QC can expect higher interest rates, tighter monetary policy

The Quad Cities has what it takes to succeed in a post-pandemic economy, Chicago Fed analyst and researcher Ellen Rissman told local business leaders at the QCBJ’s 2023 Mid-Year Economic Review. The assistant vice president of business cycle analysis and communications also warned the crowd of nearly 200 attendees gathered Thursday, June 22, at Bally’s […]

The Quad Cities has what it takes to succeed in a post-pandemic economy, Chicago Fed analyst and researcher Ellen Rissman told local business leaders at the QCBJ’s 2023 Mid-Year Economic Review. The assistant vice president of business cycle analysis and communications also warned the crowd of nearly 200 attendees gathered Thursday, June 22, at Bally’s Casino & Hotel, Rock Island, to brace for the impact of higher interest rates and tighter monetary policy for the rest of 2023. Ms. Rissman – who first joined the Federal Reserve Bank of Chicago in 1985 as a research economist – said that the evening before the event she spent time touring the community and talking with local business leaders. She also promised to share their experiences and concerns with regional and national policymakers. Among those leaders was Brigham Tubbs, chairman, president and CEO, of First Central State Bank, who helped sponsor the event. “It’s exciting to think that our discussion about local economic topics and business challenges could impact the future of Federal Reserve monetary policy,” he said Thursday while introducing Ms. Rissman to the crowd.

The second annual QCBJ Mid-Year Economic Review also included a panel of Quad Cities business leaders who shared their views on the economy, workforce, tourism and more. The panel, moderated by Steve Sorensen, owner and managing director of Strategy in Progress, included: Jennifer Bennett, president, Shive-Hattery; Robert Erickson, president and CEO, UnityPoint Health – Trinity; Dave Herrell, president and CEO of Visit Quad Cities; Delia Moon Meier, president, Iowa 80 Group; and Jake O’Rourke, COO and executive vice president, O’Rourke Sales Company. A top concern of those QC business leaders continues to be worker retention and attraction. And Ms. Rissman warned that the ongoing labor shortage is a problem that won’t be going away any time soon.  “I suggest the only options are to raise wages to attract workers because they have options and a stronger economy makes it harder for people to operate as they used to,” she said. “So in the short term, raising wages, providing benefits and offering something that your competitors don’t is a good strategy.” She warned, however that “In the longer term, these labor shortages may last for considerably longer than we would hope, partly because immigration is down from where it was, but also because we have an aging population and it’s not being replaced by other workers. So it seems to me that the way forward is through automation.” She added: “Of course that doesn't impact everybody the same way, but automation and now with the new generation of Artificial Intelligence that should make our existing workers even more productive.”

The QCBJ Mid-Year Economic Review was sponsored by First Central State Bank, Eastern Iowa Community Colleges, Iowa Association of Business and Industry (ABI) and Shive-Hattery.  Ms. Rissman, a first-time visitor to the Quad Cities, also was optimistic about the QC’s future. “I have to say I’ve been quite impressed by what I’ve seen in this area,” she said. “I appreciate what’s going on here. It seems like a vibrant community and people are sophisticated. They're welcoming and I think that you have the seeds here of what it takes to be successful.” That doesn’t mean that there won’t be challenges ahead both locally and nationally, said Ms. Rissman, whose job is to advise the Chicago Fed based on her research and data. Her visit to the QC on Thursday also is part of her mission to pull back the curtain to increase awareness and understanding of how the regional central banks and the U.S. Federal Reserve manages the nation’s monetary policy. Regarding current policy, in the months ahead she said to expect additional Fed action on interest rates due to these “interesting and challenging times.”  A consensus estimate by financial leaders that Ms. Rissman shared with the crowd predicted The Fed will raise the Fed Funds rate by 50 basis points in 25 point increments over the next six months. That could mean increasing the Fed Funds rate from the current 5.1% to 5.6% by the close of 2023. There are a number of factors used by the central banks to determine what that critical rate should be. For example, she said, “Interest rates are rising and that will have an impact” on the national and Quad Cities economy.  The Fed’s goal, she said, is to “cool things down a little bit but not too much.” “We don't want to kill the goose that lays the golden egg,” Ms. Rissman explained. “So we want to be careful about how far we push this but at the same time, unless you bring inflation down to our 2% goal, the economy is not going to be good for everybody so we need stability and inflation around 2%.” On the plus side, inflation is coming down, she said but remains high “and that’s a big concern to us.” “At the same time that we have high inflation, growth is slowing but somewhat paradoxically, the labor market is resilient and there are some hints that it’s cooling, but the labor market is very tight in general,” she added. “With weakening activity you would expect that to show through to the labor market, too, but instead the labor market has surprised us with its resilience. The payrolls are tending lower. There's still about three times the roughly 85,000-100,000 new jobs per month that we would expect to see based on demographic productivity trends.” Those labor market pressures are key to both inflation and growth outlooks, Ms. Rissman said.  “Unemployment rate spikes are up astronomically,” she added. “I’ve never seen an unemployment rate this high.” Last month, it increased from 3.4% to 3.7%, “but it’s still quite low and that also indicates a tight labor market.” There are some signs of a cooling labor market, she said, pointing to the declining number of “quits,” which are defined as usually voluntary moves by employees to a new employer. These days they are coming at more typical levels, but remain “quite high,” she added. To right the ship The Fed will continue to tighten monetary policy after cutting rates to almost zero during the COVID-19 pandemic to support the national economy.  Later, with inflation running high, she said, “The Fed quickly pivoted and between March 2022 to today we’ve increased the federal funds rates by 5 full percentage points at a very fast clip.” Higher rates should cool demand and reduce inflationary pressure but it could take some time. At the same time, she said, The Fed is reducing its balance sheet by reducing its assets. ”All told, the expected reduction is roughly equivalent to about 35 to 50 basis points in additional tightening,” Ms. Rissman said Those higher interest rates have and will continue to increase stress on the banking system. “With interest rates rising, depositors have options outside of banks, perhaps a money market fund to park their excess cash,” she said. “That means that banks may have to accommodate an unexpected outflow of deposits.” Banks also faced losses on legacy loans, for example, 30-year mortgages. “Those legacy loans were extended at a time when conditions were far different and interest rates were lower,” she said. “They need to be repriced if they’re sold at market values.” “The two of these combined – unexpected outlooks and reduced values of loan portfolios – meant that a few banks were caught flatfooted when needing to sell to pay depositors,” she said. That resulted in bank failures. It’s also resulted in the banks tightening lending standards and taking a hard look at their balance sheets to determine how best to manage their interest rates and liquidity risks, Ms. Rissman said. “What are the implications here?” she asked. “It implies that there’s a further tightening of financial conditions in addition to the Fed's actions. The magnitude of that is uncertain. But it also means that The Fed may need to do less tightening than it originally planned.”   Ellen Rissman At-A-Glance:

• Ms. Rissman is the assistant vice president of business cycle analysis and communications in the economic research department at the Chicago Fed.
• She manages a team providing timely policy analysis, advice, and communications support to the president and other senior executives at the Chicago Fed and is actively engaged in public outreach efforts.
• Her primary research interests include self-employment and entrepreneurship, structural change in the labor market, and wage and price dynamics.
• Ms. Rissman has been published in the Journal of Monetary Economics and the Journal of Labor Economics and has also been featured in the Economic Perspectives and Chicago Fed Letter, Chicago Research periodicals.
• She closely follows national and regional developments in government spending and revenues.
• Earned a bachelor’s degree in economics from the University of Michigan and a master’s and doctorate in economics from Northwestern University. 
• She has taught at Northwestern University’s School of Professional Studies in the Masters of Public Policy and Administration program.