The Federal Reserve (Fed) faces a swarm of economic variables unlike any seen in the past 50 years, and several are stinging the United States and creating a hazy outlook for investors. For instance:
- Supply-chain issues that started during the 2020 pandemic. This logjam in the production and shipping of international goods lingers mainly because China—the world’s largest exporter—maintains a strict zero-tolerance policy for COVID-19 outbreaks. In recent months, China has locked down many of its major manufacturing regions, creating product shortages that ripple around the world. The Fed has no power here.
- The Russo-Ukrainian war and resulting sanctions have caused worldwide price hikes for both countries’ key export commodities, such as oil, natural gas, grains, fertilizers and rare metals, as well as iron and steel. It will take time for these prices to correct, depending upon how long the sanctions against Russia last and the war’s outcome. Again, the Fed can do little.
- Domestic challenges. Thanks to 3.6% unemployment and federal pandemic assistance, U.S. consumers have larger savings and more access to consumer debt via credit cards than at any time this century, creating inflationary pressures as people look to open their wallets. Also, wages and salaries are increasing with the shortage of workers: There are some 11.3 million job openings and 6 million unemployed. Additionally, home prices have been rising at double-digit rates for the past two years. The Fed has tools to slow these trends down, mainly by boosting interest rates.
Consequently, the economic outlook for the U.S. economy going forward is foggy. On one hand, left-leaning economists like Larry Summers and Jason Furman are agreeing with their right-leaning counterparts John B. Taylor and Kevin Hassett. They argue that the Fed has moved too slowly to tame inflation, which has been soaring since the fall, and America is headed for a hard landing, or a recession. On the other hand, many Wall Street analysts seem to be betting on a soft landing. They foresee the Fed expeditiously raising interest rates to slow down economic growth without a recession while bringing the Fed’s preferred inflation measurement (PCE) down from 6.5% to around 2.5% within the next 24 months.
Most of us are probably rooting for the soft landing, but the Fed is clearly surrounded by a hornet’s nest of uncontrollable international events that may sting overly aggressive investors. So perhaps the best move is to don a beekeeper suit and wait for the swarm to settle down before trying to harvest honey.