Inflationary Risks and Economic Impact of Rate Increases as a Tool for the Recession of Low- and Intermediate-income Countries
Higher rates slow inflation by cooling consumer demand and allowing supply to catch up, paving the way for more moderate price increases. But in the process, they slow down hiring, weaken wage growth, prompt job losses and ripple through financial markets in sometimes disruptive ways.
How much pain today’s moves will ultimately cause remains unclear: So many countries are raising rates so quickly — and so in sync — that it is difficult to determine how intense any slowdown will be once it takes full effect. Monetary policy takes months or years to kick in completely.
The United Nations agency that warns of damage to poorer nations has warned that there is a danger or overdoing it. The rising cost of goods and services in the US is putting pressure on developing economies, who have already been dealing with costs of living due to soaring food and fuel prices.
The Fed’s moves have spurred market volatility and worries about financial stability, as higher rates elevate the value of the U.S. dollar, making it harder for emerging-market borrowers to pay back their dollar-denominated debt.
The report shows some progress in the fight against the increases, but costs have risen less over the last three months than they did in the previous three months, Mr. Biden said. But he also acknowledged that inflation remained painfully high.
The Fed Shouldn’t Boost Rates: The Consumer Price Index Inflationary Rate Rises Faster than Expect and the Fed’s Plan to Increase Its Own Rate
Even though many of these central banks are expected to follow the Fed’s lead and just boost rates by a half point, or 50 basis points, investors are concerned that policy makers around the globe may not be able to prevent an economic downturn in 2023.
The rate that banks charge each other for overnight borrowing is expected to increase due to the Fed’s anticipated action.
“Interest rates have risen at a whiplash-inducing speed, and we’re not done yet,” said Greg McBride, chief financial analyst at Bankrate. “It’s going to take some time for inflation to come down from these lofty levels, even once we do start to see some improvement.”
What’s happening: The Consumer Price Index rose 7.7% for the year ending in October, a much slower pace of increase than the 8% economists had expected and the lowest annual inflation reading since January.
“We see today that there is a bit of a savings buffer still sitting for households, that may allow them to continue to spend in a way that keeps demand strong,” said Esther George, president of the Federal Reserve Bank of Kansas City. That shows we may have to keep on doing this for a while.
George was on the Fed’s rate-setting committee, and she made a determination to control inflation. She cautions against raising rates too fast at a time of uncertainty in the economy.
George said last month that he has been in the camp of steadier and slower rate increases, to begin to see how those effects will unfold. My concern is that a succession of big rate hikes might cause you to over steer and not be able to see the turning points.
The senators wrote a letter to Powell saying they are worried that the rate hikes may cause the economy to slow to a crawl.
The Pain of Inflation Is Preferable to the Pain of a Runaway Price: Homebuilding, Mortgage Rates, and the Labor Market
Kansas City homebuilder Shawn Woods said his company has gone from selling a dozen houses a month before the Fed started raising rates to fewer than five.
He said that he didn’t think the mortgage rates would go from 3% to 7% within six months.
Woods said that they would be in for a rough period of six or eight months. “Typically, housing leads us into downturns and it leads us out of downturns. Since March or April, I think we’ve been in a housing recession.
The Bureau of Labor Statistics’ monthly jobs report on Friday will be the last major read of the economy before the November elections, and it will cap a week of new data showing that the labor market is cooling off.
The US economy added 200,000 jobs in October, down from September’s 263,000 but still above the pre-pandemic average. The unemployment rate is expected to tick up to 3.6%, still close to a half-century low.
The latest job vacancies, quits and layoffs statistics can be found in the monthly survey. Tuesday’s report surprised economists, who had predicted that the number of job vacancies in the United States would fall amid measures by the Federal Reserve to slow business growth in order to tame inflation. Instead of dropping to 10 million, it jumped to 10.7 million.
Despite the Feds most aggressive monetary tightening in modern history, the labor market hasn’t been affected.
There are currently 1.9 jobs for every one person looking for work, a margin the Fed fears is keeping inflation uncomfortably high. With plenty of options, workers want higher wages, and managers are willing to pay higher pay because it bolsters the demand for goods and services.
The analysts agree that the chances of a recession are high. But the Fed is wagering that the pain of a recession is preferable, in the long term, to the pain of runaway prices.
Unfortunately for Democrats trying to hold on to power next week, the pain of inflation appears to be outweighing any positive sentiment about job security. According to a new CNN poll, three-quarters of likely voters already feel like the country is in a recession.
The First-Time Home Buyers of the 2020 Real Estate Boom: Baby Boomers and Gen Z are Resolutely Reluctant to Change the System
The average age of a first-time home buyer is now over 30 years old, up from 33 last year.
(It also didn’t hurt that dizzying stock surges meant Baby Boomer parents with large investment portfolios were happy to pass on some of those gains to their darling Millennial kids.)
If you close on a home in the crush of competition, you should be very lucky because the 2020 housing boom will go bust.
Here’s the deal: On Thursday, a new report showed that first-time buyers made up just 26% of all homebuyers in the year ending in June — an all-time low over the four decades that the National Association of Realtors has been conducting its survey.
“They have to save while paying more for rent, as well as student debt, child care and other expenses,” said Jessica Lautz, NAR’s vice president of demographics and behavioral insights. “And this year were facing increasing home prices while mortgage rates are also climbing.”
Mortgage rates have risen throughout most of 2022, spurred by the Federal Reserve’s regime of interest rate hikes. Last week the Fed announced it would raise interest rates by 75 basis points for the sixth time this year and the fourth in a row.
Land use policies and housing production regulations are difficult to change because it’s hard to add more homes in desirable locations.
Rather than rebuilding within existing neighborhoods, housing supply has expanded through “sprawling single-family subdivisions at the urban fringe.” More people and homes are in areas that are vulnerable to wildfire.
The way we frame the American Dream needs to be reexamined because affordability is getting worse. But that will only happen if those who stand to benefit — Millennials and Gen Z — are better represented in elected office. As Schuetz argues, the upper-middle class Boomers in power now are, understandably, reluctant to change the system that got them where they are.
The Base Points of Central Bank Rates: An Overview of the Central Bank and Fed Meetings before Inflationary Rates Announcements
If that weren’t enough, there’s even more central bank drama for investors to focus on, as the Bank of England and European Central Bank both meet on Thursday to decide whether or not to raise rates again to fight inflation — and six other central banks also make their policy announcements this week.
TheBasis points are what central bankers talk about when they talk about rate moves. A basis point is one-tenth of a percentage point.
It’s still double the Fed’s customary quarter-point hike, and a sizable increase that will likely cause economic pain for millions of American businesses and households by pushing up the cost of borrowing for homes, cars and other loans.
A version of this story first appeared in CNN Business’ Before the Bell newsletter. Didn’t you get a subscriber? Right here, you can sign up. Clicking the link will take you to an audio version of the newsletter.
Bitcoin Price Rises Since Inflation: The Last Days of Digital Cryptocurrency Expansions and the Long-Term Value of a Home
Stocks surged on Thursday in their best day since 2020 after a key inflation indicator came in softer than expected. Investors broke out their party hats as they interpreted the report to mean that peak inflation may finally be behind us. The Federal Reserve might be less aggressive with its rate hikes.
Investors will closely read the Fed’s economic outlook, the Summary of Economic Projections, which is also due out Wednesday. They will watch Powell’s press conferences to get a sense of what’s to come.
“If the Fed doesn’t have to tighten as aggressively, the economy will weaken less, and headwinds for stocks will be smaller,” wrote Bill Adams, chief economist for Comerica Bank in a note.
In November, the prices of Bitcoin dropped by more than 15%. The remarkable collapse of crypto brokerage and exchange firm FTX, which was once valued as high as $32 billion, has investors in digital currencies wondering what the future will bring.
They’ve got hit just like stocks and bonds, proving there’s no place to hide in a market with worries about rate hikes and recession.
A big influx of investors from large-scale institutions and near-zero interest rates helped propel the growth of the virtual currency in the early 2000s. It reached a record high of nearly $70,000 in November.
Then, central banks started raising rates to fight inflation, and the dollar strengthened significantly, seducing investors as the ultimate safe haven. The economy soured and the new investors who still viewed bitcoin as risky exited in droves.
Just look at bitcoin prices since the summer of 2020. They’re up more than 80%…even though it has been far from a smooth ride. The Nasdaq was up 1% from July 2020 levels.
Because of this drastic change in the cost to finance a home, sales have dropped for eight months running, according to the National Association of Realtors. A survey from Fannie Mae showed that only 16% of people think this is a good time to buy a home, a record low.
Are Consumer Prices Tapered Out by a Half-Point Higgs? The Fed and the Consumer Price Index Rise Through November, and the Economy Doesn’t
Traders are betting on just a half-point increase. There is an 80% likelihood of a half-point hike.
It might not be that simple. The government reported Friday that a key measure of wholesale prices, the Producer Price Index, rose 7.4% over the past 12 months through November. That was a bit higher than the expected rate of 7.2% but a marked slowdown from the 8% increase through October.
The Consumer Price index data for November comes out a day before the announcement by the Fed. The inflation rate rose through the month of October.
Kathy Jones said that inflation has probably peaked but may not come down as quickly as people want.
The Fed’s policy statement and Powell’s press conference are both important, but investors need to pay attention to other things. The Fed also will release its latest projections for gross domestic product growth, the job market and consumer prices Wednesday.
“A pivot or pause is not a cure-all for this market,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. Rate cuts might be too late. Recession risks are still relatively high.”
The US economy isn’t in a recession yet. Are American shoppers tapped out? We’ll get a better sense of that Thursday after the government reports retail sales figures for November.
So it’s possible consumers were simply getting a head start on holiday shopping. Inflation has an effect on the numbers too, since retail sales have been impacted (positively) by the fact that people have to spend more money for stuff.
Everybody has been worried about inflation this year. The CEO of Comgest Global Investors said it would be more about disinflation in the next two decades.
Stock and bond markets: What does it tell us about the economy and central bank? A Commentary on Cosserat’s view on luxury goods and cosmetics
What does that mean for investors? Cosserat said people should be looking for quality consumer companies that still have pricing power and can maintain their profit margins. Two stocks that his firm owns that he said fit that bill: Luxury goods maker Hermes
(HESAF) and cosmetics giant L’Oreal
(LRLCF).
Friday: Eurozone PMI; UK retail sales; earnings from Accenture
(ACN), Darden Restaurants
(DRI) and Winnebago
(WGO)
Stocks rallied sharply in October and November due to hopes that the Fed would begin to scale back on the size of its rate hikes. They are still down for the year, though, and have been more volatile in December.
Long-term bond yields have eased as well, with the yield on the 10-year US Treasury edging back down to about 3.5% after moving above 4.3% in late October. That was the highest the 10-year has been since 2008.
“The macroeconomic focus will shift from fears of Fed tightening to how badly growth slows and earnings fall before global central banks can hint at providing accommodation,” said Tom Essaye, founder and editor of the Sevens Report investing newsletter, on Monday.
Sam Bankman-Fried will testify in front of the House Financial Services Committee on Tuesday. The Senate Banking Committee will hold its own FTX hearing Wednesday, but Bankman-Fried is not currently on the list of witnesses set to appear.
The Dots of Interest Rate Rise and Fall: Implications for the Fed’s Big Bang, the Economy, and the General Relativity
Maybe investors will be able to relax and take a deep breath before the Fed announcement and press conference later that day. There isn’t any guarantee of that.
The time for slowing the pace of rate increases could come as soon as the December meeting, according to Federal Reserve Chairman Powell.
And the economy has so far withstood the Fed’s aggressive rate hikes. The GDP is strong, the job market is healthy and the wages are growing. Business is also good: Companies are largely beating revenue expectations and reporting positive earnings results.
The European Central Bank, the Bank of England and the Swiss National Bank are expected to follow the United States with half-point moves of their own on Thursday. Norway, Mexico, Taiwan, Colombia and the Philippines will also likely increase their borrowing costs this week.
The dot plot was a way for Ben Bernanke to assure the public that the Fed was keeping interest rates low for the time being. Now the opposite is true, the dots have become a signal that interest rates will remain elevated into the future — spooking investors and Fed watchers alike.
The mediandot is expected to rise to a new peak in the federal funds rate of 5%-525% according to a Goldman Sachs note on Monday. Fed officials have stated that they expect to raise rates by half a percent more than last time.
Economists at EY-Parthenon believe that projections for real GDP growth will likely be revised down from 1.2% in the fourth quarter of 2023 to around 0%. The unemployment projections will probably approach 5%, rather than 4.4%.
The Tesla Model of Autonomy: a No-Square Campaign against Self-Driving Tesla’s Incapacity to Obtain a Fourth-Order Driver Assistance System
Hundreds of thousands of British workers are striking in December, including rail staff, postal workers and ambulance drivers. Pay is not keeping up with inflation, which hit a 41-year high of 11.1% in October.
For most of the RCN’s history, there was a “no strike” policy. In 1995, the union changed its rules, allowing strikes as long as they did not compromise patient care.
It’s the broadest wave of industrial unrest since the country went through a “Winter of Discontent” in the 70s.
Tesla CEO Elon Musk has said numerous times since 2015 that Tesla cars would be entirely self-driving in two years, or less. Even after his self-imposed deadlines have fallen by, it hasn’t happened. Even when equipped with a $15,000 technology package that is literally called “Full Self Driving Capability,” a Tesla car can’t actually drive by itself, reports my colleague Peter Valdes-Dapena.
“Mere failure to realize a long-term, aspirational goal is not fraud,” Tesla’s lawyers wrote in a November 28 court filing, asking that the suit be dismissed.
There are many cases in which the use of driver assist technology is involved, according to the lawsuit.