NEWARK – On Thursday, Lyons Companies and the University of Delaware will host their annual Economic Forecast, where Federal Reserve Bank of Cleveland President and CEO Loretta Mester will offer her thoughts on current economic trends and how the Fed should respond. Also appearing with Mester are Michael K. Farr, founder of investment firm Farr, Miller & Washington, and Hilary Provinse, executive vice president and head of mortgage banking for Berkadia, who has spent time on Wall Street as well.The free virtual event begins at noon Thursday, and the public is invited to register online.As a sneak preview of the annual event, Farr and Provinse weighed in on a few questions from Delaware Business Times. What do you think is the most important factor driving inflation today?
[caption id="attachment_194933" align="alignright" width="300"] Michael Farr addresses the crowd at the 2020 Lyons/University of Delaware Economic Forecast summit. | DBT PHOTO BY JACOB OWENS[/caption]
Farr: Inflation is being driven by a surge in demand caused by a stimulus-fueled economic recovery combined with supplies that have been limited by pandemic disruptions. As prices surge, the Federal Reserve is trying to stop inflation without squashing the economic recovery. It’s a near-impossible task.Provinse: I think it’s helpful to separate inflation into two stories: what got us to 7.5%, and what will keep us elevated. Pent up consumer demand and buyers flush with savings from the COVID shutdown created real supply chain bottlenecks. This, coupled with increases in housing costs, gasoline, and just about everything else has led to a sustained period of inflation much longer than the Fed had initially believed would occur. What will keep inflation above the Fed’s preferred target is wage growth. Whether you look at average hourly earnings, survey data, or the Fed’s Wage Growth Tracker, increased earnings and the cost of employment will likely place a floor on inflation above 2%, which could drive an even more hawkish tone from the Fed over the next year.How many, if any, rate increases do you anticipate from the Fed this year? What rate do you think 2022 ends at?
[caption id="attachment_220619" align="alignleft" width="122"] Hilary Provinse | PHOTO COURTESY OF BERKADIA[/caption]
Farr: I expect fewer rate hikes than most strategists: 3 or perhaps 4. The removal of fiscal stimulus (additional unemployment benefits, suspension of student loan payments, etc.) to consumers along with the economic pressures created by the Ukrainian conflict and an easing in supply constraints will mean that the Federal Reserve will not be required to take multiple severe actions. In short, much of the current inflation will stall because of headwinds that are already underway.Provinse: Five or six, depending on how strong the Fed starts their rate hikes in March. The recent shock to oil prices should give the Fed ammunition to bump 50 basis points in March, should they desire, and would likely keep the rate hikes to a manageable five. If the Fed chooses a 25 basis point March hike, they’ll likely move at almost every meeting to demonstrate their strong intention to combat inflation. For rate forecasts, I’d expect Fed Funds rate to be around 1.5%, while the yield curve continues to flatten and 10-year UST ends between 2.25% and 2.5%.How would you rate the Biden administration’s response to the economic challenges so far?Farr: The Biden Administration has been dealing with unique challenges for which there is no roadmap. Chair Jay Powell has led some heroic actions to stave off what could have easily been another Great Depression. The Fed has not been flawless. I believe they kept monetary stimulus in place for far too long. That said, great risks lie ahead. Almost every rate tightening cycle has led to recession. I expect this cycle will ultimately lead to recession too, though it could take a couple of years.Provinse: The disarray and infighting in the Democratic caucus makes it hard to ascribe success or fault purely to the administration. To characterize the broader policy response to economic challenges I would have to call it lackluster. The stimulus included in the Build Back Better Act and the resultant debts associated are better off not incurred and would likely have exacerbated inflationary pressure. The administration seems to be relying on the Fed to combat economic issues and punting on policy fixes.