U.S. Federal Reserve Chair Jerome Powell on Wednesday confirmed that a “K-shaped economy” appeared to be developing in the U.S. And questioned whether it was “sustainable.”
The “K-shaped economy” concept expresses the idea that wealthier Americans have enjoyed boom times owing to inflation in their financial and property assets, while poorer Americans are hurt by price inflation in consumer staples such as food and energy. The result can be seen in charts in which a downward curve shows the variables associated with low-income activity and an upward curve charts the fortunes of the wealthy, forming a “K” shape.
At the Fed’s rate-setting meeting on Wednesday, Powell was asked this question by Christine Romans of NBC News: “I wanted to ask you about how the higher-income households are really driving spending right now that are backed by home equity and stock market wealth, but lower-income consumers are really struggling with the accumulation of five years now of rising prices. It’s price levels, not really the inflation rate, holding some of these families back. How sustainable is this so-called K-shaped economy?”
TL;DR
- Federal Reserve Chair Jerome Powell confirmed a developing "K-shaped economy" in the U.S.
- This economy sees wealthy Americans benefiting from asset inflation, while poorer Americans struggle with rising consumer prices.
- Powell expressed uncertainty about the sustainability of this "K-shaped economy" and its impact on consumption.
- The Fed is also reviewing employment data, which may be distorted due to recent government closures.
Powell twice said he wasn’t sure it was sustainable. He began by admitting that the K-shaped economy concept was “clearly a thing” that the Fed was seeing in its data:
“We hear about this a lot. If you listen to the earnings reports for consumer-facing companies that tend to deal with low- and moderate-income people, they’ll all say that we’re seeing people tightening their belts, changing products that they buy, buying less, and that sort of thing. And so it’s clearly a thing. It’s also clearly a thing that, asset values—housing values and securities values are high, and they tend to be owned by people more at the higher end of the income and wealth.”
And then he voiced his concerns: “So as to how sustainable it is, I don’t know. Most of the consumption does happen by people who have more means. The top third accounts for way more than a third of the consumption, for example. So it’s a good question how sustainable that is.”
Powell stated that a portion of the Federal Reserve's apprehension, in relation to a distinct conversation concerning employment conditions, stems from the possibility that the pace of new jobs being generated might be less robust than current figures indicate. He acknowledged that the Fed had been operating with incomplete information regarding employment statistics due to the governmental closure, which hindered the Bureau of Labor Statistics from carrying out its surveys during the preceding two months.
“So the data may be distorted and not just—not just sort of more volatile, but distorted. And that’s really because data was not collected in October and half of November,” he said.
He stated that the available figures might exaggerate the present rate of employment growth, and that the economy could actually be losing positions.
“Gradual cooling in the labor market has continued. Unemployment is now up three-tenths from June through September, payroll jobs averaging 40,000 per month since April. We think there’s an overstatement in these numbers by about 60,000, so that would be negative 20,000 per month. And also, just to point at one other thing, surveys of households and businesses both show declining supply and demand for workers,” he said.
The financial markets applauded Powell's choice to lower borrowing costs by 25 basis points to the 3.5% range. The S&P 500 responded by reaching an unprecedented peak during the trading session, only to retreat later. It concluded the day with a gain of 0.76% at 6,886.
Powell also indicated that further rate reductions wouldn't occur in the near future. “We’ve cut now three [times]. We’ve now cut a total of 175 basis points. And, as I mentioned, you know, we feel like we’re well positioned to wait and see how the economy evolves from here.”
S&P futures saw a decline of 0.53% this morning. This downturn is probably attributable to three factors: Powell's affirmation that additional infusions of inexpensive capital are not forthcoming for the foreseeable future; investors cashing in on gains from their successful trades following yesterday's&P advance; and a poor earnings call from Oracle which fell short of projections regarding revenue while disclosing a substantial escalation in AI expenditures. The company's stock experienced a drop of 11.5% during after-hours trading. Additionally, Nasdaq 100 futures showed a decrease of 0.74% in premarket activity.
Here’s a snapshot of the markets ahead of the opening bell in New York this morning:
- S&P 500 futures were down 0.53% this morning. The last session closed up 0.76%.
- The STOXX Europe 600 was up 0.23% in early trading.
- The U.K.’s FTSE 100 was up 0.20% in early trading.
- Japan’s Nikkei 225 was down 0.9%.
- China’s CSI 300 was down 0.86%.
- The South Korea KOSPI was down 0.59%.
- India’s Nifty 50 was up 0.55%.
- Bitcoin fell to $90K.
