How long can the Fed whistle past the "There is no inflation" graveyard before raising rates?

David Goldsmith

All Powerful Moderator
Staff member
5.5-6%? I think we got a few intra meeting fed hikes coming. 4% 10yr on way? Equities in this environment?
I don't think that's right. We are already in the mid to high 4s in mortgage rates. If the Fed raises rates another 4% I find it hard to conceive mortgages only go up 75bps to 125bps.


Well-known member
If he is right (and it's hard for me to argue against it since I've been feeding this thread for a year and a half) where does that push mortgage rates to and what is the impact on Real Estate?
I think it’d push mortgages to 5-6%. As the forward curve currently stands, resets on ARMs over the next 5 years are looking to come in at 5-6%. With FFR at 4-5%, that’d make resets come in at 6-8%. Either way, a far cry from the 2.x% ARMs and fixed rates people were using as recently as 6 months ago as the basis for their purchases.


Well-known member
I don't think that's right. We are already in the mid to high 4s in mortgage rates. If the Fed raises rates another 4% I find it hard to conceive mortgages only go up 75bps to 125bps.
You have to remember the market is already expecting the Fed to raise ~3% from here as it stands by 2023. So the Summers view would “only” be another 75bps to 175bps atop that.

Absent direct Fed intervention in the MBS market, 30yr fixed mortgages have tended to set at the 10yr treasury rate plus ~2%. Right now, the forward yield curve is very flat a year out. So the 10yr treasury yield is ~2.5% and 30yr fixed is ~4.5%.

If the Summers view is applied, then FFR in 2023 should become 4-5%. But I don’t believe he thinks it needs to stay there for 10 years. Rather, after a few years, it can normalize to what economists consider a neutral stance at 2.x%. So that means 10yr treasuries at 3-4%, and hence my guess of 5-6% for 30yr fixed mortgages.

Of course, this whole episode could shift the market’s notions of “neutral stance”. The Fed will be working down the $9T balance sheet it had been accumulating over the past 14 years. As the shocks of inflation-fighting ripple through these upcoming years, somehow I don’t think the Fed is going to be as trigger-happy with QE as it has in the past, having seen a demonstration that they can indeed take it too far.

David Goldsmith

All Powerful Moderator
Staff member
At this point I don't have much faith in Fed jawboning, but if somehow they both stop buying MBS and actually "run off" their existing MBS holdings, I don't see enough money in the mortgage market. From what I've been hearing from bankers, at this point their interest in lending their own money won't even start until mortgage rates hit 6%
Fed's balance sheet runoff will be rapid, Brainard says

Federal Reserve Governor Lael Brainard on Tuesday said she expects a combination of interest rate increases and a rapid balance sheet runoff to bring U.S. monetary policy to a "more neutral position" later this year, with further tightening to follow as needed.
The Fed on Wednesday releases minutes of its March meeting that are expected to provide fresh details on its plans to reduce its bond holdings, and Brainard's remarks provided a bit of a preview.

"I think we can all absolutely agree inflation is too high and bringing inflation down is of paramount importance," Brainard said at a conference at the Minneapolis Fed.

To do so, she said, the Fed will raise rates "methodically" and, as soon as next month, begin to reduce its nearly $9 trillion balance sheet, quickly arriving at a "considerably" more rapid pace of runoff than the last time the Fed shrank its holdings.

The rapid portfolio reductions "will contribute to monetary policy tightening over and above the expected increases in the policy rate reflected in market pricing and the Committee’s Summary of Economic Projections," she said.
The hawkish tone from one of the Fed's usually more dovish policymakers sent stocks down and Treasury yields up to multi-year highs, as investors digested the implications of a more aggressive policy path.

Investors are concerned by "the speed and aggressiveness of the Fed with its balance sheet reductions," said CFRA Research's Sam Stovall.
The Fed raised rates last month for the first time in three years, and released projections showing most policymakers thought the policy rate would end the year at least in the range of 1.75%-2%, if not higher. That would require quarter-point rate increases at all six remaining Fed meeting this year.

Markets see the Fed moving faster, delivering half-point rate hikes in May, June and July, to bring the rate to 2.5%-2.75% by the end of this year. Most policymakers view 2.4% as a "neutral" level, above which borrowing costs start to reduce growth.
"Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017–19," Brainard said.

Back then, the Fed began by limiting runoff from its $4.5 trillion balance sheet to $10 billion a month, and took a year to ramp that up to a maximum of $50 billion a month. Analysts expect a pace about twice that this time around.

The Fed targets 2% inflation, as measured by the personal consumption expenditures price index. In February the PCE price index was up 6.4% from a year earlier, and Brainard said she sees risks of it rising further, as Russia's invasion of Ukraine pushes up gas and food prices, and COVID lockdowns in China worsen supply chain bottlenecks.
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And though the geopolitical events could pose risks to growth, she noted, the U.S economy has considerable momentum and the labor market is strong, with unemployment now at 3.6%, just a hair above its pre-pandemic level.
The Fed's signaling on policy has already tightened financial conditions, Brainard said, with mortgage rates up a full percentage point in the past few months.
"We are prepared to take stronger action" if warranted by readings on inflation or inflation expectations, Brainard said, adding that she would also be watching the yield curve for any signs of downside risks to the economy.

It was unclear from Brainard's remarks whether she feels a rapid portfolio runoff would render bigger-than-usual rate hikes unnecessary.
Kansas City Fed President Esther George, who also supports a faster balance sheet runoff, left that door open.
"I think 50 basis points is going to be an option that we’ll have to consider, along with other things," George told Bloomberg TV on Tuesday.

If the Fed does raise rates as fast as markets now predict, that would mark at least for a few months the fastest pace of policy tightening in decades.
Fed Chair Jerome Powell says he believes the Fed can manage a "soft landing," where the central bank raises borrowing costs enough to slow the economy and bring inflation down, but not enough to send unemployment surging or push the economy into recession.

Economists say that will be difficult, if not impossible: in a recent paper Harvard University's Larry Summers noted that since 1955 there has never been a time when wage growth exceeded 5% and the unemployment rate was below 5% that was not followed within two years by a recession.
Hourly wages for non-managerial employees rose 6.7% from a year earlier in each of January, February and March, Labor Department data show.

Fed officials argue however that past is not necessarily prelude. For one thing, workers are already coming off the labor market sidelines as the pandemic eases, and more of that trend could ease wage pressures.
For another, the United States is a net oil exporter, so rising energy prices won't slow the economy as much as they did in the 1970s, making stagflation less likely.
"I'm not expecting that we'll fall into recession," San Francisco Fed Bank President Mary Daly told a meeting of the Native American Finance Officers Association in Seattle.
As the Fed tightens policy to fight inflation, she said, "we could slow so it looks like we are teetering close to it, that's possible, but it will be a short-lived event I expect, and then we'll be back up."

David Goldsmith

All Powerful Moderator
Staff member
Producer Price Index is a leading indicator for consumer prices. To me this says inflation is continuing to rise.
Supplier prices rose 11.2% from a year ago in March, the biggest gain on record
  • The producer price index, which measures prices paid by wholesalers, rose 1.4% in March and 11.2% from a year ago, both records for data going back to 2010.
  • Prices for final demand goods led with a 2.3% monthly rise, while services prices gained 0.9%.
  • Wednesday's release comes the day after the BLS reported the consumer price index for March surged 8.5% over the past year.
Producer prices soar 11.2% from a year ago in March, hit new all-time high
The prices that goods and services producers receive rose in March at the fastest pace since records have been kept, the Bureau of Labor Statistics reported Wednesday.
The producer price index, which measures the prices paid by wholesalers, increased 11.2% from a year ago, the most in a data series going back to November 2010. On a monthly basis, the gauge climbed 1.4%, above the 1.1% Dow Jones estimate and also a record.
Stripping out food, energy and trade services, so-called core PPI rose 0.9% on a monthly basis, nearly double the 0.5% estimate and the biggest monthly gain since January 2021. Core PPI increased 7% on a year-over-year basis.
PPI is considered a forward-looking inflation measure as it tracks prices in the pipeline for goods and services that eventually reach consumers.
Wednesday's release comes the day after the BLS reported that the consumer price index for March surged 8.5% over the past year, above expectations and the highest reading since December 1981.
On the producer side, prices for final demand goods led with a 2.3% monthly rise, while services prices gained 0.9%, up sharply from the 0.3% February increase. Goods inflation has outstripped services during the Covid pandemic, but March's numbers indicate that services are now catching up as consumer demand shifts.
Energy prices were the biggest gainer for the month, rising 5.7%, while food costs increased 2.4%.
Swelling inflation has prompted the Federal Reserve to begin tightening monetary policy.
In March, the Fed increased its benchmark short-term borrowing rate by 0.25 percentage point as the first step in what is expected to be a series of hikes through the year. Markets are pricing in an almost certainty that the central bank will double that move at its May meeting, and will keep going until the fed funds rate hits about 2.5% by the end of the year.
Markets initially showed no reaction to the PPI news, with stock market futures hovering around flat and Treasury yields also little changed.

David Goldsmith

All Powerful Moderator
Staff member

If You Must Point Fingers on Inflation, Here’s Where to Point Them​

As the midterm elections draw nearer, a central conservative narrative is coming into sharp focus: President Joe Biden and the Democratic-controlled Congress have a made a mess of the American economy. Republicans see pure political gold in this year’s slow-motion stock market crash, which seems to be accelerating at the perfect time for a party seeking to regain control of Congress in the fall.
The National Republican Congressional Committee in a tweet last month quipped that the Democratic House agenda includes a “tanking stock market.” Conservatives have been highlighting a video clip from 2020 when then-president Donald Trump warned about a Joe Biden presidency: “If he’s elected, the stock market will crash.” Right wing pundit Sean Hannity’s blog featured the clip under the headline: “TRUMP WAS RIGHT.”
But the narrative pinning blame for the economy’s woes squarely on Democrats’ shoulders elides the true culprit: the Federal Reserve. The financial earthquakes of 2022 trace their origin to underground pressures the Fed has been steadily creating for a over a decade.

It started back in 2010, when the Fed embarked on the unprecedented and experimental path of using its power to create money as a primary engine of American economic growth. To put it simply, the Fed created years of super-easy money, with short-term interest rates held near zero while it pumped trillions of dollars into the banking system. One way to understand the scale of these programs is to measure the size of the Fed’s balance sheet. The balance sheet was about $900 billion in mid-2008, before the financial market crash. It rose to $4.5 trillion in 2015 and is just short of $9 trillion today.

All of this easy money had a distinct impact on our financial system — it incentivized investors to push their money into ever riskier bets. Wall Street-types coined a term for this effect: “search for yield.” What that means is the Fed pushed a lot of money into a system that was searching for assets to buy that might, in return, provide a decent profit, or yield. So money poured into relatively risky assets like technology stocks, corporate junk debt, commercial real estate bonds, and even cryptocurrencies and nonfungible tokens, known as NFTs. This drove the prices of those risky assets higher, drawing in yet more investment.

The Fed has steadily inflated stock prices over the last decade by keeping interest rates extremely low and buying up bonds — through a program called quantitative easing — which has the effect of pushing new cash into asset markets and driving up prices. The Fed then supercharged those stock prices after the pandemic meltdown of 2020 by pumping trillions into the banking system. It was the Fed that primarily dropped the ball on addressing inflation in 2021, missing the opportunity to act quickly and effectively as the Fed chairman, Jerome Powell, reassured the public that inflation was likely to be merely transitory even as it gained steam. And it’s the Fed that is playing a frantic game of financial catch-up, hiking rates quickly and precipitating a wrenching market correction.

So, now the bill is coming due. Unexpectedly high inflation — running at the hottest levels in four decades — is forcing the Fed to do what it has avoided doing for years: tighten the money supply quickly and forcefully. Last month, the Fed raised short-term rates by half-a-percentage point, the single largest rate hike since 2000. The aggressiveness of the move signaled that the Fed could take similarly dramatic measures again this year.

A sobering realization is now unfolding on Wall Street. The decade of super-easy money is likely over. Because of inflation’s impact, the Fed likely won’t be able to turn on the money spigots at will if asset prices collapse. This is the driving force behind falling stock prices, and why the end of the collapse is probably not yet in sight. The reality of a higher-interest-rate world is working its way through the corridors of Wall Street and will likely topple more fragile structures before it’s all over.

After the stock and bond markets adjust downward, for example, investors must evaluate the true value of other fragile towers of risky assets, like corporate junk debt. The enormous market for corporate debt began to collapse in 2020, but the Fed stopped the carnage by directly bailing out junk debt for the first time. This didn’t just save the corporate debt market, but added fuel to it, helping since 2021 to inflate bond prices. Now those bonds will have to be re-priced in light of higher interest rates, and history indicates that their prices will not go up.

And while the Fed is a prime driver of this year’s volatility, the central bank continues to evade public accountability for it.
Just last month, for instance, the Senate confirmed Mr. Powell to serve another four-year term as Fed chairman. The vote — more than four to one in favor — reflects the amazingly high level of bipartisan support that Mr. Powell enjoys. The president, at a White House meeting in May, presented Mr. Powell as an ally in the fight against inflation rather than the culprit for much of this year’s financial market volatility. “My plan is to address inflation. It starts with a simple proposition: Respect the Fed and respect the Fed’s independence,” the president said.

This leaves the field open for the Republican Party to pin the blame for Wall Street’s woes on the Democratic Party’s inaction. As Jim Jordan, the Republican congressman from Ohio, phrased it on Twitter recently, “Your 401k misses President Trump.” This almost certainly presages a Republican line of attack over the summer and fall. It won’t matter that this rhetoric is the opposite of Mr. Trump’s back in 2018 and 2019, when the Fed was tightening and causing markets to teeter. Back then, Mr. Trump attacked Mr. Powell on Twitter and pressured the Fed chairman to cut interest rates even though the economy was growing. (The Fed complied in the summer of 2019.) But things are different now. Mr. Biden is in office, and the Fed’s tightening paves a clear pathway for the Republican Party to claim majorities in the House and Senate.

Republicans have also honed in on Mr. Biden’s $1.9 trillion American Rescue Plan, meant to mitigate the impact of the Covid-19 pandemic, as a cause for runaway inflation. Treasury Secretary Janet Yellen rejected that, noting in testimony before members of Congress: “We’re seeing high inflation in almost all of the developed countries around the world. And they have very different fiscal policies. So it can’t be the case that the bulk of the inflation that we’re experiencing reflects the impact” of the American Rescue Plan.
Continue reading the main story

Democrats would be wise to point to the source of the problem: a decade of easy money policies at the Fed, not from anything done at the White House or in Congress over the past year and a half.
The real tragedy is that this fall’s election might reinforce the very dynamics that created the problem in the first place. During the 2010s, Congress fell into a state of dysfunction and paralysis at the very moment when its economic policymaking power was needed most. It should be viewed as no coincidence that the Fed announced that it would intensify its experiments in quantitative easing on Nov. 3, 2010, the day after members of the Tea Party movement were swept into power in the House. The Fed was seen as the only federal agency equipped to forcefully drive economic growth as Congress relegated itself to the sidelines.
With prices for gas, food and other goods still on the rise and the stock market in a state of flux, there may still be considerable pain ahead for consumers. But Americans shouldn’t fall for simplistic rhetoric that blames this all on Mr. Biden. More than a decade of monetary policy brought us to this moment, not 17 months of Democratic control in Washington. Voters should be clear-eyed about the cause of this economic chaos, and vote for the party they think can best lead us out of it.

David Goldsmith

All Powerful Moderator
Staff member
Fed Intensifies Efforts to Locate Lost Plot
It has to restore its own credibility and fight inflation while avoiding a huge recession. Best of luck.

Good Luck, Fed​

A key artifact in any future Museum of the American Coronavirus Experience will be the absolutely bonkers Rube Goldberg machine a YouTuber named Creezy spent two lockdown months creating in his backyard between March and May of 2020. The 70-step basketball shot takes nearly three minutes to complete, with interlocking toys, ropes, garden implements and sportsballs covering what must be an acre of hilly land. There’s even a water feature.

This complexity is only a taste of the Fed’s dilemma as it tries to squelch a raging inflation inferno without destroying the economy in the process. The Fed today raised its key interest rate by 75 basis points, the biggest move since 1994, as markets expected. But Chairman Jay Powell said policy makers might not raise rates by that much in July, which made markets happy. But making markets happy is bad because that makes it harder to fight inflation. But making markets sad makes it likelier we have a financial crisis/depression.

So did the Fed do the right thing or not? Before the decision, Mohamed El-Erian wrote central bankers needed to do much more than just raise 75 basis points in order to restore what he argues is shredded credibility. The necessary steps included making people feel better about the Fed’s predicting skills and sounding tougher on inflation. It’s hard to say just how much today’s efforts succeeded.

After the decision, Mohamed tweeted the Fed had raised and front-loaded its rate expectations while cutting its growth expectations, which sounds pretty hawkish. He called this “Consistent with a stagflationary baseline, a fatter recession left tail, and a thinner right tail.” Which, uh, yay?

A lot of people think the Fed will have to trigger a recession to stop inflation. Powell said that wasn’t his aim, which sounds kind of dovish. At the same time, the Fed is predicting higher unemployment by the time this nightmare is over. Bloomberg’s editorial board writes that being more aggressive now might mean getting inflation under control sooner, meaning it can be less aggressive later. But figuring out the precise volume, frequency and timing of aggression is dicier than a 70-step basketball shot.

Because with so many moving parts, it’s not always clear a rate hike at one end of the Rube Goldberg machine will result in lower prices at the other. For example, Conor Sen points out surging mortgage rates could
shut down the housing market so abruptly that it turns off builders and hollows out the real-estate-industrial complex. That will mean housing shortages persist, keeping prices high. In conclusion, it’s complicated.

Bonus Central-Bank Reading: The ECB’s emergency meeting was a big nothing burger and won’t help peripheral bonds.

David Goldsmith

All Powerful Moderator
Staff member

It Gets Ugly: Inflation Shifts to Services. Food, Fuel Spike Too. Dollar’s Purchasing Power Swoons.​

Oh dearie, the Fed is going to meet in late July, and it’s going to talk about services inflation.

Services are now starting to power this inflation. And services are where people spend the biggest part of their budget. It’s where inflation is now getting entrenched, independent of commodity prices, and where it’s very tough to bring inflation under control. The declining commodities prices may help contain food prices and gasoline prices, but not services.
Inflation in June was also driven by food and gasoline where it’s staring consumers in the face on a daily basis, though some of the price pressures are now abating. And prices of durable goods, such as cars and electronics, are rising at a less ugly pace.
The headline Consumer Price Index (CPI-U), released today by the Bureau of Labor Statistics, spiked by 1.3% in June from May, and by 9.1% year-over-year, the worst since 1981:

The Consumer Price Index for “all urban wage earners & clerical workers” (CPI-W), whose third-quarter average is used to adjust the COLAs for Social Security next year, spiked by 9.8% in June:

Services Inflation gets ugly and is hard to control.

Inflation in services is not related to commodities. And the recent declines in commodities that will eventually show up as lower inflation in gasoline and some food items has no impact on services.
The CPI for services spiked by 1.0% in June from May, and by 6.2% from a year ago, the worst since 1991. And this isn’t going to turn around anytime soon, and this is why the Fed is going to dish out some salty rate hikes to get this under control:

Services include housing costs, which we’ll get to in a moment, and other key items, most prominently these (year-to-year % change):
  • Housing: +5.7%;
  • Hotels & motels: +11.5%
  • Health insurance: +17.3%
  • Medical care services: +4.8%
  • Airline fares, summer special: +34.1%
  • Delivery services: +14.4%
  • Other personal services: +6.7% (personal care: +6.3%; laundry and dry-cleaning services: +10.2%, haircuts: 6.3%)
  • Video and audio services: +4.9%
  • Pet services, including veterinary: +7.9%
Some services prices declined, year-over-year:
  • Telephone services: -0.1%
  • Car and truck rental: -7.7%
  • Admission to sporting events: -6.1%

Food, oh dearie…

For people in the lower part of the income spectrum spend most of their money on necessities, and a relatively big portion of their income goes to food, and they’re getting crushed by this food inflation.
The CPI for “food at home” – food bought in stores and at markets – spiked by 1.0% in June from May, and by 12.2% year-over-year, the ugliest spike since 1979:

In some categories, the price spikes earlier this year are running into resistance, and prices dipped on a month-to-month basis, such as beef and pork. But prices in other categories are now going haywire, such as cereals, poultry and eggs, as inflation jumps from product category to product category.
Major food-at-home categories, and % change from a year ago:
  • Cereals and cereal products: +15.1%
  • Beef and veal: +4.1%
  • Pork: +9.0%
  • Poultry: +17.3%
  • Fish and seafood: +11.0%
  • Eggs: +33.1%
  • Dairy and related products: +13.5%
  • Fresh fruits: +7.3%
  • Fresh vegetables: +6.5%
  • Juices and nonalcoholic drinks: +11.6%
  • Coffee: 15.8%
  • Fats and oils: 19.5%
  • Baby food: 14.0%
“Food away from home” CPI – such as food from restaurants, vending machines, cafeterias, and sandwich shops – jumped by 0.9% In June from May, and by 7.7% year-over-year, the most since November 1981.


The Energy CPI spiked by 7.5% in June from May and by 41.6% from a year ago. This was driven by:
  • Gasoline: +11.2% for the month, +59.9% year-over-year.
  • Utility natural gas to the home: +8.2% for the month, +38.4% year-over-year.
  • Electricity service: +1.7% for the month, +13.7% year-over-year.

Housing costs – they’re spiking with a lag.

The CPI for “rent of shelter” accounts for 31.9% of total CPI and is the largest component. It attempts to measure housing costs as a service (not as an asset to be purchased). It comes in two components:
“Rent of primary residence” (accounts for 7.2% of total CPI) jumped by 0.8% in June from May, and by 5.8% year-over-year (red in the chart below). It tracks what a large panel of tenants reported about their actual rent payments over time, including in rent-controlled apartments.
“Owner’s equivalent rent of residences” (accounts for 23.7% of total CPI) jumped by 0.7% for the month and by 5.5% year-over-year (green line). It tracks the costs of homeownership as a service, based on what a large panel of homeowners report their home would rent for.
Both measures, though spiking, are still below the overall CPI and therefor are still holding down CPI, but they’re holding it down less each month, and in a few months, they will become the primary driver of CPI inflation:

CPI for housing costs, Asking Rents, and Home Prices.

The CPI for housing costs consists of two above rent measures: the first tracks rents as experienced by tenants that have been renting these homes for a while; the second tracks what homeowner think their own homes would rent for.
“Asking rents” track advertised rents of apartments and houses listed for rent. They’re a measure of rents that landlords are trying to get on their vacant units. They do not reflect actual rents paid by tenants. But they show where landlords think the current market is.
The Zillow Rent Index reflects asking rents. It jumped by 0.8% in June from May, to a record of $2,007, but that jump was smaller than the prior spikes. On a year-over-year basis, it spiked by 14.8%, which is a huge and gigantic spike, but it was smaller than the prior spikes.
But it takes a while for asking rents to become actual rents that tenants have to start paying when their lease expires and that they are then reporting as part of the CPI panel.
The “rent of primary residence” (purple) and the “owner’s equivalent rent” (green) are slowly catching up with the Zillow Rent Index (red), and they will continue to rise well into 2023 even if asking rents tracked by Zillow rise less (my discussion of this phenomenon):

Home prices spiked by 20.4% year-over-year, according to the latest Case-Shiller Home Price Index (purple line below). I have been documenting this raging mania with my series, The Most Splendid Housing Bubbles in America.
But the CPI attempts to measure the cost of the service that a home provides – shelter – via its “owner’s equivalent or rent” (red). Both indices here are set to 100 for January 2000:

Durable goods CPI.

New vehicles, used vehicles, consumer electronics, furniture, appliances, etc. Month-to-month, CPI for durable goods rose 0.7% in June, after having ticked up just 0.1% in May and April, and having dipped in March.
Year-over-year, durable goods still spiked by 8.4%, but this was way down from the 18.7% spike in February:

Some major categories of durable goods:

Used vehicles CPI: +1.6% in June from May, +7.1% compared to the sky-high spike a year ago exceeding 40% at one point. In February, March, and April, prices had dropped. But in May and June, prices jumped again.
This chart shows the index value (not the year-over-year % change of the index value):

The new vehicle CPI: + 0.7% in June from May, +11.4% year-over-year. The last few months have seen the worst price spikes in the data going back to the 1950s, amid still widespread new-vehicle shortages and “above-sticker” prices. Much higher interest rates would help bring demand down, which would relieve some of the price pressures.
This chart shows the index value (not the year-over-year % change of the index value):

Information technology (computers, software, accessories, smartphones, etc.): +0.3% in June from May, -6.7% year-over-year. These types of products have gotten immeasurably more powerful over the years. Today’s smartphone runs circles around super computers in 1980 that cost millions of dollars back then. So the amount of money that you pay for what you get – which is what inflation measures – tends to fall year after year.
“Core” CPI.
The “core” CPI, which excludes the volatile commodities-dependent food and energy components, tracks inflation in the broader economy. It jumped by 0.7% in May from June, the biggest jump since February – accelerating again, now driven by services!
Year-over-year, it rose 5.9% from the red-hot levels a year ago. The sharper month-to-month increases and the spike in services will start to push the core CPI higher later this year.

Purchasing Power of the dollar goes WHOOSH.

The CPI tracks the loss of the purchasing power of the consumer’s dollar and the purchasing power of labor. In June, the purchasing power of $100 in January 2000 dropped to $56.90 in June 2022. No wonder Americans are in a rotten mood:

David Goldsmith

All Powerful Moderator
Staff member
A Recession Alarm Is Ringing on Wall Street
An inversion of the bond market’s yield curve has preceded every U.S. recession for the past half century. It is happening again.

Wall Street’s most-talked-about recession indicator is sounding its loudest alarm in two decades, intensifying concerns among investors that the U.S. economy is heading toward a slowdown.
That indicator is called the yield curve, and it’s a way of showing how interest rates on various U.S. government bonds compare, notably three-month bills, and two-year and 10-year Treasury notes.
Usually, bond investors expect to be paid more for locking up their money for a long stretch, so interest rates on short-term bonds are lower than those on longer-term ones. Plotted out on a chart, the various yields for bonds create an upward sloping line — the curve.

But every once in a while, short-term rates rise above long-term ones. That negative relationship contorts the curve into what’s called an inversion, and signals that the normal situation in the world’s biggest government bond market has been upended.

An inversion has preceded every U.S. recession for the past half century, so it’s seen as a harbinger of economic doom. And it’s happening now.
The difference between two- and 10-year Treasury yields

The yield curve has predictive power that other markets don’t.​

On Wednesday, the yield on two-year Treasury notes stood at 3.23 percent, above the 3.03 percent yield on 10-year notes. A year ago, by comparison, two-year yields were over one percentage point lower than the 10-year yields.

The Fed’s mantra on inflation back then was that inflation would be transitory, meaning that the central bank did not see a need to rapidly raise interest rates. As a result, shorter-dated Treasury yields remained low.

But over the past nine months, the Fed has become increasingly concerned that inflation isn’t going to fade on its own, and it has begun to tackle rapidly rising prices by raising interest rates quickly. By next week, when the Fed is expected to raise rates again, its policy rate will have jumped about 2.5 percentage points from near zero in March, and that has pushed up yields on short-term Treasurys like the two-year note.

Investors, on the other hand, have become increasingly fearful that the central bank will go too far, slowing the economy to such an extent that it sets off a severe downturn. This worry is reflected in falling longer-dated Treasury yields like the 10-year, which tell us more about investors’ expectations for growth.

Such nervousness is also reflected in other markets: Stocks in the United States have fallen close to 17 percent this year, as investors have reassessed companies’ ability to withstand a slowdown in the economy; as the price of copper, a global bellwether because of its use in an array consumer and industrial products, has fallen over 25 percent; and with the U.S. dollar, a haven in periods of worry, at its strongest in two decades.

What sets the yield curve apart is its predictive power, and the recession signal it is sending right now is stronger than it has been since late 2000, when the bubble in technology stocks had begun to burst and a recession was just a few months away.
That recession hit in March 2001 and lasted about eight months. By the time it started, the yield curve was already back to normal because policymakers had begun to lower interest rates to try to return the economy to health.
The yield curve also foretold the global financial crisis that began in December 2007, initially inverting in late 2005 and staying that way until mid-2007.
That track record is why investors across the financial markets have taken notice now that the yield curve has inverted again.

“The yield curve is not the gospel, but I think to ignore it is at your own peril,” said Greg Peters, co-chief investment officer at the asset manager PGIM Fixed Income.

But which part of the yield curve matters?​

On Wall Street, the most commonly noted part of the yield curve is the relationship between two-year and 10-year yields, but some economists prefer to focus on the relationship between the yield on three-month bills and 10-year notes instead.
That group includes one of the pioneers of research into the yield-curve’s predictive power.
Campbell Harvey, an economics professor at Duke University, remembers being asked to develop a model that could forecast U.S. growth while he was a summer intern at the now-defunct Canadian mining company Falconbridge in 1982.
Mr. Harvey turned to the yield curve, but the United States was already roughly a year into recession and he was soon laid off because of the economic climate.

It wasn’t until the mid-1980s, when he was a Ph.D. candidate at the University of Chicago, that he completed his research showing that an inversion of the three-month and 10-year yields preceded recessions that began in 1969, 1973, 1980 and 1981.
Mr. Harvey said he preferred to look at three-month yields because they were close to current conditions, while others have noted that they more directly capture investors’ expectations of immediate changes in Fed policy.

For most market watchers, the different ways to measure the yield curve all broadly point in the same direction, signaling slowing economic growth. They are “different flavors,” said Bill O’Donnell, an interest rate strategist at Citibank, “but they are all still ice cream.”

Three-month yields remain below 10-year yields. So by this measure, the yield curve hasn’t inverted, but the gap between them has been shrinking rapidly as concerns about a slowdown have escalated. By Wednesday, the difference between the two yields had fallen from over two percentage points in May to around 0.5 percentage points, the lowest it has been since the pandemic-induced downturn in 2020.

The yield curve can’t tell us everything.​

Some analysts and investors argue that the attention on the yield curve as a popular recession signal is overdone.
One common criticism is that the yield curve tells us little about when a recession will start, only that there probably will be one. The average time to a recession after two-year yields have risen above 10-year yields is 19 months, according to data from Deutsche Bank. But the range runs from six months to four years.
The economy and financial markets have also evolved since the 2008 financial crisis, when the model was last in vogue. The Fed’s balance sheet has ballooned as it has repeatedly bought Treasurys and mortgage bonds to help support financial markets, and some analysts argue that those purchases can distort the yield curve.

These are both points that Mr. Harvey accepts. The yield curve is a simple way to forecast the trajectory for U.S. growth and the potential for a recession. It has proved reliable, but it is not perfect.
He suggests using it in conjunction with surveys of economic expectations among chief financial officers, who typically pull back on corporate spending as they become more worried about the economy.

He also pointed to corporate borrowing costs as an indicator of the risk that investors perceive in lending to private companies. Those costs tend to rise as the economy slows. Both of these measures tell the same story right now: Risk is rising, and expectations for a slowdown are mounting.

“If I was back in my summer internship, would I just look at the yield curve? No,” Mr. Harvey said.
But that also doesn’t mean it has stopped being a helpful indicator.
“It’s more than helpful. It’s quite valuable,” Mr. Harvey said. “It is incumbent upon any company’s managers to take the yield curve as a negative signal and engage in risk management. And for people, too. Now is not the time to max out your credit card on an expensive holiday.”

David Goldsmith

All Powerful Moderator
Staff member

Retail’s ‘Dark Side’: As Inventory Piles Up, Liquidation Warehouses Are Busy​

Consumers are buying fewer discretionary goods and returning more. To clear their shelves, retailers are selling to liquidators at steep discounts.

Once upon a time, when parents were scrambling to occupy their children during pandemic lockdowns, bicycles were hard to find. But today, in a giant warehouse in northeastern Pennsylvania, there are shiny new Huffys and Schwinns available at big discounts.

The same goes for patio furniture, garden hoses and portable pizza ovens. There are home spas, Rachael Ray’s nonstick pans and a backyard firepit, which promises to make “memories every day.”
The warehouse is run by Liquidity Services, a company that collects surplus and returned goods from major retailers like Target and Amazon and resells them, often for cents on the dollar. The facility opened last November and is operating at exceptionally high volumes for this time of year.

The warehouse offers a window into a reckoning across the retail industry and the broader economy: After a two-year binge of consumer spending — fueled by government checks and the ease of e-commerce — a nasty hangover is taking hold.

The warehouse is nearly the size of two football fields.
With consumers cutting down on discretionary purchases because of high inflation, retailers are now stuck with more inventory than they need. While overall spending rebounded last month, some major retailers say shoppers are buying less clothing, gardening equipment and electronics and focusing instead on basics like food and gas.
Adding to that glut are all the things people bought during the pandemic — often online — and then returned. In 2021, shoppers returned an average of 16.6 percent of their purchases, up from 10.6 percent in 2020 and more than double the rate in 2019, according to an analysis by the National Retail Federation, a trade group, and Appriss Retail, a software and analytics firm.
Last year’s returns, which retailers are not always able to resell themselves, totaled $761 billion in lost sales. That, the retail federation noted, is more than the annual budget for the U.S. Department of Defense.

It’s becoming clear that retailers badly misjudged supply and demand. Part of their miscalculation was caused by supply chain delays, which prompted companies to secure products far in advance. Then, there is the natural cycle of booms — whether because of optimism or greed, companies rarely pull back before it’s too late.
“It is surprising to me on some level that we saw all that surge of buying activity and we weren’t collectively able to see that it was going to end at some point,” J.D. Daunt, chief commercial officer at Liquidity Services, said in an interview at the Pennsylvania warehouse earlier this month.

“You would think that there would be enough data and enough history to see that a little more clearly,” he added. “But it also suggests that times are changing and they are changing fast and more dramatically.”

Strong consumer spending may have saved the economy from ruin during the pandemic, but it has also led to enormous excess and waste.

Retailers have begun to slash prices on inventory in their stores and online. Last Monday, Walmart issued the industry’s latest warning when it said that its operating profits would drop sharply this year as it cut prices on an oversupply of general merchandise.

The warehouse opened in November and is operating at exceptionally high volumes.

Adding to the glut are the things people bought during the pandemic and then returned.
Many companies cannot afford to let discounted items ‌linger on their shelves because they have to make room for new seasonal goods and the necessities that consumers now prefer. While some retailers are discounting the surplus within their stores, many would rather avoid holding big sales themselves for fear of hurting their brands by conditioning buyers to expect big price cuts as the norm. So retailers look to liquidators to do that dirty work.

Additionally, industry executives say the glut is so large that some retailers could run out of space to house it all.

“It’s unprecedented,” said Chuck Johnston, a former Walmart executive, who is now chief strategy officer at goTRG, a firm which helps retailers manage returns. “I have never seen the pressure in terms of excess inventory as I am seeing right now.”

So, much of the industry’s flotsam and jetsam washes up in warehouses like this one, located off Interstate 81, a few exits from the President Biden Expressway in Scranton, the president’s hometown.

The giant facility is part of an industrial park that was built above a reclaimed strip mine dating back to when this region was a major coal producer. Today, the local economy is home to dozens of e-commerce warehouses that cover the hilly landscape like giant spaceships, funneling goods to the population centers in and around New York and Philadelphia.

Liquidity Services, a publicly traded company founded in 1999, decided to open its new facility as close as it could to the Scranton area’s major e-commerce warehouses, making it easy for retailers to dispense with their unwanted and returned items.

Even before the inventory glut appeared this spring, returns had been a major problem for retailers. The huge surge in e-commerce sales during the pandemic — increasing more than 40 percent in 2020 from the previous year — has only added to it.

The National Retail Federation and Appriss Retail calculate that more than 10 percent of returns last year involved fraud, including people wearing clothing and then sending it back or stealing goods from stores and returning them with fake receipts. But more fundamentally, industry analysts say the increasing returns reflect consumer expectations that everything can be taken back.

“It’s getting worse and worse,” Mr. Johnston said.

Some of the returns and excess inventory will be donated to charities or returned to the manufacturers. Others get recycled, buried in landfills or burned in incinerators that generate electricity.

Early in the pandemic, children’s bicycles could be hard to find. Now, they’re available at big discounts.

Liquidators say they offer a more environmentally responsible option by finding new buyers and markets for unwanted products, both those that were returned and those that were never bought in the first place. “We are reducing the carbon footprint,” said Tony Sciarrotta, executive director of the Reverse Logistics Association, the industry trade group. “But there is still too much going to landfills.”

Retailers will probably receive only a fraction of the items’ original value from the liquidators but it makes more sense to take the losses and move the goods off the store shelves quickly.

Still, liquidation can be a sensitive topic for the big companies that want customers to focus on their “A-goods,” not the failures.

Mr. Sciarrotta calls it “the dark side” of retail.

On a tour through the Pennsylvania warehouse, Mr. Daunt and the warehouse manager, Trevor Morgan, said they were not allowed to discuss where the products originated. But it was not difficult to figure out.

An 85-inch flat-screen TV had an Amazon Prime sticker still on the box. Bathroom vanities came from Home Depot. There was a “home theater” memory foam futon with a built-in cup holder from a Walmart return center.

Many unopened boxes on the warehouse floor carried the familiar bull’s-eye logo of Target. Air fryers, baby strollers and towering stacks of Barbie’s “Dream House,” which features a swimming pool, elevator and a home office. (Even Barbie, it seems, has grown tired of working from home.)

When Target’s sales exploded during the first year of the pandemic, the company was a darling of Wall Street. But in May, the retailer said it was stuck with an oversupply of certain goods and the company’s stock price plummeted nearly 25 percent in one day. Other retailers’ share prices have also fallen.

Walter Crowley regularly buys goods from the warehouse, focusing mostly on discounted home improvement goods, which he resells to local contractors.

Target’s stumbles have been an opportunity for people like Walter Crowley.

Mr. Crowley regularly rents a U-Haul and drives back and forth to the liquidation warehouse from his home near Binghamton, N.Y.

Mr. Crowley, who turns 54 next month, focuses mostly on discounted home improvement goods, which he resells to local contractors, like multiple pallets of discontinued garage door openers, tiles and flooring.

But on a sweltering day earlier this month, he stood outside the warehouse in his U-Haul loading up on items from Target.

“I saw its stock got tanked,” said Mr. Crowley, a cigarette dangling from his mouth and sweat pouring down his face. “It’s an ugly situation for them.”

He bought several cribs, a set of sheets for his own house and a pink castle for a girl in his neighborhood who just turned 5.

“I end up giving a lot of it away to my neighbors, to be honest,” he said. “Some people are barely getting by.”

The buyers bid for the goods through online auctions and then drive to the warehouse to pick up their winnings.

It’s a diverse group. There was a science teacher who stocked up on plastic parts for his class, as well as a woman who planned to resell her purchases — neon green Igloo coolers, a table saw, baby pajamas — in the Haitian and Jamaican communities of New York. She ships other items to Trinidad.

The Pennsylvania warehouse, one of eight that Liquidity Service operates around the country, employs about 20 workers, some of whom have been hired on a temporary basis. The starting pay is $17.50 an hour.

Charles Benincasa, a temporary worker at the warehouse, said he’s watched the boxes pile up and worries about the implications for the economy.
Charles Benincasa, 39, is a temporary worker who has had numerous “warehousing” jobs, the most recent at the Chewy pet food distribution center in nearby Wilkes-Barre.

Mr. Benincasa said his friends and family had gotten in the habit of returning many of the goods they buy online. But as he’s watched the boxes pile up in the Liquidity Services warehouse, he worries about the implications for the economy.

“Companies are losing a lot of money,” he said. “There is no free lunch.”

David Goldsmith

All Powerful Moderator
Staff member
$15 French Fries and $18 Sandwiches: Inflation Hits New York
As food prices rise at the fastest rate in decades, it’s become more expensive to eat and drink in New York City.

This was supposed to be a summer of long-awaited celebrations in New York City, the return of a packed calendar full of birthday dinners and happy hours. But New Yorkers are confronting sticker shock everywhere they look, whether they’re shopping for barbecue supplies at the grocery store, ordering a beer after work or grabbing a late-night slice of pizza.

While rent and the cost of Uber trips have reached eye-popping levels, rising food prices are among the most painful results of inflation. In May, food prices in the New York City area rose at their fastest annual pace since 1981, according to the Bureau of Labor Statistics. The effects have been especially visible throughout the city — everybody has to eat.
The increase slowed in June, the most recent inflation report showed, but food prices were still 9.1 percent higher than a year earlier in New York and 10.4 percent higher nationwide.
Rising prices have come for beloved New York staples like the ice cream cones at Mister Softee trucks and the bacon, egg and cheese sandwiches at bodegas. And they have worsened the city’s hunger crisis; the number of children visiting food pantries was 55 percent higher earlier this year than it was before the pandemic, according to City Harvest, the largest food rescue organization in New York City.

Many restaurants and bars that survived the pandemic resisted raising prices last year, afraid of scaring away customers during a fragile recovery. Now, as businesses have increased wages to attract workers in a competitive labor market while facing soaring food and energy costs, higher prices are popping up on menus across the city.
We followed five New Yorkers last month during their weekly eating routines to document where they were seeing the effects of inflation.

$3.50 for a Bagel​

On a recent Monday morning, shortly after arriving at work, Mamadu Jalloh paid $3.50 for an everything bagel with plain cream cheese and $1.50 for a hot coffee at a street cart near his job in Queens, where he works at a nonprofit organization that helps formerly homeless adults.

The cart’s owner, Ali Apdelwyhap, had just raised coffee prices by 50 cents. Almost every single item in his cart had become more expensive, even the bags of ice he uses to store drinks. He was hesitant to go beyond 50 cents, worried his regulars — who include a large number of construction workers — would stop coming. “It’s too much for people,” he said.
Before the pandemic, Mr. Apdelwyhap’s breakfast cart had been parked in Midtown, serving lawyers and bankers who seemed less sensitive to price increases. Now, with most office workers no longer commuting five days a week, he said he can’t sustain his business there. He settled on this new corner along the northeastern waterfront in Queens after noticing construction sites nearby, hoping it would be a place where workers were required to show up in person.

The State of Jobs in the United States​

Employment gains in July, which far surpassed expectations, show that the labor market is not slowing despite efforts by the Federal Reserve to cool the economy.​

Mr. Jalloh, 28, is one of them, driving in five days a week from his home in the South Bronx. Since high food and gas prices have strained his budget, he will sometimes skip breakfast or lunch to make his $700 monthly rent, or shop at 99-cent stores.
His hourly wage recently increased by 5.4 percent, from $24.62 to $25.95, as part of a citywide cost-of-living adjustment given to certain nonprofit workers. But, Mr. Jalloh said, it has done little to defray the impact of inflation. “It’s helping, but it’s not really helping,” he said.

$3.75 for Ice Cream​

Patrick Dunne, a second-year medical student, stopped by Veniero’s Pasticceria & Caffe, a bakery in the East Village of Manhattan, for a midday snack. It cost him $3.75 for one scoop of strawberry ice cream, an order that increased by 25 cents this summer. He also bought a box of pastries, including a $7 portion of tiramisù, which increased by 50 cents.
Mr. Dunne, 25, brought the pastries back to his family in the Bronx. He moved in with them after leaving his Manhattan apartment early in the pandemic, and now, with rents surging, he cannot afford his own place.
Mr. Dunne was excited about a summer of eating out with friends, but on days when he has hospital shifts, he more frequently brings granola bars from home or eats from the dollar menu at McDonald’s.

“You almost don’t want to get too mad because you know the restaurant owners are also paying a hefty price,” he said. “So you feel empathy, but you’re upset about the price increases.”

At Veniero’s, the staff was juggling an onslaught of pandemic disruptions. A new refrigerator took more than a year to arrive. Butter prices have surged, partly because of high costs for cattle feed, exacerbated by a drought in parts of the United States. A waitress who quit because she was unvaccinated has not yet been replaced.
Robert Zerilli, the fourth-generation owner, said he “had no choice” but to raise prices last month. “We have to make a profit,” he said.

$18 for a Sandwich​

During his lunch break on a work-from-home day, Mychal Lopez, 32, walked to Win Son Bakery, a Taiwanese cafe near his apartment in Brooklyn’s East Williamsburg neighborhood. He spent $30.48 — a cold brew coffee for $4, a shrimp scallion pancake sandwich for $18 and a berry rice cake for $6.
The owners of Win Son said they have increased prices to deal with rising food and labor costs, but declined to detail by how much. The price of eggs, an ingredient in several Win Son items, is projected to jump 78 percent this year, according to the U.S. Department of Agriculture, after a major bird flu outbreak decimated chicken flocks and lowered egg production.
Mr. Lopez said the coffee at Win Son was still cheaper than the typical price in Midtown, where he commutes four days a week to his job for a fashion retailer. The average price of a 16-ounce cold brew around there is $4.88, according to the prices listed at 13 coffee shops.
Mr. Lopez said he has been bringing lunch to the office more after he recently paid $6 for a matcha latte in Midtown. “It’s symptomatic of New York,” he said, sighing. “You’re just like, this is what I need to do to live in the city and get through the day.”

$8 for Blueberries​

For years, Margaret Rodgers, a retiree who lives in Astoria, Queens, has shopped for fruits and vegetables at the Union Square farmers’ market in Manhattan. She keeps track of her food budget by filling a pouch with $80 in cash. But lately, the pouch has emptied after just two trips to the market. She was shocked to discover that a pint of berries was now at least $8.
“For the first time in my life, I am really feeling the effects of the increasing cost of food,” said Ms. Rodgers, 79.
Ken Migliorelli, who sells produce at the market from his family farm in Dutchess County, said he has had to raise prices across the board. As the war in Ukraine constrained the supply of oil, high gas prices made it more expensive for Mr. Migliorelli’s trucks to drive produce 100 miles from the Hudson Valley to the city. The price of fertilizer has soared, exacerbated by the supply-chain and export disruptions of the war.

This year, Mr. Migliorelli raised the price of blueberries by $2 to $3; they’re now $8 a pint. A pound of peaches rose to $5, from $3.50 last year.
Zaid Kurdieh of Norwich Meadow Farms, another vendor at the Union Square market, said he is trying to minimize price increases on staples like zucchini and carrots, but plans to raise prices by as much as 30 percent on items that are in demand at high-end restaurants, like baby squash. A pound of cherry tomatoes at his stand is now $12, up from $10 last year.
“I can’t keep up with expenses at the moment,” Mr. Kurdieh said. “I’m not seeing the light at the end of the tunnel.”

$15 for French Fries​

After a day of work, Kathy Li met up with a colleague at the Skylark, a cocktail bar near Times Square. She ordered a neon blue gin and vodka cocktail for $20, and then split $15 French fries and $19 chips with guacamole — a price she described as “ridiculous.”
Ms. Li, 30, said the financial firm where she works provides free breakfast, lunch and snacks, which frees up her budget to go out frequently for drinks or dinner.
This summer, the Skylark raised prices on its chips and guacamole by $1.25 after avocado prices skyrocketed. (The United States temporarily suspended avocado imports from the Mexican state of Michoacan after a U.S. inspector there faced a safety threat.)
Because of the pandemic, the bar stayed shut until October 2021, and then the Omicron variant prompted widespread cancellations of holiday parties in December, typically the bar’s most lucrative month, according to David Rabin, a Skylark co-owner.
Mr. Rabin has been trying to recover from those losses while also contending with high employee turnover. He increased wages for some managers and spent more on training new hires for positions like security guards.
Mr. Rabin and the bar’s managers had a monthslong debate about whether to raise alcohol prices by $1 and charge $20 per cocktail, a threshold that Mr. Rabin had long resisted.
“We’re not trying to make anyone feel like we’re trying to fleece them,” Mr. Rabin said. But after noticing similar bars in the area charging at least $20, the bar owners decided to make the move. “It has become, unfortunately, the norm,” he said.

David Goldsmith

All Powerful Moderator
Staff member
Consumer Income & Spending Still Out-Hobble Inflation, Despite Everything

Spending on gasoline plunges due to plunge in price. “Real” spending on durable goods, amazingly, jumps for 2nd month. Services spending rises but stuck below pre-pandemic trend.

Something interesting happened in July to inflation-adjusted consumer income and spending. Remember when President Biden said that inflation was “zero percent” when the Consumer Price Index data came out in mid-August? Obviously, neither inflation nor CPI were 0%. CPI jumped by 8.5% in July 2022, compared to July 2021, which is how we generally discuss inflation. But the plunge in gasoline prices caused CPI to not change in July from June, so 0% change month-to-month, but 8.5% change year-over-year.
So today, the Bureau of Economic Analysis reported consumer income and spending in July. Adjusted for inflation (= “real”) by the PCE inflation measure, in July from June, the change in the “seasonally adjusted annual rates” were:
  • Real personal income from all sources: +0.3%
  • Real personal income without government transfer payments: +0.4%
  • Real personal spending: +0.2%

Not adjusted for inflation:

Total consumer spending without adjustment for inflation increased by $23.7 billion in July from June (increase in the seasonally adjusted annual rate of spending). Spending fell in three categories, notably on gasoline due to the plunge in gasoline prices, and rose in the remaining categories:
Spending fell in these three categories, in July from June, without inflation adjustment:

  • Gasoline: -$55.9 billion, as the price of gasoline has plunged
  • Financial services and insurance: -$20.1 billion
  • Transportation services: -$0.5 billion as airfares come down a little.
Spending rose in the remaining categories in July from June, without inflation adjustment:
  • Housing and utilities: +$23.4 billion
  • Other services: +$13.7 billion
  • Other nondurable goods: +$11.0 billion
  • Final expenditures of NPISH (Non-Profit Institutions Serving Households): +$10.8 billion
  • Recreational goods and vehicles: +$9.7 billion
  • Motor vehicles and parts: +$8.4 billion
  • Furnishings and durable household equipment: +$7.3 billion
  • Clothing and footwear: +$4.3 billion
  • Food and beverages: +$3.6 billion
  • Healthcare: +$2.8 billion
  • Other durable goods: +$2.0 billion
  • Food services and accommodations: +$1.7 billion
  • Recreation services: +$1.4 billion.

Adjusted for inflation.

The BEA adjusts consumer income and spending based on its PCE inflation measure, not the CPI inflation measure. Its July PCE price index dipped by 0.1% in July from June, on a 4.8% plunge in energy prices, and was up 6.3% year-over-year.
In other words, inflation adjustments had little impact overall on income and spending growth in July from June, though they did impact year-over-year growth.

Income, adjusted for PCE inflation, rose.

“Real” personal income from all sources rose 0.3% in July from June, undoing the dip in the prior month, and is flat with April (purple in the chart below).
This includes income from wages and salaries, dividends, interest, rentals, farms, businesses, and government transfer payments such as stimulus, Social Security, unemployment, welfare, etc., but does not include capital gains/losses.
Compared to July 2021, real income fell 1.6%; compared to July 2020, it fell 2.2%; compared to July 2019, it was up 5.9%. It dipped below pre-pandemic trend at the beginning of this year and has remained there.
Real personal income without transfer payments rose 0.4% in July from June, eking out a new record. Compared to a year ago, it rose 1.3%; compared to two years ago, it rose 6.2%; compared to July 2019, it rose 4.9%. But it remains below pre-pandemic trend:

Per-capita “real” disposable income rose. Boiled down to the per-person level, and based on what’s left over after taxes, per-capita “real” disposable income rose 0.2% in June, seasonally adjusted annual rate, but was down 4.0% from July 2021, and was down 6.6% from July 2020, and up just 1.6% from July 2019 (in “2012 dollars” to adjust for inflation). It has fallen far below pre-pandemic trend (green line):

“Real” spending on goods and services rose, eking out a new record.

Consumer spending on goods and services in July, adjusted for inflation, rose 0.2% from June, was up 2.2% from July 2021, up 9.9% from July 2020, and up 5.1% from July 2019. It remains below the pre-pandemic trend (green line):

“Real” spending on non-durable goods continues to revert to trend after pandemic bubble. Inflation-adjusted spending on food, fuel, household supplies, and other nondurable goods fell in July by 0.5% from June, which includes the plunge in spending on gasoline due to the plunge in prices. From July 2021: -1.3%. But from July 2020: +5.2%; and from July 2019: +9.4%. This spending continues to revert from the stimulus spending binge toward pre-pandemic trend (green line).

“Real” spending on durable goods, amazingly, jumped again. Americans just don’t want to slow down their purchases of stuff, it seems. Inflation-adjusted spending on vehicles, appliances, electronics, furniture, and other durable goods jumped by 1.5% in July from June, and the second month in a row of increases, and was up by 3.4% from July 2021, up 10.6% from July 2020, and up 24.7% from July 2019.
These are big increases (inflation adjusted!), as Americans have been refusing to throttle back this durable-goods spending to pre-pandemic trend; just not happening, though everyone, including me, thought it would (green line).

Spending on services, adjusted for inflation, ticked up. “Real” spending on services – healthcare, housing, education, travel, sports events, haircuts, repairs, subscriptions, streaming, etc. – rose by 0.2% in July from June, by 3.3% from July 2021, by 11.4% from July 2020, and by just 1.0% from July 2019.
It remains sharply below pre-pandemic trends, having run roughly in parallel with pre-pandemic trend since March without catching up.
The share of spending on services remained at 61.9% of total spending in July, unchanged for the past three months, and remains below the share of around 64% during normal times, while spending on durable goods and nondurable goods still run above pre-pandemic trends.

David Goldsmith

All Powerful Moderator
Staff member

Markets Plunge as Inflation Data Undercuts Wall Street’s Optimism​

Stocks plunged, government bond yields soared and the dollar bounced after investors were wrong-footed by data showing stubbornly high price increases last month.

Stocks plummeted, U.S. government bond yields soared and the dollar bounced on Tuesday after fresh inflation data undermined investors’ bets on the persistence of inflation and the extent to which the Federal Reserve needed to raise interest rates to combat it.
Consumer prices rose 8.3 percent in the year through August, a report showed on Tuesday, as overall inflation in the United States did not moderate as much as many economists had expected. More worryingly, some underlying measures of price pressures even re-accelerated last month.
Stocks, which were trading higher in the hours before the data was released, turned sharply lower, with the S&P 500 slumping 3 percent. Stocks had nudged higher in recent trading sessions, up about 5 percent for the week leading up to the report, as investors increasingly bet that the Fed would be able to cool inflation without tipping the economy into a severe downturn.

But the higher-than-expected inflation data caught investors off guard, revealing that broad-based price pressures remain. Every sector in the S&P 500 index fell as investors rethought how much the Fed may need to raise interest rates, which makes borrowing more expensive for consumers and companies. The Nasdaq Composite stock index, which is full of tech stocks that are seen as more sensitive to rising interest rates, fell nearly 4 percent.

“We are not out of the woods yet. We can’t even see the edge of the woods from here,” said Luke Tilley, the chief economist at Wilmington Trust.

The turmoil was another upset for investors in a summer of surprises. Better-than-expected earnings, along with some signs that inflation may have peaked, made investors more confident in July and August. Then, a series of speeches by Fed officials, including the central bank’s chair, Jerome H. Powell, warned that the fight against inflation was not over and that interest rates needed to move markedly higher, helping pull stock prices lower again.
With a sense that the Fed’s message had been received, some investors began to see the higher path forward for interest rates as a possible limit on how high rates would go. Even before the inflation data was released on Tuesday, investors had come to expect another big rate increase, of three-quarters of a percentage point, when the Fed meets next week. For a time, some had bet on a less aggressive, half-point increase as the more likely option.

Now, some investors are even starting to price in the possibility that the central bank could raise rates by a full percentage point, which would be its largest rate increase since 1984.

Last week, analysts at Nomura raised their forecasts for the Fed’s interest rate increase by a quarter point, to a three-quarter-point rise. On Tuesday, the analysts raised their expectations to a full point.
“We continue to believe markets underappreciate just how entrenched U.S. inflation has become and the magnitude of response that will likely be required from the Fed to dislodge it,” the analysts wrote in a research report.
The yield on the two-year Treasury bond, a measure of borrowing costs that is sensitive to changes in the expected path of interest rates, shot higher after the inflation numbers were released, rising above 3.75 percent, a fresh high for the year.

And the U.S. dollar, which had weakened for days against a basket of currencies representing major U.S. trading partners, swiftly strengthened on Tuesday, gaining more than 1 percent.
Mike Pond, the head of global inflation-linked research at Barclays, said the surprising inflation data had not altered his view that the Fed would raise rates by three-quarters of a point next week.
“But we do think it will change the tone of what they are going to do going forward,” he said. “This will leave the Fed more concerned.”

Futures prices that show investors’ expectations for where interest rates will be at the end of the year have jolted higher, now predicting an upper limit of 4.25 percent, adding an additional quarter-point to previous forecasts. The upper limit of the Fed’s current target rate is 2.5 percent.

Bankers and investors have clung to expectations that even with a more rapid pace of rate increases, the Fed may yet stick a so-called soft landing, lowering inflation but avoiding a severe recession. Yet there is also acknowledgment that the Fed’s task has been made harder by stubbornly high inflation.
Solid data on the labor market earlier this month, which pointed to the resiliency of the economy after several rate increases this year, also highlights the challenge of slowing inflation at the same time as unemployment remains low, bolstering consumer spending.
“The longer the economy holds on, the longer household balance sheets can withstand these high prices, the more aggressive the Fed has to be in the future,” said Lauren Goodwin, an economist at New York Life Investments. “Investors were getting too comfortable with the idea that inflationary pressures were easing.”

David Goldsmith

All Powerful Moderator
Staff member
This Inflation Will Be Tough to Get under Control

It’s like a dam broke. And now higher interest rates and mortgage rates for much longer, with lower asset prices, as the Everything Bubble gets repriced.

So now the media suddenly focuses on this big problem I’ve been screaming about for many months: Inflation has shifted from energy and from goods tangled up in supply-chain issues to services where there are no supply chain issues.
A great example is insurance. I guarantee you that there is an unlimited supply of insurance, and yet health insurance costs spiked by 24% over the 12-month period, and auto insurance jumped by 9%.
It’s small stuff too. I just got a 20% increase on my broadband service that I subscribed to a year ago to replace Comcast, which had doubled its monthly fee a year earlier.
Other service prices jumped too. Motor-vehicle maintenance and repair jumped 9%, and rents are spiking, and all kinds of service providers are jacking up their prices, and consumers are paying them.

That’s services inflation. And most of it is unrelated to energy and supply chains.
Yet gasoline prices have plunged from their highs in June, and many supply-chain issues that drove up prices of some goods have been resolved, and lots of commodities prices have come way down.
So now we’re dealing with inflation in services. This type of inflation means that something has seriously changed in the economy, and how the participants in that economy – so that’s consumers, businesses, and governments – are reacting to price increases. And how they’re reacting is that they’re paying those price increases.
Businesses are paying them because they know they can pass them on to their customers. Consumers are paying them, because they’re getting raises, and they’re still flush with cash from all the pandemic money, from the PPP loans, the mortgage payments and rental payments they didn’t have to make, and from the gains in real estate and from the cash-out refis last year, and from the gains in stocks and cryptos, though those gains have started to dissipate.
And governments at all levels sit on huge amounts of pandemic-era cash, and this cash is getting spent, and so wholesale prices go up and businesses pay them, and consumer prices go up, and people pay them. And it happened suddenly, starting nearly two years ago.
For many years, central banks have engaged in massive amounts of money printing and interest rate repression. The Bank of Japan started this over two decades ago, and it bought up a big portion of the government’s debt, and it repressed interest rates to zero, and in recent years below zero. It got away with it for years, and there was essentially no consumer price inflation.
And then during the Financial Crisis, starting late 2008, the Federal Reserve in the US started printing large amounts of money and it repressed short-term interest rates to zero, in order to bail out the bondholders and stockholders of the banks, and to inflate asset prices in general, to inflate stock prices, and bond prices, and real estate prices. And that didn’t trigger a big wave of consumer price inflation either.
And when the European Central Bank saw that neither the Bank of Japan’s money printing, nor the Federal Reserve’s money printing triggered consumer price inflation, but just asset price inflation, it too jumped into the game and printed huge amounts of money and repressed interest rates to zero, and then below zero.
And central banks of smaller countries were doing it, and just about everyone in the developed world was doing it.
And then came the Pandemic, and so now all these central banks that had been printing money and repressing interest rates without triggering consumer price inflation, went hog-wild, thinking that these many trillions of free money wouldn’t cause inflation either, because it didn’t before. But this time the amounts were a lot huger, and they came very fast.
And governments all around spent many trillions in borrowed money that their central banks were providing via their bond purchases, and all this central-bank monetary stimulus and the governments’ fiscal stimulus washed over the globe, and much of it over the United States economy, and just about everyone here got some of this money, people, businesses, and state and local governments, and they all started spending this money.
This sudden wave of free money caused a historic spike in demand for goods, which triggered the supply chain issues, which triggered the backlogs, the waiting lists, and people were so flush with money that they paid whatever, and prices of goods then spiked. It kicked off with used vehicles where prices spiked like crazy, starting in late 2020.
It was when the dam broke. And inflation began pouring into the United States.
Now the big push in inflation is no longer from goods, and it’s no longer from commodities and energy, and gasoline prices have already plunged as have many commodities. Now the big push is from services.
Inflation has spread across the entire economy, and is deeply entrenched in sectors that have little or nothing to do with energy, commodities, and supply chains.
So what we have here is that the dam that held back inflation for over a decade of money printing and deficit spending suddenly broke, and inflation flooded the country and spread across it, spread from sector to sector, and it’s huge, and more inflation is flooding in. And the original triggers have already started to recede, such as energy and supply chains, and now it’s services and other goods.
This dam that broke cannot just be put back together, so that inflation might just evaporate or whatever.
We haven’t seen this type of inflation in over 40 years. The prior dam that broke was during the oil embargo in the 1970s. And it led to a long and huge flood of inflation, that was ultimately brought back under control, but way too late, by draconian monetary policies, like we cannot even imagine today, with 30-year fixed mortgage rates hitting 18%.
Today we whine about the 6% mortgage rates. Back then, it took mortgage rates that were three times higher than today’s 6% to get this inflation monster under control.
So no, this inflation is not going away on its own. It is self-propagating. It has momentum, it’s cycling from segment to segment, and when prices stabilize or tip in one segment, they’re spiking in another. It’s what I call the game of inflation Whac A Mole.
The Fed has finally figured this out too – over a year too late. But now it’s serious about this inflation.
And here is the thing: with every meeting since last fall, the Fed has gotten hawkisher and hawkisher. All interest rate projections – how many times it might hike rates, how big the hikes might be, and where the hikes might end – moved higher at every meeting.
So now the Fed might go to 4% with its short-term policy rates by the end of this year. It might go to 4.5% by early next year.
[Update: at the FOMC meeting this week, a few days after this podcast aired, this was moved up to about 4.4% by the end of this year, and higher next year… read: Powell’s Whatever-it-Takes Moment].

And we now think that the Fed might then pause to see how inflation will react. But inflation keeps getting worse at the core of the economy, namely in services, and so the Fed might not pause at 4.5%, and all bets are essentially off until we see some containment of this inflation at the core of the economy.
The Fed is now also engaging in quantitative tightening or QT, which means it is reversing quantitative easing, which will reverse the effects of quantitative easing, which was the Everything Bubble, where all asset prices shot up together. And this is now being reversed.
The QT program has ramped up to full speed in September. Last week, the Fed stopped buying mortgage-backed securities entirely. And it’s letting its mortgage backed securities run off the balance sheet. By stepping away from the mortgage market, the Fed will no longer repress mortgage rates, and they’re going to go where the market thinks they should go, given that inflation is over 8%. Mortgage rates have already more than doubled from 3% a year ago, to well over 6% now.
The harder and the faster the Fed cracks down by hiking rates and by unloading its balance sheet, the sooner inflation might go back down. But the Fed really hasn’t cracked down yet. It’s still just lowering the amount of fuel it’s pouring on the inflation fire.
The top end of the Fed’s target range for the federal funds rate is currently 2.5% [update: as of Wednesday, it’s 3.25%], and with inflation over 8%, the Fed is still pouring huge amounts of fuel on the fire.
There is a good chance it will hike its target by 75 basis points at its meeting this week [update: it did], which would bring the top end to 3.25%. With CPI inflation at over 8%, it will still be pouring huge amounts of fuel on the fire.
Even if it hikes by a full percentage point, with the top of its range then at 3.5%, it would then still be pouring huge amounts of fuel on the inflation fire.
Interest rates will have to go a lot higher to crack down on inflation. And that includes long-term interest rates, and mortgage rates.
It doesn’t help that government spending, and I mean at all levels of government, is still stimulating the economy and fueling inflation. State and local governments are flush with pandemic money, and they’re going to spend it.
And the federal government is still throwing money around, including for things like incentives for EVs where demand is already red-hot, and prices are already spiking, and there are already long waiting lists to get one, and so now the government is throwing many billions of dollars of stimulus money on top of the already red-hot EV sector. This stuff is just crazy – to stimulate demand in an already red-hot sector with spiking prices.
This is going on all over the place. In other words, this is still a massively stimulated economy, fiscal stimulus, as well as monetary stimulus. And the inflation dam has broken, and new inflation is pouring into the economy.
To get this under control will take a lot of action by the Federal Reserve. Governments are not contributing anything to fighting inflation. On the contrary. They’re lined up stimulating inflation. It’s all on the Fed’s shoulders.
So this inflation isn’t going away any time soon. It has a good chance of getting worse next year. And it’s going to take years to get this under control, years of much higher interest rates, and years of much lower asset prices.
But it also means, years of much higher yields for bond holders and savers that buy those products in the future. Some yields of Treasury securities are already at 4%, such as the one-year Treasury yield. Some one-year CDs are already at 3.5%. Some savings accounts are at around 2%. And they’ll all be going higher as we go forward. But they’re still way below the rate of inflation.
We’re looking at years of much lower home prices, and much lower prices of commercial real estate. The whole entire asset bubble – the everything bubble that had been inflated by years of money printing and interest rate repression – this everything bubble is going to get repriced, and some of it has already gotten partially repriced.
Cryptos are down 70% or so. The overall stock market is down 20%, as tracked by the Wilshire 5000 index as of Friday. The most speculative parts of the stock market are down 70% and 80% and 90% or more, such as the hundreds of stocks that went public via IPO or SPAC over the past two-and-a-half years – my infamous Imploded Stocks.
And it has just started. We’re only a few months into Fed tightening. And the Fed is still way behind the curve. Inflation is now raging at the core of the economy where it is very difficult to dislodge. The many years of easy money are gone, and they’re not coming back any time soon.
I think central banks are now learning a lesson how the combination of money printing and deficit spending are just fine for many years, until suddenly the dam breaks, and inflation floods the economy, when no one expects it anymore, triggering years of a very messy process to bring this back under control.

David Goldsmith

All Powerful Moderator
Staff member

You’re not good at this.
A recession so contrived and man-made that every economist, politician, business owner, college student, CEO, rapper and professional athlete has been able to see it coming in real-time for months and months…
Take a picture, you may never see anything so obviously about to happen ever again. A child could have foreseen it.
At a certain point, a person who is charge of price stability should probably look in the mirror and say “For whatever reason, I am not good at this. Or whatever method I am using to make decisions is not going well or producing positive outcomes.”

I don’t think this is so much to ask of the people we put in charge of our institutions.
The Federal Reserve’s Open Market Committee for example. If in any given year you find yourself oscillating furiously back and forth between stimulus and austerity, perhaps it’s time to stop and reevaluate. It might be the data you’re using or the way in which you’re using it. It might be your instincts. It might be a combination of things. The pendulum should swing, just not all the way in both directions all the time. That’s not a cycle, that’s a circus.
If your forecasting abilities led you to the conclusion that you would not have to do any rate hikes in 2022, followed a few months later by having to do the sharpest rise in interest rates of all time, maybe you’re not good at this. If you’re buying mortgage and treasury bonds to stimulate the economy in the month of March and then deliberately trying to crash the markets and create a recession in September, you’re probably not the right person to have in charge of the money supply. You may not be the “price stability guy.”

Just sayin.
I’m sure you mean well. I’m sure you’re doing your best. I’m sure there are challenges the rest of us can’t see. I get it. But still. What are you doing. Literally.
It’s not numbers on a spreadsheet. We’re talking about people’s lives being played with. The social costs of being separated from employment are obvious on an aggregate level. On a local and personal level they can be catastrophic. Creating massive bubbles in one calendar year only to have to pop them in the following calendar year is irresponsible. There should be something in between 90mph and slamming on the e-brake. Is this not taught in PhD school? Most of us are taught moderation in elementary school. The marshmallow test. Impulse control. Nap time. Listening.
Zero percent interest rates plus fiscal and monetary stimulus with housing up 40% and stocks at an all-time high was a ridiculous policy. Everyone said so at the time. Here’s me last May, for example: Stimulating the Housing Market is Psychotic. An equally ridiculous policy is record-setting rate hikes piled one atop another before even attempting to see if the first ones are producing the desired effect. Why wait to see if the economy will cool off when we can just crash it and be absolutely certain? Okay, I suppose that’s one strategy…
I don’t think the whole data-dependent thing is going well. If it’s led us here, I think we can try something else instead without sacrificing anything. Let’s try common sense-dependent, see if that goes a little bit better. Or turn it over to someone else.

David Goldsmith

All Powerful Moderator
Staff member
‘The Fed is breaking things’ – Here’s what has Wall Street on edge as risks rise around the world
Markets entered a perilous new phase in the past week, one in which statistically unusual moves across asset classes are becoming commonplace.
Surging volatility in what are supposed to be among the safest fixed income instruments in the world could disrupt the financial system's plumbing, according to Mark Connors, former Credit Suisse global head of risk advisory.
That could force the Fed to prop up the Treasury market, he said. Doing so will likely force the Fed to put a halt to its quantitative tightening program ahead of schedule.
The other worry is that the whipsawing markets will expose the weak hands among asset managers, hedge funds and other players who may have been overleveraged or took on unwise risks. Margin calls and forced liquidations could further roil markets.

As the Federal Reserve ramps up efforts to tame inflation, sending the dollar surging and bonds and stocks into a tailspin, concern is rising that the central bank's campaign will have unintended and potentially dire consequences.

Markets entered a perilous new phase in the past week, one in which statistically unusual moves across asset classes are becoming commonplace. The stock selloff gets most of the headlines, but it is in the gyrations and interplay of the far bigger global markets for currencies and bonds where trouble is brewing, according to Wall Street veterans.

After being criticized for being slow to recognize inflation, the Fed has embarked on its most aggressive series of rate hikes since the 1980s. From near-zero in March, the Fed has pushed its benchmark rate to a target of at least 3%. At the same time, the plan to unwind its $8.8 trillion balance sheet in a process called "quantitative tightening," or QT — allowing proceeds from securities the Fed has on its books to roll off each month instead of being reinvested — has removed the largest buyer of Treasurys and mortgage securities from the marketplace.

"The Fed is breaking things," said Benjamin Dunn, a former hedge fund chief risk officer who now runs consultancy Alpha Theory Advisors. "There's really nothing historical you can point to for what's going on in markets today; we are seeing multiple standard deviation moves in things like the Swedish krona, in Treasurys, in oil, in silver, like every other day. These aren't healthy moves."

Dollar's warning
For now, it is the once-in-a-generation rise in the dollar that has captivated market observers. Global investors are flocking to higher-yielding U.S. assets thanks to the Fed's actions, and the dollar has gained in strength while rival currencies wilt, pushing the ICE Dollar Index to the best year since its inception in 1985.

"Such U.S. dollar strength has historically led to some kind of financial or economic crisis," Morgan Stanley chief equity strategist Michael Wilson said Monday in a note. Past peaks in the dollar have coincided with the the Mexican debt crisis of the early 1990s, the U.S. tech stock bubble of the late 90s, the housing mania that preceded the 2008 financial crisis and the 2012 sovereign debt crisis, according to the investment bank.

The dollar is helping to destabilize overseas economies because it increases inflationary pressures outside the U.S., Barclays global head of FX and emerging markets strategy Themistoklis Fiotakis said Thursday in a note.

The "Fed is now in overdrive and this is supercharging the dollar in a way which, to us at least, was hard to envisage" earlier, he wrote. "Markets may be underestimating the inflationary effect of a rising dollar on the rest of the world."

It is against that strong dollar backdrop that the Bank of England was forced to prop up the market for its sovereign debt on Wednesday. Investors had been dumping U.K. assets in force starting last week after the government unveiled plans to stimulate its economy, moves that run counter to fighting inflation.

The U.K. episode, which made the Bank of England the buyer of last resort for its own debt, could be just the first intervention a central bank is forced to take in coming months.

Repo fears
There are two broad categories of concern right now: Surging volatility in what are supposed to be the safest fixed income instruments in the world could disrupt the financial system's plumbing, according to Mark Connors, the former Credit Suisse global head of risk advisory who joined Canadian digital assets firm 3iQ in May.

Since Treasurys are backed by the full faith and credit of the U.S. government and are used as collateral in overnight funding markets, their decline in price and resulting higher yields could gum up the smooth functioning of those markets, he said.

Problems in the repo market occurred most recently in September 2019, when the Fed was forced to inject billions of dollars to calm down the repo market, an essential short-term funding mechanism for banks, corporations and governments.

"The Fed may have to stabilize the price of Treasurys here; we're getting close," said Connors, a market participant for more than 30 years. "What's happening may require them to step in and provide emergency funding."

Doing so will likely force the Fed to put a halt to its quantitative tightening program ahead of schedule, just as the Bank of England did, according to Connors. While that would confuse the Fed's messaging that it's acting tough on inflation, the central bank will have no choice, he said.

`Expect a tsunami'
The second worry is that whipsawing markets will expose weak hands among asset managers, hedge funds or other players who may have been overleveraged or took unwise risks. While a blow-up could be contained, it's possible that margin calls and forced liquidations could further roil markets.

"When you have the dollar spike, expect a tsunami," Connors said. "Money floods one area and leaves other assets; there's a knock-on effect there."

The rising correlation among assets in recent weeks reminds Dunn, the ex-risk officer, of the period right before the 2008 financial crisis, when currency bets imploded, he said. Carry trades, which involve borrowing at low rates and reinvesting in higher-yielding instruments, often with the help of leverage, have a history of blow ups.

"The Fed and all the central bank actions are creating the backdrop for a pretty sizable carry unwind right now," Dunn said.

The stronger dollar also has other impacts: It makes wide swaths of dollar-denominated bonds issued by non-U.S. players harder to repay, which could pressure emerging markets already struggling with inflation. And other nations could offload U.S. securities in a bid to defend their currencies, exacerbating moves in Treasurys.

So-called zombie companies that have managed to stay afloat because of the low interest rate environment of the past 15 years will likely face a "reckoning" of defaults as they struggle to tap more expensive debt, according to Deutsche Bank strategist Tim Wessel.

Wessel, a former New York Fed employee, said that he also believes it's likely that the Fed will need to halt its QT program. That could happen if funding rates spike, but also if the banking industry's reserves decline too much for the regulator's comfort, he said.

Fear of the unknown
Still, just as no one anticipated that an obscure pension fund trade would ignite a cascade of selling that cratered British bonds, it is the unknowns that are most concerning, says Wessel. The Fed is "learning in real time" how markets will react as it attempts to rein in the support its given since the 2008 crisis, he said.

"The real worry is that you don't know where to look for these risks," Wessel said. "That's one of the points of tightening financial conditions; it's that people that got over-extended ultimately pay the price."

Ironically, it is the reforms that came out of the last global crisis that have made markets more fragile. Trading across asset classes is thinner and easier to disrupt after U.S. regulators forced banks to pull back from proprietary trading activities, a dynamic that JPMorgan Chase CEO Jamie Dimon has repeatedly warned about.

Regulators did that because banks took on excessive risk before the 2008 crisis, assuming that ultimately they'd be bailed out. While the reforms pushed risk out of banks, which are far safer today, it has made central banks take on much more of the burden of keeping markets afloat.

With the possible exception of troubled European firms like Credit Suisse, investors and analysts said there is confidence that most banks will be able to withstand market turmoil ahead.

What is becoming more apparent, however, is that it will be difficult for the U.S. — and other major economies — to wean themselves off the extraordinary support the Fed has given it in the past 15 years. It's a world that Allianz economic advisor Mohamed El-Erian derisively referred to as a "la-la land" of central bank influence.

"The problem with all this is that it's their own policies that created the fragility, their own policies that created the dislocations and now we're relying on their policies to address the dislocations," Peter Boockvar of Bleakley Financial Group said. "It's all quite a messed-up world."

David Goldsmith

All Powerful Moderator
Staff member
Flush with Pandemic Cash & Tax Revenues, States, Cities Throw Money Around. Congress too. Is it a Surprise Consumers Outspent this Raging Inflation?

The Fed, which is trying to slow demand to tamp down on consumer price inflation, gnashes its teeth.​

In many ways, this is still the most overstimulated economy ever, and it’s not wanting to come down because there is still all this cash from the Fed’s and the government’s stimulus floating around. So here is an example.
California has so much cash right now it doesn’t know what to do with it. So it’s throwing money around left and right, including directly at consumers. The state will start sending out stimulus checks, I mean inflation checks, in October for up to $1,050 per household. In total, about $10 billion are expected to be sent to consumers just in time for shopping season, and folks are going to spend this extra $10 billion.
Other states – and cities– too are flush with money, and they’re spending it in a million different ways either directly or by subsidizing one thing or another. And Congress just passed massive give-away legislation that douses corporations and consumers in all kinds of incentives, cash, rebates, and what not.
And this kind of stuff just keeps on keeping on – because states and cities are flush with pandemic cash, and cash from tax revenues, and they’re going to throw this money at their businesses and consumers. And Congress is still living in an era where money was free, and it acts like it.

This comes when the Fed is trying to slow demand by hiking interest rates to slow purchases by businesses and consumers, to take pressure off prices and allow for the raging inflation to cool. All this stimulus still going on from the other side of the equation is counteracting what the Fed is trying to accomplish. And the Fed is gnashing its teeth.
So is it any surprise that consumers spent with abandon in August, even outspent the renewed flareup of raging inflation? Nope, it’s not a surprise.
Total consumer spending on goods and services, adjusted for inflation – so “real” consumer spending – ticked up by 0.1% in August from July, and by 1.8% from a year ago, to another record, despite raging inflation.
This was driven by increased spending on services (adjusted for inflation), even as spending on goods (adjusted for inflation) continued to dip from the huge mega-stimulus surge last year. Clearly, the Fed’s message about wanting to slow demand hasn’t gotten through to consumers just yet:

Spending on services, adjusted for inflation, ticked up 0.2% for the month, and rose by 3.0% from a year ago. Services include healthcare, housing, education, travel, sports events, haircuts, repairs, subscriptions, streaming, etc.
Services accounted for 62% of total consumer spending in August, the highest since pre-pandemic times, but was still below the share of around 64% during normal times as spending on services still runs below pre-pandemic trend; but spending on durable goods, as we’ll see in a moment, still hasn’t come off the stimulus bubble.

Spending on durable goods, adjusted for inflation, continues to run substantially above pre-pandemic trend. This is where the most overstimulated economy ever manifested itself in an explosion of spending in 2020 and 2021, that is now slowly and reluctantly reverting to trend.
Inflation-adjusted spending on vehicles, appliances, electronics, furniture, and other durable goods fell by 0.4% in August, but it didn’t even undo the jump in the prior month. Compared to the stimulus-driven durable-goods spending last year, August was up by 2.9%. Compared to August 2019, spending (adjusted for inflation) was up by a still astounding 25%!

Spending on non-durable goods, adjusted for inflation, which was also boosted during the stimulus era, is reverting to pre-pandemic trend and is almost there. In August, spending on food, gasoline, household supplies, etc. ticked down 0.1% from July, and was down 2.2% from the stimulus-fueled level last year. It was still up 9% from August 2019 (adjusted for inflation).

It is now inflation in services, ironically, that is shooting straight up, while inflation in durable goods is beginning to vanish. “Ironically” because inflation-adjusted spending on services is still way below pre-pandemic trend. And you’d think that this would be a difficult segment for inflation to take off in. But no. Inflation has been on a tear.

David Goldsmith

All Powerful Moderator
Staff member

Fed’s Inflation Fight Has Some Economists Fearing an Unnecessarily Deep Downturn​

Some economists fear the Federal Reserve—humbled after waiting too long to withdraw its support of a booming economy last year—is risking another blunder by potentially raising interest rates too much to combat high inflation.
The Fed has lifted rates by 0.75 percentage point at each of its past three meetings, bringing its benchmark federal-funds rate to a range between 3% and 3.25% last month—the fastest pace of increases since the 1980s. Officials have indicated they could make a fourth increase of 0.75 point at their Nov. 1-2 meeting and raise the rate above 4.5% early next year.
Fed Chairman
Jerome Powell
has said the central bank isn’t trying to cause a recession, but it can’t fail in its effort to bring down inflation. “I wish there was a painless way to do that. There isn’t,” he said last month.

Still, several analysts worry the Fed is on track to raise rates higher than required, potentially triggering a deeper-than-necessary downturn.
“They’ve done a tremendous amount of tightening,” said
Greg Mankiw,
a Harvard University economist who advised President
George W. Bush.
“Recessions are painful for a lot of people. I think Powell’s right that some pain is probably inevitable…but you don’t want to cause more than is necessary.”
Until June, officials hadn’t lifted rates by 0.75 point, or 75 basis points, since 1994. Instead, they usually preferred making smaller quarter-point increases that gave them more time to see their economic effects.
“I would slowly ease the foot off the brake,” Mr. Mankiw said. “That means probably for a given meeting, if they’re debating 50 or 75, go with 50 instead of 75.”
Former Fed Vice Chairman
Donald Kohn
agrees it is near time for Fed officials to slow their rate increases. “They need to downshift soon. They need to somehow downshift without backing off,” he said.
Fed officials left rates near zero last year as they focused on spurring a strong labor market recovery. The war in Ukraine this spring sent commodity prices higher and fueled concerns that inflation might become embedded into wage and price contracts.
“Moving in these 75-basis-point steps was effective when the Fed had a long way to go. It becomes more problematic when they need to calibrate policy more carefully, and I believe we’re approaching that point,” said Brian Sack, who ran the New York Fed’s markets desk from 2009 to 2012 and is now the director of economics at hedge-fund manager D.E. Shaw.
Some Fed critics say the current surge in inflation is the result of global disruptions rather than an overheated U.S. labor market, and they are pointing to signs that prices have begun to fall for a swath of goods and services, including commodities, freight shipping, and housing.
Housing costs have contributed notably to inflation in recent months amid large increases over the past year in residential rents. But housing demand is falling sharply as the 30-year mortgage rate nears 7%, a 16-year high—a direct result of the Fed’s rate increases. Home prices started to fall this summer in more U.S. markets, and economists at Goldman Sachs expect price drops of between 5% and 10% nationally by the end of next year. Apartment rent increases also have begun to slow.
A series of interest-rate rises have rippled through the U.S. economy, and more are projected to be on the way. WSJ breaks down the numbers hitting Americans’ wallets this year and beyond.

Asset prices have also taken a beating, which tends to reduce spending and investment. A portfolio invested 60% in stocks and 40% in bonds is down nearly 20% this year.
“The housing market doesn’t look pretty, and that will eventually spread to the rest of the economy,” said Mr. Mankiw. Lower asset prices will, too, at some point, he said.
Fed officials are cautious about expecting inflation to fall because it has consistently defied such forecasts over the past year. Some have pointed to risks of additional economic disruptions—for example, higher energy prices this winter if Russia suspends oil sales.
The strong U.S. labor market is fueling several officials’ concerns by making it easy for workers to switch jobs in pursuit of higher pay, putting upward pressures on wages. That could especially be the case if consumer spending keeps shifting away from goods toward more labor-intensive services.
Eric Rosengren,
who headed the Boston Fed from 2007 until last year, said he sees the Fed’s projected policy path as broadly appropriate. “If anything, I think the risks show they’re going to have to raise rates a bit more than they’re suggesting,” he said. “The U.S. economy, to date, looks more resilient than I might have expected given the rate increases that have already occurred.”
Traditionally, the Fed set policy based on forecasts of inflation, which lags behind changes in output. But officials now are reacting more to the latest inflation data “because they have absolutely zero confidence in their ability to forecast inflation,” said
Nathan Sheets,
chief global economist at Citigroup. He said he is concerned the Fed will overdo rate rises but concedes inflation in the service sector is “pretty concerning.”
One risk is that economic activity slows sharply but filters through to inflation measures with a longer-than-usual delay. Wholesale prices of used cars have been dropping in recent months, for example, but this hasn’t shown up broadly in price indexes yet. Housing prices and residential rents are calculated in a way that is particularly lagged.
Mr. Sheets said waiting for proof that inflation is declining before slowing rate rises means monetary policy could be “held hostage by something you know with high confidence is going to reverse in the coming months.”
New York Fed President
John Williams
said last week he expects falling commodity prices and easing bottlenecks to bring inflation to 3% by the end of next year, leaving it still too far above the Fed’s 2% goal.
Government policy makers focused heavily last year on avoiding the mistakes they thought were made after the 2008 downturn. Some said it would be easier to bring down inflation that overshot the Fed’s 2% target than to lift inflation from below that level.
Now, officials have signaled they are willing to err on the side of raising rates too much because they don’t want to repeat the mistakes of the early 1970s, when consumers and businesses began to anticipate high inflation, causing prices to keep rising. The Fed ultimately raised interest rates high enough to trigger a severe recession in the early 1980s to bring down prices and break that psychology.
“There is a record of failed attempts to get inflation under control, which only raises the ultimate costs to society of getting it under control,” Mr. Powell said last month.
Fed officials have spent considerable time studying the 1970s “and will avoid making those mistakes,” said
Diane Swonk,
chief economist at accounting firm KPMG. “But it opens the door to a whole host of new mistakes.”
Mr. Sack said he sees meaningful risks from both too much and too little tightening. “It’s not a completely one-sided story,” he said. “There are also risks from financial markets reacting in an abrupt way to higher rates, or from the slowdown in activity building on itself and becoming harder to control.”