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.
US-Fed-Balance-sheet-2022-10-06-total-assets-detail.png


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.
US-Fed-Balance-sheet-2022-10-06-Treasuries.png

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.
US-Fed-Balance-sheet-2022-10-06-mbs.png

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:
US-Fed-Balance-sheet-2022-10-06-unamortized-premiums.png

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:
US-Fed-Balance-sheet-2022-10-06-primary-credit.png

And here’s how we got to Raging Inflation:

US-Fed-Balance-sheet-2022-10-06-assets-long.png
 

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
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 UrbanDigs.com
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
thehill.com/policy/finance/3716328-feds-latest-hike-will-push-up-mortgage-rates/
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.
Defense & National Security — US says North Korea shipping ammunition to Russia
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.”
view

“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.
 

David Goldsmith

All Powerful Moderator
Staff member
This is why you need to read UrbanDigs Forum.

Inflation Forecasts Were Wrong Last Year. Should We Believe Them Now?​

Economists misjudged how much staying power inflation would have. Next year could be better — but there’s ample room for humility.

At this time last year, economists were predicting that inflation would swiftly fade in 2022 as supply chain issues cleared, consumers shifted from goods to services spending and pandemic relief waned. They are now forecasting the same thing for 2023, citing many of the same reasons.
But as consumers know, predictions of a big inflation moderation this year were wrong. While price increases have started to slow slightly, they are still hovering near four-decade highs. Economists expect fresh data scheduled for release on Tuesday to show that the Consumer Price Index climbed by 7.3 percent in the year through November.
That raises the question: Should America believe this round of inflation optimism?
“There is better reason to believe that inflation will fall this year than last year,” said Jason Furman, an economist from Harvard who was skeptical of last year’s forecasts for a quick return to normal. Still, “if you pocket all the good news and ignore the countervailing bad news, that’s a mistake.”

Economists are slightly less optimistic than last year.​

Economists see inflation fading notably in the months ahead, but after a year of foiled expectations, they aren’t penciling in quite as drastic a decline as they were last December.

The Fed officially targets the Personal Consumption Expenditures index, which is related to the consumer price measure. Officials particularly watch a version of the number that illustrates underlying inflation trends by stripping out volatile food and fuel prices — so those forecasts give the best snapshot of what experts are anticipating.
Last year, economists surveyed by Bloomberg expected that so-called core index to fall to 2.5 percent by the end of 2022. Instead, it is running at 5 percent, twice that pace.
This year, forecasters expect inflation to fade to 3 percent by the end of 2023.
The Federal Reserve’s predictions have followed a similar pattern. As of last December, central bankers expected core inflation to end 2022 at 2.7 percent. Their September projections showed price increases easing to 3.1 percent by the end of next year. Fed officials will release a new set of inflation forecasts for 2023 on Wednesday following their December policy meeting.

Supply chains are healing.​

At this time last year, economists were hopeful that snarls in global shipping and manufacturing would soon clear; consumer spending would shift away from goods and back to services; and the combination would allow supply and demand to come back into balance, slowing price increases on everything from cars to couches. That has happened, but only gradually. It has also taken longer to translate into lower consumer prices than some economists had expected.

But the expected shift is finally, if belatedly, showing up. After months of supply chain healing, consumers are now beginning to feel the benefit. Used car prices began declining meaningfully in October inflation data, furniture prices are slumping and apparel is falling in price. Similar cost declines are expected to weigh on inflation next year.
“It is far too early to declare goods inflation vanquished, but if current trends continue, goods prices should begin to exert downward pressure on overall inflation in coming months,” Jerome H. Powell, the Fed chair, said during a recent speech.

The Fed is working on cooling demand.​

Unfortunately, moderation in goods prices alone would probably fail to return America to a normal inflation rate, because price increases for services have been accelerating. That category — which covers everything from meals out to monthly rent — accounted for half of consumer price inflation in October, based on a Bloomberg breakdown, up from less than a third a year earlier.
Many types of service inflation are closely intertwined with what’s happening in the job market. For companies including hair salons, restaurant chains and tax accountants, paying employees is typically a major, if not the biggest, cost of doing business. When workers are scarce and wages are climbing rapidly, businesses are more likely to raise their prices to try to cover heftier labor bills.
That means that today’s very low unemployment and abnormally rapid wage growth could help to keep price increases faster than usual, even though the job market wasn’t a big driver of the initial burst in inflation.
That is where Fed policy could come in. Companies can only charge more if their customers are able — and willing — to pay more. The Fed can stop that chain reaction by lifting interest rates to slow demand.

Policymakers have raised interest rates from near-zero at the start of 2022 to nearly 4 percent, and are expected to make another interest rate increase this week. Those moves have made it more expensive to borrow money to buy a house, finance a big purchase or expand a business.
The knock-on effects are now trickling through the economy: Fewer house sales could eventually mean less hiring in construction and manufacturing, which in turn would mean less spending in the local economies where would-be builders and factory workers live. As the job market slows down and wage growth moderates, demand is expected to weaken for everything from dinners out to air travel.

Understand Inflation and How It Affects You​

“Slower wage growth will reduce upward pressure on services inflation,” economists at Goldman Sachs predicted. But the process might take time. They expect the labor market for health care workers in particular to remain hot and put upward pressure on inflation next year, for instance.

Rent growth is moderating.​

In one service category, though, a 2023 inflation deceleration is a fairly sure bet: rents.
Rent increases take time to flow into measured inflation because existing tenants do not start paying more until they renew their leases. That means that a 2021 pop in new rents has been slowly working its way into the official price numbers, pushing up inflation throughout 2022.

Market-based rents have begun to cool or even fall in recent months, which suggests that rent growth should also begin to moderate. The uncertainty is when the slowdown will happen — some economists think as early as next spring — and how quickly rents will decelerate.

But big wild cards remain.​

The challenge with forecasting inflation is that while it is possible to make guesses about specific categories like rent, many inflation drivers come as a surprise. Forecasters in 2021 could not have guessed that Russia would invade Ukraine in early 2022, sharply pushing up food and fuel prices.

Likewise, it is hard to guess what will happen on the geopolitical stage next year. An escalation of the conflict in Europe could put renewed pressure on gas prices. The return of Chinese consumers after years of rolling lockdowns could lead to more people competing for goods in the global market.

And things could simply take longer than expected to return to normal. That’s partly what happened in 2022. Consumption and the labor market both outstripped expectations, keeping the pressure on prices.
“The economy was more resilient than expected,” said Laura Rosner-Warburton, senior economist at Macro Policy Perspectives. “Supply chain problems lasted a lot longer than expected and have been difficult to forecast on the way up and down.”
How quickly demand will slow is still uncertain. The labor market is expected to cool, but for now it is strong. And many households are still in solid financial shape. They amassed $2.3 trillion in extra savings during the pandemic thanks to months stuck at home and government stimulus, and still had about $1.7 trillion of that by mid-2022, based on Fed research.
Those nest eggs have helped Americans to sustain their spending this year, giving companies the ability to raise prices without scaring away customers — a trend that could continue, at least for a while.
The challenge in forecasting, Mr. Furman said, is that there’s “a powerful desire to tell a happy story.” So far, inflation has been anything but.
 

David Goldsmith

All Powerful Moderator
Staff member
I still think they all ignore a core belief of mine:
The only thing you need to get inflation is for people to expect inflation.

Fed Official Compares Inflation to Uber Surge Pricing​

Neel Kashkari, the president of the Minneapolis Fed, kicked off 2023 monetary policy debates with a call for better understanding of what causes inflation.

A Federal Reserve official compared inflation to Uber surge pricing on Wednesday in the first formal monetary policy remarks of 2023, kicking off what promises to be a contentious year of debate about how fast price increases will fade and how aggressive America’s central bank needs to be in counteracting them.
Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis and one of the 12 officials with a vote on monetary policy this year, published an essay on monetary policy and the inflation surge in 2021 and 2022. Consumer price increases were as high as 9 percent last year, and remain above 7 percent according to the latest data.
But the price pop was driven by a combination of high demand and supply constrained by outside shocks — mainly the pandemic and the war in Ukraine — rather than by wages and shifting expectations traditionally thought to drive lasting inflation. It is easy to think of the burst in terms of ride-share surge pricing, Mr. Kashkari said: Prices jumped, profits increased, and wages picked up, but there just wasn’t enough supply to bring the market into balance.
“Our models seem ill equipped to handle a fundamentally different source of inflation, specifically, in this case, surge pricing inflation,” Mr. Kashkari wrote. He added that “even if we had been able to identify all the shocks in advance, I don’t think our workhorse models would have come anywhere close to forecasting 7 percent inflation.”

The implication, Mr. Kashkari noted, is that the Fed needs to deepen its “analytical capabilities surrounding other sources and channels of inflation” outside of expectations and wage growth.

Inflation F.A.Q.​

Card 1 of 5
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.

Mr. Kashkari is just one of the Fed’s officials, but his comments followed a long period over the holidays during which the central bank was largely silent. They appeared ahead of minutes from the Fed’s December meeting, which were released on Wednesday afternoon, providing a window into Fed officials’ thinking about the path ahead for interest rates.
The Minneapolis Fed president acknowledged a frequent criticism of Fed policy right now: If inflation is being caused by one-off disruptions, why is the Fed using its traditional tools — which work heavily via the labor market — to restrain it?
“Unfortunately, the initial surge in inflation is leading to broader inflationary pressures that the Federal Reserve must control,” Mr. Kashkari wrote. “For example, nominal wage growth has grown to 5 percent or more, which is inconsistent with our 2 percent inflation target given recent trend productivity growth.”

Mr. Kashkari wrote that he expected policy to play out in three distinct phases.
First, the Fed is raising interest rates to restrain demand and bring the economy back into balance, something it has recently done at the fastest pace since the 1980s. Officials are now slowing those moves down.

Next, the Fed will pause and hold rates at a high level. Mr. Kashkari thinks that will be appropriate at around 5.4 percent — an estimate that places him among the Fed’s more aggressive officials, though a few see rates going even higher. Rates are currently set in a range between 4.25 percent and 4.5 percent.

Understand Inflation and How It Affects You​

“To be clear, in this phase any sign of slow progress that keeps inflation elevated for longer will warrant, in my view, taking the policy rate potentially much higher,” he wrote.
Finally, the Fed will eventually cut rates. But Mr. Kashkari, like many of his colleagues, sees that as a long way away.
It would be a mistake “to cut rates prematurely and then have inflation flare back up again,” he wrote.
 

inonada

Well-known member
I think that’s a pretty well-covered area of thought / research, David. E.g., that’s why they so closely track and follow inflation expectations from surveys (rather than just markets).

I think the part they flubbed is the limits of stimulus. The federal government threw $5T of stimulus at the pandemic, and the Fed piled on with ZIRP and a $5T bond buying spree. For comparison, over a similar 2-year period after the 2008 financial crisis the federal govt spent $1T in stimulus and the Fed bought $1.5T in bonds.

But think about it. In a financial crisis, supply shrinks because demand drops. Stoking demand (via stimulus) reestablishes supply to its capacity. In a pandemic, supply shrinks because people stop working or work less efficiently. The economy’s production capacity had dropped, so stoking demand via stimulus simply created inflation.
 

inonada

Well-known member
Now all that is theory to be studied, but “Team Transitory” really screwed it up with respect to reading the real-time data. Everybody knows rents are a third of CPI and on the tail end of inflationary effects, setting in last. Everybody also knows that new leases are a leading indicator of where CPI rents (which average all leases plus owners-equivalent-rent) are headed.

So how can you look at these charts in spring 2021… summer 2021… fall 2021…:


and continue to insist inflation is transitory, having to do with supply chain issues & cars & their chips that will abate? What the hell does all that have to do with rents? And in the process, not only maintain ZIRP but also carry on buying another $2.5T of bonds.
 

David Goldsmith

All Powerful Moderator
Staff member
Main driver of inflation been increased corporate profits. As I often repeat, the only thing you need to get inflation is for people to expect inflation.
https://thehill.com/policy/finance/...to-corporate-profit-as-main-inflation-driver/

Labor Costs Point to Corporate Profit as Main Inflation Driver
| The continued drop in labor costs has economists pointing to private sector profits as a main driver of inflation, undercutting arguments from the Federal Reserve regarding its plan to bring down consumer prices that remain around 40-year highs. Unit labor costs, which are measured by the Labor Department to determine how much businesses are paying for workers to produce their goods and services, have been getting outpaced by profits over several quarters, leading economists to call out a trend. Paul Donovan, an economist with Swiss Bank UBS, wrote in a note to investors saying that [last] Wednesday’s labor cost numbers showed again that corporate profits are rising faster than labor costs. “Today’s inflation is more about margin expansion than labor costs,” he wrote. Earlier this week, Donavan said the slowing labor cost growth underscored “how little of the current inflation is labor related.” That’s a very different argument from the one put forward by many U.S. policymakers, both in the political and economic sectors. The Hill

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David Goldsmith

All Powerful Moderator
Staff member
It looks like the Fed has stopped whistling:

However it looks like Real Estate Brokers have taken up the mantle trying to talk their book enough to wish a hot market into existence.
 

David Goldsmith

All Powerful Moderator
Staff member
A Growing Lack of Confidence in the Fed Is Spilling Over into a Lack of Confidence in U.S. Banks

Millions of Americans are beginning to ask themselves this question: Is the Federal Reserve (the “Fed”) a competent central bank or a terminally compromised regulator that simply does the bidding of Wall Street’s mega banks to the peril of average Americans and the U.S. economy? Millions of other Americans have already made up their minds on this point.
These persistent doubts about an institution with an $8.8 trillion balance sheet – that is backstopped by the U.S. taxpayer – is very bad for confidence in the U.S. banking system, especially when the Fed pivots from one banking bailout to the next. (What was the size of the Fed’s balance sheet prior to its serial bailouts? On December 26, 2007, the Fed’s balance sheet stood at $929 billion. It has soared by 847 percent in just over 15 years of serial bailouts.)
Let’s look at the evidence that’s been stacking up against the Fed since the financial crisis of 2008 – the worst economic collapse in America since the Great Depression of the 1930s.
In response to the 2008 financial crisis, the Fed introduced a hodge podge of emergency lending programs to Wall Street’s biggest banks, as well as cranking out its traditional discount window loans. While the Fed released general details of what the programs were created to do, it did not release the names of the Wall Street firms that were doing the bulk of the borrowing, or the sums borrowed by each institution.
A tenacious investigative reporter at Bloomberg News, the late Mark Pittman, filed a Freedom of Information Act (FOIA) request with the Fed for the names of the banks, the amounts borrowed and the terms. Under the law, the Fed had to respond in 20 business days. The Fed stalled Pittman for six months, leading to the parent of Bloomberg News, Bloomberg LP, filing a lawsuit against the Fed in the Federal District Court in Manhattan in November 2008. Bloomberg won that suit. The Fed then appealed the decision to the Second Circuit Court of Appeals. A large number of other mainstream media outlets and groups filed an Amicus brief in the matter, in support of the release of the information.
The Fed also lost at the Second Circuit. The Fed was, apparently, too embarrassed to take the case to the U.S. Supreme Court, because President Obama’s acting Solicitor General, Neal Katyal, planned to file a brief contrary to the Fed’s position, so a group called The Clearing House Association LLC, made up of some of the very same Wall Street banks that were being bailed out by the Fed, filed their own appeal with the Supreme Court. The Supreme Court declined to hear the case in March of 2011, leaving the decision of the Second Circuit standing.
The financial reform legislation known as the Dodd-Frank Act (which was signed into law by President Obama on July 21, 2010) had forced the Fed to release the transaction details of its seven emergency lending facilities in December of 2010. When the Supreme Court declined to hear the court case, the Fed finally released the discount window transactions in March 2011.
On March 21, 2011, then Bloomberg News Editor in Chief Matthew Winkler released this statement:
“At some point long before the credit markets seized up in 2007, financial markets collapsed and the economy plunged into the worst recession since the 1930s, the Federal Reserve forgot that it is the central bank for the people of the United States and not a private academy where decisions of great importance may be withheld from public scrutiny. As only Congress has the constitutional power to coin money, Congress delegates that power to the Fed and the Fed must be accountable to Congress, especially in disclosing what it does with the people’s money.”
The Dodd-Frank legislation, thanks to an amendment by Senator Bernie Sanders, required the Government Accountability Office (GAO) to conduct an audit of the Fed’s emergency lending programs. When that information was released in July of 2011, it revealed that the Fed had sluiced more than $16 trillion in cumulative loans at below-market interest rates to teetering banks. (Just three Wall Street firms, Citigroup, Morgan Stanley and Merrill Lynch, received $5.7 trillion of that.)
The GAO report notes on page two that the audit does not include the Fed’s loans made through its discount window during the financial crisis. Also, in a tiny footnote on page 2 of the GAO audit, there is this statement: “…this report does not cover the single-tranche term repurchase agreements conducted by FRBNY in 2008. FRBNY conducted these repurchase agreements with primary dealers through an auction process under its statutory authority for conducting temporary open market operations.” FRBNY stands for the Federal Reserve Bank of New York – the deeply conflicted and crony regulator of Wall Street’s largest banks, which is, literally, owned by the same banks. (See These Are the Banks that Own the New York Fed and Its Money Button.)
When the Levy Institute of Economics tallied up all of the Fed’s lending programs, including the single-tranche repurchase agreements (called ST OMO or single-tranche open market operations) and added in the Fed’s dollar swap lines, it came up with a cumulative tally of $29 trillion in emergency Fed loans.
Mainstream media’s attitude about holding the Fed accountable to the people has changed dramatically for the worse since the 2008 crisis.
Wall Street On Parade is the only media outlet that continues to demand accountability for the former President of the Dallas Fed, Robert Kaplan, making million dollar plus trades in S&P 500 futures while sitting on inside information as a voting member of the Federal Reserve’s Federal Open Market Committee (FOMC). (See After 16 Months, There Are Still No Arrests in the Fed’s Trading Scandal.) The Chair of the Fed, Jerome (Jay) Powell, had the audacity to refer this investigation to the Fed’s own Inspector General, who reports to the Fed Board of Governors that is chaired by Powell.
Wall Street On Parade is also the only media outlet to crunch the numbers and report on another multi-trillion dollar bailout of the mega banks on Wall Street by the Fed that began on September 17, 2019 – months before there was any COVID-19 pandemic that the Fed could blame for the relaunch of its emergency lending programs.
These were the first emergency repo loans issued by the Fed since the financial crisis of 2008. That fact alone should have galvanized mainstream media to investigate what was going on. Instead, when the Fed was forced (under the Dodd-Frank legislation) to release after two years the names of the banks that borrowed the huge sums and the amounts borrowed, there was a bizarre total news blackout by mainstream media. (See our report: There’s a News Blackout on the Fed’s Naming of the Banks that Got Its Emergency Repo Loans; Some Journalists Appear to Be Under Gag Orders.)
From September 17, 2019 to December 31, 2019, $5.269 trillion was cumulatively doled out by the Fed in emergency repo loans to its primary dealers (the trading houses on Wall Street, most of which have federally-insured banks under the same bank holding company roof). Adjusted for the term of the loan, these figures are even more staggering.
The normal repo loan market is typically an overnight (one-day) loan market. The Fed started out with one-day overnight loans but then periodically also added 14-day, 28-day, 42-day and other term loans – suggesting an extremely serious liquidity crisis. We had to adjust our cumulative tallies to account for these term loans in order to get an accurate picture as to who was grabbing the bulk of these cheap loans from the Fed. For example, let’s say a trading firm took a $10 billion loan for one-day but on the same day took another $10 billion loan for a term of 14 days. The 14-day loan for $10 billion represented the equivalent of 14-days of borrowing $10 billion or a cumulative tally of $140 billion.
If we simply tallied the column the Fed provided for “trade amount” per trading firm, it listed only $10 billion for that 14-day term loan and not the $140 billion it actually translated into. The chart below provides the term-adjusted numbers for emergency repo loan borrowers in the last quarter of 2019.
Fed's Repo Loans to Largest Borrowers, Q4 2019, Adjusted for Term of Loan
The trading unit of the largest bank in the United States, JPMorgan Chase, was one of the largest borrowers under the Fed’s repo loans in 2019, despite its Chairman and CEO, Jamie Dimon, constantly bragging about the bank’s “fortress balance sheet.” The trading unit of the bank that received the largest bailout in global banking history during and after the 2008 financial crisis, Citigroup, was a major borrower. Goldman Sachs, which has a storied history of reckless and irresponsible trading behavior, but is nonetheless allowed to own a federally-insured bank, was a major borrower. And the trading units of numerous foreign banks, such as the Japanese bank, Nomura, and German, Deutsche Bank, were large borrowers. (The share price of Deutsche Bank, a major derivatives counterparty to Wall Street banks, was in a death spiral at the time.)
In some cases, the Fed appeared to be customizing loans for specific borrowers -– something that the Dodd-Frank financial reform legislation of 2010 expressly prohibits. For example, on December 17, 2019, the Fed made a 13-day term loan for $6.1 billion. BNP Paribas Securities received $1 billion of that; Daiwa Capital Markets got $100 million; Deutsche Bank Securities took $3 billion; and Societe Generale took the balance of $2 billion. That’s only four firms while the legal mandate of Dodd-Frank is that the Fed can only lend to “broad-based” programs. On the same date of December 17, 2019, the Fed also made an overnight loan of $52.65 billion. Deutsche Bank took three lots of that loan totaling $6.5 billion, bringing its total borrowing on that date to $9.5 billion.
The Fed’s audited financial statements show that on its peak day in the last quarter of 2019, the Fed’s emergency repo loans outstanding stood at $259.95 billion. The cause of that banking crisis remains unexplained to the American people.
Excluding the banking crisis related to the COVID-19 pandemic in 2020, Americans now find themselves in Banking Crisis 3.0 with a new Fed bailout program called the Bank Term Funding Program (BTFP). That program came on the heels of the second and third largest bank failures in U.S. history in March: respectively, Silicon Valley Bank and Signature Bank, both of which are now in FDIC receivership.
On March 12, the Fed explained its emergency action as follows:
“The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.”
The operative words in the above statement from the Fed are “one year” and “valued at par.” The Fed has now morphed from an historic practice of making overnight loans to making long-term loans and is now accepting as collateral debt instruments valued at par (meaning the full face amount), despite the fact that their market value is deeply underwater. Under the Federal Reserve Act, the Fed is mandated to accept only “good” collateral. The collateral the Fed is accepting might be good in 5, 10 or 15 years, but right now it’s underwater — the reason for this new Fed emergency lending program in the first place.
Democrats on the Senate Banking Committee have asked the Government Accountability Office to investigate the supervisory practices of bank regulators in regard to the recent bank failures. That GAO investigation needs to broaden dramatically to focus on the 15-year hubris of the Fed and its bailouts.
 

David Goldsmith

All Powerful Moderator
Staff member

A ‘Rocky and Bumpy’ Economy Where Wages Are Up and Inflation Persists​

Key pay and inflation gauges have stayed stubbornly high as Federal Reserve officials consider when to stop raising interest rates

Inflation isn’t as high as it was last year. The job market isn’t as hot. The economy is slowing down. But none of this is happening as quickly or as smoothly as Federal Reserve officials would like.
The latest evidence came on Friday, when a set of government reports painted a picture of an economy that is generally headed in the direction that policymakers want, but is taking its time to get there.
“We knew that inflation was going to be rocky and bumpy,” said Megan Greene, chief economist for the Kroll Institute. “We found peak inflation, but it’s not going to be a smooth path down.”
Consumer prices were up 4.2 percent in March from a year earlier, according to the Fed’s preferred measure of inflation, the Personal Consumption Expenditures index, the Commerce Department said Friday. That was the slowest pace of inflation in nearly two years, down from a peak of 7 percent last summer.

But after stripping out food and fuel prices, a closely watched “core” index held nearly steady last month. That measure rose by 4.6 percent over the year, compared with 4.7 percent in the previous reading — a figure that was revised up slightly.
Wages, meanwhile, continue to rise rapidly — good news for workers trying to keep up with the rising cost of living, but a likely source of concern for the Fed.
Data from the Labor Department on Friday showed that wages and salaries for private-sector workers were up 5.1 percent in March from a year earlier. That was the same growth rate as in December, and defied forecasters’ expectations of a modest slowdown. A broader measure of compensation growth, which includes the value of benefits as well as pay, actually accelerated slightly in the first quarter.

The Fed has been raising interest rates for more than a year in an effort to cool off the economy and bring inflation down to the central bank’s target of 2 percent per year. The data on Friday is likely to add to policymakers’ conviction that their work is not done — officials are widely expected to raise rates a quarter percentage point, to just above 5 percent, when they meet next week. That would be the central bank’s 10th consecutive rate increase.

Wage data is a particular focus for Fed officials, who believe that the labor market, in which there are far more available jobs than workers to fill them, is pushing up pay at an unsustainable rate, contributing to inflation. Other measures had suggested a more significant slowdown in wage growth than showed up in the data on Friday, which is less timely but generally considered more reliable

“If any Fed officials were wavering on a May rate hike,” Omair Sharif, founder of Inflation Insights, wrote in a note to clients on Friday, the wage data “will likely push them to support at least one more hike.”

But a crucial question is what comes after that. Central bankers forecast in March that they might stop raising interest rates after their next move. Jerome H. Powell, the Fed chair, could explain after the central bank’s rate announcement next week if that is still the case. The decision will hinge on incoming economic and financial data.

Investors largely shrugged off the data on Friday morning, focusing instead on a week of robust profit reports that suggest corporate America has yet to fully feel the pinch of higher interest rates. The S&P 500 index rose 0.5 percent in midday trading. The yields on Treasury bonds, which track the government’s cost to borrow more money and are sensitive to changes in interest-rate expectations, fell slightly.
The Fed faces a delicate task as it seeks to raise borrowing costs just enough to discourage hiring and ease pressure on pay, but not so much that companies begin laying off workers en masse.

Higher interest rates have already taken a toll on housing, manufacturing and business investment. And data from the Commerce Department on Friday suggested that consumers — the engine of the economic recovery to date — are beginning to buckle. After rising strongly in January, consumer spending barely grew in February and was flat in March. Americans saved their income in March at the highest rate since December 2021, a sign that consumers may be becoming more cautious.
“You’re seeing some of that robustness to start the year really start to reverse a little bit,” said Stephen Juneau, an economist at Bank of America.

Many forecasters believe the recovery will continue to slow in the months ahead — or may already have done so. The data from March does not capture the full impact of the collapse of Silicon Valley Bank and the financial turmoil that followed.
“If you take a picture of the data as it was in the first quarter, you’re left with this impression of still robust economic activity and inflation that’s still too high and too persistent,” said Gregory Daco, chief economist at EY, the consulting firm previously known as Ernst & Young. If there was real-time data on spending, credit standards and business investment, he said, “that would tell a very different picture from what the first-quarter data would indicate.”
The challenge or Fed officials is that they cannot wait for more complete data to make their decisions. Some evidence points to a more substantial slowdown, but other signs suggest that consumers continue to spend, and companies continue to raise prices.

“If we see inflation that warrants us needing to take additional pricing, we’ll take it,” Brian Niccol, chief executive at the burrito chain Chipotle, said during an earnings call this week. “I think we’ve now demonstrated we do have pricing power.” The company raised its menu prices by 10 percent in the first quarter versus the same period last year.

Wage growth is a particularly thorny issue for the Fed. Faster pay gains have helped workers, particularly those at the bottom of the earnings ladder, keep up with rapidly rising prices. And most economists, inside and outside the Fed, say wage growth has not been a dominant cause of the recent bout of high inflation.
But Fed officials worry that if companies need to keep raising pay, they will also need to keep raising prices. That could make it hard to rein in inflation, even as the pandemic-era disruptions that caused the initial pop in prices recede.
“It always feels good as a worker to see more money in your paycheck,” said Cory Stahle, an economist for the employment site Indeed. “But it also feels bad to walk into the store and pay $5 for a dozen eggs.”
Joe Rennison contributed reporting.
 

David Goldsmith

All Powerful Moderator
Staff member
This is 'the end of the beginning' of the battle against inflation, economist says

U.S. inflation cooled in May to an annual 4%, its lowest annual rate in more than two years, but core inflation rose by 0.4% month-on-month and 5.3% year-on-year.
"The central banks need to trigger a recession to force unemployment to pick up and create enough demand destruction, but we're not there yet," top Societe Generale economist Kokou Agbo-Bloua said.
Nathan Thooft, co-head of global asset allocation at Manulife Asset Management, said that a recession had been "postponed rather than canceled."
U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a meeting of the Federal Open Market Committee (FOMC) at the headquarters of the Federal Reserve on June 14, 2023 in Washington, DC.
U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a meeting of the Federal Open Market Committee (FOMC) at the headquarters of the
Central banks are at "the end of the beginning" in their battle against inflation, as several factors keep core prices persistently high, according to top Societe Generale economist Kokou Agbo-Bloua.

Markets are eagerly awaiting key inflation prints from the U.S. later this week, with the core annual consumer price index (CPI) — which excludes volatile food and energy prices — remaining persistently high to date, despite the headline figure gradually edging closer to the Federal Reserve's 2% target.


The persistence of labor market tightness and the apparent resilience of the economy means the market is pricing around a more-than 90% chance that the Fed will hike interest rates to a range of between 5.25% and 5.5% at its meeting later this month, according to CME Group's FedWatch tool.

U.S. inflation cooled in May to an annual 4%, its lowest annual rate in more than two years, but core inflation rose by 0.4% month-on-month and 5.3% year-on-year.

In assessing the current state of global policymakers' efforts to tame inflation, Agbo-Bloua quoted former British Prime Minister Winston Churchill's remarks in a 1942 speech: "Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."


"The number one 'original sin,' so to speak, is that governments have spent a huge amount of money to maintain the economy that was put in hibernation to save human lives, so we're talking roughly 10-15% of GDP," Agbo-Bloua, global head of economics, cross-asset and quant research at Societe Generale, told CNBC.

"The second point — obviously you had the war in Ukraine, you had the supply chain disruptions — but then you also had this massive buildup in excess savings plus 'greedflation,' so companies' ability to raise prices by more than is warranted, and this is why we see profit margins at record levels over the past 10 years."

Companies have developed a "natural immunity" against interest rates, Agbo-Bloua argued, since they have been able to refinance their balance sheets and pass higher input prices on to consumers, who are now expecting higher prices for goods and services.

"Last but not least, the labor market is super tight and you have lower labor productivity growth which now is pushing unit labor costs and you get this negative spiral of wage prices," he said.

"The central banks need to trigger a recession to force unemployment to pick up and create enough demand destruction, but we're not there yet."

The impact of monetary policy tightening often lags the real economy by around three to five quarters, Agbo-Bloua said. But he highlighted that the excess savings built up during the pandemic created an additional buffer for consumers and households, while companies were able to repair balance sheets. He suggested that this has helped to keep the labor market resilient, which will likely extend this lag time.

Inducing a recession
In order to maintain credibility, Agbo-Bloua therefore said central banks — and in particular the Fed — will need to keep raising interest rates until they induce a recession.

"We think that the recession or slowdown should occur in the U.S. in Q1 of next year because we think the cumulative tightening is ultimately going to have its effects, it's not disappearing," he said.

"Then in Europe, we don't see a recession in the euro area, because we see demand 2 to 3 percentage points above supply, and therefore we see more of a slowdown but not recession."

In terms of where the recession in the U.S. will begin to take hold, he suggested it will most likely "creep into corporate profit margins" that are still lingering near record levels, through the "wage growth phenomenon that is essentially going to eat into earnings."

"The second point is that consumer spending patterns will also slow down, so we think it is a combination of all of these factors that should eventually drive a slowdown," he added.

"Then again, if you look at the current path of interest rates, it seems like we might see more tightening before this is likely to occur."

'Recession postponed, but not canceled'
This sentiment was echoed by Nathan Thooft, co-head of global asset allocation at Manulife Asset Management, who said while economies had a better start to 2023 than expected and have so far mostly avoided a technical recession, this is more a case of the recession being "postponed rather than canceled."

"The tightening of credit conditions and the slowdown in lending suggest that we've so far managed to delay the impending recession as opposed to averting it altogether," Thooft said in the asset manager's mid-year outlook on Friday.

"However, whether a recession actually takes [place] is far less relevant than how long we could be stuck in a period of below-trend GDP growth."

He suggested that with global growth expected to settle at around 2.5% this year and next, below the 3% threshold that would herald a global recession if breached.

"If forecasts are correct, it means that global GDP growth would come in 15.2% below trend, a scenario last seen during the pandemic in 2020 and, before that, in the 1940s."
 

David Goldsmith

All Powerful Moderator
Staff member

Economists Lift US Growth Forecasts, See Fed Higher for Longer​

  • Forecasters surveyed see stronger economy through end of 2024
  • That strength is seen delaying when the Fed will cut rates
Economists see a stronger US economy into the next year and a smaller rise in unemployment, supporting expectations that the Federal Reserve will keep interest rates higher for longer.
Gross domestic product is expected to advance an annualized 1.8% in the third quarter, nearly quadruple the 0.5% pace projected in July, according to the latest Bloomberg monthly survey of economists. They also see the economy expanding somewhat in the last three months of the year, rather than contracting.

Economists More Sanguine About US Growth Prospects​

Change in forecasts suggests world's biggest economy will skirt recession
Source: Bloomberg monthly survey
Note: Estimates are QoQ (SAAR)
While forecasters are now projecting a stronger economy across the board, consumer spending — which accounts for about two-thirds of GDP — is seen driving momentum as Americans continue to spend at a healthy pace. The Aug. 11-16 survey of economists included 68 responses, and many were submitted before a government report showed retail sales beat estimates in July after upward revisions to the prior two months.

Economists have been growing more optimistic that the US can dodge a recession as inflation cools without doing much damage to the labor market. While Americans will have to contend with the resumption of student-loan payments and high borrowing costs in the coming months, a strong job market is expected to keep powering spending.
Read more: Walmart Lifts Outlook Again, Stays Cautious on US Shoppers
“There are several headwinds facing US consumers over the coming months,” said Brett Ryan, senior US economist at Deutsche Bank AG. “However, the undeniable resilience over the first half of the year and strong start out of the gate in Q3 have raised the probability that the economy may avoid slipping into recession – at least in the near term.”
Economists see the US economy growing 2% on average this year and 0.9% in 2024 — both above last month’s estimates. They also expect the global economy to expand more than initially projected this year, echoing more optimistic forecasts from the International Monetary Fund and World Bank.

Fed’s Path​

Economists in the survey now see the Fed holding interest rates higher for longer amid risks that a stronger economy will keep inflation above their goal. While economists don’t see further hikes on the horizon, they also don’t expect the central bank to cut rates until the second quarter of next year — which is three months later than July’s estimate.
However, economists did revise up their expectations for bond yields through the end of 2025. The two-year Treasury yield is now seen ending the current quarter at 4.82% compared to last month’s projection of 4.65%.

Higher for Longer​

Economists see Fed standing pat on borrowing costs through 1Q 2024, while dialing back rate-cut expectations through September of next year
Source: Bloomberg
Note: Date reflect upper bound of rrange for federal funds rate
The recent trend of disinflation is expected to continue. Excluding food and energy, forecasters now see the personal consumption expenditures price index cooling more quickly through the end of this year compared to their July projections. Their estimates for the overall PCE measure — which is the Fed’s preferred inflation target — were little changed.

Even so, they see another popular inflation gauge — the consumer price index — rising by more than previously thought.
At the same time, unemployment estimates were marked lower through the end of next year and hiring was seen higher, also supportive of a soft landing.
 
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