Federal Reserve rate hikes rival inflation pain in rural town

GREENSBORO, Alabama, Nov 3 (Reuters) – The community roundtable was convened for Atlanta Federal Reserve Chairman Raphael Bostic to hear how a city in the heart of the western black belt of Alabama addressed chronic issues such as population loss, housing, and the challenge of creating new jobs.

Curtis Travis, who represents the region in the state legislature, had another topic on his mind: interest rates.

The Fed’s rapid rate hikes — the fastest in a generation — may be a logical response to high inflation, Travis told Bostic during last month’s session, but it left small businesses and families dependent on the credit in a bind, and if a recession ensued it would be worse for his constituents than a rise in prices.

“Inflation is bad, but interest rates are also bad,” he told Bostic, explaining in a later interview that he thinks families in this rural area could cope more easily with hardships. higher prices than an increase in unemployment. The local unemployment rate is already almost a full percentage point above the US average of 3.5%.

“Things are just starting to improve in this area,” he said. “All of a sudden you get a recession? Right now you can sort of adjust. It’s easier to do than if you don’t have the chance. I can make the decision not to not buy a TV…I understand what they’re trying to do, but it’s too fast.”

It wasn’t the conversation Bostic was expecting, but it’s one the Fed may increasingly face as the impact of its aggressive rate hikes takes hold.

“It is very premature in my opinion to think or talk about pausing our rate hikes. We have a long way to go,” Fed Chairman Jerome Powell said on Wednesday. The biggest mistake would be to stop too soon and let inflation take hold, which he said would ultimately hurt lower-income households more.

Powell’s remarks came after policymakers approved their fourth consecutive rate hike of three-quarters of a percentage point, the fastest rise in the U.S. central bank’s key rate since 1981. is now in a range between 3.75% and 4%, the highest since the beginning of 2008.

Although officials have signaled they may be ready to temper further rate hikes, the pace and scale of the Fed’s actions have raised concerns far beyond a single rural Alabama legislative district. .

Inflation remains a top concern, with almost a third of respondents in a recent Reuters-Ipsos poll citing it as the most important issue facing the country, double the share worried about unemployment and use. A Pew Research Center survey conducted October 10-16 found that more than 90% of respondents were very or somewhat concerned about rising prices.

Yet people also worry about the cure and the disease.

In the 1970s and 1980s, Fed Chairman Paul Volcker’s attack on inflation triggered a recession that pushed the unemployment rate above 10% and then to a post-World War II high. . Volcker’s medicine was a stricter prescription than Powell’s – at one point the target federal funds rate approached 20% and the interest rate on a 30-year residential mortgage exceeded 18%.

But the 7% rate on a home loan is now the highest in 20 years, and the intensity of the Fed’s policy shift has raised fears that, like Volcker, the Fed could trigger a slowdown in the drive to rein in price.

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Democratic lawmakers, including Ohio Democrat Sherrod Brown, chairman of the Senate Banking Committee that oversees the Fed, recently wrote Powell in separate letters urging him to be fired.

“We must avoid having our near-term advances and strong labor market overwhelmed by the consequences of aggressive monetary actions to reduce inflation,” Brown wrote just before the midterm elections in which questions economics were a key point in the Republican campaign against the Democrats.

Brown’s argument, however, got only mild buying at the Fed, where the view remains firm that the biggest risk to the economy is not recession or an increase in unemployment, but a inflation taking root above its 2% target.

“I worry about the impact of rates on the economy,” Bostic said at the forum. “Inflation is worse.”

He continued: “Stable prices in the wider economy are essential” to sustainable levels of employment and growth.

The question is how much of a dent the Fed will have to make in the real economy on the way to a more sustainable, inflation-free expansion.

If, as some economists claim, prices are influenced more by forces such as commodity shocks resulting from the war in Ukraine, drought in agricultural areas, continuing supply difficulties or even aggressive businesses, this may be out of the Fed’s reach, absent a deep slowdown that is shaking up demand and, in the process, jobs. “They should stop and see how it goes,” while explaining that inflation is likely to stay above 2% for some time due to global forces pushing prices higher, said William Spriggs, professor in economics at Howard University and chief economist of the AFL-CIO union.

Spriggs said he felt the Fed’s rhetoric had pushed policymakers into a corner.

“When unemployment starts to rise, you haven’t given yourself a way out,” if inflation stays high, he said.

So far, this combination of the worst of both worlds has not developed.

Inflation hasn’t budged much since the Fed started raising interest rates.

But employment has not given up either.

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The number of job vacancies rose unexpectedly in September, and an October jobs report to be released on Friday is expected to show the economy added around 200,000 jobs during the month, still above the average of 183,000 observed during the decade 2010 to 2019.

Data from payroll provider UKG showed activity among its sample of 4 million, mostly hourly workers, fell around 1% from September to October, evidence of what the vice president of the company, Dave Gilbertson, said to be a modest slowdown in hiring but still consistent with a “soft landing” for the Fed.

“Cracks are starting to show,” Gilbertson said, noting a more than 2% decline in manufacturing crews. But “the general theme…is that the soft landing is still intact.”

Even in housing, a key part of the economy battered by high mortgage rates, the intertwined construction industry has yet to shed jobs, adding to the nerves of Fed policymakers to they keep raising rates, although, as Bostic said, they might have some explaining to do.

“I don’t think most people have in mind the idea that stable prices are helpful for everyone. And in more rural places where they’re used to just being broke, I think we don’t didn’t show such strength,” Bostic said. . But, “we can’t solve all the problems… We have to stay focused on the most important things, and at this point inflation is rising so it’s not the focus of everyone’s concerns. “

Reporting by Howard Schneider; Editing by Dan Burns and Suzanne Goldenberg

Our standards: The Thomson Reuters Trust Principles.

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