Fed Signals Fear as Consumer Confidence, Manufacturing Falls

A Federal Reserve chairman has warned that the central bank’s policies may be hurting growth as several economic indicators soured.

In an interview with the Financial Times, Dallas Federal Reserve head Robert Kaplan warned of the “downside” to a more tightening monetary policy. Additionally, he noted that the Fed’s previous optimism was possibly too early as inflation and other economic data points became increasingly sluggish in early 2016.

A Federal Reserve chairman has warned that the central bank’s policies may be hurting growth as several economic indicators soured.

In an interview with the Financial Times, Dallas Federal Reserve head Robert Kaplan warned of the “downside” to a more tightening monetary policy. Additionally, he noted that the Fed’s previous optimism was possibly too early as inflation and other economic data points became increasingly sluggish in early 2016.

“In order to reach our inflation objective we may need to be more patient than we previously might have thought. If that means we take an extended period of time where we stop and don’t move, that may also be necessary. I am not prejudging that,” he said.

Kaplan cited high debt levels, overcapacity, demographic headwinds, and technological disruptions as disruptive trends that could hurt inflation in the United States. In a rare move among economists, Kaplan noted that technological improvements might actually be hurting growth expectations as they lower companies’ purchasing power.

Traditionally and conventionally, economists see technology as being wholly beneficial to growth and not a headwind in a macro sense.

Nonetheless, growing data points since 2009 have supported Kaplan’s viewpoint that technological disruption is not helping growth in the midst of aging populations, tougher comparables in emerging markets, and fiscal policy headwinds that have caused inflation rates to rescind and investment rates to remain moribund.

Most recently, the Richmond, Virginia Federal Reserve regional bank released a report that manufacturing had contracted. Its February Manufacturing Survey fell to -4 versus an expectation of a 2 reading, which would have been flat from the 2 reading in January. Survey respondents reported slower manufacturing and a decline in new orders. In a trend consistent with other recent studies, including the recently released Markit flash PMI report, however, employment saw a modest improvement.

“Shipments and the volume of new orders decreased modestly this month. Manufacturing hiring continued to increase at a modest pace, while average wages grew mildly and the average workweek lengthened slightly. Prices of raw materials and finished goods rose at a slower pace this month, compared to January,” the Richmond Fed noted in its report.

Additionally, consumer confidence is weakening even as job data shows small signs of improvement. The Consumer Confidence Index declined in February, going from 97.8 revised in January to 92.2 in February, far below 97.2 expectations. The Present Situation Index fell to 112.1 and Expectations Index plummeted to 78.9 from 85.3.

Conference Board Director of Economic Indicators, Lynn Franco, was extremely dour about the report’s results. “Consumers’ assessment of current conditions weakened, primarily due to a less favorable assessment of business conditions. Consumers’ short-term outlook grew more pessimistic, with consumers expressing greater apprehension about business conditions, their personal financial situation, and to a lesser degree, labor market prospects,” she said.

“Continued turmoil in the financial markets may be rattling consumers, but their assessment of current conditions suggests the economy will continue to expand at a moderate pace in the near-term.”