Because the market is taking Powell’s “soft” business language so much

Roger Ferguson

Michele Nagel | Bloomberg | Getty Images

Anyone who has read a Fed chairman who coined the term “soft-ish” for an economic landing, as Jerome Powell did on Wednesday, as a bullish sign, has a transient understanding of how much it means to make every single day’s trading action. . Shares plummeted Thursday after the relief rally, giving up all post-meeting FOMC gains and more, on the pace of the worst day of 2022 for equities.

Going back to the rougher economic reality, on Main Street, small business owners probably weren’t fooled by the false head of the market at all. They have a sobering view of the rest of 2022. More than 80% of small business owners say to CNBC that a recession will hit the US economy this year. The main business problem they face is inflation, which is driving up the prices they pay for commodities and other inputs, while they are growing increasingly fearful of passing on further price increases to the consumer.

The Fed’s battle against inflation is not one that Main Street has a lot of faith in right now. Only 27% of small business owners are confident in the Federal Reserve’s ability to control inflation, according to the newly released paper. CNBC Survey | SurveyMonkey Small Business for the second quarter of 2022while 70% say the Fed’s current rate hike plans will negatively impact their business over the next six months.

For Roger Ferguson, former Fed vice president and former head of investment giant TIAA, the Fed is doing what it can, but it can only do so much, and the downturn in the market and economic sentiment will not reverse quickly. He recently told CNBC the risk of recession is very high.

The reasons for inflation, including supply chain disruptions, the geopolitical shocks of the Russian war in Ukraine, and strong consumer demand in the US fueled by pandemic fiscal and monetary policy, can be mitigated by a Fed that is lifting rates, but not entirely controlled.

Fed forecasts also suggest inflation above 2% for at least another couple of years, said Ferguson, who is now vice president of the Business Council and distinguished colleague for international economics at the Council on Foreign Relations, CNBC Small. Business Playbook virtual Thursday event. “So there should be an expectation that inflation is going to be a bit of a challenge,” he said.

He cited some financial market indicators that predict that inflation will remain “stubbornly high” for several years to come, and while it is not in that area, he added, “it would be nice to say that inflation will be behind us relatively quickly. short, but it will be a matter, even if of minor importance, for more than a year, maybe two years “.

He sees signs that inflation could peak, but he doesn’t expect it to get drastically lower.

“We have to get used to inflation at high levels, not getting worse but not getting better,” Ferguson said.

For small businesses, this means that there will continue to be specific materials and commodities where supply remains tight and inflation high, and while inflation will appear to be improving slightly, it will be incremental in a macro sense, and is not the case with each individual input cost. Labor costs will remain high although wage inflation is also expected to start to slow.

“Powell noted in his post-meeting lecture that the Fed has tools, as he described it, ‘notoriously straightforward’ tools,” Ferguson said.

And while Powell has been clear that some factors may be beyond their control (such as the functioning of the supply chain, Covid and the war), “it has been clear that he sees a credible path to bringing inflation back to target. by about 2%, and do it in a way that is soft or a “soft” landing, “Ferguson said.

Inflation will not return to 2% anytime soon and the Fed has no illusions about that either, but it will slow down and become less of a factor in business decisions, but not across the board, or soon.

For small businesses, those who want to start a business today or are already running one, Ferguson said they should expect “a rather volatile time.”

Small businesses are a huge engine of the economy and employment growth, he added, and from the supply-to-labor issues, the long-term outlook is positive if the Fed can fight inflation. But before we know the answer to that question, the next 12-18-24 months “may be a bit difficult,” she said.

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