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**MAY 12, 2023**

Kuttner on TAP

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**** More Reasons for the Fed to Relent

But don't bet the farm on a saner monetary policy.

The latest inflation report from the Bureau of Labor Statistics
<[link removed]> combined with the
continuing crisis afflicting regional banks gives the Federal Reserve
good reason to stop punishing the economy with high interest rates. But
it remains to be seen whether the Fed will come to its senses.

On Wednesday, the Consumer Price Index showed that inflation is
continuing to subside. Prices in April were 4.9 percent higher than a
year earlier, the lowest annual increase since the period ending April
2021. Wages were up 4.4 percent, so wages can't be accused of pushing
up prices. Adjusted for inflation, worker income continues to fall
behind the cost of living.

A deeper look at the details of the BLS report shows even better news.
Food prices did not increase at all in April. Gasoline increased only
three-tenths of 1 percent. And the cost of electricity declined.
Excluding food, energy, and shelter, where the BLS's measure is
misleading, the annual rate of inflation was just 3.7 percent.
(Commercial indexes show rental costs and housing prices subsiding.)

Meanwhile, the crisis of regional banks seems to be deepening, an
indirect casualty of the Fed's high interest rates. Last week, panicky
depositors pulled out 9.5 percent of PacWest's total deposits
<[link removed]>,
and stock trading had to be suspended because of chaotic market
conditions. Even so, the value of PacWest stock fell 23 percent
yesterday, and PacWest was said to be seeking a buyer.

As I suggested in a recent post
<[link removed]>,
the continuing woes of regional banks are the result of speculators
shorting the bank's stock, combined with bad Fed policy, which turns
such speculation into a self-fulfilling prophecy. Given all of this, you
might think that the Fed would relent. But several key Fed officials are
still obsessed with the unrealistic inflation target of 2 percent,
including New York Fed President John Williams
<[link removed]>.

Meanwhile, the economy continues to generate an impressive number of
jobs, 253,000 in April
<[link removed]>, or far more than had
been predicted by most forecasters. If we do manage the elusive "soft
landing," and avoid a recession, it will be no thanks to the Fed.

~ ROBERT KUTTNER

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