Federal Reserve Chairman Jerome Powell could influence the current debt ceiling debate by informing Congress that the Fed will be forced to continue raising interest rates to counter the inflation fueled by government overspending, Breitbart Economics Editor John Carney said in interview Tuesday with Fox Business host Larry Kudlow.
“It would be nice if fiscal and monetary policy were on the same page,” Kudlow said, noting that former Federal Reserve Chairmen Alan Greenspan and Paul Volcker were not afraid to weigh in on fiscal policy debates on Capitol Hill.
Carney explained how Powell could convey a warning about the impact of government spending on inflation without appearing “overly political.”
“He could do this very easily without seeming overly political,” Carney argued. “He could just say, ‘Look, you have a choice. If you keep overspending, then we’re going to push interest rates up to 7 percent. Or you can cut back on the spending, and we don’t have to go extreme on interest rates.’ That’ll solve the inflation problem. And you can just say, ‘Look, that’s not my decision. It’s yours, Congress. You control the purse; but know that that’s going to be the consequence.’ And that will put so much pressure on them to get a deal done to cut back on spending.”
Kudlow turned to the topic of the expected recession.
“This is the most widely anticipated recession in the history of business,” Kudlow quipped. “I mean, how bad a shape is the economy in or not?”
“We keep expecting that sometime over the next two quarters we’ll start a recession, but that keeps getting pushed back further and further,” Carney explained. “It’s really hard to look at what’s happening right now with corporate profits and say we’re on the verge of a recession. One of the things driving corporate profits is the very strong labor market. Everybody has a job — 3.5 percent unemployment. Surveys showed that people aren’t afraid of losing their job at all. So, they’re still spending.”
CNBC’s latest All-America Economic Survey revealed that 67 percent of Americans are not worried about losing their jobs, Carney noted in Tuesday’s Breitbart Business Digest newsletter. And, as he noted in Monday’s newsletter, “Thirty companies in the S&P 500 reported earnings last week. Bank of America’s analysts report that 90 percent beat estimates for earnings per share, 73 percent beat on revenues, and 67 percent beat both.”
All of this suggests that the Federal Reserve will continuing raising interest rates, Carney argued.
“The Fed is definitely going to raise,” Carney told Kudlow. “They can’t afford to back down in front of the market that has been saying they’ve got to cut. I don’t think they can afford to say ‘No, we’re not going to raise.’”
The stability of the financial sector in the wake of the Silicon Valley Bank (SVB) collapse also gives the Fed room to hike.
“The thing that they were afraid of back in March, which was the Silicon Valley Bank collapse and the big financial crisis, it didn’t happen. We are basically through it. If you look at the numbers, yes, banks are still borrowing a lot from the Fed, but the Fed gave them a really good deal. So, of course, they’re going to keep borrowing from the Fed. And there are no signs of things getting worse, and things seem to be stabilizing.”
The housing market does not seem to be showing signs of fallout from the SVB collapse either.
“Even the National Association of Homebuilders survey said that they’re not seeing any sharp steepening of credit availability at all,” Carney noted. “And that’s one of the reasons homebuilder sentiment is up now four months in a row because they can borrow what they need to build the projects they want.”
In Monday’s Breitbart Business Digest, Carney wrote:
The most recent report from the Federal Reserve on bank balance sheets points to a waning of stress on the financial system. The balance sheets of large banks—defined as the top 25 banks by assets—expanded modestly, and the balance sheets of smaller banks contracted a bit. But there was not sign of a widespread flight from banks in general or from smaller to larger banks.
What’s more, lending expanded. Large banks saw their books of loans and leases grow by $13.1 billion, according to the Fed’s H.8 report. Small bank loan books grew by $3.1 billion. The largest driver of this expansion was commercial and industrial loans, which grew by $10 billion at large banks and $2.7 billion at small banks.
The fact that the loan market is not tightening as much as expected puts pressure on Fed officials to continue hiking rates to reach their two percent inflation target, Carney concluded.