The Fed Pauses But Warning Signs Flash

The Federal Reserve just wrapped up its latest policy meeting, and they decided to pause on interest rate hikes, keeping rates unchanged at 5.25%. However, Fed Chairman Jerome Powell signaled there is likely one more rate hike coming later this year. 

In this week's podcast episode, we do a deep dive into the Fed meeting and warning signs he sees flashing in the economy. Here are some key takeaways:

Runaway Government Spending

The Federal Government has been engaging in massive deficit spending - over $1 trillion added to the national debt in just the last 3 months! This has happened despite the Fed's tightening policies aimed at curbing inflation. 

As Quinton explains in this episode, "What's happening is the Federal Government is undermining the Federal Reserve's policy right now. They're undermining every attempt they have to stop inflation."

Fed Chairman Powell brazenly brushed off questions about the dangerous debt levels. This is a stark contrast to Paul Volcker who in the 1980s was very vocal in criticizing the government's fiscal policies. This shows signs that the Fed's independence is being compromised.

Recession Warnings

On top of the inflationary pressures from rampant spending, we could potentially be seeing early signs of an impending recession. 

Looking at consumer spending trends from the graph below, we can see that entertainment and apparel spending are on the decline. This indicates consumers are pulling back on discretionary purchases - a classic recession red flag.

Meanwhile, costs for housing and transportation continue to rise. There are various factors inflating these expenses, from high mortgage rates to pricier airline tickets. But the trend of consumers spending more on essentials while cutting discretionary expenses paints a concerning economic picture.

The Fed's Slippery Slope 

We see the Fed's latest pause as a signal they are nearing the end of their rate hiking campaign. We expect one more small increase, but it’s possible the central bank will then be forced to reverse course and start cutting rates in 2023.

While Chairman Powell touts "real" interest rates now being positive with inflation falling, this is likely a temporary blip. It is likely that inflation will be heading higher again due to the government's massive deficit spending.

And even with positive real rates, the economy is showing recession warnings. Economic gravity will prevail and the Fed's slippery tightrope act will eventually fall into rate cuts.

Bottom Line

In conclusion, the warning signs flashing across different economic sectors warrant diligent observation and cautious optimism. It is crucial for American citizens to stay informed, make educated decisions, and prepare for possible economic headwinds. The intersection of escalating government debt, a potentially compromised Federal Reserve, and early signs of consumer pullback combine into a cautionary tale of economic prudence and resilience.

Whether the unfolding economic story will be one of resilience and recovery or of downturn and recession is yet to be seen, but the warning signs suggest that a proactive and informed stance may be the key to weathering the potential storm.