Fed Inflation Revisited: Supply Imbalances, High Food and Energy Prices, and Pressures in the U.S. Consumer Market
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the central bank said in a statement on Wednesday.
Annual inflation in September was 6.2%, according to the Fed’s preferred yardstick — unchanged from the month before. The better known consumer price index shows prices rising even faster, at an annual rate of 8.2%.
The way for more moderate price increases will be paved by higher rates due to cooling consumer demand. They slow down hiring and weaken wage growth, and they also cause job losses in some markets.
Higher borrowing costs have already put a big dent in the housing market. There is a gradual slowing of the economy. But consumers, still flush with cash saved up early in the pandemic, continue to spend money. The Fed may have to tap the brakes harder, for longer, than it would otherwise.
Several international bodies warned that there is a dire danger of overdoing it, and that the damage can be particularly acute in poorer nations. A cost-of-living crisis in developing nations has already been created by rising food and fuel prices, and now American imports are more expensive because of the dollar’s rise.
The Fed moves made it harder for emerging-market borrowers to pay back their dollar debt, and caused market volatility as the value of the U.S. dollar increased.
The Rise and Fall of Consumer Prices in the Last Four Years: Implications of the Fed’s Adjustment Rate Increases on the Core Index, Fuel and Food
Fresh inflation data released Thursday showed that the consumer prices climbed more quickly than expected, bad news for the Federal Reserve as it tries to bring the most rapid price increases in four decades back under control.
Prices increased 6.6 percent after stripping out fuel and food — which tend to be volatile and are often removed from inflation readings to allow for a better sense of underlying trends — an uptick in the so-called core index that was also more than economists expected.
Fed officials and analysts will be more interested in the August and September figures. While the annual numbers reflect what has happened cumulatively over the past 12 months, the monthly data give a clearer snapshot of how prices are evolving in real time.
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.
Most economists don’t think that this year’s adjustments will be enough to make a difference in inflation. But because rate moves work by slowing consumer demand, one might expect their effects to show up in everyday consumer goods and services categories first. That hasn’t happened yet. Consumers are still willing to pay more for things, as prices continue to go up briskly.
The Fed is likely to raise interest rates again, but the expectation is for a half-point increase after four hikes in a row.
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. But he also acknowledged that inflation remained painfully high.
In a report Monday, Vanguard said central banks would stop their aggressive tightening cycle in early 2023 as inflation fell and job losses became more common. Most central banks will not cut rates in 2023 because of the need to cool wage growth.
“Interest rates have risen at a whiplash-inducing speed, and we’re not done yet,” said Greg McBride, chief financial analyst at Bankrate. “For inflation to come down from these lofty levels, even once we do start to see some improvement, it’s going to take some time.”
If the central bank were to stop hiking rates in the foreseeable future, they could possibly remain elevated for another year or more.
Esther George, president of The Federal Reserve Bank of Kansas City, said that there is a bit of a savings buffer that may allow households to spend in a way that keeps demand strong. “That’s suggestive that we need to keep at this for a while.”
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.”
George said last month that he had been in the camp of steadier and slower rate increases to see how the effects from a lag will unfold. “My concern being that a succession of very super-sized rate hikes might cause you to oversteer and not be able to see those turning points.”
Democrats are trying to hold onto power next week because of the pain of inflation and its negative effect on job security. According to a new CNN poll, three-quarters of likely voters already feel like the country is in a recession.
The State of the Real Estate Market During the First Five-Year Fed Reevaluation: How Well Did the US Economy Get Its Job?
Shawn Woods said his company went from selling a dozen houses a month before the Fed started raising rates to less 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 it will be 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.
The US economy is expected to have added 200,000 jobs last month, down from 263,000 in September but well above the pre-pandemic average. The unemployment rate is expected to edge up slightly, to 3.6% from 3.5% — still close to a half-century low.
Take the latest monthly JOLTS survey on job vacancies, quits and layoffs. Economists had predicted that the number of job vacancies would fall as a result of the Federal Reserve slowing business growth. But instead of dropping to 10 million, it surged to 10.7 million.
The Fed’s most aggressive monetary tightening in modern history is unlikely to have much of a negative impact on the labor market.
In September, the Fed predicted a 1.2% GDP growth in 2023, an unemployment rate of 4% and an inflation rate of 2.8%. The Fed’s GDP target could be slashed and its expectations for the unemployment rate and consumer prices raised.
There are currently 1.9 jobs for every one person looking for work, a margin that the Fed worries is keeping inflation uncomfortably high. With plenty of options, workers are demanding higher wages; and with few applicants, managers are forking out higher pay, which bolsters demand for goods and services (and therefore drives up prices).
The likelihood of an economic downturn is increasing, and the Fed’s projections may reflect that. But the Fed is not expected to start cutting interest rates until 2024 at the earliest, so it may be too late for the central bank to prevent a recession.
“It’s good to see progress, but let’s just understand we have a long ways to go to get back to price stability,” Fed Chairman Jerome Powell said at a press conference after the board announced its latest, smaller rate increase.
Baby Boomers are Rejoind: The Effects of Mortgage and Land Use Increases on the Real Estate Supply in the 2020 Real Estate Boom
Cut to 2020 and that narrative got flipped on its head. They were unable to afford homes in the suburbs, it wasn’t because they didn’t want to. When the demand for property exploded, it was driven by people in their 30s, who were finally flush after years of work, and eager to flee to a better life.
(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.)
People who closed on a home in the frenzied market for homes in the 2020 housing boom should be 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.
Jessica Lautz, a vice president of demographics and behavioral insights, said that they have to save while paying more for rent, student debt and other expenses. “And this year were facing increasing home prices while mortgage rates are also climbing.”
Mortgage rates have gone up since the Federal Reserve began hiking interest rates. 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 policies that regulate land use and housing production make it extremely difficult to add more homes in desirable locations,” writes Jenny Schuetz, an urban economist at the Brookings Institution.
Single-family subdivisions at the urban fringe have been used to expand the housing supply. That’s putting more people and homes in environmentally vulnerable areas, such as wildfire-prone regions of the West.
Federal and local governments should rethink the way they frame the American Dream as affordability gets 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 First Mile: A Marathon in a Wake for Stocks and the First Mile of the Second Half of the Fed’s Peak Inflation
(Side note: “Basis points” are how central bankers talk about rate moves, which usually happen in tiny increments. One-tenth of a percentage point is the basis point.
The story was first published in the Before the Bell newsletter. You are not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking on the link.
Stocks surged on Thursday in their best day since 2020 after a key inflation indicator came in softer than expected. The investors believed the report to mean that the peak inflation may be over. The Federal Reserve could be less aggressive with rate hikes.
The Summary of Economic Projections is due out on Wednesday, so investors will be interested in it. They will watch Powell’s news conferences to get clues about what’s to come.
The first mile is important in a marathon. The report could mean a soft or softish landing, where inflation does not rise as fast as feared, and the economy does not fall into a recession. It is also good for markets.
The economy would weaken less and the drag on stocks would be smaller if the Fed does not tighten as aggressively.
Bitcoin Price Rises Since The Covid-Era: A Crypto Thaw for the Long-Term Interest Rate and Inflationary Threats
Bitcoin prices fell more than 15% in November and have plummeted about 65% this year. FTX’s collapse has investors wondering what will happen in the future.
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 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. In November it reached a record high of over $70,000.
The dollar strengthened significantly as central banks raised their rates to fight inflation and attracted investors to be safe. There was a downturn in the economy, and new investors who still saw bitcoin as a risky asset left in droves.
The prices of the virtual currency have gone up since the summer of 2020. They’re up more than 80%…even though it has been far from a smooth ride. The Nasdaq, by way of comparison, is only up about 1% from July 2020 levels.
The purchasing power of buyers has fallen since mortgage rates went up a year ago. 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.
Some traders think it will be a half-point increase. Federal funds futures on the Chicago Mercantile Exchange show an 80% probability of a half-point hike.
The hope is that inflation pressures are finally starting to abate enough that the Fed can pivot — Fed-speak for a series of smaller rate hikes -— to avoid crashing the economy into a recession.
The Producer Price Index and the Consumer Price Index: When Does Inflation Come Into Play? Kathy Jones, President, Finance, and Economic Impact
It might not be that simple. The Producer Price Index, which is a key gauge of wholesale prices, rose 7.4% during the last year according to the government. The rate was higher than expected, but not as high as the 8% increase through October.
Kathy Jones said that inflation probably peaked, but it may not come down as quickly as people want.
Jones still thinks the Fed will raise rates by only half a point this week and may look to hike them just a quarter point in early 2023. But she conceded that the Fed is now sort of “making it up as they go along.”
Wednesday: Fed meeting; EU industrial production; UK inflation; earnings from Lennar
(LEN) and Trip.com
(TCOM)
“A pivot or pause is not a cure-all for this market,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. It may be too late to cut rates. There are still high risks for the recession.
The Consumer Price Index and Retail Sales are two key economic reports that will be released on Tuesday and Thursday. Those numbers will give more clues about the health of American consumers. Is they still shopping despite the price increases?
So it’s possible consumers were simply getting a head start on holiday shopping. Retail sales have been negatively impacted by inflation since people must spend more money for stuff.
“Everybody has been talking about inflation this year. Cosserat said disinflation will be more of a focus in the next two decades.
What Should Investors Look For When Central Banks & Treasury Meet Next-Generation Rates? Insights from an Investment Expert in Hermes and L’oreal
What does that mean for investors? quality consumer companies that have pricing power and are able to maintain their profit margins is what people should look for, said Cosserat. Two stocks that his firm owns are luxury goods maker Hermes and cosmetics giant L’oreal.
Friday: Eurozone PMI; UK retail sales; earnings from Accenture
(ACN), Darden Restaurants
(DRI) and Winnebago
(WGO)
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.
Hopes that the Fed would reduce the size of its rate hikes helped propel stocks higher in October and November. 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. That was the highest the 10-year has been since 2008.
The Fed and other central banks may not even consider lower interest rates until it is too late in the game.
“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.
Fed Rates Will Stay Low for a Time: Sam Bankman-Fried, the FTX Chairman, and EY-Parthenon
Sam Bankman- Fried, founder of FTX, will testify before the House Financial Services Committee on Tuesday. Bankman-Fried is not on the list of witnesses set to appear, but the Senate Banking Committee will hold a FTX hearing on Wednesday.
Maybe investors will be able to relax and take a deep breath before the Fed announcement and press conference later that day. There is 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% and 4.5%, the highest in seven years.
The Swiss National Bank and the European Central Bank are expected to make half-point moves on Thursday. Norway, Mexico, Taiwan, Colombia and the Philippines will also likely increase their borrowing costs this week.
In order to assure the public that the Fed planned to keep interest rates low for a time, former Fed chairBenBernanke created a dot plot. 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 economists at EY-Parthenon think that the projected real GDP growth in the fourth quarter of 2023 will be around zero. They believe the unemployment rate will approach 5% (from 4.4% in the September update).
Long-term self-driving cars are not enough: Tesla argues indictment, inflation is slowing down, and a lawsuit by Cooban cites Tesla’s driver assist technology
Tens of thousands of Royal College of Nursing members will go on strike on Thursday and Tuesday in protest of low pay and working conditions in England, Northern Ireland and Wales. They plan to walk out again on December 20, reports my colleague Anna Cooban.
“Patient safety is always paramount,” the RCN says on its website, adding that some nursing staff would continue to work through the strike. The RCN will keep critical services up and running during this month’s intermittent strikes.
The most recent wave of industrial unrest is the broadest since the early 1970s when a large number of workers went on strike.
Tesla CEO Elon Musk has said numerous times since 2015 that Tesla cars would be entirely self-driving in two years, or less. But years after his self-imposed deadlines have blown by, it still hasn’t happened. A $15,000 technology package called “Full Self Driving Capability,” which is used for a particular type of car, is not enough for a car to drive by itself.
Lawyers for Tesla argued in a court filing that failure to realize a long-term goal is not fraud.
The lawsuit, filed by the California firm of Cotchett, Pitre & McCarthy, also cited numerous cases of crashes involving the use of Tesla’s driver assist technology.
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.
Fed-federal-reserve interest rates december inflation-benchmark: the impact on the American consumer spending, mortgages, and credit cards
Many Americans are feeling the effect as they pay more interest on credit cards, loans and car loans, because of the price increases. The average interest rate for used car buyers is nearly 10%, compared to 8.12% last year, and they are making their largest monthly payments on record.
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. By mid-afternoon, the major indices were mostly flat.
Rents continue to climb, but Fed officials think the worst shelter inflation may be behind us. Since the beginning of the year the market rents have been increasing at a slower rate.
The price of haircuts and drycleaning has gone up in the last twelve months. Services other than housing and energy account for nearly a quarter of all consumer spending.
Source: https://www.npr.org/2022/12/14/1142757646/fed-federal-reserve-interest-rates-december-inflation-benchmark
The Job Market in the United States: Where are we going? How will the US economy respond to the global economic crisis and how do we plan to respond?
“We see prices for things coming down,” Powell said. “We understand what will happen with housing services. 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.
Powell thinks the job market is out of balance because there are more openings than available workers. The share of adults who are working and looking for work has not fully recovered despite the fact that the US economy has replaced all of the jobs that were lost during the Pandemic.
Some retired workers may not return to the job market. The Fed is attempting to balance out the supply and demand for workers by cutting down on demand.