to be “maybe a little rocky,” he said.

https://www.cnbc.com/2022/05/05/why-the-market-is-taking-powells-soft-ish-economic-language-so-hard.html Why the market takes Powell’s “soft” economic language so hard

Gary B. Graves

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