The Federal Reserve (Fed) is likely to begin tapering a key component of its monetary easing policy by the end of the year. At the conclusion of its Jackson Hole Symposium, held virtually on August 27, Fed Chair Jerome Powell said the economy has reached a point where it may not need as much policy support. Given that, the Fed may begin to curtail its asset purchase program, as long as the economy maintains its current progress.
Chair Powell emphasized that tapering does not portend a willingness by the Fed to increase interest rates. He noted the rationale for doing so must pass a more stringent test. Given that long-term inflation remains around the Fed’s target rate of 2% and the fact that the economy, as he said, “has much ground to cover to reach maximum employment,” an increase in interest rates could be further off.
A key measure of inflation is hovering at a 30-year high
The U.S. Commerce Department reported that the core personal consumption expenditures price index in July rose 3.6% from where it was a year ago, which was a continuation of the rate registered in June. That level of inflation has not been seen since May 1991.
Chair Powell, in his symposium speech, emphasized the importance of the Fed not making an “ill-timed policy move” in response to what it perceives as transitory inflation. He noted the Delta variant remains a near-term risk for the economy, and unemployment – at 5.4% for July – is “still much too high.” It may be relatively low for the pandemic, but that is still well above the 3.5% rate seen in February 2020, before COVID-19 brought lockdowns in the United States.1
Uncertainty from the Delta variant seen on multiple economic fronts
The increase in COVID-19 cases caused by the Delta variant has had an impact across many sectors of the economy.
- A spike in jobless claims: For the first time in five weeks, new claims increased, rising to 353,000 for the week ended August 21, according to the U.S. Commerce Department.2 It was an increase of 4,000 claims, up from 349,000 for the week before. While the advent of vaccines caused more businesses to reopen and enabled consumers to feel more confident about mingling with others in public, the surge in COVID-19 cases brought on by the Delta variant seems to have clouded the economic outlook.
- Shaken consumer confidence: The University of Michigan’s consumer sentiment index fell to 70.3 in August, down 13.4% from July, and one of the largest drops on record.3 University of Michigan economist Richard Curtin explained that consumers’ significantly reduced confidence stemmed from higher inflation, slower wage growth, and smaller declines in unemployment. The rise in new COVID-19 cases also appears to have dashed hopes that the pandemic could end soon.
- A decline in retail sales: In August, the U.S. Commerce Department reported that U.S. retail sales fell 1.1% for the month of July, as worries about the Delta variant may have curtailed consumers’ shopping activity.4
- One bright spot: An increase in manufacturing activity. Production at U.S. factories increased by 1.4% in July, according to the Federal Reserve.5 Automakers propelled that surge. July is a month when they usually shut down plants to retool. They suspended doing so this year to offset the impact that the semiconductor shortage has had on their production schedules.
A cause for some hope amid the spike in COVID-19 cases
While hospitalizations and deaths from COVID-19 have surged in some states like Florida, data analysis by the U.S. Centers for Disease Control and Prevention suggests the spikes may only last about two months.6 Some states, which were some of the initial Delta variant hotspots, like Arkansas and Missouri, have already seen declines in new cases.
While the Delta variant still could present surprises, the data offers a hopeful indication that the daily infection rate may begin to decline after an initial two-month surge.
In other, much-needed positive news on the COVID-19 front, the U.S. Food and Drug Administration (FDA), on August 23, granted full approval to the Pfizer/BioNTech COVID-19 vaccine for people aged 16 and older.7 The FDA’s action may put to rest concerns some people had about the vaccine and could be the seal of approval they needed to get inoculated.
House adopts the Senate’s $3.5-trillion budget resolution
Holding off a potential revolt from moderate members of her caucus, U.S. House of Representatives Speaker Nancy Pelosi got her Democratic majority to vote favorably on a resolution that constitutes a big step forward for President Biden’s sweeping economic agenda.
While the resolution is merely an outline, with the details needing to be worked through in future legislation, the resolution includes pledges to expand Medicare, invest more in education and family programs, and increase spending on efforts to combat climate change. The proposal would also raise taxes on corporation and wealthy families, while rolling back the tax cuts introduced during the Trump Administration.8
Education Department continues to cancel student debt
On August 19, the Education Department announced plans to cancel $5.8 billion in debt for borrowers who have a total and permanent disability.9 A week later, it announced plans to cancel $1.1 billion worth of loans for 115,000 borrowers who attended ITT Technical Institute.10 The now-defunct, for-profit school is accused of misrepresenting itself and steering students into pricey private loans. To date, the Education Department in the Biden Administration has canceled $9.5-billion of student debt for 563,000 borrowers,11 and progressives in the Democratic party are calling for the Administration to go even further to reduce the burden of student loans.
China continues its regulatory crackdown
In a series of moves over the past year, Chinese regulators have taken aim at the real estate, financial services, private education, and technology sectors. This month, the country passed new legislation to set tougher rules on how companies handle user data,12 a measure seen as part of a continuing effort to curb the influence of big Chinese tech companies, like Alibaba and Tencent, as well as the ride-hailing firm DiDi.
Use of consumer data and cybersecurity issues were cited as the primary justifications for regulators’ actions in July when it forced DiDi to stop taking on new customers and removed its app from Chinese app stores.13
The new Personal Information Protection Law resembles similar legislation from California and Europe, as it requires firms to get consent from consumers to collect, use and share their information and to provide an easy way to opt out of any personal data gathering. The legislation is seen as a way to protect consumer privacy. It may also be an attempt by the government to limit and regain for itself some of the influence over consumers that tech giants have been able to gain in recent years.
The Wall Street Journal also reported this month that China’s anticorruption watchdog is investigating whether top government officials have too close of a relationship to private-sector businesses.14 The probe is focused on the city of Hangzhou where Alibaba and its fintech affiliate Ant Group are based. Zhou Jiangyong, the city’s top Communist Party official has been named as one of the subjects of the probe. The country’s Central Commission for Discipline Inspection has given Communist Party members three months to resolve any conflicts of interests involving themselves or family members.
In a blow to the gaming community and companies that serve that market, China also has increased its restrictions on how often minors can play video games. As Bloomberg reported this month on the basis of an announcement from China’s Xinhua state news agency, gaming platforms from Tencent to NetEase can now offer gaming to minors only from 8 p.m. to 9 p.m. on Fridays, Saturdays and Sundays, and on public holidays.15 The new rule is an even more severe restriction than the limit imposed in 2019 that set a cap on minors’ game-playing time of 1.5 hours per day on most days.
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