Evelyn Reynolds

Yum Brands CEO David Gibbs recently crystallized the confusion a lot of people are feeling right now as they try to figure out what’s going on with the U.S. economy.
A shrinking economy typically doesn’t come with high inflation and a red-hot labor market.
Perhaps the economy is so bizarre because consumers are no longer acting rationally.

National Guard troops pose for photographers on the East Front of the U.S. Capitol the day after the House of Representatives voted to impeach President Donald Trump for the second time January 14, 2021 in Washington, DC.
Chip Somodevilla | Getty Images

In an earnings call this week, Yum Brands CEO David Gibbs expressed the confusion many people are feeling as they try to figure out what’s going on with the U.S. economy right now:

“This is truly one of the most complex environments we’ve ever seen in our industry to operate in. Because we’re not just dealing with economic issues like inflation and lapping stimulus and things like that. But also the social issues of people returning to mobility after lockdown, working from home and just the change in consumer patterns.”

Three months earlier, during the company’s prior call with analysts, Gibbs said economists who call this a “K-shaped recovery,” where high-income consumers are doing fine while lower-income householders struggle, are oversimplifying the situation.

“I don’t know in my career we’ve seen a more complex environment to analyze consumer behavior than what we’re dealing with right now,” he said in May, citing inflation, rising wages and federal stimulus spending that’s still stoking the economy.
At the same time, societal issues like the post-Covid reopening and Russia’s war in Ukraine are weighing on consumer sentiment, which all “makes for a pretty complex environment to figure out how to analyze it and market to consumers,” Gibbs said.
Gibbs is right. Things are very strange. Is a recession coming or not?
There is ample evidence for the “yes” camp.
Tech and finance are bracing for a downturn with hiring slowdowns and job cuts and pleas for more efficiency from workers. The stock market has been on a nine-month slump with the tech-heavy Nasdaq off more than 20% from its November peak and many high-flying tech stocks down 60% or more.

Inflation is causing consumers to spend less on nonessential purchases like clothing so they can afford gas and food. The U.S. economy has contracted for two straight quarters.

San Francisco’s cable cars return to service after COVID-19 shutdown in San Francisco, California, United States on September 21, 2021.
Anibal Martel | Anadolu Agency | Getty Images

Downtown San Francisco doesn’t quite have the ghost town feel it did in February, but still has vast stretches of empty storefronts, few commuters and record-high commercial real estate vacancies, which is also the case in New York (although Manhattan feels a lot more like it’s back to its pre-pandemic hustle).
Then again:
The travel and hospitality industries can’t find enough workers. Travel is back to nearly 2019 levels, although it seems to be cooling as the summer wanes. Delays are common as airlines can’t find enough pilots and there aren’t enough rental cars to satisfy demand.
Restaurants are facing a dire worker shortage. The labor movement is having its biggest year in decades as retail workers at Starbucks and warehouse laborers at Amazon try to use their leverage to extract concessions from their employers. Reddit is filled with threads about people quitting low-paying jobs and abusive employers to … do something else, although it’s not always exactly clear what.
A shrinking economy typically doesn’t come with high inflation and a red-hot labor market.
Here’s my theory as to what’s going on.
The pandemic shock turned 2020 into an epoch-changing year. And much like the 9/11 terrorist attacks in 2001, the full economic and societal effects won’t be understood for years.
Americans experienced the deaths of family members and friends, long-term isolation, job changes and losses, lingering illness, urban crime and property destruction, natural disasters, a presidential election that much of the losing party refuses to accept, and an invasion of Congress by an angry mob, all in under a year.
A lot of people are dealing with that trauma — and the growing suspicion that the future holds more bad news — by ignoring propriety, ignoring societal expectations and even ignoring the harsh realities of their own financial situations. They’re instead seizing the moment and following their whims.
Consumers aren’t acting rationally, and economists can’t make sense of their behavior. It’s not surprising that the CEO of Yum Brands, which owns Taco Bell, KFC and Pizza Hut, can’t either.
Call it the great unrest.
How might that manifest itself? In a decade, how will we look back at the 2020s?
Perhaps:

Older workers will continue to leave the workforce as soon as they can afford it, spending less over the long term to maintain their independence, and stitching together freelance or part-time work as needed. The labor market will remain tilted toward workers.
Workers in lower-paying jobs will demand more dignity and higher wages from their employers, and be more willing to switch jobs or quit cold if they don’t get them.
People will move more for lifestyle and personal reasons rather than to chase jobs. Overstressed workers will continue to flee urban environments for the suburbs and countryside, and exurbs one-to-three hours’ drive from major cities will see an upswing in property values and an influx of residents. Dedicated urban dwellers will find reasons to switch cities, creating more churn and reducing community bonds.
The last vestiges of employee loyalty will disappear as more people seek fulfillment ahead of pay. As one tech worker who quit her job at Expedia to work for solar tech company Sunrun recently put it, “You just realize there’s a little bit more to life than maxing out your comp package.”
Employees who proved they could do their jobs remotely will resist coming back to the office, forcing employers to make hybrid workplaces the norm. Spending patterns will change permanently, with businesses catering to commuters and urban workers continuing to struggle.
Those with disposable income will vigorously spend it on experiences — travel, restaurants, bars, hotels, live music, outdoor living, extreme sports — while curbing the purchase of high-end material goods and in-home entertainment, including broadband internet access and streaming media services. The pandemic was a time to hunker down and upgrade the nest. Now that we’ve got all the furniture and Pelotons we need, it’s time to go out and have fun.

It’s possible that this summer will be the capstone to this period of uncertainty and consumers will suddenly stop spending this fall, sending the U.S. into a recession. Further “black swan” events like wars, natural disasters, a worsening or new pandemic, or more widespread political unrest could similarly squash any signs of life in the economy.
Even so, some of the behavioral and societal shifts that happened during the pandemic will turn out to be permanent.
These signals should become clearer in earnings reports as we move further from the year-ago comparisons with the pandemic-lockdown era, and as interest rates stabilize. Then, we’ll find out which businesses and economic sectors are truly resilient as we enter this new era.
WATCH: Jim Cramer explains why he believes inflation is coming down

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Initial claims for unemployment insurance totaled 260,000 last week, in line with estimates.
The U.S. trade deficit in goods and services decreased to $79.6 billion in June, slightly lower than the estimate for $80 billion.

A sign for hire is posted on the window of a Chipotle restaurant in New York, April 29, 2022.
Shannon Stapleton | Reuters

Initial claims for unemployment insurance totaled 260,000 last week, near the highest level since November amid a shift in the U.S. labor market.
The total for the week ended July 30 was in line with the Dow Jones estimate but a gain of 6,000 from the previous week’s downwardly revised level, the Labor Department reported Thursday.

In other economic news, the U.S. trade deficit in goods and services decreased to $79.6 billion in June, down $5.3 billion and slightly lower than the estimate for $80 billion.
The jobless claims number comes a day before the Bureau of Labor Statistics releases its much anticipated nonfarm payrolls report for July. That is expected the show the U.S. economy added 258,000 positions in the month, compared to the 372,000 initial June estimate and the lowest total since December 2020.
“The labor market remains in good shape as the summer quarter progresses but the rise in initial claims since early April is a cold breeze blowing at the hot labor market this summer,” said Stuart Hoffman, senior economic advisor at PNC Financial Services.
Federal Reserve officials are watching the jobs market closely for clues about an economy that is showing the highest inflation rate in more than 40 years.
Jobless claims had been running around their lowest levels since the late 1960s but started ticking higher in June as inflation pressures swelled and companies started cutting back on hires. Even with robust hiring in 2021 and the first half of 2022, the total employment level is 755,000 below where it was in February 2020, the last month before the Covid pandemic hit.

The four-week moving average of jobless claims, which smooths out weekly volatility, reflects the shift in the jobs market. That number rose 6,000 from the previous week to 254,750, up sharply from the recent low of 170,500 on April 2 and the highest level of the year.
Continuing claims, which run a week behind the headline number, totaled 1.42 million, up 48,000 from the prior week and 83,000 from the beginning of July.

Trade deficit comes off record high

On the trade side, the lower deficit reflects a shift back to a more normal environment after the U.S. shortfall with its global trading partners hit a record $107.7 billion in March.
Exports rose $4.3 billion while imports declined by $1 billion. However, the goods deficit with China rose $4.7 billion to just shy of $37 billion. Imports on auto vehicles, parts and engines declined $2.7 billion while capital goods increased nearly $1 billion.
Even with the June decline in the deficit, it is still 33.4% higher than a year ago as domestic supply has failed to keep up with strong demand. That has fueled an inflation rate running at its highest level since the early 1980s.
The Federal Reserve has instituted a series of four interest rate increases this year totaling 2.25 percentage points, in part an effort to curb some of that pandemic-era demand. Fresh inflation numbers will be released next week, after June’s consumer price index showed a 12-month increase of 9.1%.

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If you’re unsure if the U.S. economy is in a recession, you’re not alone.
Gross domestic product has declined in back-to-back quarters this year, which is a common signal to market watchers of a recession. But even top experts are debating whether that fact in the current economy amounts to the “R” word this time.

Meanwhile, many of those financial experts who say we’re not in a recession now, contend that one is on the way.
Why is it all so confusing?
Watch this video, as CNBC’s Emily Lorsch breaks it all down.

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The employment picture over the past six months is behaving nothing like an economy in a downturn.
Even with the other evidence suggesting otherwise, many commentators have focused on the traditional definition of recession as being two straight quarters of negative GDP growth.

If the U.S. economy is in recession, someone forgot to tell the jobs market.
The employment picture over the past six months is behaving nothing like an economy in a downturn, instead creating jobs at a rapid pace of nearly 460,000 a month.

Research from CNBC’s Steve Liesman indicates that during a typical downturn, the employment picture would be far gloomier, losing ground instead of gaining. Several charts presented during Wednesday’s “Squawk Box” help paint the picture.
The CNBC team looked at economic data going back to 1947. It indicated that when gross domestic product has been negative for six months, as is the case for 2022, payrolls fall by an average of 0.5 percentage point. But this year, the job count actually has increased by 1%.

Arrows pointing outwards

Data from human relations software company UKG backs up that notion, with internal data that shows jobs have been created about in line with the Bureau of Labor Statistics’ count.

Arrows pointing outwards

Finally, the Dallas Federal Reserve, in research posted Tuesday, said its analysis of multiple data points found “that most indicators — particularly those measuring labor markets — provide strong evidence that the U.S. economy did not fall into a recession in the first quarter” of the year.
One data point the central bank’s researchers looked at was real personal consumption expenditures. They found that consumption generally declined during recessions. By contrast, the measure increased during the first half of 2022.

Arrows pointing outwards

Even with the other evidence suggesting otherwise, many commentators have focused on the traditional definition of recession as being two straight quarters of negative GDP growth. The first quarter declined 1.6%, and the second quarter fell 0.9%, meeting that standard.
Another anomalous factor about the current state is that even though GDP fell in real inflation-adjusted terms, the economy on a nominal basis grew strongly during the second quarter. Nominal GDP rose 7.8% during the period but was outweighed by an 8.6% quarterly inflation rate.
By contrast, during the last recession, in 2020, nominal GDP contracted 3.9% in the first quarter and 32.4% in the second quarter, while real GDP fell 5.1% and 31.2%, respectively.
St. Louis Fed President James Bullard told CNBC, also during “Squawk Box,” that he doesn’t think the economy is in a recession, though he was more dismayed by the second-quarter decline.
“The first-quarter slowdown, I think, … was probably a fluke, but the second quarter was more concerning,” he said. Even if some rate-sensitive pockets of the economy slow, “that doesn’t by itself mean you’re in recession just because you see some negative signs in some parts of the economy.”
The latest data on the jobs picture comes out Friday, when the BLS is expected to report a payrolls gain of about 258,000 for July, according to Dow Jones estimates. BLS data earlier this week showed that the gap between job openings and available workers is still vast but edging lower.

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The companies that hired most aggressively during the pandemic are now overstaffed and forced to cut back or impose hiring freezes.
Meanwhile, airlines and hospitality companies are desperately trying to staff up after Covid-19 lockdowns led them to downsize.
“The pandemic created very unique, once-in-a-lifetime conditions in many different industries that caused a dramatic reallocation of capital,” said Julia Pollak, ZipRecruiter’s chief economist.

Passengers at an American Airlines gate at the Dallas/Fort Worth International airport in Dallas.
Scott Mlyn | CNBC

It wasn’t long ago that Amazon, Shopify and Peloton doubled their workforces to manage through the pandemic surge, while Morgan Stanley staffed up to handle a record level of IPOs, and mortgage lenders added headcount as rock-bottom rates led to a refinancing boom.
On the flipside, Delta Air Lines, Hilton Worldwide and legions of restaurants slashed headcount because of lockdowns that rolled through much of the country and other parts of the world.

Now, they’re scrambling to reverse course.
Companies that hired like crazy in 2020 and 2021 to meet customer demand are being forced to make sweeping cuts or impose hiring freezes with a possible recession on the horizon. In a matter of months, CEOs have gone from hypergrowth mode to concerns over “macroeconomic uncertainty,” a phrase investors have heard many times on second-quarter earnings calls. Stock trading app Robinhood and crypto exchange Coinbase both recently slashed more than 1,000 jobs after their splashy market debuts in 2021.
Meanwhile, airlines, hotels and eateries face the opposite problem as their businesses continue to pick up following the era of Covid-induced shutdowns. After instituting mass layoffs early in the pandemic, they can’t hire quickly enough to satisfy demand and are dealing with a labor market radically different from the one they experienced over two years ago, before the cutbacks.
“The pandemic created very unique, once-in-a-lifetime conditions in many different industries that caused a dramatic reallocation of capital,” said Julia Pollak, chief economist at job recruiting site ZipRecruiter. “Many of those conditions no longer apply so you’re seeing a reallocation of capital back to more normal patterns.”

For employers, those patterns are particularly challenging to navigate, because inflation levels have jumped to a 40-year high, and the Fed has lifted its benchmark rate by 0.75 percentage point on consecutive occasions for the first time since the early 1990s.

The central bank’s efforts to tamp down inflation have raised concerns that the U.S. economy is headed for recession. Gross domestic product has fallen for two straight quarters, hitting a widely accepted rule of thumb for recession, though the National Bureau of Economic Research hasn’t yet made that declaration.
The downward trend was bound to happen eventually, and market experts lamented the frothiness in stock prices and absurdity of valuations as late as the fourth quarter of last year, when the major indexes hit record highs led by the riskiest assets.
That was never more evident than in November, when electric vehicle maker Rivian went public on almost no revenue and quickly reached a market cap of over $150 billion. Bitcoin hit a record the same day, touching close to $69,000.
Since then, bitcoin is off by two-thirds, and Rivian has lost about 80% of its value. In July, the car company started layoffs of about 6% of its workforce. Rivian’s headcount almost quintupled to around 14,000 between late 2020 and mid-2022.

Tech layoffs and an air of caution

Job cuts and hiring slowdowns were big talking points on tech earnings calls last week.
Amazon reduced its headcount by 99,000 people to 1.52 million employees at the end of the second quarter after almost doubling in size during the pandemic, when it needed to beef up its warehouse capabilities. Shopify, whose cloud technology helps retailers build and manage online stores, cut about 1,000 workers, or around 10% of its global workforce. The company doubled its headcount over a two-year period starting at the beginning of 2020, as the business boomed from the number or stores and restaurants that had to suddenly go digital.
Shopify CEO Tobias Lutke said in a memo to employees that the company had wagered that the pandemic surge would cause the transition from physical retail to ecommerce to “permanently leap ahead by 5 or even 10 years.”
“It’s now clear that bet didn’t pay off,” Lutke wrote, adding that the picture was starting to look more like it did before Covid. “Ultimately, placing this bet was my call to make and I got this wrong. Now, we have to adjust.” 
After Facebook parent Meta missed on its results and forecast a second straight quarter of declining revenue, CEO Mark Zuckerberg said the company will be reducing job growth over the next year. Headcount expanded by about 60% during the pandemic.
“This is a period that demands more intensity and I expect us to get more done with fewer resources,” Zuckerberg said.
Google parent Alphabet, which grew its workforce by over 30% during the two Covid years, recently told employees that they needed to focus and improve productivity. The company asked for suggestions on how to be more efficient at work.

“It’s clear we are facing a challenging macro environment with more uncertainty ahead,” CEO Sundar Pichai said in a meeting with employees. “We should think about how we can minimize distractions and really raise the bar on both product excellence and productivity.”
Few U.S. companies have been hit as hard as Peloton, whose fitness equipment and on-demand classes became an instant gym replacement during lockdowns and which has since suffered from massive oversupply issues and out-of-control costs. After doubling headcount in the 12 months ended June 30, 2021, the company in February announced plans to cut 20% of corporate positions as it named a new CEO.

Banks and Wall Street bracing for a ‘hurricane’

Some of the Peloton products that were flying off the shelves in the pandemic were being offered as perks for overworked junior bankers, who were sorely needed to help manage a boom in IPOs, mergers and stock issuance. Activity picked up with such ferocity that junior bankers were complaining about 100-hour workweeks, and banks started scouting for talent in unusual places like consulting and accounting firms.
That helps explain why the six biggest U.S. banks added a combined 59,757 employees from the start of 2020 through the middle of 2022, the equivalent of the industry picking up the full population of a Morgan Stanley or a Goldman Sachs in a little over two years.
It wasn’t just investment banking. The government unleashed trillions of dollars in stimulus payments and small business loans designed to keep the economy moving amid the widespread shutdowns. A feared wave of loan defaults never arrived, and banks instead took in an unprecedented flood of deposits. Their Main Street lending operations had better repayment rates than before the pandemic.
Among top banks, Morgan Stanley saw the biggest jump in headcount, with its employee levels expanding 29% to 78,386 from early 2020 to the middle of this year. The growth was fueled in part by CEO James Gorman’s acquisitions of money management firms E-Trade and Eaton Vance.
At rival investment bank Goldman Sachs, staffing levels jumped 22% to 47,000 in the same time frame, as CEO David Solomon broke into consumer finance and bolstered wealth management operations, including through the acquisition of fintech lender GreenSky.
Citigroup saw a 15% boost in headcount during the pandemic, while JPMorgan Chase added 8.5% to its workforce, becoming the industry’s largest employer.
But the good times on Wall Street didn’t last. The stock market had its worst first half in 50 years, and IPOs dried up. Investment banking revenue at the major players declined sharply in the second quarter.
Goldman Sachs responded by slowing hiring and is considering a return to year-end job reductions, according to a person with knowledge of the bank’s plans. Employees typically make up the single biggest line item when it comes to expenses in banking, so when markets crater, layoffs are usually on the horizon. 
JPMorgan CEO Jamie Dimon warned investors in June that an economic “hurricane” was on its way, and said the bank was bracing itself for volatile markets.

Jamie Dimon, chief executive officer of JPMorgan Chase & Co., during a Bloomberg Television interview in London, U.K., on Wednesday, May 4, 2022.
Chris Ratcliffe | Bloomberg | Getty Images

ZipRecruiter’s Pollak said one area in finance where there will likely be a hemorrhaging of workers is in mortgage lending. She said 60% more people went into real estate in 2020 and 2021 because of record low mortgage rates and rising home prices. JPMorgan and Wells Fargo have reportedly trimmed hundreds of mortgage staffers as volumes collapsed.
“Nobody is refinancing anymore, and sales are slowing,” Pollak said. “You’re going to have to see employment levels and hiring slow down. That growth was all about that moment.”
The intersection of Silicon Valley and Wall Street is a particularly gloomy place at the moment as rising rates and crumbling stock multiples converge. Crypto trading platform Coinbase in June announced plans to lay off 18% of its workforce in preparation for a “crypto winter” and even rescinded job offers to people it had hired. Headcount tripled in 2021 to 3,730 employees.
Stock trading app Robinhood said Tuesday it’s cutting about 23% of its workforce, a little over three months after eliminating 9% of its full-time staff, which had ballooned from 2,100 to 3,800 in the last nine months of 2021.
“We are at the tail end of that pandemic-era distortion,” said Aaron Terrazas, chief economist at job search and review site Glassdoor. “Obviously, it’s not going away, but it is changing to a more normalized period, and companies are adapting to this new reality.”

Retail is whipsawing back and forth

In the retail industry, the story is more nuanced. At the onset of the pandemic, a stark divide quickly emerged between businesses deemed to be essential and those that were not.
Retailers such as Target and Walmart that sold groceries and other household goods were allowed to keep their lights on, while malls filled with apparel shops and department store chains were forced to shut down temporarily. Macy’s, Kohl’s and Gap had to furlough the majority of their retail employees as sales screeched to a halt.
But as these businesses reopened and millions of consumers received their stimulus checks, demand roared back to shopping malls and retailers’ websites. Companies hired people back or added to their workforce as quickly as they could.
Last August, Walmart began paying special bonuses to warehouse workers and covering 100% of college tuition and textbook costs for employees. Target rolled out a debt-free college education for full- or part-time employees and boosted staff by 22% from early 2020 to the start of 2022. Macy’s promised better hourly wages.

Nurphoto | Getty Images

They hardly could have predicted how quickly the dynamic would shift, as rapid and soaring inflation forced Americans to tighten their belts. Retailers have already started to warn of waning demand, leaving them with bloated inventories. Gap said higher promotions will hurt gross margins in its fiscal second quarter. Kohl’s cut its guidance for the second quarter, citing softened consumer spending. Walmart last week slashed its profit forecast and said surging prices for food and gas are squeezing consumers.
That pain is filtering into the ad market. Online bulletin board Pinterest on Monday cited “lower than expected demand from U.S. big box retailers and mid-market advertisers” as one reason why it missed Wall Street estimates for second-quarter earnings and revenue.
Retail giants have so far avoided big layoff announcements, but smaller players are in cut mode. Stitch Fix, 7-Eleven and Game Stop have said they’ll be eliminating jobs, and outdoor grill maker Weber warned it’s considering layoffs as sales slow.

The travel industry can’t hire fast enough

With all of the downsizing taking place across wide swaths of the U.S. economy, the applicant pool should be wide open for airlines, restaurants and hospitality companies, which are trying to repopulate their ranks after undergoing mass layoffs when Covid hit.
It’s not so easy. Even though Amazon has reduced headcount of late, it’s still got far more people working in its warehouses than it did two years ago. Last year the company lifted average starting pay to $18 an hour, a level that’s difficult to meet for much of the services industry.
Hilton CEO Christopher Nassetta said on the quarterly earnings call in May that he wasn’t satisfied with customer service and that the company needs more workers. At the end of last year, even as travel was rebounding sharply, headcount at Hilton’s managed, owned and leased properties as well as corporate locations was down by over 30,000 from two years earlier.
It’s easy to see why customer service is a challenge. According to a report last week from McKinsey on summer 2022 travel trends, revenue per available room in the U.S. “is outstripping not just 2020 and 2021 levels, but increasingly 2019 levels too.”

Delta Airlines passenger jets are pictured outside the newly completed 1.3 million-square foot $4 billion Delta Airlines Terminal C at LaGuardia Airport in New York, June 1, 2022.
Mike Segar | Reuters

At airlines, headcount fell as low as 364,471 in November 2020, even though that wasn’t supposed to happen. U.S. carriers accepted $54 billion in taxpayer aid to keep staff on their payroll. But while layoffs were prohibited, voluntary buyouts were not, and airlines including Delta and Southwest shed thousands of workers. Delta last month said that since the start of 2021 it has added 18,000 employees, similar to the number it let go during the pandemic in order to slash costs.
The industry is struggling to hire and train enough workers, particularly pilots, a process that takes several weeks to meet federal standards. Delta, American Airlines and Spirit Airlines recently trimmed schedules to allow for more wiggle room in handling operational challenges.
“The chief issue we’re working through is not hiring but a training and experience bubble,” Delta CEO Ed Bastian said on the quarterly earnings call last month. “Coupling this with the lingering effects of Covid and we’ve seen a reduction in crew availability and higher overtime. By ensuring capacity does not outstrip our resources and working through our training pipeline, we’ll continue to further improve our operational integrity.”
Travelers have been less than pleased. Over the Fourth of July holiday weekend, more than 12,000 flights were delayed due to bad weather and not enough staff. Pilots who took early retirement during the pandemic don’t appear inclined to change their minds now that their services are once again in high demand.
“When we look at labor shortages related to travel, you can’t just flip a switch and suddenly have more baggage handlers that have passed security checks, or pilots,” said Joseph Fuller, professor of management practice at Harvard Business School. “We’re still seeing people not opt in to come back because they don’t like what their employers are dictating in terms of working conditions in a post-lethal pandemic world.”
— CNBC’s Ashley Capoot and Lily Yang contributed to this report.
WATCH: Big Tech reports earnings, most guide higher despite macro headwinds

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St. Louis Fed President James Bullard said he expects another 1.5 percentage points or so in interest rate increases this year.
“We’re not in a recession right now. … To some extent, a recession is in the eyes of the beholder,” he told CNBC.
Markets are pricing in another half percentage point rate hike from the Fed in September, though the chances of a third consecutive 0.75 percentage point move are rising.

St. Louis Federal Reserve President James Bullard said Wednesday that the central bank will continue raising rates until it sees compelling evidence that inflation is falling.
The central bank official said he expects another 1.5 percentage points or so in interest rate increases this year as the Fed continues to battle the highest inflation levels since the early 1980s.

“I think we’ll probably have to be higher for longer in order to get the evidence that we need to see that inflation is actually turning around on all dimensions and in a convincing way coming lower, not just a tick lower here and there,” Bullard said during a live “Squawk Box” interview on CNBC.
That message of continued rate hikes is consistent with other Fed speakers this week, including regional presidents Loretta Mester of Cleveland, Charles Evans of Chicago and Mary Daly of San Francisco. Each said Tuesday that the inflation fight is far from over and more monetary policy tightening will be needed.
Both Bullard and Mester are voting members this year on the rate-setting Federal Open Market Committee. The group last week approved a second consecutive 0.75 percentage point increase to the Fed’s benchmark borrowing rate.
If Bullard has his way, the rate will continue rising to a range of 3.75%-4% by the end of the year. After starting 2022 near zero, the rate has now come up to a range of 2.25%-2.5%.
Consumer price inflation is running at a 12-month rate of 9.1%, its highest since November 1981. Even throwing out the highs and lows of inflation, as the Dallas Fed does with its “trimmed mean” estimate, inflation is running at 4.3%.

“We’re going to have to see convincing evidence across the board, headline and other measures of core inflation, all coming down convincingly before we’ll be able to feel like we’re doing our job,” Bullard said.
The rate hikes come at a time of slowing growth in the U.S., which has seen consecutive quarters of negative GDP readings, a common definition of recession. However, Bullard said he doesn’t think the economy is really in recession.
“We’re not in a recession right now. We do have these two quarters of negative GDP growth. To some extent, a recession is in the eyes of the beholder,” he said. “With all the job growth in the first half of the year, it’s hard to say there’s a recession. With a flat unemployment rate at 3.6%, it’s hard to say there’s a recession.”
The second half of the year should see reasonably strong growth, though job gains probably will slow to their longer-run trend, he added. July’s nonfarm payroll growth is expected to be 258,000, according to Dow Jones estimates.
Even with the slowing trend, markets are pricing in another half percentage point rate hike from the Fed in September, though the chances of a third consecutive 0.75 percentage point move are rising. The market then expects future increases in November and December, taking the benchmark fed funds rate to a range of 3.25%-3.5% by the end of the year, below Bullard’s target.
“We’re going to follow the data very carefully, and I think we’ll get it right,” Bullard said.

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