Fed Will Hike Rates Into Economic Train Wreck | Danielle DiMartino Booth

Episode Summary

Executive Summary: Danielle DiMartino Booth argues inflation is still on a disinflationary path because supply chains normalized, fiscal stimulus faded, inventories are being destocked, and global liquidity is contracting. She says the labor market is weaker than official data show due to faulty BLS models and rising claims, and expects Powell to likely hike again in July and September before reality catches up.

Main Topics: Inflation is easing because the original shocks reversed (Priority: 5/5): Booth says inflation began with supply-chain disruption and massive pandemic stimulus, but both have largely unwound; the Fed arrived late and is now adding tightening pressure after the disinflationary forces were already in motion. Destocking and goods disinflation (Priority: 5/5): She highlights falling inventories, weaker auto prices, and broad-based destocking across retail, manufacturing, and services as evidence that goods inflation will keep cooling. Housing distortions and Airbnb shadow inventory (Priority: 4/5): Higher mortgage rates have frozen existing-home supply, but she argues short-term rental owners face collapsing cash flows and may sell, creating shadow inventory and disinflation in housing-related markets. Labor market weakness hidden by official statistics (Priority: 5/5): Booth contends the unemployment rate understates stress because continuing claims are rising across most states, self-employed workers are not captured well, and the BLS birth-death model is overstating payroll growth. Recession already underway in parts of the economy (Priority: 4/5): She argues industrial production excluding autos has been in recession since April 2022 and that GDP is being propped up by lagged autos, construction tied to green subsidies, and fiscal refunds. Liquidity tightening and global disinflation (Priority: 4/5): Booth says QT, Treasury cash management, ECB tightening, and contracting global M2 are all withdrawing liquidity, while stock gains are driven more by retail flows than broad economic strength. Fed path: likely more hikes, not cuts (Priority: 5/5): After initially thinking hikes might be over, she now expects July and possibly September hikes, saying Powell is trying to keep rates higher for longer until core inflation nears target.

Key Arguments: Inflation is falling because supply-chain bottlenecks have eased and fiscal stimulus has already washed through the system, not because the Fed’s tightening is the primary cause. Fed tightening has worsened housing affordability and business investment by raising financing costs, even as it failed to address the earlier sources of inflation. Used-car inflation and retail goods prices are cooling because auction demand, dealer behavior, and inventory levels have reversed from shortage to glut. Broad retail and industrial destocking is disinflationary because firms are carrying less inventory than historical norms and are incentivized to clear stock. Housing data are distorted by locked-in low mortgage rates for owner-occupiers and by a likely wave of Airbnb/single-family shadow inventory hitting the market. The labor market is weaker than headline data suggest because continuing claims are rising in most states and many small-business/solo-preneur job losses never appear in unemployment claims. The BLS birth-death model is overstating job creation despite a sharp rise in bankruptcies and Chapter 11 filings. Global liquidity conditions are tightening, not easing, due to QT, ECB balance-sheet reduction, Treasury General Account refill, and contracting global M2. The stock market’s strength reflects liquidity rotation and retail participation more than a healthy macro backdrop. Powell is likely to pursue at least one more hike because he wants to preserve credibility while core inflation remains above target, but he will eventually be constrained by slowing growth and credit stress.

Data Points: Core inflation: ~4%-5% (around 5%) - Booth says core inflation remains sticky on a month-over-month and 3-month annualized basis despite headline disinflation. Used car inflation: 4.4% - Referenced as a recent CPI print, lagged from Mannheim auction spikes earlier in the year. Airbnb rents in Monroe County, PA: Down 52% year over year - Example from the Poconos showing collapsing short-term rental pricing. Average Airbnb rent in largest counties: Down 29% year over year - Evidence of broad-based short-term rental weakness and shadow inventory. Airbnbs for rent: 936,000 - Booth cites this as shadow inventory that could eventually hit the housing market. U.S. unemployment rate: 3.7% - Official headline labor market measure she argues is misleadingly strong. Initial claims: 239,000 - Mentioned as still near 2018-2019 levels, with holiday distortions noted. Share of population with rising continuing claims: 90% for 3 consecutive months - Booth says this indicates labor-market weakening across most states. States with declining continuing claims: 3 states: Hawaii, Kansas, Oklahoma - She says only these states remained resilient, with Hawaii about to flip. Jobs attributed to birth-death model: 37% of jobs created over the last 12 months - Booth criticizes the BLS imputation as overstating payroll growth. Small-business bankruptcy filings: More than double year over year - Used to argue the birth-death model conflicts with real-time business failure data. Industrial production excluding autos: In recession since April 2022 - Booth says the non-auto industrial sector has already been contracting. Job postings in business and professional services: 35% below pre-pandemic levels - Cited as evidence of a white-collar recession. Nationwide job postings: Down 3.5% vs pre-pandemic - Broad labor-demand cooling across industries. CFO survey: 40% of small business CFOs cannot access financing - Supports the claim that credit conditions are tightening sharply. June IRS refunds to date: Over $30 billion - She says tax refunds/credits are effectively fiscal stimulus flowing into consumption. Prior monthly record IRS refunds: $25.6 billion in December 2022 - June is tracking well above the prior peak. Fed balance sheet QT: Another $50 billion expected off the balance sheet - Booth points to continued quantitative tightening. Global M2: Negative 3.4% - She cites this as an extraordinary global liquidity contraction.

Pivotal Quotes: "the Fed's tightening policy, Jack, has been inflationary to housing" — Danielle DiMartino Booth: She explains that higher rates worsened housing affordability because owners are locked into low fixed-rate mortgages. "we have a glut in the semiconductors that are used to make cars" — Danielle DiMartino Booth: Used to illustrate that auto-related supply shortages have reversed into oversupply, which is disinflationary. "the data is painfully corrupted, actually" — Danielle DiMartino Booth: Her critique of BLS labor-market statistics and the birth-death model.

Implications: Listeners should expect cooler inflation but weaker growth, more credit stress, and possibly one or two more Fed hikes before the cycle turns. Official labor data may lag reality, so investors should watch claims, credit, inventories, and revisions.