The The Federal Reserve announced at its meeting on September 22, 2021, “If progress continues overall as planned, the Committee considers that a moderation in the pace of asset purchases could soon be justified. It’s time for moderation or outright elimination right now. The consequence will be continued inflation and a high risk of entering a volatile era of boom and bust.
The housing construction industry is peaking. Builders are erecting new homes as fast as they can, but they are limited by the availability of land, building materials, and labor. Anyone with a hammer and a pickup truck can find construction work today. Yet the Fed buys $ 40 billion worth of mortgage-backed securities each month. St. Louis Federal Reserve Chairman James Bullard said in june, “… maybe we don’t need to be in mortgage-backed securities with a booming real estate market and even a looming real estate bubble.” It certainly makes a lot of sense. And house prices have gone up since that statement was made.
The Fed said the current high inflation “largely reflects transitional factors.” There are certainly transitory factors in the current inflation report, but also enormous pressures. GDP hit a record high in the second quarter, with further increases very likely in the third quarter (to be released at the end of October). Government spending by federal, state and local governments has increased significantly from pre-pandemic levels. In this environment, the Fed is pursuing a massive monetary stimulus.
Business leaders need to consider the likely macroeconomic consequences for their businesses. Most likely, economic growth will be strong in 2022 and 2023. The Fed has noted, rightly, that “the trajectory of the economy continues to depend on the evolution of the virus”. But the limitations in economic activity associated with the pandemic cannot be addressed with more stimulus measures. It won’t help restaurants and hotels if foreclosure rules or public fears keep customers away.
The continued rise in prices will frustrate consumers, leading to political pressure to lower inflation. The Fed will react eventually, but later is not wiser. Inflation responds to monetary policy with a long lag, of the order of two years. (This is actually a distributed lag, with a few small impacts fairly quickly, larger impacts later, and then diminishing impacts. Two years is a rough rule of thumb.) During lags, inflation will continue to rise. accelerate. The Fed could very well be tempted to tighten its policy even more during this waiting period, which would send the economy into recession.
High inflation correlates with a more volatile economy. This is true in American economic history as well as in many other countries.
Businesses must therefore be prepared for faster growth, both up and down, in sales and costs in the years to come. While recessions are one of the likely consequences of today’s Federal Reserve decision, booms will also occur between crises. As Joseph once told Pharaoh, the good years should be used to prepare for the bad years. But it’s hard to know exactly when the bad years will come. The best way is to be more flexible, which means less debt and more equity, less expensive assets and more rentals and leases of property, and maybe more outsourcing and less money. employees.
The ability to fall back quickly will help businesses, but also the ability to grow quickly, taking advantage of the good times between recessions.
The United States has had a fairly quiet economic era, at least by historical standards. Our recessions have been less frequent since 1982, mainly because we lowered inflation. Now look for a return to the cyclicality of the late 1960s and 1970s.