Implications of a Rapidly Raising U.S. Inflationary Cut-and-Puzzle Rate on Economic Growth, Job Loss, and Job Creation
Higher rates slow inflation by cooling consumer demand and allowing supply to catch up, paving the way for more moderate price increases. But in the process, they slow down hiring, weaken wage growth, prompt job losses and ripple through financial markets in sometimes disruptive ways.
How much pain today’s moves will ultimately cause remains unclear: So many countries are raising rates so quickly — and so in sync — that it is difficult to determine how intense any slowdown will be once it takes full effect. It can be months or years before monetary policy starts to kick in.
Many economists and bodies have warned that there is a risk of over-doing it and it could hurt poorer nations more than other countries. 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.
The Fed’s moves have spurred market volatility and worries about financial stability, as higher rates elevate the value of the U.S. dollar, making it harder for emerging-market borrowers to pay back their dollar-denominated debt.
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 high.
Fed Rate Increases Aren’t Leaving the Fed But They Are Trying to Stimulate the Economy: A Reply to Governor Powell
The major concern is that the Fed and other central banks may not begin to pause, let alone consider lowering interest rates to try and stimulate the economy, until it’s too late.
The Fed has increased its benchmark lending rate six times this year in an attempt to discourage borrowing, cool the economy and bring down historically high inflation that peaked at 9.1% over the summer.
“We’re not done yet, as interest rates have risen at a whiplash-inducing speed,” said Greg McBride, chief financial analyst. It will take a while for inflation to come down from these lofty levels, even once we begin to see some improvement.”
The Consumer Price Index rose in the year ended in October but at a slower rate than had been expected and was the lowest reading since January.
Esther George, the president of the Federal Reserve Bank of Kansas City, believes that there is a portion of a savings buffer remaining for households that could allow them to continue to spend. “That suggests we may have to keep at this for a while.”
George was on the Fed’s rate-setting committee and has expressed a desire to control inflation. She’s warned against raising rates too quickly in a time of economic uncertainty.
George has been in a camp of steadier and slower rate increases to begin to see how the effects of a lag will unfold. “My worry is that a series of large rate hikes might cause you to oversteer and not be able to see the turning points.”
“We are deeply concerned that your interest rate hikes risk slowing the economy to a crawl while failing to slow rising prices that continue to harm families,” Sen. Elizabeth Warren, D-Mass., and colleagues wrote in a letter Monday to Fed chairman Jerome Powell.
The U.S. Economy is Going Through a Phase of Downsizing and Deflation: Job Openings, Salaries, and Layoffs
Shawn Woods said that his company had gone from selling a dozen houses a month to just five in the month since the Fed began raising rates.
“I wouldn’t have believed we’d go from 3% to 7% within six months,” said Woods.
“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. From a housing viewpoint, I think we’ve 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 forecast to have added 200,000 jobs in October, down from 263,000 in September but still above the pre-pandemic average. The unemployment rate is expected to increase to 3.6% from 3.5%, still close to a half-century low.
Take the latest survey to find job vacancies, quits and layoffs. The number of job vacancies in the United States was unexpected and surprised economists who had predicted that the Federal Reserve would slow business growth in order to tame inflation. But instead of dropping to 10 million, it surged to 10.7 million.
The Fed would prefer that everyone keep their jobs, just as long as there is some moderation in wage growth and job openings.
The Fed worried that inflation would be too high because there are 1.9 jobs for every person looking for work. 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).
In a report Monday, the strategist said that deflation risks are high across the US,EA and UK for the next year. The next US recession is expected to start in 2023 according to a consensus of experts.
Democrats trying to hold onto power next week will find that the pain of inflation is outweighing any positive sentiment about job security. According to a new CNN poll, three-quarters of likely voters already feel like the country is in a recession.
More bad news for the young Millennial and Gen Zers hoping to buy their first home: The past decade is turning heads toward the next generation
More bad news for the younger Millennial and Gen Zers hoping 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 that 2020 housing boom begins to go bust, those who managed to close on a home in the crush of competition fed by rock-bottom mortgage rates should count themselves extremely lucky.
For a historical comparison, the share of first-time buyers over the past decade has been between 30% and 40%. In 2009, in the middle of the Great Recession, it was high as 50%.
“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. Mortgage rates are also climbing while home prices are increasing.
Home prices shot up with the median peaking in June at $413,800, even as mortgage rates went up. Imagine your starter home was over 400 grand.
Housing is broken. Inventory constraints, and more recently outdated restrictions, are a big part of the problem.
Rather than rebuilding within existing neighborhoods, housing supply has expanded through “sprawling single-family subdivisions at the urban fringe.” There are more people and homes in areas that are vulnerable to fire.
As affordability reaches crisis levels, now is a good time for federal and local governments to rethink the way we frame the American Dream. It will only happen if elected office is represented better by those who are trying to benefit. Schuetz believes that the Boomer generation is very reluctant to change the system that got them where they are.
The Bank of England and the ECB hike: The basis point of central bank rate moves and implications for borrowing costs in the UK and beyond
The Bank of England lifted its key interest rate by the same amount on Thursday, making it the biggest hike in 33 years. The European Central Bank did the same thing last week.
Basis points are what central bankers talk about when they talk about rate moves. A basis point is a percentage point.
It is double the Feds normal quarter-point hike and will likely cause economic pain for millions of people by pushing up the cost of borrowing for cars, houses and other loans.
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The Covid-Era of Cryptocurrencies: A Tragic Year for Investors and Home Buyers in the Post-Inflationary Era
After a key inflation indicator came in less-than-expected, the stock market surged on Thursday, their best day since 2020. 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 Summary of Economic Projections and the Feds economic outlook will be read by investors on Wednesday. And they will watch Powell’s press conferences for clues about what’s to come — though they may end up sorely disappointed.
Bill Adams, Chief economist for Comerica Bank, said in a note that the economy would weaken less if the Fed didn’t have to tighten as much.
It’s been a terrible year for cryptocurrency. The value of Bitcoin has dropped nearly 75% since last November and the spectacular implosion of cryptocurrency exchange FTX, a so-called unicorn startup that was recently valued at $32 billion, is just the latest bit of bad news for investors in digital currencies.
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.
The Covid-era saw a large influx of cash and investors from large scale institutions, as well as near-zero interest rates. It increased in November to a record high of over $70,000.
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.
The CNN Business Fear & Greed Index, which measures seven indicators of market sentiment, is now in neutral territory, but it pales in comparison to what is happening with cryptocurrencies.
The impact rates have on homebuyers continues to evolve as the Housing market is the most interest-rate sensitive segment of the economy. “Home sales have declined significantly and, as we approach year-end, they are not expected to improve.”
Consumer Price Rises, Consumer Prices, and The Dot Plot: Predictions of the Next Fed, Fed and Wall Street Rates
Traders are betting on just a half-point increase. Federal funds futures on the Chicago Mercantile Exchange show an 80% probability of a half-point hike.
It may 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 rate wasn’t as high as anticipated but was a bit slower than the eight-tenths of a percent increase through October.
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.
“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.
But the main event at December’s meeting will be the Federal Reserve’s highly anticipated Summary of Economic Projections and what’s known colloquially as the dot plot. Investors will be paying close attention to these forecasts for clues about the path of rate hikes in the new year and beyond. They’re worried that they’ll show a more aggressive monetary policy tightening path, indicating that more hikes are coming next year.
“A pivot or pause is not a cure-all for this market,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. It could be too late to cut rates. Recession risks are still relatively high.”
The Consumer Price Index for inflation and retail sales are released this week on the consumer front. Those numbers will give more clues about the health of American consumers. Is it possible that they are still shopping despite the price increases?
Consumers might be getting a head start on holiday shopping. Retail sales have been impacted by the fact that more people spend money on stuff because of inflation.
“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 High-Year Treasury Yield of the US and Declining Wall Street Growth: Sevens Report on Wall Street, Hermes, and L’Oreal
What does that mean for investors? Cosserat said people should be looking for quality consumer companies that still have pricing power and can maintain their profit margins. Two stocks that his firm owns that he said fit that bill: Luxury goods maker Hermes
(HESAF) and cosmetics giant L’Oreal
(LRLCF).
Friday: Eurozone PMI; UK retail sales; earnings from Accenture
(ACN), Darden Restaurants
(DRI) and Winnebago
(WGO)
Stocks rallied sharply in October and November due to hopes that the Fed would begin to scale back on the size of its rate hikes. The year has been a terrible one, and stocks have been volatile so far in December.
The 10-year US Treasury yield is now at about 3.5%, after moving above 4.3% in late October. That was the highest it’s been since 2008.
Tom Essaye, the founder and editor of the Sevens Report, said that the macroeconomic focus will shift to how badly growth slows and earnings fall before global central banks can hint at providing accommodation.
Sam Banksman- 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 is a hawk step down, or Will the dots become a signal of future interest rates in the U.S. economy?
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.
“We think the markets are too sanguine on rates after the first quarter and we expect Powell to take a more hawkish tone and for the dots to indicate higher rates for a longer period of time than what is currently being priced in by the futures markets,” wrote Cliff Hodge, chief investment officer for Cornerstone Wealth in a recent note. So to say, a hawk step-down.
The economy has been able to resist the Fed’s rate hikes. The job market is healthy, wages are growing and the GDP is strong. Businesses are beating revenue expectations and reporting positive earnings results.
The European Central Bank, the Bank of England and the Swiss National Bank are expected to follow the United States with half-point moves of their own on Thursday. Norway, Mexico, Taiwan, Colombia and the Philippines will also likely increase their borrowing costs this week.
Former Fed chair Ben Bernanke first created the dot plot in 2012, mostly as a way to assure the public that Fed leaders planned to keep interest rates low for the time being. Now the opposite is true, the dots have become a signal that interest rates will remain elevated into the future — spooking investors and Fed watchers alike.
In a note on Monday, Goldman Sachs analysts said they expect the median “dot” to rise to a new peak in Federal fund rates of 5%-5.25%, up from 4.5%-4.75% in September. That would mean Fed officials expect to raise rates by half a percent more than they did three months ago, when the plot was last released.
Economists at EY-Parthenon believe that projections for real GDP growth will likely be revised down from 1.2% in the fourth quarter of 2023 to around 0%. Unemployment rate projections, they say, will likely approach 5% (from 4.4% in the September update).
Is the Tesla CEO really that self-driving? An expert investigation into the nursing union “no strike” campaign on the UK’s largest nursing union
It’s the first time in its 106-year history that the RCN — the UK’s biggest nursing union — has gone on strike in England. The action has been sparked by a cost-of-living crisis that has slashed nurses’ spending power nearly three years after the start of a pandemic that pushed many to their limits.
The RCN had a policy of “no strike” for most of it’s history. In 1995 the union allowed strikes as long as they did not compromise patient care.
It is the broadest wave of industrial unrest since the country’s infamous “winter of discontent” in the late 1970s, when huge numbers of workers, from truck drivers to gravediggers, 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. Peter reports that even though a $15,000 technology package called full self driving capability is used, a car can not actually drive by itself.
Lawyers forTesla argue that the company may have failed to live up to the lofty goals, but it doesn’t mean they perpetuated a fraud like in the class-action lawsuit.
Several cases of crashes involving the use of Tesla’s driver assist technology are cited in the lawsuit filed by a California firm.