Fed Rate Increases: Why Is It Still Predicting Inflation? – A Rejoinder to the Fed and Predictions for Powell

The desired effect of higher interest rates is beginning to be achieved. Consumer spending has cooled in recent months. The central bank would like inflation to stay below 4%, but it has dropped significantly.

It is not certain how much pain today’s moves will cause, even though many countries are raising rates so quickly that it is hard to say how much will go down once it takes full effect. It can take months or years for the 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. A cost-of-living crisis has already been caused by high food and fuel prices, and now as the dollar increases, American imports are more expensive for developing economies.

It can cause turmoil and even a recession. Despite that, the Fed is poised to continue raising interest rates. That’s because the Fed, like central banks around the world, is in charge of domestic economy goals: It’s supposed to keep inflation slow and steady while fostering maximum employment. While occasionally called “central banker to the world” because of the dollar’s foremost position, the Fed goes about its day-to-day business with its eye squarely on America.

Mr. Biden said the report showed “some progress” in combating the increases, noting that costs have climbed by less over the past three months than they had in the prior three months. He acknowledged that inflation was still very high.

In a note to clients Monday, Gregory Daco, chief economist at EY-Parthenon, wrote that he expects Powell will insist on keeping the policy rate low for some time 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.”

The First Mile in a Marathon: When the Federal Reserve Becomes More Aggressive with its Rate Increases, and when the Consumer Price Index May Come Out

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The stock market had its best day since 2020 on Thursday as an 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.

The more widely watched Consumer Price Index data for November comes out Tuesday, just a day before the Fed announcement. CPI rose 7.7% year-over-year through October.

The Summary of Economic Projections is due out Wednesday, and will be read closely by investors. They may end up being sorely disappointed but they will watch the press conferences for clues.

It’s not all bad news: The first mile in a marathon matters. The latest report bodes well for the economy and could mean that a soft or soft-ish landing, where inflation eases without recession, is still achievable. That’s also good for markets.

Bill Adams is chief economist for Comerica bank and he wrote a note saying if the Federal Reserve didn’t have to tighten as aggressively, the economy would weaken less.

Curvature, Real Estate, and Cryptocurrency: The First Five Years of Crypto-Memory Growth and Fed Rate Increases

Crypto-advocates were hoping that rising interest and inflation rates would drive investors away from the dollar and into alternative assets like gold and Bitcoin. Paul R. La Monica reported that they have been in for a rude awakening this year.

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.

A thaw in crypto. Near-zero interest rates, stimulus cash and a big influx of investments from large-scale institutions led to the surge of the virtual currency. 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. At the same time, the economy began to sour and those new investors who still viewed bitcoin as a risky asset exited in droves.

It is not surprising that the CNN Business Fear and Greed index is in neutral territory, but it pales in comparison to what is going on with cryptocurrencies.

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 another 75 basis points, the sixth rate increase this year and the fourth-consecutive hike of that size.

The purchasing power of buyers has plummeted because of the recent rise in mortgage rates. That has pushed many buyers out of the market and those who remain may need to look at a lower price point or make compromises on the location, size, or condition of a house in order to find one that is affordable.

The investors expected the Fed to raise their rates by 0.25 percentage points. After Powell spoke, the odds of a half-point increase increased dramatically.

Rates were raised by only half-point in December, after having been raised by four straight quarters of a percentage point between June and November. The short-term rate of the Fed is currently between 4% and 4.5%.

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. The increase through October was 8%, but the rate of increase was slightly higher at 7.3%.

“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.

Implications of the December 13 Meeting on the U.S. Retail Sales and Inflationary Rate Cuts and the ECB Industrial Production

The Fed meeting, EU industrial production, and UK inflation are all happening on Wednesday.

“A pivot or pause is not a cure-all for this market,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. The rate cuts may not be enough. Recession risks are still relatively high.”

The US economy is not in a recession. But are American shoppers tapped out? We’ll get a better sense of that Thursday after the government reports retail sales figures for November.

Perhaps consumers were 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.

This year everyone has been talking about inflation. Cosserat said that in the years to come, it will be more about disinflation.

The Fed and Central Bank Debates: What Will They Mean for An Investor’s Guide? A View from FTX CEO Sam Bankman-Fried

What does that mean for investors? People should be looking for quality consumer companies that can maintain their profit margins and still have pricing power. Two stocks that his firm owns that he said fit that bill: Luxury goods maker Hermes

            (HESAF) and cosmetics giant L’Oreal

            (LRLCF).

Friday: earnings from the aforementioned companies, as well as the Eurozone PMI and UK retail sales.

The central bank drama will get even more interesting when the Bank of England and European Central Bank both meet on Thursday to decide whether or not to raise their rates again to fight inflation.

The stock market rallied in October and November on the belief that the Federal Reserve would scale back its rate increases. They are still down sharply for the year, though, and stocks have been more volatile so far 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. The 10-year has been high in recent years.

“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, founder of FTX, 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 Fed isn’t going to cut the bank debt. The economy is growing and the economy is prospering: An analysis from Powell’s predecessor at the Fed

Before the Fed announcement and press conference, maybe investors will relax and take a deep breath. There’s no guarantee of that.

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.

The Fed’s anticipated action would increase the rate that banks charge each other for overnight borrowing to a range of between 4.25% and 4.5%, the highest since 2007.

Powell said that he wouldn’t see rate cuts before the committee was confident that inflation was going to go down.

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. But it certainly isn’t, in my view, something that is necessary to bring inflation down.”

And the economy has so far withstood the Fed’s aggressive rate hikes. The job market is healthy, wages are growing, Americans are spending and GDP is strong. Business is also good: Companies are largely beating revenue expectations and reporting positive earnings results.

Rate hikes from the central bank of England and the European Central Bank: Inflationary consequences for the United States and the automotive sector in the epoch of economic recovery

The Bank of England and the European Central Bank are expected to follow in the footsteps of the United States on Thursday. Mexico and the Philippines will 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.

“We have a ways to go to get back to price stability,” Powell said at a press conference after the board announced a rate increase.

Many Americans, already contending with price increases in nearly every part of their lives, are feeling the effects as they pay more in interest on credit cards, mortgages and car loans. The average interest rate for used car buyers is less than last year and they are making the largest payments on record, says a credit reporting firm.

What causes inflation? It may be the result of a rise in demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.

Wall Street was mostly depressed by the Fed’s warning of further rate hikes and the announcement of another increase in the stock market. But stocks recovered and the major indices were mostly flat by mid-afternoon.

Inflationary Progress in the U.S. After the Swine Flu: The F-Dimensional Economy and Prime Product Prices

After hitting a four-decade high of 9% in June, inflation is showing some signs of easing. Gasoline prices have fallen sharply, and so have the prices of certain goods such as used cars and televisions.

The worst of shelter inflation may have been behind us, according to Fed officials. The increases in market rents have slowed.

The price of haircuts rose 6.8% in the last twelve months, while the price of dry cleaning jumped 7.9%. Services apart from housing and energy make up more than a quarter of consumer spending.

Powell said that goods prices were coming down. We are familiar with the situation with housing services. But the big story will really be the the rest of it, and there’s not much progress there. And that’s going to take some time.”

The job market is out of balance because there are more job openings than workers are available for, says Powell. Although the U.S. economy has regained all of the jobs lost during the swine flu, the proportion of adults who are working or searching for work has not fully recovered.

Many older workers who retired in the last two years may not return to the job market. With the supply of workers constrained, the Fed is trying to restore balance by tamping down demand.

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.

Wall Street Will Get The Last Jobs Number for 2022: Predictions from Inflation and Wage Growth in the U.S.

Before the invasion of Ukraine, gasoline prices were higher than they are now. The prices of other goods like used cars and televisions have fallen, as pandemic kinks in the supply chain come untangled. Travelers become more price-conscious and the prices for travel-related items have dropped as a result.

He said on Wednesday that no one knows whether we will have a recession or not.

Changes in the weather or the war in Ukraine could cause big swings in prices at the gas station and the grocery store. Faster or slower economic growth around the world could also cause gyrations in the price of crude oil and other commodities.

The price of services depends on what happens to the wages. It depends on how many jobs are created each month, how many workers are available to fill those jobs, and how productive workers are.

Wall Street will get the last jobs figures for 2022 on Friday morning. The US government is expected to report that 200,000 jobs were added in December, according to forecasts of economists surveyed by Reuters. That would be a slowdown from the 263,000 jobs added in November.

Traders are betting on a further deceleration in jobs growth because that could lead to a reduction in the size of interest rate hikes by the Federal Reserve.

As of late traders have become even more focused on economic reports and stocks have been volatile based on inflation figures.

Wednesday’s weaker than expected report on the health of the manufacturing sector, coupled with more signs of strength in the jobs market given the solid report about labor turnover, led to more market volatility.

Thursday morning is when the weekly jobless claims numbers come out, as well as a report from the payroll company about the private sector job market. More alarm bells about inflation could be set off by further strength.

Wall Street will also need to dive even deeper into Friday’s jobs report to get a better sense of what’s happening in the economy. The unemployment rate is expected to remain at 3.7%, close to a half-century low.

The level of wage growth will also be under scrutiny. An increase in worker compensation historically tends to lead to more inflation. Consumers can pay higher prices for their products and services if they have disposable income.

Wage growth was only 4.7% over the previous 12 months in October, which was cheered by investors. But year-over-year wage growth perked back up to 5.1% in November. 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.

Retail, banking and tech are thought to have sticky inflation due to worker shortages fueling wage growth.

In other words, the Fed is likely to focus more on worker paychecks in Friday’s jobs report than the number of jobs added. Wall Street may do the same.

Overall, the jobs market is still in good shape. You would not know that from what is happening in Silicon Valley. Software giant with component. The company said 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.

Now, though, recession alarm bells are sounding once more as inflation and rate hikes take their toll…and tech companies realize that they may have not factored that in to their budgeting plans.

A recent note to employees was written by the chair and co- CEO of the company, which said it hired too many people in the lead up to the economic downturn.

“Companies that last a long time go through different phases. Andy Jassy told employees in a memo that they weren’t in heavy people expansion mode every year.

The world economy isn’t out of the woods, but it’s coming. Economists worry about disinflation

The global economy is clearly not out of the woods. Many, including the head of the International Monetary Fund, are still concerned about a looming downturn that could hit China and emerging markets particularly hard.

According to Anna Cooban of CNN, European investors appear to be growing more hopeful that there will be a slower pace of consumer price increases in France and Germany. A drop in energy prices is leading the pullback.

The British Retail Consortium said in a report Wednesday that food prices surged 13.3% in December. The number of items consumers bought fell during the same period as grocery sales hit a record in the UK, but the data analysis firm noted that the total number of items consumers bought was at a record high.

Wage gains have also eased in recent months, despite the tight job market. The 1970s had some concerns that wage gains may cause prices to go up more than they should.

“We don’t want to be impersonated like we were in 2021,” the Fed governor said two weeks ago. Three months of relatively low readings of core inflation exploded in our face.

“We’re pulling off something really nice right now,” says Sojourner, who served as a senior economist for the Council of Economic Advisers in both the Obama and Trump administrations. “If the we get to the place where the Fed over-corrects, then we start to see jobs destroyed. Hopefully we can avoid that.

Federal Reserve chairman Jerome Powell warned on Tuesday the central bank may have to push interest rates higher than previously expected in order to curb stubborn inflation.

Daly acknowledged that high inflation and the aggressive policy action taken by the Fed to bring it down have caused panic on Main Street and Wall Street. “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.

The Fed needs to raise rates by half a percentage point, as the European central bank does after the Roadrunner chase off a cliff

Atlanta Fed President Raphael Bostic also said Wednesday that he believes the Fed needs to raise its policy rate by half a percentage point at the next meeting.

The Federal Reserve Governor warned that interest rates could go higher than expected after seeing better-than-expected economic data.

For the US economy, it could be considered a “Wile E. Coyote moment”, referring to the cartoon dog’s chase of the Roadrunner off a cliff.

There was a surge in economic data in the weeks following that meeting, showing robust job gains and strong consumer spending.

The warning came after a series of indicators that indicated the economy is running hotter than expected despite the aggressive action from the Fed.

Powell was challenged about potential job losses caused by rate hikes, by Sen. Elizabeth Warren.

She noted the December forecast of the Fed showed the unemployment rate would climb to 4.6% by year’s end. Warren said that would mean putting 2 million people out of work.

“You are gambling with people’s lives,” she said. You cling to the idea that there is only one solution, lay of millions of workers. We need a Fed that fights for families.

The Fed chairman said they were taking the only measures they could to bring inflation down. Will people better off if we walk away from our jobs and inflation stays at around 6 or 7 percent?

Republicans want to raise the debt ceiling in part by reining in government spending. The Democrats say the GOP is endangering a costly federal default if the debt ceiling is not raised.

Congress needs to raise the debt ceiling. That’s the only way out,” Powell said. “And if we fail to do so, I think that the consequences are hard to estimate, but they could be extraordinarily adverse, and could do longstanding harm.”

That’s the approach the European Central Bank took last week, when it followed through with plans to raise rates by half a point even as one of Europe’s biggest banks, Credit Suisse, was swept up in the market mayhem.

Inflationary economics: What is it and how does it affect the stock market and stock markets? — An overview from the Wall Street Journal

What is inflation? Inflation is a loss of purchasing power, meaning your dollar won’t go as far in the future. It’s a constant change in the prices of everyday goods and services like food, furniture, transportation, and toys.

Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.

How does inflation affect the poor? Poor households spend more of their budgets on necessities like housing and gas than wealthier ones, which makes inflation hard to shoulder.

Is inflation affecting the stock market? Trouble for stocks occurs when there is rapid inflation. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.

Source: https://www.nytimes.com/2023/03/20/business/economy/fed-inflation-bank-collapses.html

Comment on “Scaling the financial crisis in the past few years” by David Mericle, Ph.D. Anderson, C.A.F. Nicholson, H. E. Seifert, M. S

David Mericle wrote that markets seem to be less than convinced that efforts to support smaller banks will prove enough. Federal Reserve officials are likely to agree that stress in the banking system remains the most immediate concern at the moment.