AMELIA ISLAND, Florida, May 18 (Reuters) – More than a year of rising interest rates after the collapse of a Silicon Valley bank fueled fears that a spiraling financial crisis could soon be brewing in the U.S. as bank bond portfolios tumbled this spring. economy.
However, new research indicates those investment losses — most of them unrealized — were offset almost dollar for dollar by the benefits of cheaper deposits, which kept core bank operating margins steady.
In the view of Philipp Schnabl, a professor at New York University’s Stern School of Business and author of the study, it’s evidence that fears of an impending financial meltdown may be overblown.
But it also adds to a growing body of indicators that Federal Reserve officials and economists cite as reasons why the current economic cycle has defied historical norms, beating expectations just as much as other easy forecasts.
From the job market to consumer behavior to the financial sector, officials and economists at this week’s Atlanta Fed conference in Amelia Island, Florida laid out different ways the economy could behave differently than before. In conference proceedings and separate interviews, they talked about a better-than-expected economy amid rising borrowing costs.
„We’re still trying to understand this inflation,” Chicago Fed President Austin Goulsbee said during a forum at the conference. It’s a mistake to deride „untainted inflation” because there was a large component of „untainted inflation” driven by supply and other shocks unique to the Covid-19 pandemic.
Decoupling those impacts „gives some potential to have a 'soft landing’ of a form that is certainly unusual,” Goolsbee said, adding that monetary tightening slows the economy and lowers inflation without triggering a recession.
’Against History’
The debate over how much damage, if any, U.S. Federal Reserve rate hikes to control inflation might do to the job market and economic growth is sometimes intense.
Senior policymakers like former Treasury Secretary Larry Summers and Nobel economics laureate Joseph Stiglitz have taken roughly opposite views: Summers says unemployment would have to rise significantly for inflation to die, and Stiglitz maps out why the pandemic makes this time different.
The risks are central to the Fed’s debate over whether to pause or continue rate hikes, and the outcome remains unresolved. For example, Schnabl’s study opens up the possibility that bank metrics can change rapidly as deposits become more expensive.
How this could shape the 2024 US presidential election, whether it will be held under the blue sky of unemployment and high inflation or a strong job market and reasonably stable prices.
Research on past periods of high inflation indicates that it can take a recession to regain control. Federal Reserve Chairman Jerome Powell admitted at a recent press conference that some of the best results expected by the central bank would be „anti-historic.”
Nevertheless, some argue that the roots of the once-in-a-century health crisis and the government’s unprecedented response to it could allow for an unusual resolution to the onset of hyperinflation in 2021.
’Clear signs of progress’
Widely anticipating an economic slowdown from the „optimistic side” of the economic forecasting community, Goldman Sachs chief economist John Hutches said during a panel presentation on Amelia Island that „his expectation is that the economy will continue to expand even as inflation moderates.” .”
Hutchius said the bank credit crunch is real, but is expected to deduct only four-tenths from economic growth, which he recently predicted would still be above the consensus 1.6% this year.
At the same time, he said the job market was showing an „unprecedented” break from past behavior with a steady decline in job openings without any rise in the unemployment rate.
Inflation is „starting to show clear signs of improvement,” Hatchius said, adding that a set of „exceptionally benign” changes is creating a gradually softer labor market, even with a low 3.4% unemployment rate.
Whether the continued health of the labor market is consistent with a steady decline in inflation from its current levels of over 4% toward the central bank’s 2% target remains largely unknown.
Sparing the front lines
Richmond Fed President Thomas Parkin said in a Reuters interview that he revised his forecasts for this year to include slower economic growth and a lower unemployment rate than he had initially expected.
Layoffs appear to be underway, he said, adding that job losses are concentrated in white-collar industries, which may be better off keeping costs or taking time off work, while hiring continues in front-line service jobs. International distribution.
„You don’t see frontline people getting laid off. You see professionals getting laid off,” Parkin said, adding that he thinks a group is less likely to file unemployment claims and devote more time to further training or other work. activities.
This would allow the job market to cool without increasing unemployment.
Economists and policymakers at this week’s conference pointed to other factors that add to the case for a soft landing.
As industries such as construction, housing falls, jobs are halted as building turns to public sector and infrastructure projects. Households still have $500 billion in pandemic savings, their leverage is low and liquidity has improved through mortgage refinancing when interest rates were low, savings that can now support spending.
Even policymakers who see a soft-landing path will be able to navigate it, or shocks from bank debt or other parts of the economy won’t ultimately cause the recession they want to avoid.
But the „uncertainty” about what’s working in the economy at this point could overshadow developments that some officials believe are working in their favor.
„The dynamics that we have today are really unique, which means that we have strength in certain areas of the economy that you don’t normally have when we’re in this part of the policy cycle,” Atlanta Fed President Raphael Bostick said. Appearance with Coolsbee. „That’s why I have some hope … that we’ll generally see inflation return to our target without major disruptions.”
Report by Howard Schneider; Editing by Don Burns and Paul Simao
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