Inflation Reduction Act won’t have ‘big effects on either growth or inflation’: Economist

JPMorgan Chief U.S. Economist Mike Feroli joins Yahoo Finance Live to discuss the Inflation Reduction Act and whether it will help curb inflation as well as consumer spending and the outlook for the U.S. economy.

Video transcript

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- With inflation rising at the highest level in four decades, the House gave final approval last week to President Biden's Inflation Reduction Act. It's meant to tame the price hikes that have hit American households this year. But will it actually do that? Our next guest says the answer is likely no.

Joining us now to discuss, JPMorgan's chief US economist Mike Feroli. Mike, it's always great to see you. And, of course, this seems to be sort of the consensus here, that the so-called Inflation Reduction Act, right, this is a bit of marketing. It's not what it's actually going to do. But are we talking about even in the longer term that it's not going to have these kinds of positive price effects on the US economy?

MIKE FEROLI: In the longer term it could. And again, I don't want to-- I'm not trying to make broad comments here about the advisability or the advisability of the act itself. But I do think there are potentially some benefits to the supply side of the economy.

Now, that said, in the longer term, in theory at least, inflation should be under the control of the Fed. And that is who determines at least long-run inflation. So even if it does have a long-run supply-side benefit to have inflation under control, we need to have a Fed that's focused on doing that.

But I think the more visible thing is that in the short run, we don't really see much of an effect, because in the short run, the effect on both spending and taxes or the net of those two doesn't really do much to either add or detract from the growth outlook, nor do we see big indirect effects through things like changes in drug pricing, in part because the way the act got scaled back by the parliamentarian at the last weekend. So for the horizon over which these things are visible, which is like maybe the next year or two, we just don't see really big effects on either growth or inflation, for that matter.

- I guess, Mike, continuing down that thought process as well, how soon could consumers, even if this is signed into law by Biden this week and then spending gets fast tracked, how soon would consumers actually notice the difference?

MIKE FEROLI: Probably, definitely not this calendar year, and I'd be surprised if even next calendar year. A lot of the things aren't going to really even affect consumers all that much. So the taxes will mostly be at a corporate level, of course. And the spending will take place over quite some time.

Now, some of that will come in the form of tax credits. But most of that is directed to businesses, utilities, and others. So I wouldn't expect consumers to really notice as much. I mean, I think they're going to see what's going on in the energy markets more recently much sooner than they're going to see anything from this.

- I don't know, maybe they'll notice when they get a tax break on the below 55,000 assembled in North America electric vehicles.

- Oh, burn, Julie, burn.

- That's one example. No, but, I mean, it's very specific.

- I got it. Michael, what, just stepping back here, looking at your growth estimates, where are you at on GDP for the third and fourth quarter? And what are your estimates are-- what are they looking like for or kick-off next year?

MIKE FEROLI: Yeah, so third quarter we're at 1%, fourth quarter 1 and 1/2%, which would be better than what we saw in the first half of the year. We do think the consumer should get a little bit of relief here from energy prices. So Wednesday we'll get retail sales for July. Given what we already know about inflation for July, could be off to a real-- good be off to an OK start for real consumer spending in the third quarter. So we're feeling all right about that, that we returned to positive growth territory.

I mean, the Empire State Survey report this morning doesn't really point to a boomy quarter, but we do think we get back to positive growth. And I think that should continue in the fourth quarter, given the projected path for headline inflation. As well as some of the normalization in supply chains could actually be not only beneficial for inflation, but also for growth, particularly if motor vehicle production comes back like the automakers are anticipating.

- Mike, what happened with that Empire Manufacturing number? Why was it so lousy?

MIKE FEROLI: Earlier I think in your segment you were talking about the strong dollar. The one sector of the economy that that's going to hit the hardest is manufacturers. So that may be one factor there.

Empire State had been looking a little better than some of the other regional Fed surveys. So maybe it's just catching up a little bit. I wouldn't want to put too much emphasis on the point estimate coming out of the Empire State. But generally speaking, I think it's reasonable to expect that manufacturing will face some headwinds here. Again, the strong dollar really means that factory sector is ground zero for the economic impact there.

- One of the other events that's worked its way into the conversation is the reasonable expectation-- and I put a question mark around that, because a lot of people are talking about whether or not the Fed should be prompted to actually have a rate cut at some point early in 2023. Is that something that should even be on the table for discussion right now? Do you believe that may happen? And what would have to even take place?

MIKE FEROLI: So I would be surprised if it's actually on the table at the Fed any time soon. I think they have been pretty clear that they need compelling evidence that inflation is actually moving down and not just forecasted to move down. So we're pretty long way from there. We had a nice suite of inflation data last week, but still a lot of, I think a lot of work to be done, particularly in getting the labor market back into better balance, which hasn't really even begun.

So look, as we've seen over the past couple of years, anything can happen in the space of six months. That being said, I think under most expectations, it's going to take quite a while before they can be comfortable getting rates back down. I think for now, the first order of business is actually to get policy rates into restrictive territory. I mean, after last month's hike, they're basically just back to neutral.

So with the economy running as hot as it is, you have to get policy rates restrictive, I think, before we can even start to talk about getting them back down to neutral, which I think before we see that, we're going to need to see inflation numbers that are even softer than what we saw last week. I mean, last week the 3/10 we got on the core CPI was nice. But we'd probably like to see it even lower than that in a world where the Fed is going to be comfortable actually cutting rates.

- I mean, do you think-- do you think we're going to get that any time soon? I mean, we keep-- I know you're a macro guy. We try to do both as much as we can. And we keep hearing company after company telling us demand is softening in a lot of different areas, from apparel to appliances to consumer electronics. One would think that is going to have to have some feed-through into prices.

MIKE FEROLI: I agree. And I think we're already starting to see evidence that prices for goods should be moving down. So we've seen weakening import prices. We've seen supply chain improvements in terms of delivery times. So I think it's a pretty relatively safe bet to think that goods prices should be softening in coming months. And perhaps we'll see that with some of the retailers tomorrow.

And we know that inventories at general merchandisers is pretty elevated. So I think that's one part. But goods are only one third of the consumption basket roughly. So you've got rents that have been running very strong. And that should persist for quite some time. And a lot of the other service prices have been picking up, too.

So I agree that what you're probably going to hear this week is retailers saying consumers are under a little stress. They're a little more price sensitive. But I think we also need to see things like, again, rents is such a huge component of the price basket that we need to see that soften. And a little bit of early evidence in some of the company reports from real estate companies that we're seeing some easing up of the imbalances in the rental market. But I think that's still early innings in terms of getting a more normal rental market.

- Yeah, it doesn't feel like that is on the imminent horizon. Thanks so much, Mike. Good to see you. Have a great week. JPMorgan Chief US Economist Mike Feroli there.