Why is the Federal Reserve so Strong? Why the Fed is raising rates to fend for itself and protect itself in a turbulent world, and what it could do to the American economy
It takes higher rates to slow inflation and make it easier for prices to go up. They can cause trouble in the financial markets by slowing down hiring, changing wage growth, and causing job losses.
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. It can take months or years for monetary policy to kick in.
But many economists and several international bodies have warned that there’s a pronounced danger or overdoing it, including a United Nations agency that warned the damage could be particularly acute in poorer nations. Developing economies had already been dealing with a cost-of-living crisis because of soaring food and fuel prices, and now their American imports are growing steadily more expensive as the dollar marches higher.
Back in 2018, Fed Chair Jerome Powell described the Fed’s approach to raising rates similar to being in a dark room with furniture and having to move carefully to avoiding running into something. Well, however dark that room was in 2018, it is a lot darker now. There are forces that are driving inflation that are more opaque, and in light of the recent rise in business debt, the consequences of monetary tightening are likely to be greater.
Typically, the “Fed” is a pretty sleepy corner of America, which is known for dull press conferences. There is no news coming out of the central bank if the economy is sailing smoothly.
I sat next to the woman on the airplane a few weeks ago. She asked me if I thought the Federal Reserve would keep raising rates to fight inflation after she described herself as knowing zero about the economy.
At this point, we should all be interested in the Federal Reserve. Because big shifts are happening in our economy and the fate of our country may rest on the actions the Fed is taking currently and in the coming months.
At its core, the Federal Reserve has two main jobs: keeping inflation low and making sure maximum number of people are employed in America. This is known as the Fed’s “dual mandate.”
The most important parts of a strong economy are watch and protect, and so the Fed is mandated to protect them.
There is economic security if you have jobs and stable prices. Together, these two pillars form the foundation for everything else,” Mary Daly, head of the San Francisco Federal Reserve Bank, said in a recent speech at Boise State University.
The Federal Reserve has been increasing interest rates in order to bring the prices down and try to suppress demand. Rising rates have made it more expensive for people to get a home mortgage or a car loan or to carry a balance on their credit card. The central bank’s benchmark interest rate increased from zero to 4.5% this week. But rates are now high enough to begin constraining inflation, and the Fed has indicated it may not push them much higher. This week’s rate hike was half a percentage point less than the last four. On average, Fed policymakers think rates will top out next year at just over 5%.
Daly points out that this level of inflation hits everyone. It is especially difficult on the country’s most vulnerable. “The toll… lands hardest on those with low and moderate incomes,” she said. “This corroding of real wages is more than just painful. It also undermines the basic American promise, which says that if you work hard, you can get ahead. Inflation traps people in a loop of running fast and falling behind, unrelated to effort or input.
Inflation and the Smith Family: The First Year in a Single Dollar, and Why Does It Feel So Strange to Eat Breakfast in Bed?
Smith and his family like to have breakfast in bed on Sunday mornings, with Smith sometimes buying cinnamon rolls as a treat. “It’s something I have bought periodically for years and it was eight bucks for a package of six cinnamon rolls.” He immediately felt it was about double what he had typically paid. “It felt dramatic,” he said.
The prices of the Smith family’s normal purchases and activities had just risen and it added up fast in a family of six, as it turned out. So Smith and his family started making a bunch of cutbacks: no more eating out, no summer road trip to Utah to see relatives.
He said his kids complained, that they didn’t do anything this summer. “They were right and it was largely because gas that used to cost us, you know, maybe $150 to travel somewhere now costs three or $400.”
Over the last year, the central bank has raised interest rates eight times in an effort to tamp down demand. But after appearing to cool off late last year, both consumer spending and hiring came roaring back in January, putting more upward pressure on prices.
The Federal Reserve has lifted its target range for interest rates from near zero to between 4.5% to 4.75% over the past year in their fight against inflation. In February they slowed the rate of hikes to a quarter of a percent, down from half a percent in December. Inflation reached a 40-year high in 2022, but began to decline in the last quarter of the year. The January inflation data shows that the rate of prices increases had increased once again.
The result was a big economic shock. The economy fell into a terrible recession, unemployment spiked to 11% and people and politicians unleashed all kinds of wrath onto Chair Volcker. Volcker wanted to bring inflation under control. Eventually, it worked, and inflation did come down. It took years of economic pain, and millions of people lost their jobs.
Policymakers also projected that PCE inflation, the Fed’s favored price gauge, would remain far above its 2% target until at least 2025. Further projections showed souring expectations for the health of the US economy, with Fed officials now predicting that unemployment will rise to 4.6% by the end of 2023 and remain at that level through 2024. They were expecting a rate of 4.4% in September, but that was 0.2 percentage points higher than they were expecting.
Actually, he seems to have already made the call… in code. The Federal Reserve has a history of communicating in code (or, basically, not communicating and leaving everybody to desperately try and interpret things like tie color choice and body language).
Gregory Daco wrote that he expected Fed Chair Powell to insist on the need for a restrictive policy for some time in order to bring inflation down to 2%. “This will serve to push back against current market pricing … Powell will stress that history cautions strongly against prematurely loosening policy.”
Powell said that the job is not finished and that the labor market is too tight for his liking. it would be “very premature” to think “we really got this,” he said, adding that unless the economic trajectory changes drastically, he doesn’t expect to cut rates this year.
Hopefully the inflation report that’s coming this Thursday will show prices coming down and if unemployment stays low, the dual mandate will never have to duel. My airplane conversations can go back to complaining about legroom and we can all have our cinnamon rolls and afford them, too.
Mr. Biden said that costs have risen less in the last three months than they have in the previous three months. But he also acknowledged that inflation remained painfully high.
Two years ago, the Fed thought inflation would come down on its own, once supply problems were solved. Instead, price hikes proved both larger and longer-lasting than the central bank expected.
He thinks that consumer spending is not slowing as much as he thought, the labor market is still hot, and inflation is not coming down as fast as he thought.
In an interview that aired on CBS on Sunday, Treasury Secretary Janet Yellen — Powell’s predecessor at the Fed — said there is “a risk of a recession. It isn’t something that is necessary to bring inflation down.
The strength of the US economy was underscored in the third quarter GDP data released Thursday, as policy makers rushed to cool off pervasive inflation that has had a serious affect on American views, according to a one-on-one interview in Ohio that aired on CNN.
According to the Bureau of Economic Analysis, gross domestic product increased at an annualized rate of 2.6% in the third quarter. In the first and second quarters of the year, the decline was 2.5% and 0.6%, respectively.
Congressional Budget Negotiations during the 2008 Covid-19 Recession: The Case for Private Sector Investment and the Implications for American Family and Economic Development
The complex balancing act that President Joe Biden and his top economic officials have attempted this year, as they try to highlight a rapid economic recovery and major legislative victories while also promising to tackle soaring prices, has been underscored by the view of Yellen.
It is a reality that makes it harder for the administration to take advantage of what they perceive to be a robust record. Biden, asked about the economy last week, told reporters it’s “strong as hell,” drawing criticism from Republicans.
As they proceeded through the economy, those efforts would be felt. Asked if the administration’s general message to Americans was one of patience, Yellen said: “Yes.”
“There were several problems that we could have had, and difficulties many families American families could have faced,” Yellen said. We don’t have these problems because the Biden administration has done them. So, often one doesn’t get credit for problems that don’t exist.”
As part of a push to highlight the major legislative wins that have resulted in millions of private sector investment in manufacturing around the country, the Federal Reserve chair traveled to Cleveland.
It is a piece of an economic strategy designed to address many of the vulnerabilities and fails laid bare by Covid-19, with significant federal investments in infrastructure and creating from scratch key pieces of critical supply chains.
Listing off a series of major private sector investments, including the $20 billion Intel plant opened a few hours drive outside of Columbus, Yellen said they were “real tangible investments happening now,” even as she acknowledged they would take time to full take effect.
“But you’re beginning to see repaired bridges come online – not in every community, but pretty soon. Many communities are going to see their roads improved and their bridges repaired. We’re seeing money flow into research and development, which is really an important source of long term strength to the American economy. And America’s strength is going to increase and we’re going to become a more competitive economy,” she said.
Source: https://www.cnn.com/2022/10/27/politics/janet-yellen-gdp-recession-cnntv/index.html
Inflation and the Budget: A Critique of a Time-Dependent Debt Cutback Against House Speaker Biden
Yellen also addressed the battle lines that have been drawn this week over raising the debt ceiling, a now-perpetual Washington crisis of its own making that House Republicans have once again pledged to utilize for leverage should they take the majority.
But Yellen, who has long highlighted the “destructive” nature of the showdowns, has also backed doing away with the debt limit altogether through legislation. A group of House Democrats wrote to Democratic leaders to request that action in the lame duck session of Congress, but Biden rejected the idea this week.
She made it clear that she did not intend to be part of a time period when top officials usually leave the administration. Asked about reports she had informed the White House she wanted to stay into next year, Yellen said it was “an accurate read.”
I feel very excited by the program that we spoke about. “And I see in it great strengthening of economic growth and addressing climate change and strengthening American households. I would like to be a part of that.
Powell also suggested that interest rates may ultimately have to climb higher than the 5 to 5.5% range that policymakers had predicted in December in order to bring prices under control. The Fed has a benchmark rate of 4.5%.
“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 awhile for inflation to come down from those lofty levels, even if we do start to see some improvement.”
After hitting a four-decade high of 9% in June, annual inflation dipped to 7.1% last month, according to the government’s latest scorecard. It is the smallest annual price increase in over a year.
The Fed is Not Here to Stay: Housing Rates Rise, and Job Openings Rise in the Post-Trump Economy of the U.S.
“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. We might need to keep at this for a while.
George and her colleagues on the Fed’s rate-setting committee want to control inflation. She cautions against raising rates too fast at a time of economic uncertainty.
“I have been in the camp of steadier and slower [rate increases], to begin to see how those effects from a lag will unfold,” George said last month. “My concern is that if you have a succession of rate hikes, you might oversteer and not be able to see those turning points.”
In a pointed exchange, Sen. Elizabeth Warren, D-Mass., challenged Powell about the potential job losses that could result from such aggressive rate hikes.
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.
“Never in my wildest dreams would I have thought we’d go from 3% [mortgage rates] to 7% within six months,” said Woods, president of Ashlar Homes and the Home Builders Association of Kansas City.
“I think we’re in for a rough six or eight months,” Woods said. “Typically, housing leads us into downturns and it leads us out of downturns. And I think from a housing perspective, we’ve probably been in a housing recession since March or April.”
When the Bureau of Labor Statistics releases its October jobs report on Friday, it will be the last major read of the economy before the midterm elections — and it will cap a week of new data signaling that the white-hot labor market is showing only tentative signs of cooling off.
Hiring remains surprisingly resilient. The economy added a robust 263,000 jobs in November, and the unemployment rate is just 3.7% — down dramatically from nearly 15% in the spring of 2020.
Take the monthly JOLTS survey on job vacancies, quits and layoffs. Economists had predicted that the number of job vacancies in the United States would fall because of the Fed slowing business growth. But instead of dropping to 10 million, it surged to 10.7 million.
Even if interest rate hikes begin to come down, they will continue to be high and economists think the US economy will go into a recession next year. The odds of the economy not falling into a recession are small, but Powell said that the path to a soft landing is narrow if rates are kept high.
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. Three quarters of likely voters feel that the country is in a recession according to a new CNN poll.
The Boom in the Real Estate Boom: Baby Boomers are Reluctant to Rethink Their First-time Homebuying Choices and Mortgage Rates
The news isn’t great for the younger generation trying to buy their first home. The typical age of a first-time homebuyer is now a record 36 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.)
As the housing boom ends in 2020, people who were lucky enough to close on a home in the crush of competition should be very lucky.
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. Home prices are increasing and mortgage rates are going up as well.
Mortgage rates have risen throughout most of 2022, spurred by the Federal Reserve’s regime of interest rate hikes. The Fed raised interest rates last week by another 75 basis points, marking the sixth increase of the year and making it the fourth hike in a row.
Jenny Schuetz, an urban economist at the Brookings Institute, writes that there are policies that make it difficult to add more homes in desirable locations.
It has expanded through single-family subdivisions at the urban fringe, rather than rebuilding within existing neighborhoods. That’s putting more people and homes in environmentally vulnerable areas, such as wildfire-prone regions of the West.
Federal and local governments can rethink how they frame the American Dream as affordability becomes crisis levels. 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.
Fed Rate Increases and Implications for Small-Scale Business: Towards a Reversible Second Fed Resummation
In the past four meetings the Fed has raised rates by three-quarters of a percentage point. There were two small rate hikes earlier this year. At the beginning of the year, the central bank’s short-term interest rate was zero but it has since climbed to a range of 4% to 4%.
Minneapolis Federal Reserve President Neel Kashkari said last Wednesday that he’s “open to the possibility” of a larger interest rate increase in the Fed’s March policy meeting, “whether it’s 25 or 50 basis points.” (That’s a quarter or half of a percent. A basis point is one hundredth of one percent).
It is double the Feds usual quarter point hike and will cause economic pain for millions of American businesses and households, by pushing up the cost of loaning out money.
Bill Adams, chief economist for Comerica Bank wrote that if the Fed doesn’t have to tighten aggressively, the economy will weaken less and the effects on stocks will be smaller.
Before the Bell newsletter: The stock market recovery in the wake of a soft first-quarter inflationary outburst and the crypto winter
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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. That means the Federal Reserve could be less aggressive with its rate hikes.
Financial markets are not in agreement with the forecast. Many investors are betting that the central bank will soon start cutting interest rates, despite repeated warnings to the contrary from Fed officials. The stock and bond markets have rallied in recent weeks due to the expectation of lower borrowing costs.
This isn’t the first time that there has been a so-called crypto winter. Bitcoin prices have been notoriously volatile over the past few years, but they have still done better than many major stock market indexes.
Unfortunately, those assets have gotten hit just like stocks and bonds, proving there really is no place to hide in a market where worries about rate hikes and recession reign supreme.
Bitcoin Thaw: A Cryptothaw for the Curvature of the 21st Century, and its Impact on the Prediction of the Fed
A crypto thaw: Bitcoin soared through the Covid-era on the wings of near-zero interest rates, stimulus cash and a big influx of investors from large-scale institutions. It reached a new high of over $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. At the same time, the economy began to sour and those new investors who still viewed bitcoin as a risky asset exited in droves.
Just look at bitcoin prices since the summer of 2020. It has been a rocky ride but they’re up 80%. The Nasdaq, by way of comparison, is only up about 1% from July 2020 levels.
The purchasing power of buyers has fallen due to the recent increase in mortgage rates. It has pushed buyers out of the market and those who remain may have to make compromises on location, size, or condition if they want to find a house that is affordable.
Investors are now pricing in about a 70% chance of just a quarter-point rate increase at the Fed’s next meeting on February 1, according to Fed funds futures on the Chicago Mercantile Exchange.
The hope is that inflation pressures willbate enough for the Fed to shift to a more accommodative stance, thus avoiding a recession.
The Fed is going to be tougher than expected: Consumer prices and the consumer price index are up 7.4% over the past year compared to October and November
It may be more difficult than that. The government reported Friday that the producer price index rose 7.4% over the past year. It was a tad higher than expected but still slower than the 8% increase from October to November.
The November consumer price index data is coming out just a day before the Fed announcement. CPI rose 7.7% year-over-year through October.
“Inflation has probably peaked but it may not come down as quickly as people want it to,” said Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research.
The Fed will conclude its rate hike regimen by the second quarter of next year, predicted JPMorgan analysts in a recent note. “With inflation continuing to fade and fiscal policy likely on hold, the Fed is likely to end its tightening cycle early in the new year and inflation could begin to ease before the end of 2023,” they wrote. The analysts expect two quarter-point hikes in the first half of 2023.
So investors are going to need to pay attention not to just what the Fed says in its policy statement about rates and what Powell talks about in his press conference. 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 may be too late. Recession risks are still relatively high.”
The US economy is not in a recession. But are American shoppers tapped out? The retail sales figures from November will give us a better idea of that.
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 talking about inflation this year. Going forward, it will be more about disinflation in 2023 or 2024,” said Arnaud Cosserat, CEO of Comgest Global Investors.
The Case for Anomalous Rate Increases in Retail and Consumer Markets: Daly explains the “Small Luxury Goods Manufacturer” and L’Oreal
What does that mean for investors? Quality consumer companies that are able to maintain their profit margins should be looked for by people. Two stocks that his firm owns that he said fit that bill: Luxury goods maker Hermes
(HESAF) and cosmetics giant L’Oreal
(LRLCF).
On Friday, Eurozone PMI;UK retail sales; and earnings from the likes of Darden Restaurants and Winnebago.
If the central bank does not hike rates in the near term, interest rates could rise into 2024 even if they are not hiked again.
The European Central Bank is expected to make a half-point move on Thursday, followed by the Bank of England and the Swiss National Bank. Norway, Mexico, Taiwan, Colombia and the Philippines will also likely increase their borrowing costs this week.
The hike, smaller than the previous four increases, comes after the latest government reading showed inflation is running at its slowest annual rate in nearly a year.
In a speech, Daly said there was more work to be done. Further policy tightening is necessary in order to put this episode of high inflation behind us.
Many Americans are feeling the effect of increased interest costs on their credit cards, home loans and car loans due to price increases. Currently, used car buyers are charged an average interest rate of 9.34%, compared to 8.12% last year, and they’re making the largest monthly payments on record, according to credit reporting firm Experian.
Inflationary Recovery and the Economy: Fed Expansion and Property Prices in the First 12 Months of 2008–The Longitudinal Revised
The central bank said in a statement Wednesday that inflation remained elevated due to supply and demand issues.
The stock market fell after the announcement of another increase, mostly as Wall Street digested the Fed’s warning that there are more rate hikes to come. But stocks recovered and the major indices were mostly flat by mid-afternoon.
Rents continue to climb, but Fed officials believe the worst of shelter inflation may be behind us. Market rents have gone up less since spring.
The price of haircuts rose 6.8% in the last twelve months, while the price of dry cleaning jumped 7.9%. Services other than housing and energy make up about 25% of consumer spending.
Inflationary Trends and the Uncertainty of the Economy and Labor Supply in the Context of the Great Recession in the U.S.
“We see goods prices coming down,” Powell said. What will happen to housing services will be understood by us. But the big story will really be the the rest of it, and there’s not much progress there. It’s going to take some time.
The effects of the pandemic on the economy and labor supply can be seen in the current labor market. The labor force participation rate has declined as the demand exceeds the supply, he said.
The central bank has made it clear it will do whatever it takes to bring inflation back down, and on Wednesday it raised interest rates for the seventh time in nine months.
Since Russia’s invasion of Ukraine, the price of gasoline has fallen sharply. The price of used cars has fallen, as the supply chain gets untangled. And travel-related prices for things like airplane tickets and rental cars have dropped, as the pent-up demand that followed lockdowns has faded, and travelers become more price-conscious.
“I think there is no question that our inflation is on a glide path somewhere close to 2% and then we will be able to raise it if we want to,” he said. “And until the Fed can be confident of that, it’s going to have to be tightening rather than easing.”
The central bank had lowered its economic growth forecast and has raised it for unemployment. There is a lot of uncertainty according to Powell.
He said he didn’t believe anyone knew whether the country would have a recession or not.
The Fed’s Challenge: Avoiding a High-Summary Recession without Snowballing into a Receding Economy
Changes in the weather or the war in Ukraine could cause big swings in prices at the gas station and the grocery store. The prices of crude oil and other commodities can change as the world’s economic growth slows.
The price of services depends on what happens to wages. That depends in turn on how many jobs the country adds each month, how many workers are available to fill those jobs, and how productive workers are when they’re employed.
After Wednesday’s meeting, Jon Stewart said that the Fed was committed to putting us in a high unemployment recession.
The Fed has not given me a lot of optimism that they can navigate that without hitting a recession. … If a soft landing is avoiding a recession altogether, then I think that’s a pretty tough task. If it’s a milder recession than recent history, I think that’s still in the cards.”
“Employment has yet to soften notably, but I think the jobs data is likely to deteriorate meaningfully and quickly,” said finance professor Jeremy Siegel of The Wharton School of the University of Pennsylvania in his weekly commentary for WisdomTree last week.
Powell expressed optimism on Wednesday that a soft landing was still possible and that the labor market was tight enough to withstand an increase in unemployment without snowballing into a recession. JOBS NUMBERS will be watched very closely by investors.
Super Saturday Stocks Trading: When Will Bankman-Fried Arrive in New York? – Charged with Eight Counts of Fraud and Deception
It’s not certain when Bankman-Fried will appear in court. If he waives his extradition, he would likely return to the United States quickly. Once in the states, he will appear before a US judge for an arraignment and bail hearing.
Last Tuesday, federal prosecutors from the Southern District of New York charged Bankman-Fried with eight counts of fraud and conspiracy. Bankman-Fried could face up to 115 years in prison if convicted on all eight counts against him, though he likely wouldn’t get the maximum sentence.
US market regulators have filed civil lawsuits against him accusing him of defrauding investors and customers and saying he had built a house of cards on a foundation of deception.
The Saturday before Christmas — also known as Super Saturday — is typically the busiest shopping day of the November-December gift-buying period. With Christmas Day falling on a Sunday, and Christmas Eve falling on the preceding Saturday, Super Saturday this year is on Dec. 17th. More than 158 million consumers are estimated to shop that day, according to the National Retail Federation.
The NRF estimates that only half of the gift buying has been completed. With less than a week to go until Christmas Day, and drop-dead shipping deadlines approaching, people have a lot more buying to do.
Source: https://www.cnn.com/2022/12/19/investing/premarket-stocks-trading/index.html
The November Precise Predictions for the United States Consumer Consumers and Forecasts for Next-Generation Core Inflation
It costs retailers to sit on an oversupply for too long. Retailers who use their own warehouse and distribution centers have limited space to store merchandise, so they have wiggle room to accommodate excess inventory. Costs increase if more space is needed because they can’t quickly clear out.
Unsellable products lose value over time. That’s especially true with fashion clothing as savvy shoppers won’t buy last year’s style if the trend has passed. Stores are forced to reduce prices in order to make money.
Well ahead of the final full weekend before Christmas, stores this year were already offering discounts of 50% to 60% off, and tacking on free shipping for online orders.
“I’ve studied the holiday season for 20 years and haven’t seen discounting so dramatic,” said Ross Steinman, professor of consumer behavior at Widener University in Chester, Pennsylvania.
He said that retailers were very nervous. The time is running out to get consumers to make purchases.
Inflation has moderated in recent months, especially on items like goods as supply chain bottlenecks have eased and consumers focused more spending in areas like leisure and hospitality.
The core PCE was up 4.7% annually and 2% on a monthly basis, matching expectations of economists.
To be sure, much of this decline reflects falling energy prices. In December, even the so-called core inflation rate, which excludes volatile energy and food prices, moved down a bit to 5.1% from 5.3% in the same month a year ago.
Spending rose in November at a much slower rate than in previous months, according to the report. Spending was up 0.1% in November as compared to 0.8% the month before. Personal income increased by 0.4% in November, down from 0.7% in October.
The November PCE report, the last major inflation gauge released in 2022, provided a snapshot of an economy in transition. The Fed has been trying to rein in the highest inflation since the early 1980’s by raising interest rates.
It has been inflation within the services sector that has been a little stickier than expected. The services index posted a monthly increase of 0.4%, as well as a year- over-year increase of more than 9%, the PCE report showed.
The Fed is concerned that strong wage growth can lead to persistently higher service prices and overall inflation, because much of the services inflation is due to housing costs.
The December Manufacturing Orders Down in the Light of the Great Recession, and Inflation in the 2022-to-2020 Economic Recession
A separate Commerce Department report released Friday showed that new orders for manufactured goods tumbled 2.1% in November, the biggest monthly drop since the onset of the pandemic.
Transportation equipment, specifically new orders for non-defense aircraft and parts, drove the decline, according to the report. New orders increase by Excluding transportation.
“Core durable goods orders slowed but did not contract, reflecting growing unease about the economy,” Diane Swonk, chief economist for KPMG, tweeted Friday after the report’s release. “Manufacturing activity has begun to contract and prelim reading for December suggests it will contract further at year end. The manufacturing sector will have a cold winter.
The final consumer sentiment index for December came in at 59.7, up marginally from the preliminary reading of 59.1 and the final reading of 56.8 in November.
She added: “Their outlook for the economy may have improved, but it remains relatively weak. The continued strength of incomes and the labor markets will determine the future of robust consumer spending.
The consumer confidence index from the Conference Board landed at its highest measurement in more than two years earlier this week.
America’s central bank found itself in a glaring spotlight for much of the year as Federal Reserve Chairman Powell used tools such as interest rate hikes and quantitative tightening to curb inflation.
As 2022 draws to a close, inflation metrics show some of that may have worked: Consumer prices are cooling, home sales have ground to a halt, and some of America’s best-known companies have made plans to slow their roll and pull back on capital investment.
That means the Fed, with its “laser focus on the job market,” could be “continually hawkish” at the start of 2023, said Ross Mayfield, investment strategy analyst at Baird.
However, a “structural labor shortage” remains a major headwind, Powell noted in December, attributing the lack of workers to early retirements, caregiving needs, Covid illnesses and deaths, and a plunge in net immigration.
As such, employers are hesitant to lay people off, and other areas of the economy are showing such strength that those who are unemployed are able to get rehired quickly, Mayfield said.
“It’s been pretty impressive how well the consumer has held up over the past 18 months, and not pulling the rug out from under the consumer is pretty much how you get to the soft landing,” Mayfield said.
The Future of the Stock Market: A Brief History of Low-Lying Wall Street Rates and Long-Term Gas Prices in the U.S.
There are meetings scheduled for a year in the future. The meeting has a summary of economic projections and thedot plot which shows where each Fed member expects interest rates to land.
It was a bad time for the market, with the S&P 500 losing about 20% of its value, and the Nasdaq dropping more than one-third. All three US markets have had their worst years in recent years.
New numbers indicate that the number of first-time unemployment benefits applicants has risen to 225,000. That is still low and almost exactly where it was a year ago, long before recession fears emerged.
“This is one reason to the be optimistic the economy could skirt a recession,” Moody’s Analytics chief economist Mark Zandi told CNN on Thursday. “Without mass layoffs, it’s unlikely consumers will stop spending and the economy suffer a downturn.”
After spiking above $5 a gallon for the first time ever in June, gas prices have plunged. The national average for regular gasoline dropped to $3.10 a gallon, its lowest point in 18 months, but has risen slightly in recent days to $3.22 a gallon.
The Rise of the Wall Street Wall: Why Silicon Valley is Getting Closer to Rejoind about Inflation and Rate Hijacking
Now, the key risk to the economy is not that the Fed sticks to its guns and keeps rates near current levels. Keeping rates up could raise the risk of a recession, but it isn’t likely to be a very big one. The main risk is if inflation stops declining. That would require substantial further monetary tightening in order to get it under control, and would have more serious implications for the US economy and financial markets.
Still, traders have been glued to economic reports even more than usual as of late, and stocks have been incredibly choppy based on what the latest figures indicate about inflation.
The report that the health of the manufacturing sector was less than expected, along with more signs of strength in the jobs market given the solid report about labor turnovercaused more market volatility.
That’s the reason why investors will be looking at the weekly jobless claims numbers as well as a report from the payroll processing company on the private sector job market. More alarm bells about inflation and Fed rate hikes could be set off by further strength.
Wage growth will be watched closely. An increase in worker compensation historically tends to lead to more inflation. If you have more disposable income, you will be able to afford higher prices for products and services.
Investors cheered the fact that wage growth, measured by average hourly earnings, rose only 4.7% over the previous 12 months in October. Wage growth rebounded in the month of November to 5.1%. Economists are predicting that wage increases cooled a bit, to 5% annually, in December.
“The persistent mismatch between labor supply and demand continues to put upward pressure on wages,” said Lauren Goodwin, economist and portfolio strategist at New York Life Investments, in a report.
The number of jobs created is likely to be more important by the Fed than the number of workers earning a living. Wall Street may do the same.
The jobs market is still functioning well. You would not know that from the things going on in Silicon Valley. The component of the software giant. Salesforce
(CRM) announced Wednesday it was laying off 10% of its workforce.
The hope was that consumers and businesses would continue to spend heavily on tech products and services, a notion that seemed valid as the economy quickly rebounded from a brief recession in 2020.
Tech companies may have not factored in inflation and rate hikes into their budgeting plans as recession alarm bells are sounding once more.
“As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing,” said Salesforce chair and co-CEO Marc Benioff in a recent note to employees.
“Companies that last a long time go through different phases. They are not in heavy people expansion mode on a yearly basis according to a memo shared with employees.
Source: https://www.cnn.com/2023/01/05/investing/premarket-stocks-trading/index.html
The Global Economy Is Not Out Of The Woods: A CNN Analysis of European Consumer Prices, Energy and Oil Prices During a Preheating Season
The global economy is clearly not out of the woods. The head of the International Monetary Fund still worries about a downturn that could impact China and other emerging markets particularly hard.
But CNN’s Anna Cooban notes that investors in Europe appear to be growing more hopeful that the pace of consumer price increases is starting to slow in France and Germany. The prices of energy are going down.
Consumers continue to be impacted by higher prices. British shoppers felt the pinch of inflation in December and decided to shop at the European discount grocer, which had its best December in the United Kingdom. Aldi said Brits bought more than 48 million mince pies, for example.
Steven Kamin is a senior fellow at the American Enterprise Institute and he studies international macroeconomic and financial issues. He served as director of the international finance division of the Federal Reserve from 2011 to 2020. The opinions in this commentary are of his own. View more opinion on CNN.
Wage Gains During Inflationary Cycle: Implications for Labor, Productivity, and the Recovery of the Fed’s Gross Domestic Product
Wage gains have also eased in recent months, despite the tight job market. It’s great to know that there’s no need to worry that wage gains will put more upward pressure on prices.
The measures of inflation expectations that are derived from financial markets and those based on household surveys have moved down since the beginning of last year. Wages have barely kept up with rising prices since the beginning of the epidemic, while labor productivity has risen 4%.
Workers have not been compensated for increases in productivity. The consequence, as acknowledged by Fed Vice Chair Lael Brainard, is that “the labor share of income has declined over the past two years and appears to be at or below pre-pandemic levels, while corporate profits as a share of GDP remain near postwar highs.” Wages could rise faster than prices if workers regain their share of corporate income. Firms should be able to absorb wage increases by cutting profit margins, and that should make it easier for the Fed to reduce inflation.
After years of large rate increases intended to cool the economy, the Federal Open Market Committee has decided to return to a more traditional interest-rate policy.
The Fed chair will reiterate in the report that there is more that can be done to bring down annual inflation to 2%, according to the preview.
Powell echoed that sentiment Wednesday, saying: “I continue to think that it is very difficult to manage the risk of doing too little, and finding out in six or 12 months that we actually were close but didn’t get the job done.”
The Fed is Doomed: a Day before Valentine’s Day in the U.S. Economy After Five Years of Inflation
The press conference preceded a jump in US markets that indicated investors expect a dovish Fed going forward. After climbing in January, the S&P 500 closed the first day of February 1.1% higher.
Excluding volatile food and energy costs, the “core” prices were 4% higher than a year ago in December. That’s down from a 5.2% annual rate in September.
Chris Waller, the Fed governor, said two weeks ago that they don’t want to be head-faked. Three months of relatively low readings of core inflation were seen before it exploded in our face.
The January jobs report showed 517,000 new jobs and Powell didn’t expect it to be so strong. “It kind of shows you why we think that this will be a process that takes a significant period of time.”
Powell said that the disinflationary process has begun. There is still price gains within the services sector.
Powell expects housing inflation to decrease by the middle of this year, but he is keeping a close eye on the core services report, which excludes housing.
The major US stock indexes rallied during Powell’s discussion but then fell in early afternoon trading, with the Dow down by around 200 points or 0.6%, the S&P lower by 0.3% and the tech-heavy Nasdaq down by 0.2%.
The hot job total in January was probably too hot for the Fed to like, as economists said it was heavily influenced by seasonal factors. The labor market is robust and that is not in keeping with the Fed efforts to lower inflation.
He said that there was a labor market with 3.5% unemployment and wages moving up for most of the people at the lower end of the spectrum. Everyone wants to go back to that place.
If central bankers discuss inflation, then this could be the best Valentine’s Day ever. Four members of the Federal Reserve talked about the economy today.
The president of the Fed does not vote on the interest-rate settingFederal Open Market Committee. Barkin told the TV station on Tuesday that inflation is “normal” and that it is coming down slowly.
The problem is trying to predict the future. “When inflation repeatedly comes in higher than the forecasts…or when the jobs report comes in with hundreds of thousands more jobs than anyone expected…it is hard to have confidence in any outlook,” she said.
How Do We Expect Rate Increases to Survive? The Philadelphia Fed President Patrick Harker, John Williams, the New York Fed, and the Labor Department
Philadelphia Fed President Patrick Harker sounded a little more dovish (i.e. less concerned about inflation) than Logan. He also is an FOMC voting member this year. Harker said in a speech Tuesday that “we are not done yet” with rate hikes but added that “we are likely close.” Harker noted that “at some point this year, I expect that the policy rate will be restrictive enough that we will hold rates in place.”
Last up was New York Fed President John Williams, another FOMC member and also someone whose name has been mentioned as a possible successor to Lael Brainard as Fed vice chair now that President Biden is expected to name Brainard as his new top economic adviser.
Along those lines, Williams said that there will likely be “a period of subdued growth and some softening of labor market conditions.” He thinks the unemployment rate will climb up to between 4% to 4.5% over the next year, and he expects a measly 1% real GDP growth this year. The jobless rate is currently 3.4%.
A torrent of jobs data coming in the next few days could lead to volatile market swings as Wall Street investors prepare for Hell Week.
What to expect: ADP’s private payroll report for February and the JOLTS job openings, hires and quits report for January are expected Wednesday. On Thursday, Challenger, Gray & Christmas are set to release their job cuts numbers for February, and Friday brings the main show — the Labor Department’s monthly employment report.
Hirt’s Outlook for the Future: Joe Biden’s Budget and Embedding Strategies in the Cross-Section of the Debt Conundrum
Josh Hirt, senior US economist at Vanguard said that they were stuck in the middle. Core areas of the economy have resilience, even though activity in the interest rate-sensitive sectors has weakened. We are in this in-between period where the impact of rates has not fully worked through the economy.”
Hirt said he expects the unemployment rate will likely climb from its current 54-year low, albeit slowly and modestly, to around 4.5% to 5% by the end of this year.
Tuesday: Federal Reserve Chair Jerome Powell is expected to testify on economic outlook and monetary policy before the Joint Economic Committee; earnings from Dick’s Sporting Goods, Caseys General Stores, Squarespace, and Dole.
On Thursday, President Joe Biden is expected to present his annual budget to Congress. The plan comes at a time of fiscal unrest as arguments over the debt ceiling rage on. Republicans, who control the House, say they will not raise the limit until deep cuts are made in federal spending. The White House has refused to negotiate.
Increasing taxes on the ultra-wealthy will help offset the rising costs of medicare and social security, says Biden. The president proposed a tax on the rich last year. Biden’s proposals for increased taxes on capital gains and corporate stock buy backs have been denounced by Wall Street.
Macroeconomic Constraints on Disinflation and the Fed’s Action to “Find a Fed that will fight for families”
Main Street and Wall Street panicked because of high inflation and the Fed’s action to bring it down. “The responses range from fearing these actions will tip the economy into a recession to fearing they won’t be enough to get the job done,” she said.
High inflation levels in goods, housing and other sectors along and strong economic data, she said, has led her to question the momentum of disinflation.
Bostic said Wednesday he believes the Fed needs to raise its policy rate by half a percentage point at the next meeting.
The governor of the Fed warned Thursday that interest rates could go higher than expected due to better than expected economic data.
It could definitely mean a Willie E. Coyote moment for the US economy, since the cartoon dog chases the Roadrunner off a cliff into mid-air.
There was a huge amount of macroeconomic data in the weeks following that meeting, showing good jobs gains, consumer spending and inflation.
Summers said his best guess would be for the fed funds rate to grow from its current range (4.5% to 4.75%) to 5.5%, but noted he “wouldn’t be amazed” if it were to hit 6%, given the uncertainties in the economy.
The warning, in testimony before the Senate Banking Committee, comes after a series of economic indicators that indicate the economy is running hotter than expected despite aggressive action from the Fed.
She noted the Fed’s own December forecast showed the unemployment rate climbing to 4.6% by the end of this year. It would put 2 million people out of work.
“You are gambling with people’s lives,” she said. “You cling to the idea that there’s only one solution: Lay of millions of workers. We need a Fed that will fight for families.”
The Fed Shouldn’t Spill: Spending More, Not Less: Inappropriate Use of Congress to Kill the Debt Ceiling
Republicans are demanding the government rein in spending as a condition to raise the debt ceiling. Democrats accuse the GOP of risking a costly federal default if the debt ceiling is not raised and the government finds itself unable to pay its bills.