What the Fed and Madonna have in common

Fed economists work hard to uphold the institution’s reputation as a stoic pillar of economic wisdom — unperturbed by politics or the vagaries of the day, all-knowing and, above all, efficient. This obsession with image serves an important purpose: the reliability of the central bank depends on whether Americans think it is…reliable.

It’s not a secret. In their June meeting minutes, the officials noted that strong credibility and communication had “helped shift market expectations about future policy and had already contributed to a noticeable tightening in financial conditions that would likely help reduce inflationary pressures by limiting aggregate demand”.
If Fed Chairman Jerome Powell says the Fed will cut historically high inflation rates, Americans believe him and change their behavior accordingly. It’s a self-fulfilling prophecy, Fed’s version of The Secret.
But perception doesn’t always match reality, and Federal Reserve economists are as sensitive to capricious economic shifts as you and I are. There is no official rule to follow; they make their monetary policy by trial and error, and there have been mistakes.

The Fed, like Madonna, is constantly changing. This institution which aims to project an aura of stability is not beyond surprising us.

The Fed’s targets are relatively ambiguous and subject to interpretation, said Vincent Reinhart, chief economist at Dreyfus-Mellon. Definitions of these three goals – maximum employment, stable prices and moderate interest rates – are “unidentified flying objects”, he said. Right now, it’s clear that employment is strong and prices are high, but as interest rates continue to rise, there may be more ambiguity and room for monetary recommendations. decreasing.

The Fed as we know it gradually raises and lowers interest rates in pre-designated meetings. They explain their decision-making with as much communication as possible and release their economic projections to give Americans an idea of ​​what’s to come in the future.

This was not the case in 1980, when inflation soared to 14.6%, the highest level on record.

Under Paul Volcker, Fed officials raised and cut their benchmark rates sharply in unscheduled meetings without corresponding policy statements. The fed funds rate didn’t have a narrow target range like it does today – it regularly spanned 5 percentage points. It wasn’t until Alan Greenspan took over in the 1990s that the Fed started adjusting rates at FOMC meetings and it wasn’t until the 2000s that the central bank started tightening and release rates cyclically.

Big changes also happened in 2008 under the leadership of Ben Bernanke. It was then that the Fed responded to the Great Recession by adopting a policy that had previously been unfathomable: interest rates were cut by 100 basis points to near zero. They stayed there until 2015.

These actions were “experimental and unprecedented,” said Christopher Leonard, author of The Lords of Easy Money, a forthcoming book on the history of the Fed. “They pushed the boundaries.”

Today’s Fed has undergone “a huge shift toward transparency and is trying to clearly communicate its policy up front so as not to surprise the markets,” said Brian Rehling, head of global income strategy. fixed at the Wells Fargo Investment Institute. They are more transparent in their goals and policies. Beyond that, Powell’s impact on the annals of monetary policy remains to be defined.

Powell appears to loosely follow the monetary playbook set by Volcker during the high inflation era of the 1980s, but every president must play to his or her own strength, Reinhart said. “Greenspan could dive deep into data. Volcker had a personal authority on his understanding of markets and banking that was daunting,” he said. Powell seems to be interested in coming across as outspoken; it shifted the Fed’s focus and attention to all Americans instead of just economists and investors, he added.

But that central bank will face a new set of challenges when “the economy isn’t feeling so good and inflation still hasn’t come back down to the target level,” Rehling said. Powell will have to decide whether the Fed stays the course on hawkish rate hikes while dealing with political and public pressure on the state of the global economy. This may be when the Fed will enter its “Material Girl” era.

The FOMC will meet in Washington next week and is expected to announce another 75 basis point interest rate hike.

Happy 13th birthday at $7.25 minimum wage

July 24 marks 13 years since the last increase in the US federal minimum wage, to $7.25 an hour. It is also the longest period without a raise since the enactment of the federal minimum wage in 1938.

Even though historically high rates of inflation have eroded the strength of U.S. paychecks and headlines focus on the tight labor market, that rate of $7.25, which equates to $15,080 per year for full-time work, remains firmly intact.

“Every day without a raise is another day the minimum wage falls further behind the cost of living,” said Holly Sklar, CEO of Business for a Fair Minimum Wage.

An annual income of $15,080 is about four times lower than the average US household budget of $61,334 in 2020, according to the latest available data from the Bureau of Labor Economics. Inflation has increased by nearly 15% over the past two years.
The federal minimum wage is now at its lowest value since 1956, when the minimum wage was 75 cents, new analysis from the Economic Policy Institute has found.

A worker earning minimum wage today earns 27.4% less than in July 2009 and 40.2% less than in February 1968 after adjusting for inflation, EPI found.

About 30 states and Washington DC have minimum wages above the federal standard. Five states have not adopted a state minimum wage: Alabama, Louisiana, Mississippi, South Carolina and Tennessee. Two states, Georgia and Wyoming, have minimum wages below $7.25 an hour. In these seven states, the federal minimum wage of $7.25 per hour applies.

Next

Monday: Chicago Fed National Activity Index for June

Tuesday: Microsoft, Alphabet, Coca-Cola and McDonald’s report earnings

Wednesday: Fed interest rate decision and FOMC press conference; Meta and Boeing announce profits

Thursday: Apple, Amazon and Pfizer announce earnings

Friday: Exxon Mobile and Chevron report earnings

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