The Fed wants to cool spending; a strike, a shutdown and student loans may add ice

WASHINGTON, Sept 18 (Reuters) – U.S. Federal Reserve officials have tentatively accepted the possibility of curbing inflation without a recession, but this week the autoworkers strike, the federal It raises new questions, including a potential government shutdown and the squeeze on student loans for consumers. Risk to its best outcome.

The United Auto Workers union on Friday launched strikes against all three major automakers, initially striking about 13,000 workers at the three plants, but that number could rise. Congressional Republicans have blocked negotiations because federal lawmakers have until September 30, when current spending authorizations expire or the federal government must shut down. Student loan repayments will resume in October after a three-year suspension due to the coronavirus pandemic.

Taken individually, nothing is likely to change policymakers’ perceptions of short-term risks or alter their policy focus on controlling inflation, which remains high.

But the economy is already expected to slow in the final months of the year, and prolonged disruption to the auto industry and federal agencies could cause consumer spending to fall, hurting the Fed’s efforts to combat inflation and pushing up auto prices. There is a possibility that unpredictable results may occur. This is the kind of blow to business and consumer confidence that could mean the difference between a “soft landing” and a recession.

Is there a “hole” ahead?

As millions of consumers face student loan payment renewals that divert them from other spending in October, Goldman Sachs economists predict that a fourth-quarter “pothole” will reduce total sales by 1. It warned that the index could fall by more than a percentage point, tempering its generally bullish outlook. Growth of domestic products.

At that point, the economy will still be growing at an annual rate of 1.3%, according to Goldman’s estimates. But the amount they see being cut from GDP is higher than the 1% growth rate Fed officials had expected the economy to grow in June, and also higher than many private forecasts. .

Vincent Reinhart, chief economist at Dreyfus & Research, said the Fed’s aggressive interest rate hikes are still having an impact on the economy, with banks tightening credit and consumers reaching the limits of their pandemic-era savings. He said it may not take long to get the economy off track. Mr. Mellon is the former head of the Federal Reserve’s monetary policy division.

A further risk, Reinhart said, is that the Fed’s balance sheet deterioration is now reaching levels that could unexpectedly tighten financial conditions.

“Recessions result from shocks to economic vulnerabilities, which become more vulnerable if they are delayed in the tightening cycle, if funds rates are restricted and buffers are reduced,” he said. “This type of event would have been canceled a year ago.”

The Fed is already expected to keep interest rates on hold at 5.25% to 5.5% at its Sept. 19-20 meeting, and new risks may only change the tone and language of the meeting.

In any case, central bankers are offering little guidance on future decisions at this point. The rate hikes that began in March 2022 to avoid high inflation are likely nearing an end, but we are not ready to say with certainty that rate hikes have peaked or to indicate when it is time for rate cuts. I haven’t been able to do it. Next step.

Economic data in recent months has generally worked in the Fed’s favor, with inflation receding even as the economy continues to grow above trend and add a healthy number of jobs each month.

But each successive shutdown of two major sectors — with potentially as many as 146,000 autoworkers on strike and potentially 800,000 federal workers without pay — chipped away at growth and confidence. It will be.

Analysts fear that the stage could be set for a protracted conflict on both fronts.

“This unique situation means that the auto supply chain remains disrupted by the pandemic, and intense negotiations are expected as workers try to regain ground lost to inflation amid record profits for the industry.” “This means that the impact of a strike could be particularly harmful,” said Michael Pearce. Chief US Economist at Oxford Economics.

An escalation of the strike could cut car production by a third, and given the spin-off effects on the economy as a whole, growth could be reduced by up to 0.7 percentage points as long as the strike continues. This is a large amount for an economy whose growth trend is estimated to be: Approximately 1.8% per year.

While some government shutdowns have been short-lived, the last government shutdown in late 2018 and early 2019 lasted five weeks. Goldman estimates that 0.2 percentage points of GDP would be lost per week, resulting in an additional 1% drop in annual output.

This trend is difficult to predict, and some analysts have even suggested that a hit to consumer spending could help fight inflation, but events of this kind often result in temporary growth By simply slowing the rate, growth will later pick up as workers receive back pay and higher wages.

A Congressional Budget Office report on the last government shutdown found few lasting effects.

However, it is also difficult to predict the “inflection point” when households and businesses will begin to downsize their businesses all at once. Some economists say the resumption of student loan repayments for tens of millions of borrowers may already be reshaping behavior.

Pantheon Macroeconomics’ Ian Shepherdson and Kieran Clancy said this week that the spike in payments to the U.S. Department of Education coincided with a decline in online searches for things like “flight tickets,” “restaurant reservations,” and “new car.” He pointed out that there was. The airline’s daily passenger numbers are falling, and other hard data “does not offer any hint of short-term improvement.”

Retail sales in August exceeded expectations, mostly due to higher gasoline prices. Other sales increased by only 0.2%.

Reinhart said that even if the economy improves, the Fed won’t provide relief until the fight against inflation is over, putting added pressure on businesses and households with high interest rates.

“They have been living with the risk of recession,” he said. “They’ve been preparing for it for a year and a half.”

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