Slowing Inflation Offset by the Federal Reserve’s Recession Call

Samuel Beckett famously wrote in Waiting for Godot: "The tears of the world are a constant quantity. For each one who begins to weep somewhere else another stops." In today's economy, the volume of bad news is continuous: For every time a fresh data point is released and shows welcomed relief, another metric or forecast is published and confirms a dreadful situation. The latest inflation numbers and the Federal Reserve's subsequent recession call perfectly illustrate what is unfolding in the US economy. In 2023, it might be an inexhaustible search for respite and nepenthe from thy memories of high prices and slowing growth.

The Death of Inflation is Nigh?

For the first time since May 2021, the US annual inflation rate stood at 5% in March, down from 6% in February, according to the Bureau of Labor Statistics (BLS). This also came in below economists' expectations of 5.2%. The consumer price index (CPI) also rose 0.1% month-over-month, down from 0.4%. Core inflation, which strips the volatile energy and food components, climbed to 5.6% year-over-year, up from 5.5%. The core CPI jumped 0.4% from February to March. The annual services inflation rate remained stubbornly high, although it dipped from 7.6% to 7.3%.

Here is a breakdown of the CPI indexes for the 12 months ending in March 2023:

• Food: +8.5%

• Energy: -6.4%

• New Vehicles: +6.1%

• Used Cars and Trucks: -11.2%

• Apparel: +3.3%

• Medical Care Commodities: +3.6%

• Shelter: +8.2%

• Transportation Services: +13.9%

• Medical Care Services: +1%

On the surface, it looked to be a terrific CPI report. Investors cheered the data in the hours following the data. But then reality ostensibly settled in, with the leading benchmark indexes erasing their gains by the end of the Apr. 12 session. If the disinflation trend is proceeding as expected, the Federal Reserve’s objective of eviscerating demand through higher interest rates might be coming to fruition. Indeed, the latest data, from various Purchasing Managers’ Index readings to tightening credit conditions, suggest that economic growth is slowing. Plus, workers continue to struggle, with real wage growth and weekly earnings (inflation-adjusted) stuck in the subzero terrain.

So, does this guarantee that a recession is on the horizon? If the public fails to listen to Wall Street analysts, economists, and armchair and institutional investors, then the people may hear what the Eccles Building has to say. Hint: It is not good.

The Recession Is Coming

Since the Fed’s quantitative tightening campaign began last year, Chair Jerome Powell and his merry band of Federal Open Market Committee (FOMC) members insisted that a soft landing could be engineered. This had been a turbulent flight so far. From a technical recession to an astounding labor market, gauging where economic conditions were headed has been a challenging feat, like following the plot of the 1946 picture The Big Sleep. But the Fed has now informed passengers that the plane is on the path of a recession.

Minutes from the March FOMC policy meeting were released, and unsurprisingly all the focus was on the failures of Silicon Valley Bank and Signature Bank and the overall banking turmoil. The monthly summary revealed that Fed staff are now penciling in an economic downturn later this year, citing last month’s crisis in the financial sector. Although authorities concur that the banking system is "sound and resilient," Fed economists say the country will endure a painful pecuniary blow in the coming months.

“Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years,” the minutes stated.

The central bank's Survey of Economic Projections suggests that policymakers anticipate the GDP growth rate to be a tepid 0.4% this year. Since the first-quarter GDP is forecast to be around 2%, according to the Atlanta Fed Bank GDPNow model estimate, a contraction could occur later in the year.

At this point, the futures market is going to accelerate its call for rate cuts in response to a downturn. Peter Schiff, the chief economist and global strategist at Euro Pacific Capital, may have gotten it right in a tweet: "What makes the Fed think the recession will be mild? Normally the Fed doesn't forecast any type of recession. So if they can actually see this one coming, it likely will be massive." What’s more, this commentary and the numbers came after Warren Buffett told CNBC: "We’re not over bank failures, but depositors haven’t had a crisis."

So, if the Fed is warning that a recession is on the horizon due to the fallout from SVB and Signature, what else are the central bankers seeing that the public is not? Curious, indeed, my dear Watson.

Worse Than Bad

Is the inflation report a cause for celebration? Consider this: Egg prices are still up 36%, a loaf of bread costs 14% more than a year ago, electricity bills are 10.2% higher from March 2022, and the fuel of Western civilization (coffee) has risen 10.3% year-over-year. Sure, the month-over-month levels are easing, but the damage has already been done. Prices are unlikely to fall below pre-pandemic levels as the inflationary impacts have already been baked into the marketplace. Borrowing is more expensive, wages are still behind the cost of living, and now consumers can write down a recession on their calendars. The Howard Beale character from Network was right: "Things are bad. Worse than bad." At this point, it is easier to wait for Godot than it is to wait for another era of prosperity.