Why the market is so hard on Powell’s “soft” economic language

Roger Ferguson

Michael Nagle | Bloomberg | Getty Images

Anyone who takes the words of the Fed chairman coining the term “soft” for an economic landing, as Jerome Powell did on Wednesday, as a bullish signal has a temporary understanding of what value should be given to any single day’s trading action. Stocks fell on Thursday after a relief rally, losing all post-FOMC gains and more at the pace of the worst day of 2022 for equities.

Now back to the harsher economic reality. The small business owners on Main Street were most likely not fooled by the fake market. They have a sobering view of the rest of 2022. More than 80% of small business owners tell CNBC that a recession will hit the US economy this year. The main business problem they face is inflation, which pushes up the prices they pay for raw materials and other inputs as they become increasingly wary of passing on further price increases to the consumer.

The Fed’s battle with inflation is not one that Main Street strongly believes in right now. Just 27% of small business owners have confidence in the Federal Reserve’s ability to control inflation, according to a report just released. CNBC|Survey Monkey Small Business Survey Q2 2022while 70% say the Fed’s current rate hike plans will have a negative impact on their business over the next six months.

For Roger Ferguson, former Fed vice chairman and former head of investment giant TIAA, the Fed is doing all it can, but it can’t do much, and the downturn in market and economic sentiment won’t end quickly. He recently told CNBC that the risk of a recession is very high.

The causes of inflation, including disruptions in supply chains, geopolitical turmoil from Russia’s war in Ukraine, and strong US consumer demand driven by the pandemic’s fiscal and monetary policies, could be mitigated by the Fed, which raises rates but is not fully in control.

Even the Fed’s forecast suggests that inflation will be above 2% for at least another couple of years, Ferguson, who is now vice chairman of the Business Council and distinguished fellow in international economics at the Council on Foreign Relations, said in an interview with CNBC. event on Thursday. “Therefore, there should be an expectation that inflation will be something of a problem,” he said.

He cited some financial market indicators that suggest that inflation will remain “persistently high” for several years, and while he is not in that camp, he added, “it would be nice to say that inflation will lag behind us relatively quickly, but it will be a problem, albeit of lesser importance, for more than a year, perhaps two years.”

He sees signs that inflation may peak, but does not expect it to drop sharply.

“We need to get used to inflation at some elevated level, not getting worse, but not getting better,” Ferguson said.

For small businesses, this means that there will still be certain materials and commodities that remain limited in supply and inflation is high, and while inflation may appear to improve slightly, it will be gradual in macro terms, not in this case. with each separate input cost. Labor costs will remain high, although wage inflation should also start to slow.

“Powell, at his conference after the meeting, noted that the Fed has tools, as he described, “notoriously dumb” tools,” Ferguson said.

And while Powell has made it clear that some factors may be out of their control (such as the functioning of the supply chain, Covid and the war), “he has made it clear that he sees a sure way to bring inflation down to a target of about 2% and making it so in a way to land softly or “softly,” Ferguson said.

Inflation will not return to 2% anytime soon, and the Fed has no illusions about it either, but it will slow down and become less of a factor in business decisions, just not everywhere or any time soon.

Ferguson said small businesses, those looking to start a business today or already running one, should expect “pretty volatile times.”

He added that small business is a huge engine of the economy and job growth, and from supply issues to labor, the long-term outlook is positive if the Fed is successful in fighting inflation. But before we know the answer to that question, the next 12-18-24 months “will probably be tough,” he said.

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