{"id":57418,"date":"2022-07-19T08:00:02","date_gmt":"2022-07-19T12:00:02","guid":{"rendered":"https:\/\/www.ino.com\/blog\/?p=57418"},"modified":"2022-07-19T15:53:06","modified_gmt":"2022-07-19T19:53:06","slug":"are-we-returning-to-normal","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2022\/07\/are-we-returning-to-normal\/","title":{"rendered":"Are We Returning To Normal?"},"content":{"rendered":"

It may be time to start thinking that this recent bout of high inflation won\u2019t really last as long as we thought.<\/p>\n

Right now the outlook is starting to look fairly positive: Oil prices are coming down,\u00a0the chip crisis seems to be over \u2014 the shortage has quickly turned into a glut \u2014 supply chain problems have eased. <\/p>\n

At the same time, technology will continue to make things more efficient,\u00a0just as it did before the Covid-19 lockdown, thus easing price pressures. <\/p>\n

Retailers are overloaded with inventory and are already unloading it at steep discounts.\u00a0And stores can only raise prices so much before consumers say no. Do I really need that $6 box of cereal? Probably not.<\/p>\n

Does this mean the Federal Reserve won't need to be as aggressive in raising rates as we thought? Was the Fed - dare I say it \u2014 correct after all in believing that inflation was transitory, and the only thing they got wrong was how long that temporary period would be and how high inflation would rise? <\/p>\n

<\/div>\n

Maybe it won't be as long as most everyone thinks.\u00a0Like most things lately in the U.S. \u2014 climate, Covid, the economy \u2014 crises never turn out to be as bad as the panic-mongers would have us believe.<\/p>\n

Indeed, consumers don\u2019t appear as worried about inflation as most people think. Consumer confidence numbers have dropped sharply, it\u2019s true, but retail sales have held up, witness the 1.0% rebound in June after falling 0.1% the prior month, according to last Friday\u2019s report. <\/p>\n

That\u2019s mainly because we still have a robust job market and incomes continue to rise, maybe not at the same rate as inflation but not far behind. The economy added 372,000 jobs in June, down slightly from May\u2019s gain of 384,000 but 100,000+ more than forecasts. <\/p>\n

The unemployment rate remained near the 50-year low of 3.6% and about where it was before the pandemic. Most importantly, perhaps, average hourly earnings rose 5.1% in June from a year earlier, not far below the core inflation rate of 5.9%.<\/p>\n

Does this mean we\u2019re out of the inflationary woods that our monetary and fiscal authorities have largely created by flooding the economy with money when it wasn\u2019t totally necessary? I wouldn\u2019t go that far. <\/p>\n

While income gains seem to be running only a little behind the rate of inflation, the same can\u2019t be said for interest rates. On Friday the yield on the U.S. Treasury\u2019s benchmark 10-year note had fallen below 3.0%. Can the Fed realistically get inflation down to its target rate of 2% if inflation is double that on long-term bond yields? It doesn\u2019t seem possible.<\/p>\n

However, it\u2019s useful to note that other bellwether rates have risen closer to the rate of inflation, thanks to the threat\/promise of more Fed rate hikes. Specifically, the average rate on a 30-year fixed-rate mortgage in June hit 5.52%, according to Freddie Mac, more than 200 basis points above where it stood at the beginning of the year. <\/p>\n

That\u2019s certainly not good news if you\u2019re planning to finance the purchase of a house soon, but it does stand the possibility of removing some of the froth from the housing market \u2014 both purchases and rentals \u2014 that is keeping many young people from starting out on their own. Long term, that\u2019s a good thing.<\/p>\n

More than any other statistic, perhaps, housing costs were an area where the Fed proved woefully inept in measuring inflation over the past decade or so. <\/p>\n

Ever since the global financial crisis of 2008, the Fed banged its collective head against the wall trying to raise the inflation rate to 2%, while all along inflation was running well above that, if only the Fed\u2019s army of Ivy League-trained economists had paid attention to what was going on around them in home prices and rents. <\/p>\n

So where does that leave us? Is the Fed going to stop tightening because inflation may appear to be under control? No, nor should it.<\/p>\n

<\/div>\n

For the past 15 years or so, ever since the end of the global financial crisis in 2008, we\u2019ve heard constant pleas (including from yours truly) that monetary policy needs to \u201cnormalize,\u201d meaning to some traditional, pre-2008 level of interest rates. Alas, it never came to pass. <\/p>\n

The post-crisis economic growth rate was never strong enough to persuade the Fed to ease monetary policy and raise interest rates significantly. Then we had the pandemic, which moved everything back to square one, with Fed policy going well beyond where it had ever gone before.<\/p>\n

Now, with the economy still growing fairly strongly despite multiple obstacles \u2014 supply chain disruptions, war in Ukraine, inflation \u2014 that should give the Fed comfort to continue to raise rates and reduce its balance sheet without overly disrupting consumers, who continue to travel, eat at restaurants, and go to ballgames. <\/p>\n

Let\u2019s hope it doesn\u2019t lose its nerve as it has multiple times before. That should be a boon to stocks, which could certainly use a lift.<\/p>\n

It\u2019s time to get back to normal. <\/p>\n

George Yacik<\/a>
\nINO.com Contributor<\/p>\n

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

It may be time to start thinking that this recent bout of high inflation won\u2019t really last as long as we thought. Right now the outlook is starting to look fairly positive: Oil prices are coming down,\u00a0the chip crisis seems to be over \u2014 the shortage has quickly turned into a glut \u2014 supply chain […]<\/p>\n","protected":false},"author":16,"featured_media":56884,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6920],"tags":[1750,230,3554],"class_list":["post-57418","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-ino-com-contributors","tag-inflation","tag-interest-rates","tag-the-fed"],"yoast_head":"\nAre We Returning To Normal? - INO.com Trader's Blog<\/title>\n<meta name=\"description\" content=\"With the economy still growing despite multiple obstacles, that should give the Fed comfort to continue to raise rates and reduce its balance sheet.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.ino.com\/blog\/2022\/07\/are-we-returning-to-normal\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Are We Returning To Normal? 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