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**OCTOBER 28, 2022**

Kuttner on TAP

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**** The Economy Is Still Robust

Will the Fed take that health as a cue to keep strangling it?

The third-quarter numbers on economic growth, released yesterday by the
Commerce Department
<[link removed]>,
contained some surprisingly good news. But the good news is bad news, in
that it will likely reinforce the Fed's resolve to hike interest rates
by another three quarters of a point when our central bankers meet again
next week. This will be the fifth such rate hike.

First, the good news:

After declining in the first two quarters, the economy returned to
growth, expanding at an annual rate of 2.6 percent, meaning that we are
nowhere near a recession. Also good news was the fact that virtually all
of the growth was the result of increased U.S. exports.

Some of this export gain reflects temporary factors, such as increased
foreign needs for more U.S. energy. But industrial exports were modestly
up as well. And this suggests the wisdom of Biden's Made in America
policies. The more we make in America, the more we will export, and
that's good for both jobs and overall economic performance. The export
gains are all the more surprising given the overvalued U.S. dollar.

One other piece of good news was buried well down in the report, almost
as an aside. The inflation rate fell, more than expected. The core
Personal Consumption Expenditures Index purchases increased 4.5 percent
in the third quarter, a decline from the first two quarters.

This deceleration in prices suggests that inflation is moderating, due
to both improving supply chain factors and subsiding energy prices, as
well as the dampening impact of the Fed's previous rate hikes. As a
number of economists have warned, these rate increases take time to
cycle through the economy. And the decelerating inflation is one more
sign that price increases are not being driven by wage increases.

The Fed is at risk of moving too far too fast before its previous rate
increases have taken full effect. One ominous indicator was the huge
decline in housing investment, which dropped at an annualized rate of 26
percent. This is a prime consequence of the Fed's tight monetary
policy, which raises financing costs both to builders and to homebuyers.

Average mortgage rates, which were below 4 percent before the Fed's
rate-hike binge, are now in excess of 7 percent-and this at a time of
a dire shortage of affordable housing. This consequence suggests why
interest rate hikes are such a blunt instrument for dealing with
inflation, especially the kind of inflation that is as atypical and not
demand-driven as this one.

One other piece of slightly good news: Other central banks, which have
been forced by the Fed's hawkish policies to raise their own rates to
defend their currencies, are already moderating their tight-money
policies. Canada's central bank just raised its core rate half a point
rather than three quarters of a point, less than expected. And the
European Central Bank, citing recession risks
<[link removed]>,
signaled that future rate increases will probably be lower, too.

It remains to be seen when the Fed will follow suit and conclude that
the time for economic strangulation is over.

~ ROBERT KUTTNER

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As the Rio Grande Valley has shifted away from farmwork, progressive
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Republicans' Secret Swing-Seat Weapon? Dozens of Rich Nominees.
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Over half of the Republican nominees in competitive House races have
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U.S. Pressuring New Left-Wing Honduras Government
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After the Honduran government fulfilled a campaign promise by moving to
end special economic zones, two U.S. senators threatened to withdraw
foreign aid to the country. BY SARAH LAZARE

Altercation: Who Are the Real Antisemites?
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The actual hatred and the actual threat festers on the right. BY ERIC
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