The Fed’s Inflationary Rate Increases: Where Do They Come From? Observational Evidence from the Consumer Price Index and Bankrate
More moderate price increases are possible due to the fact that higher rates slow inflation and allow supply to catch up. They cause job losses, weaken wage growth, and in some cases cause financial markets to be disrupted by their actions.
How much pain today’s moves will ultimately cause remains unclear: So many countries are raising rates so quickly — and so in sync — that it is difficult to determine how intense any slowdown will be once it takes full effect. It takes a long time for monetary policy to kick in.
But many economists and several international bodies have warned that there’s a pronounced danger or overdoing it, including a United Nations agency that warned the damage could be particularly acute in poorer nations. Developing countries have already been dealing with a cost of living crisis due to high food and fuel prices, and now the dollar is increasing their cost of imports.
The Fed’s moves have spurred market volatility and worries about financial stability, as higher rates elevate the value of the U.S. dollar, making it harder for emerging-market borrowers to pay back their dollar-denominated debt.
Mr. Biden noted that costs have gone up less over the last three months than they did in the previous three months. But he also acknowledged that inflation remained painfully high.
While the vote to raise interest rates on Wednesday was unanimous, members of the Fed’s rate-setting committee showed less agreement about where borrowing costs will go in the future. Some expect the Fed’s benchmark rate will need to top 5.5% next year, while others believe a smaller increase will be needed to restore price stability.
The Fed has increased its benchmark lending rate six times this year in an attempt to discourage borrowing, cool the economy and bring down historically high inflation that peaked at 9.1% over the summer.
Greg McBride, Bankrate’s chief financial analyst, said interest rates have risen at a whiplash-inducing speed and aren’t done yet. “It’s going to take some time for inflation to come down from these lofty levels, even once we do start to see some improvement.”
What is happening? The Consumer Price Index rose 7.7% for the year ending in October, a much slower pace of increase than the 8% economists had expected and the lowest annual inflation reading since January.
Esther George, the President of the Federal Reserve Bank of Kansas City, said that there was still a bit of a savings buffer for households that could be used to continue to spend. “That suggests we may have to keep at this for a while.”
In an interview that aired on CBS on Sunday, Treasury Secretary Janet Yellen — Powell’s predecessor at the Fed — said there is “a risk of a recession. It is not something that is necessary to bring inflation down.
“I have been in the camp of steadier and slower [rate increases], to begin to see how those effects from a lag will unfold,” George said last month. “My concern being that a succession of very super-sized rate hikes might cause you to oversteer and not be able to see those turning points.”
“We are deeply concerned that your interest rate hikes risk slowing the economy to a crawl while failing to slow rising prices that continue to harm families,” Sen. Elizabeth Warren, D-Mass., and colleagues wrote in a letter Monday to Fed chairman Jerome Powell.
A Housing Crisis in Kansas City: A Pioneer in the Rise and Fall of the Real Estate Bubble,” Asked Woods in a CNN Business Before the Bell Newsletter
Shawn Woods said that his company had stopped selling houses a month before the Fed started raising rates.
“Never in my wildest dreams would I have thought we’d go from 3% [mortgage rates] to 7% within six months,” said Woods, president of Ashlar Homes and the Home Builders Association of Kansas City.
“I think we’re in for a rough six or eight months,” Woods said. “Typically, housing leads us into downturns and it leads us out of downturns. From a housing perspective, I think that we’ve been in a housing recession since March or April.
A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.
The First Mile in the Stock Market: a Miracle in a Very Long-Term High-Energy Universe Comes to an End
Stocks surged on Thursday in their best day since 2020 after a key inflation indicator came in softer than expected. Investors broke out their party hats as they interpreted the report to mean that peak inflation may finally be behind us. The Federal Reserve may be less aggressive with its rate hikes.
When investors try to get their hopes up about a central bank pivot, it’s usually crushed by negative data or messaging from the Fed.
It’s not all bad news: The first mile in a marathon matters. The report could mean that a soft landing for the economy is still possible, where inflation doesn’t go much higher than the rate of GDP. That’s also good for markets.
Powell indicated a further slowdown in Fed tightening could be in the cards. The stock market recovered a little in the fourth quarter, as investors hope inflation pressures are easing.
It isn’t the first time that there has been a cold winter in this area. Bitcoin prices have been notoriously volatile over the past few years, but they have still done better than many major stock market indexes.
That asset has gotten hit just like stocks and bonds, proving there’s no escape from the market where worries about rate hikes and recession reign supreme.
The Covid Era of Cryptocurrency: Growth, Decline, and Cost of Living in the Age of Wall Street & Wall Street Walls
A thaw in the coin. Near-zero interest rates and a massive influx of investors from large-scale institutions propelled Cryptocurrency through the Covid-era. It reached a record high of nearly $70,000 in November.
The dollar strengthened considerably, as central Banks began raising rates to fight inflation, and investors preferred it as a safe haven. At the same time, the economy began to sour and those new investors who still viewed bitcoin as a risky asset exited in droves.
After going up and down, the two coins have still gained a lot. Over the longer time horizon, digital assets are still performing better than tech stocks, according to a chief investment officer.
Mortgage rates have gone up since the Federal Reserve began raising interest rates. Last week, the Fed announced it would raise interest rates by another 75 basis points, the sixth rate increase this year and the fourth-consecutive hike of that size.
The bottom line: With mortgage rates up four percentage points from a year ago, buyers’ purchasing power has plummeted. People who still are in the market might need to make compromises on the location, size, or condition of a house in order to find one that is affordable.
Traders are betting on just a half-point increase. Federal funds futures on the Chicago Mercantile Exchange show an 80% probability of a half-point hike.
The Feds’ rate hike was the smallest in almost a year, signaling that policymakers are going to be cautious after spending most of last year boosting borrowing costs at a fast pace.
The Fed and the Consumer Price Index: It’s Not Going To Be That Easy, But It Will Be Be Alive and Well: Inflation in the New Year
It may not be that simple. The government reported Friday that a key measure of wholesale prices has risen over the past year. That was a bit higher than the expected rate of 7.2% but a marked slowdown from the 8% increase through October.
The more widely watched Consumer Price Index data for November comes out Tuesday, just a day before the Fed announcement. The consumer price index went up 7.7% through October.
“Inflation has probably peaked but it may not come down as quickly as people want it to,” said Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research.
The Fed meeting; EU industrial production; and UK inflation will be on Wednesday.
“A pivot or pause is not a cure-all for this market,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. It’s not possible to make rate cuts too late. Recession risks are still relatively high.”
Economists are actually forecasting a small dip of 0.1% in retail sales from October. But it’s important to put that number in context. Over the past 12 months, retail sales increased by 8.3%.
It is possible that consumers were getting ready for the holiday rush. Inflation has an effect on the numbers too, since retail sales have been impacted (positively) by the fact that people have to spend more money for stuff.
“Everybody has been talking about inflation this year. In the next two decades, it will be more about disinflation, according to the CEO of Comgest Global Investors.
The Economy: How the Fed is Hitting Its New Low-Loan Scales in the Near-Fast Growth Regime
What does that mean for investors? Cosserat said people should look for companies that have pricing power and can maintain their profit margins. He said that his firm owned two of the stocks he owned and they were Luxury goods maker Hermes and cosmetics giant L’Oreal.
On Friday, there will be Eurozone purchasing managers’ index, UK retail sales, and earnings from a number of companies.
It’s still double the Fed’s customary quarter-point hike, and a sizable increase that will likely cause economic pain for millions of American businesses and households by pushing up the cost of borrowing for homes, cars and other loans.
Federal Reserve Chairman Jerome Powell confirmed last month that smaller rate hikes could be expected, saying: “The time for moderating the pace of rate increases may come as soon as the December meeting.”
And the economy has so far withstood the Fed’s aggressive rate hikes. Wages are growing, Americans are spending and GDP is strong. Business is also good: Companies are largely beating revenue expectations and reporting positive earnings results.
The Swiss National Bank, the European Central Bank and the Bank of England could follow the United States in making a half-point move on Thursday. Norway, Mexico, Taiwan, Colombia and the Philippines will also likely increase their borrowing costs this week.
The hike, smaller than the previous four increases, comes after the latest government reading showed inflation is running at its slowest annual rate in nearly a year.
In his post- meeting press conference, Fed Chair Jerome Powell said that the fight against inflation is still not finished and that the trend is moving in the right direction.
The Fed is Back in Business: The U.S. Consumer Markets in the Light of Recent Rate hikes and Lowering Wall Street Charges
Many Americans, already contending with price increases in nearly every part of their lives, are feeling the effects as they pay more in interest on credit cards, mortgages and car loans. Currently, used car buyers are charged an average interest rate of 9.34%, compared to 8.12% last year, and they’re making the largest monthly payments on record, according to credit reporting firm Experian.
The central bank said in a statement that “inflation remains elevated, reflecting supply and demand related to the swine flu, higher food and energy prices, and broader price pressures.”
The stock market fell after the Fed announced another rate hike, as Wall Street took the Fed’s warning that there could be more hikes in stride. The major indices were mostly unchanged by the afternoon.
After hitting a four-decade high of 9% in June, inflation is showing some signs of easing. Gasoline prices have fallen sharply, as have the prices of used cars and TVs.
Rents continue to climb, but Fed officials believe the worst of shelter inflation may be behind us. Rents have slowed down since the beginning of the year.
The cost of living remains higher than it was before the pandemic even though prices have come down. At 7.1%, the November inflation rate is well above the Federal Reserve’s 2% target. It’s also more than three times the rate of inflation in February 2020 – before COVID-19 led to the economy shutting down. The rising cost of services such as haircuts and restaurant meals is particularly worrisome, since that’s largely driven by labor costs, which tend to be stickier than volatile food and energy prices.
“We see goods prices coming down,” Powell said. “We understand what will happen with housing services. But the big story will really be the the rest of it, and there’s not much progress there. And that’s going to take some time.”
The job market is out of balance, with more job openings than workers who are available to fill them. While the U.S. economy has now replaced all of the jobs that were lost during the pandemic, the share of adults who are working or looking for work has not fully recovered.
Many old workers in the last few years won’t be able to find a job. With the supply of workers constrained, the Fed is trying to restore balance by tamping down demand.
Prices are still climbing much faster than Americans were used to before the pandemic, even though there are signs that the Federal Reserve’s dramatic steps to slow down inflation may finally be working.
The central bank hiked its rates for the seventh time in nine months on Wednesday, and it made it clear that it was going to do everything it can to bring inflation down.
The Last U.S. Jobs Report and Implications for Wall Street, Wall Street Trading, and the Prices of Oil and Other Goods
gasoline prices have plummeted, and are now less expensive than before the invasion of Ukraine. The prices of other goods like used cars and televisions have fallen, as pandemic kinks in the supply chain come untangled. The prices of things like airplane tickets and rental cars have gone down as travelers become more price-conscious.
He didn’t think anyone knew if we would have a recession or not and if it would be a deep one.
Changes in the weather or the war in Ukraine could cause big swings in prices at the gas station and the grocery store. Faster or slower economic growth around the world could also cause gyrations in the price of crude oil and other commodities.
What happens to wages is one of the variables that affects the price of services. That depends in turn on how many jobs the country adds each month, how many workers are available to fill those jobs, and how productive workers are when they’re employed.
The last jobs figures for the year of 2022 will be released on Friday. The US government is expected to report that 200,000 jobs were added in December, according to forecasts of economists surveyed by Reuters. There were 263,000 jobs added in November.
Traders are betting on a further deceleration in jobs growth because that could lead to a reduction in the size of interest rate hikes by the Federal Reserve.
The latest inflation figures have caused stocks to plunge and traders to focus more on the economic reports.
Wednesday’s weaker than expected report on the health of the manufacturing sector, coupled with more signs of strength in the jobs market given the solid report about labor turnover, led to more market volatility.
That’s why investors will also be poring over the weekly jobless claims numbers that come out Thursday morning as well as a report from payroll processing company ADP
(ADP) about the private sector job market. More alarm bells can be set off when there is further strength.
Wall Street will need to dive even deeper into the Friday jobs report to understand what is occurring in the economy. The unemployment rate is expected to stay low.
The level of wage growth will also be under scrutiny. An increase in worker compensation historically tends to lead to more inflation. Consumers can afford to pay the higher prices that companies charge for their products and services if they have more disposable income.
Wage growth, a measure of hourly earnings, was only 4.7% over the previous 12 months in October, which cheered investors. Wage growth was up to 5.1% in November, compared to 4.9% a year ago. Economists are predicting that wage increases cooled a bit, to 5% annually, in December.
The persistent mismatch between demand and labor puts upward pressure on wages, according to a New York Life Investments report.
A report by strategists at the BlackRock Investment Institute said inflation for services companies was likely to remain stuck due to worker shortages fueling wage growth.
The Fed is likely to focus on worker paychecks in the Friday’s jobs report rather than adding more jobs. It’s possible that Wall Street will do the same.
Tech giants aren’t going away: Inflation, Walls, and the global economy are still not out of the woods
A number of major tech firms, including Amazon and Meta Platforms, have recently announced job cuts. A statement from Amazon late Wednesday said it was laying off more than 18,000 employees.
As the economy quickly rebounded from a brief recession in 2020, the hope was that consumers and businesses would spend more on tech products and services.
Now, though, recession alarm bells are sounding once more as inflation and rate hikes take their toll…and tech companies realize that they may have not factored that in to their budgeting plans.
In a recent note to employees, the co-CEO said that they hired too many people prior to the economic downturn.
“Companies that last a long time go through different phases. Andy Jassy said in the memo that Amazon does not have heavy people expansion mode every year.
The global economy is clearly not out of the woods. Many, including the head of the International Monetary Fund, are still concerned about a looming downturn that could hit China and emerging markets particularly hard.
Anna Cooban says that investors in Europe are starting to feel more hopeful about a slowing of consumer price increases in France and Germany. The fall in energy prices is leading to a decline in the stock market.
Still, consumers continue to bear the brunt of higher prices. British shoppers felt the pinch of rising inflation and flocked to the German discount store, causing it to have its best December ever in the United Kingdom. Brits bought over 48 million mince pies, according to Aldi.
The Fed Open Market Committee Meets the First Rate Meeting: The Implications for Inflation and the Fed’s Predictions, and the State of the Economy
The Federal Open Market Committee decided at the conclusion of their first meeting of 2023 to return to a traditional interest rate policy after a number of large rate increases intended to cool the economy.
The job is not finished and the labor market is too tight according to Powell. it would be “very premature” to think “we really got this,” he said, adding that unless the economic trajectory changes drastically, he doesn’t expect to cut rates this year.
Powell echoed that sentiment Wednesday, saying: “I continue to think that it is very difficult to manage the risk of doing too little, and finding out in six or 12 months that we actually were close but didn’t get the job done.”
US markets rose after the press conference indicated investors expect a more dovish Fed. The S&P 500 closed the first day of February 1.1% higher after notching its best January in four years.
Excluding volatile food and energy costs, “core” prices in December were 4.4% higher than a year ago, according to the Fed’s preferred inflation yardstick. That’s down from a 5.2% annual rate in September.
Wage gains have slipped recently, despite the tight job market. It helps to allay fears that wage gains can cause prices to go up.
The governor of the Fed said two weeks ago that the Fed does not want to be fake. Three months of relatively low readings of core inflation happened back in 2021, before it exploded in our face.
“We’re pulling off something really nice right now” says Sojourner, who was a senior economist for the Council of Economic Advisers. The jobs will be destroyed if we get to the place where the Fed overcorrects. Hopefully that won’t happen.
If central bankers discuss inflation and it makes you feel bad, then this might be the best day of the year. Four members of the Federal Reserve (although not Fed Chair Jerome Powell) spoke on the economy today.
First up was Richmond Fed President Thomas Barkin, who is not a voting member on the interest-rate setting Federal Open Market Committee this year. Barkin said in an interview with CNBC that inflation is not going to go away fast, but it is coming down slowly.
Predicting future economic data isn’t a problem. “When inflation repeatedly comes in higher than the forecasts…or when the jobs report comes in with hundreds of thousands more jobs than anyone expected…it is hard to have confidence in any outlook,” she said.
NJ Fed Chairman Patrick Harker: “We aren’t done yet” and he’s likely to go back to a dovish note
Philadelphia Fed President Patrick Harker sounded a little more dovish (i.e. less concerned about inflation) than Logan. He is an FCC voting member this year. Harker said in a speech Tuesday that “we are not done yet” with rate hikes but added that “we are likely close.” Harker expects the policy rate to be restrictive at some point this year, which will result in us keeping rates in place.
The last person up was John Williams, the president of the New York Fed, who has been rumored as a possible successor to Lael Brainard as vice chair of the Fed.
Along those lines, Williams said that there will likely be “a period of subdued growth and some softening of labor market conditions.” He said that the unemployment rate was going to go up to between 4% and 4.5% over the next year, and that he expected a 1% growth in real GDP. The jobless rate is currently 3.4%.