Fiscal Power Pendulum Threatens Monetary Policy Agenda

November 8, 2022

Today is Election Day. While each election holds its own level of importance, today’s ballot seems to hold particular significance as the outcome will determine the directional momentum of the economy for some time as the Federal Reserve struggles to slow demand in order to rein in inflation.

As many political analysts have noted, including Stifel’s own Chief Washington Policy Strategist Brian Gardner, a shift in power towards Democrats is likely to result in further expansionary fiscal policy, while a power pendulum swing to the right is likely to result in gridlock. Of course, keep in mind, neither side appears to be the party of fiscal responsibility. But politics aside – whether one supports or opposes Democratic items potentially on the agenda post-election – from a monetary policy standpoint, the latter outcome is most preferred if it results in reduced fiscal outlays, or stalls a further expansion of the money supply, arguably a sizable contributory factor to the current inflationary environment. Again regardless of support or opposition for further government initiatives be that to increase American competitiveness or create jobs, having fiscal and monetary policy move in opposite directions will make it increasingly difficult for the Fed to tame inflation and restore price stability.?

According to a Gallup poll, the top issue for voters at this point is the economy. With that, according to FiveThirtyEight, the GOP has an 84% chance of winning the House and 59% odds in the Senate.

Speaking of the Fed’s commitment to stable prices, yesterday, Richmond Fed President Thomas Barkin vowed the Committee would continue to raise rates until the Fed’s mandate of stable prices is met. Speaking at an event hosted by the Richmond Fed, Barkin said,?“We have the tools to bring inflation down, no matter what disruptions occur.”?In other words, not only is the Committee willing to raise rates higher than expected, but also policy makers are willing to force the economy into recession in order to meet the Fed’s mandate of stable prices.

Barkin’s comments come on the heels of Former New York Fed President Bill Dudley’s remarks yesterday,?suggesting Friday’s employment report was another indication of the additional work the Fed has yet to do to reinstate price stability. Speaking at a finance conference in Singapore, he said the October employment report was?“not consistent with a loosening labor market.”

Also yesterday on the economic calendar, consumer credit rose by $24.98b in September, less than the $30.0b expected and a two-month low. With fiscal stimulus fading and savings rapidly declining, consumers are increasingly turning to credit cards and other types of debt to supplement spending. Of course, while the household balance sheet is beginning from a relative position of strength with many paying off debt during the pandemic, this is far from a sustainable solution as real income growth continues to trend negative.

This morning, the NFIB Small Business Optimism Index declined from 92.1 to a reading of 91.3 in October, slightly more than the expected decline to 91.4 and a three-month low.

Tomorrow, the latest read on mortgage applications will be released.

Later in the week, on Thursday, we will have the latest read on consumer prices. In September, the headline CPI rose 0.4%, and 8.2% over the past 12 months, down from 8.3% in August. Stripping out food and energy costs, however, the core CPI rose 0.6% in September and 6.6% over the past 12 months, more than the 6.5% rise expected, and a notable uptick from 6.3% pace reported in August. For October, inflation is expected to rise 0.6% for the month and 7.9% year-over-year. While the core is expected to rise 0.5% and 6.5% from this time last month.

On Friday, the latest release of consumer optimism will be released and is expected to decline from 59.9 to 59.5 in November. While consumers are increasingly under pressure as prices rise, leading to a cooling of confidence, businesses, particularly small businesses, are also under mounting pressure amid rising labor costs, more expensive parts and materials, and skyrocketing rental prices.

?-Lindsey Piegza, Ph.D., Chief Economist