The Fed is Getting Better at Inflation: What is the Problem? Consumer Price Increases and the Effects on American Products and Services
Higher rates slow inflation by cooling consumer demand and allowing supply to catch up, paving the way for more moderate price increases. They slow down hiring, weaken wage growth, prompt job losses, and ripple through financial markets that are disruptive.
Higher borrowing costs have already put a big dent in the housing market. And other parts of the economy are beginning to slow. Consumers are still spending money despite having a lot of money saved up for the Pandemic. As a result, the Fed may have to tap the brakes harder, for longer, than it otherwise would.
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.
It’s a recipe for worldwide turmoil and even a recession. The Fed is on track to continue raising interest rates. Feds are in charge of domestic economy goals, which includes keeping inflation slow and steady while fostering maximum employment. Because of the dollar’s position, the Fed is sometimes called a central banker to the world, but it goes about its day-to-day business with its eye on America.
The report showed some progress in fighting the increases, as costs have fallen by less over the last three months than they have in the previous three months, said Mr. Biden. He acknowledged that inflation was still high.
Most economists would not think that this year’s adjustments to Fed policy would pull inflation much lower at this time. Because rate moves work with slowing consumer demand, one might expect their effects on everyday consumer goods and services to show up first. That hasn’t happened yet. From restaurant meals to cigarettes to stationery products, prices continue to climb briskly, suggesting consumers are still willing to pay up.
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.
“Interest rates rose quickly, and we are not done yet”, said Greg McBride, chief financial analyst at Bankrate. It will take some time for inflation to come down from these lofty levels once we start to see some improvement.”
Annual inflation in September was 6.2%, according to the Fed’s preferred yardstick — unchanged from the month before. Prices are rising at an annual rate of 8.2%, better known as a consumer price index.
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Esther George, the President of the Federal Reserve Bank of Kansas City, said that they see a savings buffer that may allow households to keep spending when demand is strong. That implies that we might have to keep on this for a while.
Like her colleagues on the Fed’s rate-setting committee, George has expressed a determination to control inflation. She cautioned against raising rates too quickly at a time of economic uncertainty.
George said last month that he had been in the camp of slower rate increases to see how the effects of a lag would unfold. I’m worried that a succession of very large rate hikes might cause you to oversteer and not be able to see the turning points.
The senators wrote a letter on Monday to Powell, saying they were worried that the Fed would fail to slow rising prices and slow the economy by hiking interest rates.
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.
“We’re going to be in for a rough 6 to 8 months,” Woods said. Housing leads us out of the downturn and the other way around. And I think from a housing perspective, we’ve probably been in a housing recession since March or April.”
The Last Day of Digital Cryptocurrency Investments: Why the Fed Can’t Reinflate, but the Fed Needs To Tighten
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The stock market’s best day since 2020 came when a key inflation indicator came in softer than expected. The report made the investors think that inflation may have finally come to an end. That means the Federal Reserve could be less aggressive with its rate hikes.
But investors have a knack for getting their hopes up about a central bank pivot only to be crushed by another piece of negative data or hawkish messaging from a Fed official.
“This is what the path for a soft landing looks like,” says Aaron Sojourner, an economist at the Upjohn Institute for Employment Research. “Inflation has come down but there’s not a recession.”
“If the Fed doesn’t have to tighten as aggressively, the economy will weaken less, and headwinds for stocks will be smaller,” wrote Bill Adams, chief economist for Comerica Bank in a note.
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 Rise and Fall of Bitcoin: The First Year After Thaw in the Covid-Epoch of Growth and Decoherence
A thaw. The Covid-era was marked by a surge in investors from large institutions and near-zero interest rates. 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.
Just look at bitcoin prices since the summer of 2020. They’re up more than 80%…even though it has been far from a smooth ride. The Nasdaq, by way of comparison, is only up about 1% from July 2020 levels.
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 bottom line: With mortgage rates up four percentage points from a year ago, buyers’ purchasing power has plummeted. The price of houses has gone up so that people who are still in the market may need to look for a lower price point or make compromises if they want to find a house that is affordable.
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.
The hike in the Fed’s benchmark rate is the smallest since last March, and signals that policymakers are shifting to a more cautious approach, after spending much of last year playing catch-up and boosting borrowing costs at the fastest pace in decades.
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But it may not be easy to do. The producer price was up 7.4% in the past year, according to the government. That was a bit higher than the expected rate of 7.2% but a marked slowdown from the 8% increase through October.
The November Consumer Price index data is available on Tuesday, the day before the Fed announcement. The price was up 7.7% year-over-year in 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.
In order for investors to be attentive, they need to pay attention not to what the Fed says in its policy statement about rates or what Powell says in his press conference. The Fed will release its latest projections for the job market on Wednesday.
The co-chief investment officer at Truist said that a pause or pivot wasn’t a cure-all for the market. Rate cuts may not be enough. Recession risks are still relatively high.”
The US economy isn’t in a recession yet. But are American shoppers tapped out? We’ll get a better sense of that Thursday after the government reports retail sales figures for November.
So it’s possible consumers were simply getting a head start on holiday shopping. Inflation has an effect on the numbers too, since retail sales have been impacted (positively) by the fact that people have to spend more money for stuff.
“Everybody has been 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.
Source: https://www.cnn.com/2022/12/11/investing/stocks-week-ahead/index.html
What does it Mean to Investors? The Fed Chairman reiterates that the Fed is putting the United States on a steady path in the fight against inflation
What does that mean for investors? Cosserat said people should be looking for quality consumer companies that can still maintain their profit margins. He said that his firm owns two stocks that fit that bill,: luxury goods maker and cosmetics company L’Oreal and the firm itself.
On Friday, Eurozone retail sales and earnings from ACN,DRI and WGO.
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 Chairman stated that rate cuts would not happen until the committee is confident that the inflation is going down.
The economy has not been impacted by the Fed’s rate hikes. Wages are increasing, Americans are spending money and GDP is strong. Business is also good: Companies are largely beating revenue expectations and reporting positive earnings results.
The US is expected to take the lead with half-points moves by the European Central Bank, 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 his post-meeting press conference, Fed Chair Jerome Powell signaled that while there’s still a long way to go in the fight against inflation, he believes the trend is moving in the right direction.
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Americans who are already dealing with price increases in almost every area of their lives are feeling the effects of higher interest on loans and credit cards. 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.
“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.
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. The major indices were mostly unchanged by mid-afternoon.
After hitting a four-decade high of 9% in June, inflation is showing some signs of easing. The price of gasoline and certain goods has fallen sharply, as have prices of things like used cars and TVs.
Fed officials think that shelter inflation may be behind us. Since the beginning of the year, 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 other than housing and energy make up 25% of all consumer spending.
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“We see goods prices coming down,” Powell said. We are aware of 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. And that’s going to take some time.”
Powell has described the job market as out of balance, with more job openings than there are available workers to fill them. While the U.S. economy has now replaced all of the jobs that were lost during the pandemic, the share of adults who are working or looking for work has not fully recovered.
Many older workers who retired in the last few years may not be able to find a job. With the supply of workers constrained, the Fed is trying to restore balance by tamping down demand.
Despite the Federal Reserve’s steps to slow down inflation, prices are still climbing faster than they were before the spread of the disease.
The central bank raised its rates for the seventh time in nine months on Wednesday, after it made it clear that it will do everything in its power to bring inflation down.
The price of gasoline has plummeted since Russia’s invasion of Ukraine. The prices of other goods like used cars and televisions have fallen, as pandemic kinks in the supply chain come 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.
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“We don’t know if we will have a recession or not, and there’s no way to know whether it’s going to be a deep one or not,” he said.
The war in Ukraine could cause big price swings at the gas station and grocery store. The price of crude oil and other commodities can go up or down depending on the pace of economic growth around the world.
The price of services depends on wages. How many jobs the country adds each month, how many people are available to fill those jobs, and how productive those workers are are all factors that affect that.
Wall Street will get the last jobs figures for 2022 on Friday morning. According to forecasts by economists, 200,000 jobs were created in the US in December. That would be a slowdown from the 263,000 jobs added in November.
Because of that, traders are betting that the Federal Reserve will reduce its interest rate hikes, which will lead to a reduction in jobs growth.
The stock market has been choppy thanks to the latest inflation figures and traders have been following economic reports more than usual.
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.
That is why investors care about the weekly jobless claims numbers that will be released Thursday morning as well as the report from Automatic Data Processing about the job market. More alarm bells about inflation and Fed rate hikes could be set off by further strength.
Wall Street will need to dig even deeper into Friday’s jobs report to understand the state of 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. Worker compensation can lead to more inflation. Consumers can pay a higher price for products and services if they have more disposable income.
Investors cheered the fact that wage growth, measured by average hourly earnings, rose only 4.7% over the previous 12 months in October. 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.
According to a report by analysts at the investment institute, inflation is likely to remain stable due to worker shortages fueling wage growth in the services sector.
The number of jobs added will be less than the number of workers who are paid. Wall Street may do the same thing.
Amazon, Meta Platforms, and Aldi: How European Consumers Feel the Pain of a Deep Low-Energy Economic Downturn
As my colleague Catherine Thorbecke reported, Salesforce joins a growing list of major tech firms that have recently announced job cuts, including Amazon
(AMZN) and Facebook owner Meta Platforms. Amazon made the announcement late wednesday that it was laying off over 18,000 employees.
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 know that recession alarm bells are ringing once more as inflation and rate hikes take their toll and that they may have not factored that in to their budgeting plans.
We hired too many people prior to the economic downturn, and we are now facing it, according to a recent note to employees by the chair and co-CEO of the company.
“Companies that last a long time go through different phases. They’re not in heavy people expansion mode every year,” Amazon CEO Andy Jassy said in a memo shared with employees.
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.
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. A drop in energy prices is leading the pullback.
Still, consumers continue to bear the brunt of higher prices. CNN’s Hanna Ziady reports that European supermarket giant Aldi just had its best December ever in the United Kingdom as British shoppers, feeling the pinch of inflation, flocked to the German discount grocer. Aldi said Brits bought more than 48 million mince pies, for example.
The Fed Open Market Committee Reports: “We’re not done with the economy, but we’re excited about it,” J.P. Powell told the media after the first rate hike
The decision at the conclusion of the Federal Open Market Committee was made after months of rate hikes intended to cool down the economy and is a return to a traditional interest-rate policy.
Still, Powell warned economy watchers that “the job is not fully done” and that the labor market remains 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.
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.”
US markets jumped following the press conference, indicating the investors expect a more dovish Fed going forward. The S&P 500 closed the first day of February 1.1% higher after notching its best January in four years.
Excluding volatile food and energy costs, “core” prices in December were 4.4% higher than a year ago, according to the Fed’s preferred inflation yardstick. That’s down from a 5.2% annual rate in September.
Wage gains have fallen as the job market has been tight. As in the 1970s, rapid wage gains may not put more upward pressure on prices.
“We do not want to be head-faked like we were in 2021,” Fed governor Chris Waller said two weeks ago. “Back in 2021, we saw three consecutive months of relatively low readings of core inflation before it 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’ll avoid that.
This could be the best Valentine’s Day ever, if your heart goes pitter patter when central bankers discuss inflation. Four members of the Federal Reserve (although not Fed Chair Jerome Powell) spoke on the economy today.
Thomas Barkin is no longer a voting member of the interest-rate setting Federal Open Market Committee. Barkin said in an interview with Bloomberg TV Tuesday morning that there is “more persistence to inflation than maybe we’d all want,” adding that “inflation is normalizing, but it is coming down slowly.”
The problem is trying to predict future economic data. “When inflation is 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.
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Philadelphia Fed President Patrick Harker sounded less concerned with inflation than his counterpart. He is a 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.” At some point this year, Harker expects that the policy rate will be restrictive enough that we will hold rates in place.
John Williams, the president of New York Fed, is an FOMC member and someone who has been rumored to be the successor to Lael Brainard as Fed vice chair now that Biden is expected to pick Brainard as his top economic adviser.
Williams said that there will likely be subdued growth and some change in labor market conditions. He said he expected real GDP growth of just 1% this year and that the unemployment rate will “edge up over the next year” to between 4% and 4.5%. The jobless rate is currently 3.4%.