Experts intervene before Lyon / UD economic forecasts

NEWARK – On Thursday, Lyons Companies and the University of Delaware will host their annual economic forecast, where Federal Reserve Bank of Cleveland President and CEO Loretta Mester will share her thoughts on current economic trends and the how the Fed should react.

Also appearing with Mester are Michael K. Farr, founder of investment firm Farr, Miller & Washington, and Hilary Provinse, executive vice president and head of mortgage banking at Berkadia, who has also spent time on Wall Street.

The free virtual event begins at noon Thursday, and the public is invited to Register online.

Ahead of the annual event, Farr and Provinse answered some questions from the Delaware Business Times.

What do you think is the most important factor in inflation today?

Michael Farr addresses the crowd at the 2020 Lyon/University of Delaware Economic Forecast Summit. | DBT PHOTO BY JACOB OWENS

Farr: Inflation is fueled by an increase in demand caused by a stimulus-fueled economic recovery combined with supplies that have been constrained by the pandemic disruptions. As prices soar, the Federal Reserve tries to stop inflation without crushing the economic recovery. It is an almost impossible task.

Province : I think it’s helpful to separate inflation into two stories: what got us to 7.5% and what will keep us high.

Pent-up consumer demand and shoppers overflowing with savings from the COVID shutdown have created real supply chain bottlenecks. This, coupled with rising costs for housing, gasoline, and just about everything else, has led to a period of sustained inflation much longer than the Fed had originally anticipated.

What will keep inflation above the Fed’s preferred target is wage growth. Whether you look at average hourly wages, survey data or the Fed’s Wage Growth Tracker, rising incomes and the cost of employment will likely put a floor on inflation above 2%, this which could lead to an even more hawkish tone from the Fed over the next year.

How many rate hikes, if any, do you expect from the Fed this year? How fast do you think 2022 is ending?

Hilary Province | PHOTO COURTESY OF BERKADIA

Farr: I expect fewer rate hikes than most strategists: 3 or maybe 4. The removal of fiscal stimulus (additional unemployment benefits, suspension of student loan repayments, etc.) for consumers, along with the economic pressures created by the Ukraine conflict and an easing of supply constraints will mean that the Federal Reserve will not be required to take several harsh measures. In short, much of current inflation will stagnate due to the headwinds already underway.

Province : Five or six, depending on how hard the Fed begins its rate hikes in March. The recent oil price shock should give the Fed ammunition to hike 50 basis points in March, if it chooses, and would likely keep rate hikes to a manageable five. If the Fed chooses a 25 basis point hike in March, it will likely act at nearly every meeting to demonstrate its firm intention to fight inflation. For the rate forecast, I expect the fed funds rate to be around 1.5%, while the yield curve continues to flatten and the 10-year UST closes between 2 .25% and 2.5%.

How do you rate the Biden administration’s response to economic challenges so far?

Farr: The Biden administration has faced unique challenges for which there is no roadmap. President Jay Powell took heroic action to stave off what could easily have been another Great Depression. The Fed has not been above reproach. I believe they have kept the monetary stimulus in place for too long. That said, great risks await us. Almost every rate-tightening cycle has led to a recession. I expect this cycle to also lead to recession, although it may take a few years.

Province : The disarray and infighting within the Democratic caucus makes it difficult to attribute success or fault solely to the administration. To characterize the broader policy response to economic challenges, I would have to characterize it as lackluster. The stimulus measures included in the Build Back Better Act and the resulting debts are better off and would likely have exacerbated inflationary pressures. The administration appears to be counting on the Fed to tackle economic problems and come up with policy solutions.