Powell to Testify, Gas Tax Holiday Not Much to Celebrate

Federal Reserve Chairman Jerome Powell takes the stage today beginning his two-day policy testimony before Congress. As fears of recession are rapidly rising, and American households are hurting, Powell is likely to face tough questions regarding the Committee’s decision to raise rates at a larger 75bp clip at last week’s June FOMC meeting.

If the Fed concedes that inflation is largely being driven higher by international or supply-side factors that domestic monetary policy cannot control, why did the Committee opt to raise rates at a larger interval?

Given the cost-push nature of inflation, why is the Fed convinced price pressures will abate back down nearer the Fed’s 2% target range by next year per the Summary of Economic Projections (SEP)? Is the Committee assuming balance is restored to the global marketplace and resolution is reached overseas? If yes, and this is the catalyst to lower inflation, why did the Committee feel compelled to raise rates at a larger interval??

If the Fed concedes raising rates at a faster clip will reduce growth markedly, slashing its forecast by nearly half, and risk the prospects of a soft landing, why did the Committee risk raising rates at a larger interval??

And finally, if the Fed understands that consumers are already facing tremendous?“economic hardship”?because of global events including $5 a gallon gasoline, and that raising rates simply increases the cost of capital and reduces access to financing for those that need it most to afford gas and groceries, why did the Committee need to raise rates even higher?

Powell is likely to offer more details on the reasons behind last week’s policy announcement, but those answers are likely to offer little comfort to investors. U.S. futures slumped overnight as market participants brace for a downturn.

Meanwhile, President Biden earlier this week reiterated that a U.S. recession isn't?"inevitable.”?The President’s comments follow a stagflation warning from former Treasury Secretary Larry Summers.?“We need five years of unemployment above 5% to contain inflation - in other words, we need two years of 7.5% unemployment, or five years of 6% unemployment, or one year of 10% unemployment,"?he declared.?"There are numbers that are remarkably discouraging relative to the [Fed] view. Is our central bank prepared to do what is necessary to stabilize inflation if something like what I've estimated is necessary?"

While we agree stagflation is much more harmful to the economy than a run-of-the-mill recession, the determining factor is accompanying prices pressures, much of which are out of the Fed’s control. Remember, the Fed can raise rates to tamp down demand-side pressures, but raising the cost of capital does nothing to address supply-side pressures resulting in the aftermath of Covid-19 or more recently as the result of international conflict.

After last week’s carnage, the market is struggling to regain its footing. Yesterday stocks pushed slightly higher, with the Dow Jones Industrial Average rising 641.47 points, or 2.15%, to 30,530.25, the S&P 500 climbing 2.45% to 3,764.79, and the Nasdaq Composite rising 2.51% to 11,069.30.

This morning, however, equities are trading lower with the Dow down 1.39% at 30,101 as of 8:38 a.m. ET.

Yields, meanwhile, rose yesterday with the 10-year rising 5bps to close at 3.28%.?

This morning, however, yields are trading lower with the 10-year down 10bps at 3.18% as of 8:40 a.m. ET.

Aside from Powell, other Fed speakers today include Richmond Fed President Thomas Barkin who will speak at 9:00 a.m. ET to West Virginia’s Chamber of Commerce. At 12:00 p.m. ET, Barkin will speak again during a virtual event held by the Federal City Council. At 12:55 p.m. ET, Chicago Fed President Charles Evans will discuss the economic outlook at an event in Cedar Rapids, Iowa hosted by the Corridor Business Journal. Finally today, at 1:30 p.m. ET, Richmond Fed President Thomas Barkin and Philadelphia Fed President Patrick Harker will both discuss the economic outlook during an event hosted by the Philadelphia Fed and the Official Monetary and Financial Institutions Forum.

As the November elections approach, those in Washington are struggling to come up with a solution to higher food and energy costs, or at the very least offer an appearance of searching for a solution. According to reports, President Biden will ask Congress today to enact a three-month gas tax holiday. According to White House officials, Biden will ask that both the 18 cent-per-gallon federal tax on gasoline and the 24 cent-per-gallon tax on diesel be suspended.

While even a minimal – minuscule – reduction in the cost of gasoline is a step in the right direction, a removal of $0.18 still leaves the average cost of fuel at $4.78, a 45% increase from the start of the year and still near the highest prices since mind-June when prices hit $5.02 a gallon, the highest on record.

Thus, as a more meaningful alternative, the Biden administration could release millions of acres from the Conservation Reserve Program to increase food supply and enact measures often used in emergencies following natural disasters to increase domestic energy production in the short-term. And longer-term, the government could promote investment in domestic energy production including “regular and predictable lease sales as well as streamlined regulatory approval and support for infrastructure such as pipelines,” as one refiner wrote in a letter the president.?

Of course, those in Washington cannot control the outcome of the Russia-Ukraine conflict or China’s Zero-Covid policy, however, there are impactful initiatives the administration could take to provide immediate relief to the American public, as well as policies to increase domestic production longer-term.

Yesterday, the Chicago Fed National Activity Index dropped from 0.40 to 0.01 in May, a five-month low.

Also yesterday, existing home sales dropped 3.4% from 5.60m to 5.41m in May, the weakest since June 2020. According to?Bloomberg, existing home sales were expected to decline 3.7% in May.?In the details, single family sales fell 3.6% and multi-family sales decreased 1.6%. Year-over-year, existing home sales dropped 8.6% in May, the tenth consecutive month of decline. As a result of a decline in sales, the months’ supply of existing homes rose from 2.2 to 2.6 months, averaging 2.2 months over the past three months. From a price standpoint, the median cost of a previously owned home rose 14.8% in May from a year earlier to $407.6k, a record high.

This morning, the economic calendar is empty.

Tomorrow, initial jobless claims are expected to decline 3k to 226k in the week ending June 18, and the Kansas City Manufacturing Index is expected to drop from 23 to a reading of 15 in June.

Also tomorrow, Federal Reserve Chairman Jerome Powell will testify before the House Financial Services Committee at 8:00 a.m. ET.

Later this week, on Friday, new home sales are expected to decline 0.2% from 591k to 590k in May.

Additionally on Friday, at 7:30 a.m. ET, St. Louis Fed President James Bullard will discuss central banks and inflation at an event hosted by UBS in Zurich, and at 4:00 p.m. ET, San Francisco Fed President Mary Daly will speak at a Shadow Open Market Committee Conference in Los Angeles.

-Lindsey Piegza, Ph.D., Chief Economist