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

David Goldsmith

All Powerful Moderator
Staff member

Fed’s QT: Total Assets Drop by $206 Billion from Peak​

What the Fed did in details and charts. And, well, “Primary Credit” is starting to show up again.

The Federal Reserve released its weekly balance sheet this afternoon, with balances as of yesterday, October 5, that contained the month-end roll-off on September 30 of Treasury securities, which completed the first month of QT at full speed, after the three-month phase-in period.
At full speed, the pace of QT is capped at a maximum of $60 billion per month for Treasury securities and at a maximum of $35 billion for MBS. During the three-month phase-in, the caps were half that level.
Total assets dropped by $37 billion from the prior week, by $63 billion from the balance sheet released on September 8, and by $206 billion from the peak on April 13, to $8.76trillion, the lowest since December 2021.

QT is the opposite of QE. With QE, the Fed created money that it pumped into the financial markets by purchasing securities from its primary dealers, who then sent this money chasing assets across the board, which inflated asset prices and pushed down yields, mortgage rates, and other interest rates. QT does the opposite and is part of the explicit tools the Fed is using to get this raging inflation under control.

Treasury securities: Down $137 billion from peak.

Treasury notes and bonds mature mid-month and at the end of the month, which is when maturing bonds roll off the balance sheet. Today’s balance sheet includes the roll-off on September 30.
Treasury bills. In those months when not enough Treasury notes and bonds mature to get close to the $60 billion cap, the Fed also allows short-term Treasury bills (maturities of one year or less) to roll off to make up the difference. And this happened in September.
Treasury Inflation-Protected Securities (TIPS) pay inflation compensation based on CPI. This inflation protection is income to the Fed, but it is not paid in cash, as coupon interest is, but it is added to the principal value of the TIPS, and the balance of TIPS on the Fed’s balance sheet inches up until the next TIPS issue matures, which will be in January.
In September:
  • Treasury notes and bonds roll-off: $43.6 billion.
  • Treasury bills roll-off: $13.1 billion
  • TIPS roll-off: none matured; next issue will mature in January
  • TIPS Inflation Compensation: $235 million, non-cash income added to TIPS principal.
  • Net change: -$57 billion from September 7.

MBS, with 2-3 months lag: Down $42 billion from peak.

MBS come off the balance sheet mostly through pass-through principal payments. When the underlying mortgages are paid off as the home is sold or as the mortgage is refinanced, or when regular mortgage payments are made, the principal portion is forwarded by the mortgage servicer (such as your bank) to the entity that securitized the mortgages (such as Fannie Mae), which then forwards those principal payments to the holders of the MBS (such as the Fed). The book value of the MBS shrinks with each pass-through principal payment, reducing the amount on the Fed’s balance sheet.
But mortgage refinance volume has collapsed by 86% from a year ago to the lowest level since the year 2000; back then, the Fed had also embarked on a series of rate hikes, ultimately taking them to 6.5%. The collapse in the refi volume has turned the pass-through principal payments from refi into a trickle.
In addition, home sales have slowed, which further reduces the pass-through principal payments. Pass-through principal payments from regular mortgage payments continue at their normal pace.
The fading pass-through principal payments from the refi business is why the Fed is considering selling MBS outright sometime in the future in order to fill in the gap to the $30 billion cap.
MBS get on the balance sheet 1-3 months after the Fed purchased them in the “To Be Announced” (TBA) market. Those trades take one to three months to settle, and the Fed books them after they settle, which is when the trades show up on the balance sheet.
For a special geeky deep-dive into the Fed’s transactions of MBS in the TBA market and the delays involved, go to my analysis a month ago and scroll down to the section: “MBS, creatures with a big lag.”
So for most of the phase-in period, the MBS transactions didn’t reflect the phase-in period, but the “Taper” before it. In September and October, we’re seeing the transactions from the phase-in period.
The Fed stopped buying MBS on September 16 altogether, and so the inflow of new MBS onto the balance sheet, which is already small, will fizzle out in November.
The mismatch in timing between the days when the trades settle and show up on the balance sheet, and the days when the pass-through principal payments are booked and come off the balance sheet, gives the chart the jagged line, with flat parts in between when neither happens.
The MBS had one of those flat spots this week, at $2.698 trillion, down by $11 billion from September 8, and down by $42 billion from the peak on April 13.

Unamortized Premiums: Down $32 billion from peak, to $323 billion.

All bond buyers pay a “premium” over face value when they buy bonds with a coupon interest rate that is higher than the market yield at the time of purchase for that maturity.
The Fed books the face value of securities in the regular accounts, and it books the “premiums” in an account called “unamortized premiums.” It amortizes the premium of each bond to zero over the remaining maturity of the bond, while at the same time, it receives the higher coupon interest payments. By the time the bond matures, the premium has been fully amortized, and the Fed receives face value, and the bond comes off the balance sheet.
Unamortized premiums peaked in November 2021 at $356 billion and have now declined by $32 billion to $323 billion:

A note on “Primary Credit.”​

The Fed borrows money from the banks when the banks put cash on deposit at the Fed (the “reserves”). The Fed pays the banks currently 3.15% in interest on $3.08 trillion in reserves. They’re a liability on the Fed’s balance sheet, not an asset, and they don’t belong here. I just bring them up because…
The Fed also lends money to the banks and currently charges 3.25% for it, charging more in interest than paying interest, as all banks do. The Fed does this through the discount window, called “Primary Credit” on the Fed’s balance sheet.
In March 2020, primary credit spiked to $50 billion but faded quickly and remained at very low levels. When the Fed started hiking rates in early 2022, Primary Credit began rising, though it has remained low. On today’s balance sheet, it rose to $7 billion, having doubled over the past four weeks.
It seems most banks have way too much cash and put some of it on deposit at the Fed (in total $3.08 trillion in reserves); but some banks don’t have too much cash, and borrow some from the Fed at 3.25% (in total $7 billion). In terms of magnitude, there is no comparison, but it’s nevertheless cute:

And here’s how we got to Raging Inflation:


Noah Rosenblatt

Talking Manhattan on
Staff member
Yeah shit is getting real. Talk is we are in stage 2 of 4 stages of this inflationary bear market, this stage has characteristics of bear market rallies here and there. Stage 3 and 4 dont, so if those do play out, we need to manage exectations and prepare accordingly.

Noah Rosenblatt

Talking Manhattan on
Staff member
also, its all about that terminal rate -- the fed is in control demolition mode, and will continue to do so until a credit event occurs or something else breaks in the credit machine. Until then, reset after reset after reset and with it comes higher rate sand vol. Its a new fed, we had regime change earlier this year and those bonds are no longer a hedge.

David Goldsmith

All Powerful Moderator
Staff member
I've seen a decent amount of talk recently about how inflation is starting to wind down to lessening of supply chain issues. You wouldn't know that from today's print.

Core US Inflation Rises to 40-Year High, Securing Big Fed Hike​

A closely watched measure of US consumer prices rose by more than forecast to a 40-year high in September, pressuring the Federal Reserve to raise interest rates even more aggressively to stamp out persistent inflation.
The core consumer price index, which excludes food and energy, increased 6.6% from a year ago, the highest level since 1982, Labor Department data showed Thursday. From a month earlier, the core CPI climbed 0.6% for a second month.
The overall CPI increased 0.4% last month, and was up 8.2% from a year earlier.
The advance was broad based. Shelter, food and medical care indexes were the largest of “many contributors,” the report said. Prices for gasoline and used cars declined.

On the heels of a solid jobs report last week, the inflation data likely cement an additional 75-basis point interest rate hike at the Fed’s November policy meeting and spurred speculation for a fifth-straight increase of that size in December. Traders also priced in a higher peak Fed rate for next year.
US stocks opened lower and Treasury yields surged, with the 30-year rate briefly hitting 4%, the highest since 2011. The median forecasts in a Bloomberg survey of economists had called for a 0.4% monthly rise in the core and a 0.2% gain in the overall measure.
The report stresses how high inflation has broadened across the economy, eroding Americans’ paychecks and forcing many to rely on savings and credit cards to keep up. While consumer price growth is expected to moderate in the coming months, it’ll be a slow trek down to the Fed’s goal.
Policy makers have responded with the most aggressive tightening campaign since the 1980s, but so far, the labor market and consumer demand have remained resilient. The unemployment rate returned to a five-decade low in September, and businesses continue to raise pay to attract and retain the employees needed to meet household demand.

The CPI report is the last one before next month’s US midterm elections and poses fresh challenges to President Joe Biden and Democrats as they seek to retain thin congressional majorities. Already, the surge in inflation has posed a serious threat to those prospects.
Housing Costs
Shelter costs — which are the biggest services’ component and make up about a third of the overall CPI index — rose 0.7% for a second month. Both rent of shelter and owners’ equivalent rent were up 6.7% on an annual basis, the most on record.
Economists see the housing components of the report as being elevated for quite some time, given the lag between real-time changes in rents and home prices and when those are reflected in Labor Department data. Bloomberg Economics doesn’t expect year-over-year rates for the major shelter components to peak until well into the second half of next year.

Even when removing rent of shelter, services inflation still rose at a record annual pace, underscoring the breadth and depth of price pressures.
  • Food costs rose 0.8% for a second month and were 11.2% higher from a year ago
  • The food at employee sites and schools index rose a record 44.9% from the prior month, reflecting the expiration of some free school lunch programs
  • Used car prices dropped for a third month, while new car prices continued to rise at hefty clip
  • Airfares climbed. While gasoline prices subsided in September, they’ve since started climbing again
  • Americans also experienced higher prices for utilities like natural gas and electricity in the month
While the Fed bases its 2% target on a separate inflation measure from the Commerce Department — the personal consumption expenditures price index — the CPI is closely watched by policy makers, traders and the public. Given the volatility of food and energy prices, the core index is considered a more reliable barometer of underlying inflation.
Geopolitical developments could also keep inflation elevated. OPEC+ recently announced oil production cuts, and a potential gasoline export ban by the Biden administration could backfire with higher pump prices.

The Russia-Ukraine war continues to disrupt supplies of commodities like wheat, while the White House is also considering a ban on Russian aluminum — a key component in cars and iPhones — in response to the country’s military escalation in Ukraine.
What Bloomberg Economics Says...
“What’s really at play in the September CPI is the December FOMC meeting, and the news is not good: The higher-than-expected CPI print will make it difficult for the Fed to slow down to a 50-basis-point hike at its last meeting of the year, as it indicated in the latest dot plot that it wants to do.”
—Anna Wong and Andrew Husby, economists

Fed officials have repeatedly emphasized in recent weeks the need to get inflation under control, even if that means higher unemployment and a recession. In minutes from their September meeting released Wednesday, many policy makers emphasized “the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action.”
Central banks’ determination to crush inflation, in the US and abroad, has prompted a deterioration in the economic outlook globally. Excluding the unprecedented falloff in 2020 due to the coronavirus pandemic, the IMF expects economic growth to slow to the weakest level since 2009, in the wake of the global financial crisis.
Excluding food and energy, the cost of goods was unchanged from August. Services prices less energy advanced by the most since 1990 on a monthly basis. Changing consumer preferences are underpinning services inflation and have helped ease demand for goods. Meantime, a strong dollar is diminishing foreign demand for US-made products.

Prices paid to US producers rose more than expected in September, driven in large part by services costs, Labor Department data showed Wednesday, likely portending ongoing price pressures for consumer prices for services. Producer prices for food and energy also rose.
A separate report Thursday emphasized how inflation is depressing workers’ purchasing power. Real average hourly earnings dropped in September and were down 3% from a year earlier, elongating a string of declines dating back to April 2021.

David Goldsmith

All Powerful Moderator
Staff member
Prices Rise Faster Than Expected
The Consumer Price Index rose 8.2 percent in the year through September, another stubbornly high result driven by more costly food, rent and other items.

Here’s what you need to know:​

Takeaways from another painful inflation report.

The Consumer Price Index report for September, released Thursday, showed that painfully rapid price increases continued to trouble Americans and bedevil the Fed. Here are the takeaways:
  • Inflation remains relentless. The overall index climbed 8.2 percent in September versus the prior year, a slight moderation from 8.3 percent the previous month — but that was because gasoline prices had fallen, a trend that has since reversed. Practically every other detail of the report was worrying.
  • By some metrics, inflation is hitting new highs. Stripping out food and fuel to get a sense of underlying price trends, the so-called core index climbed by 6.6 percent, the fastest pace since 1982 and more than economists had expected.
  • The monthly change in prices is also worrying. It offers a snapshot of the latest trends — and those month-to-month figures looked bad. The price index picked up by 0.4 percent from August, double what economists had expected, and the core measure rose by 0.6 percent on a monthly basis.
  • Rents are still climbing sharply. The cost of renting a primary residence climbed a brisk 7.2 percent in the year through September. That measure typically climbs around 3 percent per year, and housing costs matter because they move slowly and make up a big chunk of overall inflation.
  • Other services are becoming much more costly. From pet care to dental visits, prices for a wide range of services are up a lot. That’s worrying, because it suggests that wage increases — a major cost for service providers — may be feeding into higher prices.
  • Keep an eye on cars. A long-awaited slowdown in goods prices isn’t happening as quickly as hoped, and cars are a case in point. Used car prices dropped in September, but not nearly as much as economists expected. Meanwhile, new car prices and car parts continue to increase sharply in price.
  • For the Fed, this probably locks in a big November rate increase. Central bankers have raised interest rates five times this year and are expected to make a fourth jumbo sized, three-quarter-point move at their meeting on November 2. Raising rates cools demand and is the Fed’s main tool for trying to wrestle inflation back under control.
  • This is bad news for Democrats ahead of the midterms. Although President Biden said he saw signs of progress in the report, “prices are still too high,” he said in a statement. Republicans can draw on many details from the report to highlight the squeeze on consumers’ wallets ahead of next month’s midterm elections, sharpening their criticisms of Mr. Biden’s management of the economy.

Understand Inflation and How It Affects You​

Markets seesaw after another high inflation reading.

Markets swung wildly on Thursday after another hotter-than-expected inflation report cemented expectations for more bumper interest rate increases from the Federal Reserve that some investors worry could destabilize the financial system.
The S&P 500 initially dropped by more than 2 percent, setting a new low for the year, before rallying back to end the day 2.6 percent higher, an unusually big turn within a single day.
U.S. government bond yields surged markedly higher, adding to the turbulence. The two-year Treasury yield, which is influenced by expectations for interest rates, soared by roughly 0.2 percentage points to a new high of around 4.5 percent, a big move for an asset that typically moves in hundredths of a percentage point.

The trigger for the market swings was the Consumer Price Index report, which realized investors’ fears about persistent inflation, showing prices rising faster than expected, at an 8.2 percent rate in the year through September.
The new data is crucial for informing policymakers, and therefore investors, on how much further interest rates will need to rise before inflation starts to consistently fall. The report has also taken on greater significance as investors grow increasingly worried about the effects of rising interest rates on global financial stability, following further turmoil in British government bond markets this week.
“There are a lot of people out there looking for peak inflation and a slowdown from the Fed on rate hikes, but the data is not in their favor,” said Charlie Ripley, a senior investment strategist at Allianz Investment Management. “This is going to put pressure on the Fed to do more.”
The sharp reversal in the stock market puzzled analysts. Some said that easing pressure on British government bonds, with yields falling sharply on Thursday, offered a tailwind that lifted the stock market through the day, as it helped the British pound to strengthen, weakening the dollar and bolstering stocks.
But such whipsaw moves have also simply become more common this year, as data on the U.S. economy has collided with technical factors in markets around how investors are positioned for sharp moves higher or lower, and whether they exacerbate or reduce them.
The rally on Thursday came after another drop on Wednesday, the S&P 500’s sixth daily decline in a row, meaning stock prices had already fallen substantially, even before the fresh inflation data roiled the market. The last time the index experienced seven straight days of losses was during the onset of the coronavirus pandemic at the end of February 2020.
In a sign of the gyrations affecting the market, the CBOE Vix index, which tracks stock volatility and is known as Wall Street’s “fear gauge,” remains elevated, as does the MOVE index, which measures volatility in the Treasury market.
The sharp moves have added to investors fear that the Fed’s campaign of large rate increases could push markets closer to a financial accident, similar to the shock waves in British markets in recent weeks. Some investors said that the hotter-than-expected inflation reading raised this risk by increasing expectations for further rate increases.
Based on prices in futures markets, which show where investors expect interest rates to be after the Fed’s upcoming meeting, the forecast is for a three-quarter-point increase. Once a rare occurrence, that would be the fourth increase of that size this year.
Investors also raised their bets on the Fed increasing rates by three-quarters of a point again in December and recalibrated expectations for how high interest rates could get next year, with a peak of around 4.9 percent in May, above the Fed’s own forecasts.
Barclays’ economists quickly altered their own forecast, predicting the Fed would raise interest rates by three-quarters of a point in November and December, as well as a half-point increase in February, taking interest rates past 5 percent next year.
“We are in a new regime here with higher rates,” Mr. Ripley said. “The longer they stay elevated, we are going to see some interesting things happen in the market.”
Around the world, cracks are emerging that are amplifying investors’ worries. Japanese government debt has barely traded day to day, constrained by government intervention. Mortgage rates are at their highest since the turn of the century. The value of corporate bonds and loans has tumbled.
“Everything is coming to a culmination at once,” said Andrew Brenner, the head of international fixed income at National Alliance Securities.
The reassessment over the path of interest rates comes as companies begin to announce their financial results for the third quarter, giving investors a chance to see how rising rates are impacting business conditions.
BlackRock reported earnings on Thursday, with the asset manager’s chief financial officer Gary Shedlin saying that the drastic fall in bond and stock prices, with the S&P 500 down over 25 percent this year, has resulted in $2 trillion being wiped off the value of the assets the company manages since the end of 2021, taking its assets under management to just below $8 trillion.
“The speed at which central banks are raising rates to rein in inflation alongside slowing economic growth is creating extraordinary uncertainty, increased volatility and lower levels of market liquidity,” said Larry Fink, BlackRock’s chief executive.

Disappointing inflation data keeps Democrats on defense ahead of midterm elections.

President Biden on Thursday said he saw signs of progress in a government report that showed consumer prices rising faster than expected but acknowledged that his administration had more work to do to combat inflation.
The figures are likely to keep Democrats on defense ahead of next month’s midterm elections, as Republicans continue to highlight the pain of rising prices to criticize Mr. Biden for mismanaging the economy. Mr. Biden tried to cast the figures in a positive light while empathizing with the cash crunch that Americans are experiencing.
“Americans are squeezed by the cost of living,” Mr. Biden said at an event in Los Angeles. “It’s been true for years and folks don’t need to see a report to tell them they’re being squeezed.”
Core inflation, which excludes volatile food and energy prices, rose at the fastest annual pace in 40 years, dashing hopes that the Federal Reserve would soon be able to pivot away from its interest rate increases.
Searching for glimmers of hope in the disappointing data, Mr. Biden noted that headline inflation had averaged an annual rate of 2 percent over the last three months, which is a notable deceleration from the 11 percent in the prior quarter. Mr. Biden also noted that inflation continued to be a global problem that was not affecting just the United States.
“The price of gas is still too high and we need to keep working to bring it down,” Mr. Biden said. “We also need to make more progress bringing down the prices across the board.”
Mr. Biden met with his top economic advisers on Thursday for a briefing following the release of the data.
“While here in the United States, the Federal Reserve has primary responsibility in price stability, our administration is committed to doing what we can to bring down costs for families, including by addressing supply chain challenges and lowering the costs of essentials like health care,” Treasury Secretary Janet L. Yellen said as she met with European officials in Washington.
Brian Deese, the director of the National Economic Council, said that the Biden administration was squarely focused on finding ways to bring down the cost of energy and housing for Americans.
“We have identified and been focused for some time now, on every measure we can take to try to increase the supply of housing, particularly affordable housing and multifamily housing,” Mr. Deese said in an interview before he spoke to City Club of Cleveland on Thursday. “There are actions that we can take and will take administratively and there’s also something that we’ll be talking to Congress about.”
The president said in a statement he released on Thursday morning that the so-called Inflation Reduction Act passed by Congress in August would help lower energy and health care costs for millions of Americans and warned that if Republicans notched victories in next month’s midterm elections, they would make inflation worse.
“Republicans in Congress’s No. 1 priority is repealing the Inflation Reduction Act,” Mr. Biden said. “If Republicans take control of Congress, everyday costs will go up — not down.”
But Republicans said on Thursday that the policies of Mr. Biden and the Democrats had fueled the inflation surge, noting that rising prices are outpacing wage gains.
“Wages are down, prices are up, and Democrats have no one to blame but themselves,” said Ronna McDaniel, chairwoman of the Republican National Committee. “Americans know a Republican vote in November is a vote for lower prices and a strong economy.”

Food prices climb again, weighing on household budgets.

Food prices continued their steady rise in September, driven by broad increases in prices for fruits and vegetables, cereals and bakery products. The price of food rose 0.8 percent last month, maintaining the pace of growth seen in August.
The price of flour grew 2 percent from the previous month, while apples gained 5 percent and lettuce rose 6.8 percent. The price of potatoes rose 3.5 percent from the previous month, while margarine was up 4.2 percent. Prices for some items fell on a monthly basis, including milk and eggs, which had risen sharply earlier this year.
On an annual basis, the food index rose 11.2 percent.
Food inflation in the United States has remained stubbornly high this year, eroding the spending power of consumers and weighing heavily on lower-income Americans, who spend a greater proportion of their income on grocery bills.
Higher food prices are driven by a range of factors, including more expensive gasoline that farmers and grocers need to transport their products. Rising worker wages and prices for inputs like packaging and fertilizer have also driven up food costs, spilling over into higher prices at grocery stores.
Russia’s invasion of Ukraine has also disrupted exports of wheat, sunflower oil and other agricultural products, prompting shortages and pushing up food prices globally, particularly in import-dependent countries in the Middle East and Africa.
In the United States, a historic drought across the Western half of the country has lowered crop yields and raised prices for products like fruit, nuts and vegetables. Water levels on the Mississippi River have sunk to their lowest levels in decades, grounding the ships and barges that carry much of the country’s agricultural productions.
Hurricane Ian, too, has caused disruptions that will be felt through the food supply chain in the months to come. The storm damaged citrus groves and fields of tomatoes, strawberries, watermelon and other fruit across the Southeastern United States. The U.S. Department of Agriculture said Wednesday that Florida’s orange crop this year would be its smallest since 1943, even before factoring in the hurricane’s full effects.
Restaurant prices have also risen, outpacing the price gains at grocery stores in recent months. An index measuring the price of food at restaurants was up 0.9 percent monthly, while an index measuring the price of food at home gained 0.7 percent from the previous month. Domino’s Pizza raised its prices by more than 13 percent last quarter compared with the previous year, it said in its earnings report on Thursday.
Even as food prices continue to climb, the food aid offered by the federal government during the pandemic is expiring. An index for food at employee sites and schools soared 44.9 percent in September, as free school lunch programs expired.

Rent inflation remained rapid, a troubling sign.

Rent inflation continued to pick up sharply in September, fueling overall price increases and underlining that it would be difficult for the Federal Reserve to rein in consumer prices until housing costs stop jumping so much.
The cost of renting a primary residence climbed by a brisk 0.8 percent over the past month and was up by 7.2 percent in the year through September, while a gauge that approximates how much it would cost Americans to instead rent the housing they own has climbed by 6.7 percent over the past year. Those figures typically climb by rates around 3 percent per year.
Rapid increases in the cost of housing matter a lot when it comes to Consumer Price Index inflation: Lodging costs make up nearly a third of the overall measure. They also change course slowly. Today’s increases are fueled in part by a jump in rent rates on newly leased houses and apartments that started last year, and which gradually filter into official data as people renew with their landlords.
While market-based rate measures are now moderating, it could take time for that to show up in official housing statistics. Many economists expect rent increases in the Consumer Price Index to remain rapid for months to come.
Part of the challenge in driving down rent inflation is that it tends to closely reflect how much people earn and are thus capable of paying for housing. While wages are not keeping up with inflation, they have been climbing more rapidly than normal.

Used car prices aren’t declining as much as economists had hoped.

Economists have been carefully watching car inflation as they try to figure out what might happen next with automobile prices, and Thursday’s Consumer Price Index report offered little reason for optimism.
Cars were perhaps the most extreme example of a product rocked by the pandemic: Production slowdowns, factory shutdowns overseas, parts shortages and shipping issues combined to keep cars in short supply even as consumer demand for vehicles surged. The clash pushed prices sharply higher — so much so that used and new cars became a major contributor to overall inflation. At their most dramatic in summer 2021, used car prices climbed by a scorching 45 percent compared to the prior year (and 10 percent compared to the prior month).
Now, the supply of used cars is rebounding, and economists are looking for pre-owned vehicles to begin subtracting notably from inflation. The prices dealers pay for their inventory have been coming down sharply, but that has been taking a long time to show up in consumer prices.
Used car prices dropped in September, but not nearly as much as economists expected. They declined by 1.1 percent over the month, data showed on Thursday.
That was less than what many economists had predicted. Omair Sharif, founder of Inflation Insights, had expected them to post a 2 percent monthly decline. Ian Shepherdson at Pantheon Macroeconomics had forecast a 1.5 percent decline.
“We are sure used vehicle prices will drop sharply over the next year,” Mr. Shepherdson wrote ahead of the release.
When it comes to new cars, supply remains seriously constrained, which is limiting how much prices can fall. The Consumer Price Index data showed that prices for new cars climbed 0.8 percent in September. That made for a 10.5 percent price increase over the past year.
Auto parts are also growing rapidly more expensive: Motor vehicle parts and equipment prices climbed 13.4 in the year through September.

Gas prices fall slightly, but overall energy costs are soon expected to rise.

Gas prices fell in September, helping to bring overall inflation down slightly on an annual basis. But those falling prices were not enough to offset month-over-month inflation, which rose 0.4 percent in September.
It remains unclear whether gas prices will continue to fall. Prices at the pump have fluctuated after coming down from a record high this summer.
Gas prices fell 4.9 percent in September, according to data from Thursday’s inflation report. But the cost of gasoline has been creeping up in recent weeks as a result of temporary refinery closures and increased demand after a 98-day streak of declines ended last month. The national average price of gasoline stood at $3.913 on Thursday, according to data from AAA, a 0.2 percent decrease from the day before.
Despite lower gas prices, the overall energy index is still up 19.8 percent over the 12 months through September. Natural gas rose by 2.9 percent in September and electricity rose by 0.4 percent. While the rise in gas prices might be short-lived, energy costs are expected to rise ahead of the winter heating season as demand goes up. The increase in energy prices could pose a challenge for the Federal Reserve by complicating its campaign to lower interest rates to bring down inflation.
Gas prices give experts a sense of how the economy is doing, but they also carry political weight. The lowered gas prices were a key talking point for President Biden, who made claims about the price declines over the summer and accused energy companies of profiteering on American consumers.
“One data point, even if it comes in in a positive way, is not going to derail the Fed from its path of raising rates this year,” said Mary Ann Bartels, chief investment strategist at Sanctuary Wealth.
The Organization of the Petroleum Exporting Countries announced it would slash production by 2 million barrels a day on Oct. 5, a change which might cause prices to shoot up. Still, some analysts pointed out that some members of OPEC are unable to meet production quotas, which might minimize the impact of the cut.
“Consumers should anticipate that gas prices particularly going into the winter months can firm back up again,” Ms. Bartels said.
Isabella Simonetti

Retirees are getting an 8.7% Social Security cost-of-living raise, the biggest in decades.

Social Security on Thursday announced an 8.7 percent cost of living adjustment for retirees, the largest inflation adjustment to benefits in four decades — a welcome development for millions of older Americans struggling to keep up with fast-rising living costs.
The cost-of-living adjustment for 2023, which will be applied to benefits in January, is based on the latest government inflation figures. The final COLA, as the adjustment is known, was released after the Labor Department announced the Consumer Price Index for September, which came in at 8.2 percent. Medicare enrollees can anticipate some additional good news: The standard Part B premium, which is typically deducted from Social Security benefits, will decline next year.
The COLA, one of Social Security’s most valuable features, will give a significant boost to about 70 million Americans next year. While retirement comes to mind when most people think about Social Security‌, the program plays a much broader role in providing economic security.
In August, the program paid benefits to 52.5 million people over age 65, but younger beneficiaries — survivors of insured workers and recipients of disability benefits‌ and Supplemental Security Income, the program for very low income people — added 17.9 million people to the total, according to Social Security Administration data.
The annual inflation adjustment has been awarded since 1975 under a formula legislated by Congress. Policy experts have debated whether the current formula accurately measures the inflation that affects retirees, but there’s little disagreement on the COLA’s importance in helping beneficiaries keep up with costs.
The New York Times examined the back story of Social Security’s inflation adjustment — how it works, how it could be revised — and how it affects pocketbooks.

Everything you need to know about Social Security’s cost-of-living adjustment.

The Social Security Administration on Thursday announced an 8.7 percent cost-of-living adjustment. The increase, known as a COLA, was the highest in decades and is intended to help retired and disabled Americans keep pace with the rate of inflation. The raise for 2023 will appear in benefits payments starting in January.
About 70 million Americans receive Social Security benefits, and for many of them, it is a crucial part of their income. To find answers to your questions on the adjustment, check out our explainer by Mark Miller, who writes frequently about retirement.

David Goldsmith

All Powerful Moderator
Staff member
The Fed, Staring Down Two Big Choices, Charts an Aggressive Path
Federal Reserve officials are barreling toward another three-quarter-point increase in November, and they may decide to do more next year.

Federal Reserve officials have coalesced around a plan to raise interest rates by three-quarters of a point next month as policymakers grow alarmed by the staying power of rapid price increases — and increasingly worried that inflation is now feeding on itself.
Such concerns could also prompt the Fed to raise rates at least slightly higher next year than previously forecast as officials face two huge choices at their coming meetings: when to slow rapid rate increases and when to stop them altogether.
Central bankers had expected to debate slowing down at their November meeting, but a rash of recent data suggesting that the labor market is still strong and that inflation is unrelenting has them poised to delay serious discussion of a smaller move for at least a month. The conversation about whether to scale back is now more likely to happen in December. Investors have entirely priced in a fourth consecutive three-quarter-point move at the Fed’s Nov. 1-2 meeting, and officials have made no effort to change that expectation.
Officials may also feel the need to push rates higher than they had expected as recently as September, as inflation remains stubborn even in the face of substantial moves to try to wrestle it under control. While the central bank had penciled in a peak rate of 4.6 percent next year, that could nudge up depending on incoming data. Rates are now set around 3.1 percent, and the Fed’s next forecast will be released in December.

Fed officials have grown steadily more aggressive in their battle against inflation this year, as the price burst sweeping the globe has proved more persistent than just about anyone expected. And for now, they have little reason to let up: A report last week showed that Consumer Price Index prices climbed by 6.6 percent over the year through September even after food and fuel prices were stripped out — a new 40-year high for that closely watched core index.
“It’s a little bit hard to slow down without an apparent reason,” said Alan Blinder, a former Fed vice chair who is now at Princeton University.
Mr. Blinder expects the Fed to make another big move at this coming meeting. “If you were Jay Powell and the Fed and slowed to 50, what would you say?” he said. “They can’t say we’ve seen progress on inflation. That would be laughed out of court.”

Policymakers came into the year expecting to barely lift interest rates in 2022, forecasting that they would close out the year below 1 percent, up from around zero. But as inflation ratcheted steadily higher and then plateaued near the quickest pace since the early 1980s, they became more determined to stamp it out, even if doing so comes at a near-term cost to the economy.

Officials are afraid that if they allow fast inflation to linger, it will become a permanent feature of the American economy. Workers might ask for bigger wage increases each year if they think that costs will steadily increase. Companies, anticipating higher wage bills and feeling confident that consumers will not be shocked by price increases, might increase what they’re charging more drastically and regularly.

“The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” Mr. Powell, the Fed chair, warned at his news conference last month.

There are mounting signs in the data that today’s inflation is less and less the result of one-off trends that are likely to fade on their own over time. Supply chains are healing, and shipping costs that had spiked have come back down, but consumer prices continue to increase rapidly month after month. Those increases are driven by a broad array of goods and services, including climbing housing costs, pet care services and dental visits.

In their latest meeting minutes, officials acknowledged that “inflation was declining more slowly than they had previously been anticipating” and that price pressures “had persisted across a broad array of product categories.” Since then, inflation has only shown signs of deepening: Even measures of inflation that try to strip out noise in the data are unusually firm.
And there is little evidence, so far, that the Fed’s policy is working to tamp down price increases. Fed moves take time to play out, but their effects are already pretty clear in overall economic data: The housing market is slowing sharply, demand is beginning to pull back and people are eating into their savings stockpiles. Yet prices have shown little reaction to those trends.
“We haven’t yet made meaningful progress on inflation,” Christopher Waller, a Fed governor, said during a recent speech.
If that continues, it could force Fed officials to do more next year to constrain rate increases. James Bullard, the president of the Federal Reserve Bank of St. Louis and a voter on policy this year, signaled in an interview with Reuters last week that he might favor another big three-quarter-point rate increase in December — taking the policy rate to around 4.6 percent — and then further moves next year.

It’s “very possible” that incoming data could push officials “higher on the policy rate,” Mr. Bullard said. He said it was also possible that price increases would begin to fade, however, allowing for a pause.
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said at an event on Tuesday that absent actual progress on lowering core inflation, he did not see why he would favor stopping rates at 4.5 or 4.75 percent next year.
“We’re not even sure that the problem is not getting worse, I’m not ready to declare a pause until we at least have that confidence,” he said.
Nathan Sheets, global chief economist at Citi, expects that Fed officials will slow their rate increases in line with their most recent economic projections: moving by three-quarters of a point in November, half a point in December and a quarter-point early in 2023 before pausing. But he said there were notable risks that they end up raising rates by more.

“The Fed has struggled to explain that even if it hikes by less than three-quarters of a point, it remains determined to fight against inflation,” Mr. Sheets said.

The central bank does not want investors to believe that its dedication to fighting inflation is beginning to crack. If market players think that, financial conditions might ease, making credit cheaper and more available and working at cross-purposes to the Fed’s goals. That happened after Mr. Powell’s July news conference, when the chair hinted that rate increases might soon slow and investors incorrectly began to expect an imminent central bank retreat.

“When he opened the door to it, the market said, ‘Aha! The Fed’s pivoting,’” Mr. Sheets said. “It’s been a tricky message so far.”

Of course, there are some reasons to hope that the inflation picture could change, which would give the Fed a more clear-cut reason to slow down.

Understand Inflation and How It Affects You​

Used car prices are coming down at a wholesale level, and that could begin to more fully feed into consumer prices. Retailers are announcing discounts as inventories pile up. Companies, which continue to rake in unusually high profits as they manage to charge more than their goods and services cost to produce, are expected to slash their profit guidance as consumers begin to pull back.
There are also some nascent signs that the labor market is cooling back to something more normal. Job openings have begun to come down, and average hourly earnings have shown signs of moderating.
But hiring has persisted at an unusually rapid pace, and a quarterly measure of wages and benefit compensation that the Fed puts greater stock in — the Employment Cost Index — has continued to climb rapidly. That could keep pressure on service prices, as restaurants and health care providers try to cover rising labor bills, and higher pay could help consumers to keep spending.

At the same time, new problems could emerge: Gas prices have risen again this month, for instance, and their future trajectory is uncertain.
Recent history offers plenty of reasons for caution. The Fed has spent 18 months hoping that inflation would soon abate, only to have that expectation repeatedly dashed by reality.

But with an outlook that is so uncertain, officials have emphasized in recent speeches that policy will be made on a meeting-by-meeting basis — one reason it is too soon to say whether a fifth big rate move in December will be appropriate.
“The outlook for inflation and economic activity is subject to unusual uncertainty,” Michelle Bowman, a Fed governor, said in a speech last week. “We should continue to reiterate that we will remain ‘highly attentive to inflation risks.’ This is probably the best and clearest forward guidance we can provide at this point.”

David Goldsmith

All Powerful Moderator
Staff member
Fed’s latest hike will push up mortgage rates
The Federal Reserve’s latest interest rate hike Wednesday of 0.75 percentage points is expected to intensify pressure on the housing market while pushing up mortgage rates that already have reached nearly 20-year highs.

The interest hike announced Wednesday is the latest effort by the Fed to slow inflation by raising the cost of doing business. The interest rate hikes are also making new mortgages much more expensive, cooling the housing market while potentially raising the cost of rent.

While announcing the new interest rate hikes on Wednesday, Fed Chairman Jerome Powell said that the economy is still far away from the point at which he expects the price of rent to come down.

“There will come a point at which rent inflation will start to come down, but that point is well out from where we are now. We’re well aware of that,” Powell said, referring to rent increases as measured by the consumer price index and personal consumption expenditure index.

The Mortgage Bankers Association (MBA) reacted to the Fed’s announcement by noting that peak mortgage rates have yet to come into view.

“The combination of elevated mortgage rates and steep home-price growth over the past few years has greatly reduced affordability,” MBA economist Mike Fratantoni said in a statement.

More hopefully, Fratantoni said, “the volatility seen in mortgage rates should subside” once inflation begins to slow.

The Fed indicated at its latest meetings, however, that it is likely to continue to raise rates to a top line higher than the 4.6 percent it had suggested was coming in September.

Powell said that “at some point” it would be appropriate to slow the pace at which the Fed is increasing rates while hinting the final number would be above 4.6 percent.

Powell added that the Fed recognizes how significant its rate hikes are on the housing market, which has been experiencing surging rents amid a national shortage of housing units estimated in the millions of homes.

“Housing is significantly affected by these higher rates, which are really back where they were before the global financial crisis. They’re not historically high, but they’re much higher than they’ve been,” Powell said during a press conference on Wednesday. “We do understand that that’s really where a very big effect of our policies is.”

White House spokesperson Karine Jean-Pierre said that higher interest rates should slow demand for housing and bring housing inflation down.

“The Fed actions help bring inflation down. And as mortgage rates increase, demand in the housing market should continue to cool and inventory should increase which should have the effect of lowering housing inflation,” she said in a press conference Wednesday.

Before the Fed’s latest announcement, mortgage rates did dip slightly, according to data released Wednesday by the Mortgage Bankers Association. The MBA’s weekly survey showed the 30-year fixed-rate mortgage rate falling to 7.06 percent, down from 7.16 a week earlier, and applications decreasing for the sixth straight month.

Low-income housing advocates say the White House should be more vocal on the need to reduce the cost of rent.

“As of now, the Biden administration is dangerously silent on the single biggest line item in Americans’ budgets: their rent,” Tara Raghuveer, director of a tenant’s association in Kansas City and a low-income housing advocate, said in a statement to The Hill.

Effective mortgage rates have shot up to 7.08 percent from 4.16 percent in March when the Fed first began its rate hikes. They’ve more than doubled from their pandemic low point of 2.65 percent.

This has led to a significant decline in refinance activity as potential sellers are reluctant to give up their low rates.

“With most homeowners locked into significantly lower rates, refinance applications continued to run more than 80 percent below last year’s pace, while the refinance share of applications was 28.6 percent – the fifth straight week below 30 percent,” MBA Vice President and Deputy Chief Economist Joel Kan said in a statement.

High rates have also encouraged borrowers to pursue slightly riskier adjustable rate mortgages for a lower rate. The average rate for a 5-year adjustable rate mortgages decreased to 5.79 percent last week from 5.86 percent a week earlier.

Rising rates have already led to dramatic declines in new home sales and a record price slowdown, further limiting Americans’ ability to secure affordable housing.

Home prices slowed at a record pace in September, falling by 2.6 percent, according to the S&P CoreLogic Case-Shiller Index released last month.

Sky-high rates have also led to a sharp decline in the number of homes under contract. The forward-looking market indicator fell for the fourth consecutive month in September, dropping by 10.9 percent.
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On The Money — What the Fed’s latest rate hike means for you

Meanwhile, sales of new single-family homes in the same month fell by 10.9 percent to a seasonally adjusted annual rate of 603,000 units, according to Census Bureau data.

Yet the latest rate hike may not drastically change growing interest rates, as they are already included in many predictions, Lawrence Yun, chief economist for the National Association of Realtors said in a statement.

“Even with the Federal Reserve raising its short-term fed funds rate by another large amount, longer-term interest rates look to move only slightly. The mortgage market has already priced in the latest Fed move,” Yun said.

David Goldsmith

All Powerful Moderator
Staff member
I think this is further proof of my usual claim that the only thing you need to get inflation is for people to expect inflation.

An Economist’s Chart Goes Viral: Shows Main Source of Inflation

Chart Using BEA Data on Where Inflation Is Coming From
Josh Bivens, Director of Research, Economic Policy Institute
On April 21 Josh Bivens posted a titillating analysis on the Working Economics Blog. Bivens has a Ph.D. in Economics from the New School for Social Research and is the Director of Research at the Economic Policy Institute. The blog post was titled: “Corporate profits have contributed disproportionately to inflation. How should policymakers respond?”

Included in the blog post was a graph showing that corporate profits account for 53.9 percent of the recent rise in inflation versus an average of 11.4 percent for the period 1979 through 2019. (See above chart.)

Bevins’ chart made it into the hands of Congresswoman Katie Porter, who blew it up into a giant poster and explained its significance during a hearing before the House Subcommittee on Economic and Consumer Policy on September 22. The hearing was titled: “Power and Profiteering: How Certain Industries Hiked Prices, Fleeced Consumers, and Drove Inflation.” Armed with the chart, Porter said this during the hearing: “This is another really important point when we talk about inflation – what consumers are experiencing. Prices are not going up just because of supply chain or labor or some other invisible market forces, they are going up because powerful executives are making deliberate choices to maximize their profits at the expense of the rest of us.”

The video clip of Porter went viral on Youtube; was picked up by the Jon Stewart podcast; featured on The View; and this week Katie Porter appeared in person on the MSNBC news program, All In with Chris Hayes, to discuss the chart further. (See video clip below.) The hearing witness that Porter is questioning in the video about the graph is Mike Konczal, the Director of Macroeconomic Analysis at the Roosevelt Institute. Konczal confirms that the data on the graph is accurate and provides his Institute’s own research on how corporations are using their market power to increase markups.

In his blog post, Bivens explores the rise in corporate power in an effort to understand how corporations are getting away with these unprecedented price increases. He writes:

“It is unlikely that either the extent of corporate greed or even the power of corporations generally has increased during the past two years. Instead, the already-excessive power of corporations has been channeled into raising prices rather than the more traditional form it has taken in recent decades: suppressing wages. That said, one effective way to prevent corporate power from being channeled into higher prices in the coming year would be a temporary excess profits tax.”

In a similar vein, Katie Porter said this on the Chris Hayes’ program:

“The market power of these big corporations has grown. As small businesses, medium size businesses have been gobbled up by larger businesses, squeezed out by the pandemic, unable to deal with their supply chain issues, the largest corporations bankrolled by Wall Street have gotten more and more powerful. So what we find is that the biggest price gouging goes on in the very industries where there are the biggest players — things like Big Oil where we only have a handful of companies that dominate the market and control the supply.”

The St. Louis Fed has a monster amount of economic data available for the public to graph with a few clicks of a mouse under its FRED program (Federal Reserve Economic Data). We decided to graph after-tax corporate profits over decades to see how the more recent trend stacks up. We were absolutely stunned.

As the chart below indicates, corporate profits have gone ballistic since the Supreme Court issued its Citizens United decision in 2010, opening the floodgates for corporate money to finance the political campaigns of the members of Congress. If corporations believe they own a large swath of Congress, then they have nothing to fear from pandemic profiteering.

Growth in Corporate Profits, After Tax, 1947 through Q2 2022

This tangled web of dark money and corporate PACs underpinning corporate power may now present a serious risk to the financial stability of the United States. The Fed’s inflation-fighting toolkit has yet to be evaluated in a post Citizens United world.

David Goldsmith

All Powerful Moderator
Staff member
Dear Barry,
Suicide is when you kill yourself.

Barry Sternlicht calls Fed’s actions “suicide”​

Starwood Capital CEO says impact of interest rate hikes will come next year​

Barry Sternlicht unleashed his contempt for the actions of the Federal Reserve during an interview Thursday.
On CNBC’s “Squawk Box,” the Starwood Capital Group CEO said the Fed’s actions were “clearly suicide” for the economy. The Fed has been raising interest rates quickly in an effort to clamp down on inflation, a decision proving to be critical throughout real estate.

Sternlicht lamented the destruction of wealth, noting capital movement away from investments in new plants and equipment will cause the economy to pull back.

“It’s going to slow the economy, it cannot do anything other than that,” he said.
Sternlicht also warned the full effect of the rate hikes wouldn’t be felt until next year. Companies will reduce budgets for 2023 due to concerns about consumer weakness and a recession, he suggested.
During his company’s third quarter earnings call last week, Sternlicht assured investors that Starwood Property Trust was being extra careful in the midst of a “financial hurricane.”

“Given the craziness of the Fed, nobody knows what to do, so the banks are not only not lending, but they’re reluctant to do anything,” Sternlicht stated. “Frankly, that creates unbelievable opportunities for companies like us.”
The real estate investment trust was set to have $1.3 billion in dry powder on hand once a $600 million loan closed, the most liquidity the REIT has ever reported, according to its chief financial officer. Starwood reported $194.6 million in third quarter earnings, up more than 50 percent year-over-year. The REIT also reported $390.5 million in revenue, a 30 percent increase from last year’s third quarter.

While the interest rate hikes haven’t hurt the bottom line of Sternlicht’s REIT yet, the Fed may not be finished taking action. At the beginning of the month, it approved a fourth straight 75-basis-point hike to a target range of 3.75 to 4 percent, elevating short-term borrowing rates to their highest levels since 2008.
The Fed indicated smaller rate hikes could be on the horizon.