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Inflation stable and rates are stable; goldilocks economy now

CNBC,6-12, 24,, Fed holds rates steady, indicates only one cut coming this year

The Federal Reserve on Wednesday kept its key interest rate unchanged and signaled that just one cut is expected before the end of the year. With markets hoping for a more accommodative central bank, Federal Open Market Committee policymakers following their two-day meeting took two rate reductions off the table from the three indicated in March. The committee also signaled that it believes the long-run interest rate is higher than previously indicated. New forecasts released after this week’s two-day meeting indicated slight optimism that inflation remains on track to head back to the Fed’s 2% goal, allowing for some policy loosening later this year. “Inflation has eased over the past year but remains elevated,” the post-meeting statement said, echoing language from the last statement. In the only substantive change, the new statement followed with, “In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective.” The previous language said there had been “a lack of further progress” on inflation. Traders seemed encouraged by these comments, with the S&P 500 jumping to a record Wednesday after the statement was issued. Aggressive cutting seen for 2025 The committee, in its closely watched “dot plot” of individual participants’ rate expectations, did indicate a more aggressive cutting path in 2025, with four reductions totaling a full percentage point anticipated, up from three. For the period through 2025, the committee now sees five total cuts equaling 1.25 percentage points, down from six in March. If the projections hold, it would leave the federal funds rate benchmark at 4.1% by the end of next year. Another significant development occurred with the projection for the long-run rate of interest, essentially a level that neither boosts nor restricts growth. That moved up to 2.8% from 2.6%, a nod that the higher-for-longer narrative is gaining traction among Fed officials. In a further indication of a hawkish bent from central bankers, the dot plot showed four officials in favor of no cuts this year, up from two previously. Return to 2% target Elsewhere in the FOMC’s Summary of Economic Projections, participants raised their 2024 outlook on inflation to 2.6%, or 2.8% when excluding food and energy. Both inflation projections were 0.2 percentage point higher than in March. The Fed’s preferred inflation gauge is the Commerce Department’s personal consumption expenditures price index, which showed respective readings of 2.7% and 2.8% for April. The Fed focuses more on core inflation as a better long-term indicator. The SEP indicates inflation returning to the 2% target, but not until 2026. The decision and informal forecasts from the 19 meeting participants come during a volatile year for markets and investors’ hopes that the Fed would start easing after it raised benchmark rates to their highest level in some 23 years. The federal funds rate, which sets overnight borrowing costs for banks but feeds into many consumer debt products, is targeted in a range between 5.25%-5.50%, the result of 11 rate increases between March 2022 and July 2023. Earlier in the day, as Fed officials were preparing their economic and rate outlooks, the Bureau of Labor Statistics released the consumer price index for May. The report showed that inflation was flat on the month while the annual rate edged lower from the rate in April to 3.3%. During a press conference, Powell said that report was better than almost anyone had expected, and was factored into the FOMC’s decision. “We see today’s report as progress and as, you know, building confidence,” Powell said. “But we don’t see ourselves as having the confidence that would warrant beginning to loosen policy at this time.” Inflation remains well above the Fed’s 2% target, while also being considerably below the peak of just over 9% seen nearly two years ago. Core readings excluding food and energy prices were at 0.2% from the prior month and 3.4% from the year-ago period. In the first quarter of 2024, economic data softened from where it had been for most of the previous year, with GDP rising at just a 1.3% annualized pace. April and May have been a mixed bag for data, but the Atlanta Fed is tracking GDP growth at 3.1%, a solid pace especially in light of persistent recession worries that have dogged the economy for the past two years. Inflation data, though, has been equally resilient and has posed problems for central bankers. The year began with markets expecting a vigorous pace of rate cuts, only to be thwarted by sticky inflation and statements from Fed officials that they are unconvinced that inflation is heading back convincingly to target. “This is a nothing-burger Fed meeting. They know conditions are improving, but don’t need to rush with rate cuts,” said David Russell, global head of market strategy at TradeStation. “The strong economy is letting Jerome Powell wring inflation out of the system without hurting jobs. Goldilocks is emerging but policymakers don’t want to jinx it.”

Fed won’t raise rates now. If it does, the markets will collapse

Diccon Hyatt, 6-7, 24, Investopedia, What to Expect From Next Week’s Fed Meeting on Interest Rates,

Don’t expect the Federal Reserve to make any changes to monetary policy, but Wednesday’s meeting of the Federal Open Market Committee could shed light on when the central bank might lower interest rates. When the Fed’s policy-setting committee concludes its two-day meeting Wednesday, they’re widely expected to keep the influential fed funds rate at its current range of 5.25-5.50%. That’s a 23-year high and has been at that level since last July in an effort to maintain downward pressure on inflation.

Rates Aren’t Likely to Budge Should the Fed either raise the rate to squeeze inflation harder or lower it to stimulate the economy, it would come as a massive surprise to financial markets. Traders are mainly pricing in a September rate cut at the earliest, according to the CME Group’s Fedwatch Tool, which forecasts rate movements based on fed funds futures trading data. 1 Traders did scale back their bets for a September cut to 50.8% on Friday from 68.7% the day before following a Bureau of Labor Statistics report that showed the job market running hotter than expected in May, suggesting that wages and job growth may be putting upward pressure on inflation. Movement in the influential interest rate either way would also contradict the recent public statements of central bank officials, who have signaled they’re willing to hold the fed funds rate higher for longer. Fed policy committee members have said they’re waiting for confidence that inflation is firmly on a path down to an annual rate of 2% before they’ll consider lowering their key interest rate, which influences borrowing costs on all kinds of loans. Recent reports showing inflation slowly decreasing may have eased fears that price increases are accelerating. However, it is unlikely to have convinced policymakers that inflation is vanquished, leaving the Fed in a holding pattern. With the rate movement (or lack thereof) a foregone conclusion, the FOMC members’ quarterly economic projections, especially for the path of the fed funds rate, are likely to garner more interest. The last time Fed officials made those projections, in March, the median outlook was for three quarter-point rate cuts in 2024. But with 2024 half over and inflation remaining more stubborn than anticipated, the prospect for three rate cuts is diminishing, making just one or two more likely. “We see the Fed revising its outlook in favor of slower growth and firmer inflation,” Michael Gapen, U.S. economist at Bank of America Securities wrote in a commentary. “It should project two rate cuts this year and a cutting cycle that begins in September.” Those projections could be influenced by the report on the Consumer Price Index for May, which is set to be released Wednesday morning, hours ahead of the afternoon Fed announcements. Higher-than-expected inflation could even revive talk of possible rate hikes, Chris Clarke, assistant professor of economics at Washington State University, told Investopedia. “If it comes out strong, we’re going to see them change their tune about what they believe will happen at the end of the year,” he said. “But if it comes out soft, they might say, Yeah, rate cuts are still on the table.” As usual, the comments of Fed Chair Jerome Powell at his post-announcement press conference could inform the interest rate outlook and move markets. A hot topic at recent conferences has been whether the Fed would raise interest rates even more, given the hotter-than-expected inflation data at the outset of the year. In the past, Powell has said that’s unlikely, a message that Gapen expects him to repeat.

Economic pressure now and rates will stay the same

Jeff Cox, 6-7, 24, CNBC, ECONOMY

U.S. adds a much-better-than-expected 272,000 jobs in May, but unemployment rate edges up to 4%,
The U.S. economy added far more jobs than expected in May, countering fears of a slowdown in the labor market and likely reducing the Federal Reserve’s impetus to lower interest rates. Nonfarm payrolls expanded by 272,000 for the month, up from 165,000 in April and well ahead of the Dow Jones consensus estimate for 190,000, the Labor Department’s Bureau of Labor Statistics reported Friday. At the same time, the unemployment rate rose to 4%, the first time it has breached that level since January 2022. Economists had been expecting the rate to stay unchanged at 3.9% from April. The increase came even though the labor force participation rate decreased to 62.5%, down 0.2 percentage point. The survey of households used to compute the unemployment rate showed that the level of people who reported holding jobs fell by 408,000. “On the surface, [the report] was hot, but you’ve also got a bigger drop in household employment,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “For what it’s worth, that tends to be a more accurate signal when you’re at an inflection point in the economy. You can find weakness in the underlying numbers.” A more encompassing unemployment figure that includes discouraged workers and those holding part-time jobs for economic reasons held steady at 7.4%. The household survey also showed that full-time workers declined by 625,000, while those holding part-time positions increased by 286,000. Job gains were concentrated in health care, government, and leisure and hospitality, consistent with recent trends. The three sectors respectively added 68,000, 43,000 and 42,000 positions. The three sectors accounted for more than half the gains. Other significant growth areas came in professional, scientific and technical services (32,000), social assistance (15,000), and retail (13,000). Regarding wages, average hourly earnings were higher than expected as well, rising 0.4% on the month and 4.1% from a year ago. The respective estimates were for increases of 0.3% and 3.9%. Stock market futures lost ground while Treasury yields surged after the report. “One step forward, two steps back. Today’s data undermines the message that other recent economic data have been giving of a cooling U.S. economy, and slams the door shut on a July rate cut,” said Seema Shah, chief global strategist at Principal Asset Management. “Not only has jobs growth exploded again, but wage growth has also surprised to the upside, both moving in the opposite direction to what the Fed needs to begin easing policy.” Previous months’ reports saw small revisions: The March gain dropped to 310,000, down 5,000, while April’s saw a cut of 10,000 to 165,000. The report comes with investors on edge over how long the Fed will hold its benchmark borrowing rate at the highest level in some 23 years. In recent weeks, policymakers have indicated a reluctance to cut anytime soon as inflation remains above the central bank’s 2% target. The report was “certainly hawkish” from the Fed’s perspective, Sonders said, meaning that the data would make it less likely that the central bank will reduce rates anytime soon. Following the jobs report, traders in the fed funds futures market reduced the possibility of a cut in September to about 56%, according to the CME Group’s FedWatch measure. That was down about 12 percentage points from Thursday. The market-implied probability of a second move lower in December fell to about a coin flip after being around 68% a day ago. The Fed has not lowered rates since the early days of the Covid pandemic in 2020 and hiked 11 times between March 2022 and July 2023. The benchmark federal funds rate is currently targeted between 5.25%-5.5%.

Inflation will cool slightly now

CHRISTOPHER RUGABER The Associated Press, 6-7,. 30, An inflation gauge closely tracked by Federal Reserve rises at slowest pace this year,

WASHINGTON — A price gauge closely tracked by the Federal Reserve cooled slightly last month, a sign that inflation may be easing after running high in the first three months of this year. Friday’s report from the U.S. Commerce Department showed that an index that excludes volatile food and energy costs rose 0.2 percent from March to April, down from 0.3 percent in the previous month. It was the mildest such increase so far this year. Measured from 12 months earlier, such so-called “core” prices climbed 2.8 percent in April, the same as in March. Overall inflation increased 0.3 percent from March to April, the same as in the previous month, and 2.7 percent from a year earlier, also unchanged from March’s figure. The latest figures could provide some tentative reassurance for Fed officials, who aggressively raised interest rates to fight inflation, that price pressures are easing. Chair Jerome Powell has said he expects inflation, after picking up in the first three months of 2024, to resume cooling in the coming months. Powell has cautioned, though, that the central bank needs “greater confidence” that inflation is sustainably slowing before it would consider cutting rates. “April is a first step in the right direction, but much work remains,” said Stephen Stanley, chief U.S. economist at Santander, an investment bank. The Fed tends to favor the inflation gauge that the government issued Friday — the personal consumption expenditures price index — over the better-known consumer price index. The PCE index tries to account for changes in how people shop when inflation jumps. It can capture, for example, when consumers switch from pricier national brands to cheaper store brands. Inflation fell sharply in the second half of last year before sticking well above the Fed’s 2 percent target in the first few months of 2024. With polls showing that costlier rents, groceries and gasoline are angering voters as the presidential campaign intensifies, Donald Trump and his Republican allies have sought to heap the blame on President Joe Biden. Friday’s report also showed that income growth slowed and spending cooled sharply in April, a trend that could help moderate economic growth and inflation in the coming months and potentially please the Fed. Adjusted for inflation, after-tax incomes fell 0.1 percent in April, the second such drop this year. Consumer spending also declined 0.1 percent when adjusted for inflation, a sign that economic growth may remain modest in the current April-June quarter. The Fed will likely see such data as evidence that the economy is cooling in a way that could restrain inflation later this year. Many Americans, particularly lower-income workers, have been pulling back on spending as they struggle to keep up with rising expenses, leading some businesses to rein in prices. In recent weeks, chains including McDonald’s, Target and Walmart have announced price reductions or temporary discount deals. Grocery prices eased last month, according to Friday’s report, though they’re still up significantly from before the pandemic. The prices of long-lasting goods also dropped, led by less expensive new and used cars, furniture and appliances. The cost of used cars has declined nearly 5 percent over the past year. Gas prices, though, jumped 2.7 percent, just from March to April. Likewise, the costs of many services rose faster than the Fed would like. Restaurant meals, for example, increased 0.3 percent from March to April and are up 4 percent from a year earlier. Entertainment prices, including for movies and concerts, jumped 7.4 percent from 12 months earlier. In the past couple of weeks, a stream of remarks by Fed officials have underscored their intention to keep borrowing costs high as long as needed to fully defeat inflation. As recently as March, the Fed’s policymakers had collectively forecast three rate cuts this year, starting as early as June. Yet Wall Street traders now expect just one rate cut this year, in November. One influential Fed official, John Williams, president of the Federal Reserve Bank of New York, said Thursday that he expects inflation to start cooling again in the second half of the year. Until it does, though, Powell has made clear that the central bank is prepared to keep its key rate pegged at 5.3 percent, its highest level in 23 years. But Williams expects inflation, according to the Fed’s measure, to cool only slightly by year’s end, to a 2.5 percent annual pace. He doesn’t foresee it dropping to the Fed’s 2 percent target until next year. The central bank raised its benchmark rate from near zero to its current peak in 15 months, the fastest such increase in four decades, to try to conquer inflation. The result has been significantly higher rates for mortgages, auto loans and other forms of consumer and business borrowing.

Inflation and economy uniqueness are ridiculous; it’s not predictable


Lim Hui Jie, 5-23, 24, ECONOMY, JPMorgan CEO Jamie Dimon says can’t rule out ‘hard landing’ for the U.S., stagflation will be ‘worst outcome’,

According to the CME FedWatch Tool, about half of traders polled are pricing in a 25 basis points cut by September. The Fed has predicted three quarter-percentage cuts throughout 2024, but only if the market allows. Asked about the prospect and timing of rate cuts, Dimon said that while market expectations “are pretty good. They’re not always right.”The world said [inflation] was gonna stay at 2% all that time. Then it says it will go to 6%, then it said it’s gonna go to four … It’s been a hundred percent wrong almost every single time. Why do you think this time is right?” he said. JPMorgan uses the implied curve to estimate interest rates, he said, adding: “I know it’s going to be wrong. “So just because it says X, doesn’t mean it’s right. It’s always wrong. You go back to any inflection point of the economy ever, and people thought X and then they were dead wrong two years later,”

Core inflation is high


Brian Evans, 4-11, 24,, The ‘supercore’ inflation measure shows Fed may have a real problem on its hands

Markets are buzzing about an even more specific prices gauge contained within the data — the so-called supercore inflation reading. The gauge measures services inflation excluding food, energy and housing and has been roaring higher lately, up 4.8% year over year in March and more than 8% at a 3-month annualized pace. The picture is more complicated because some of the most stubborn components of services inflation are household necessities like car and housing insurance as well as property taxes. A hotter-than-expected consumer price index reading rattled markets Wednesday, but markets are buzzing about an even more specific prices gauge contained within the data — the so-called supercore inflation reading. Along with the overall inflation measure, economists also look at the core CPI, which excludes volatile food and energy prices, to find the true trend. The supercore gauge, which also excludes shelter and rent costs from its services reading, takes it even a step further. Fed officials say it is useful in the current climate as they see elevated housing inflation as a temporary problem and not as good a gauge of underlying prices. Tom Fitzpatrick, managing director of global market insights at R.J. O’Brien & Associates, said if you take the readings of the last three months and annualize them, you’re looking at a supercore inflation rate of more than 8%, far from the Federal Reserve’s 2% goal. “As we sit here today, I think they’re probably pulling their hair out,” Fitzpatrick said. An ongoing problem CPI increased 3.5% year over year last month, above the Dow Jones estimate that called for 3.4%. The data pressured equities and sent Treasury yields higher on Wednesday, and pushed futures market traders to extend out expectations for the central bank’s first rate cut to September from June, according to the CME Group’s FedWatch tool. “At the end of the day, they don’t really care as long as they get to 2%, but the reality is you’re not going to get to a sustained 2% if you don’t get a key cooling in services prices, [and] at this point we’re not seeing it,” said Stephen Stanley, chief economist at Santander U.S. Wall Street has been keenly aware of the trend coming from supercore inflation from the beginning of the year. A move higher in the metric from January’s CPI print was enough to hinder the market’s “perception the Fed was winning the battle with inflation [and] this will remain an open question for months to come,” according to BMO Capital Markets head of U.S. rates strategy Ian Lyngen. Another problem for the Fed, Fitzpatrick says, lies in the differing macroeconomic backdrop of demand-driven inflation and robust stimulus payments that equipped consumers to beef up discretionary spending in 2021 and 2022 while also stoking record inflation levels. Today, he added, the picture is more complicated because some of the most stubborn components of services inflation are household necessities like car and housing insurance as well as property taxes. “They are so scared by what happened in 2021 and 2022 that we’re not starting from the same point as we have on other occasions,” Fitzpatrick added. “The problem is, if you look at all of this [together] these are not discretionary spending items, [and] it puts them between a rock and a hard place.” Sticky inflation problem Further complicating the backdrop is a dwindling consumer savings rate and higher borrowing costs which make the central bank more likely to keep monetary policy restrictive “until something breaks,” Fitzpatrick said. The Fed will have a hard time bringing down inflation with more rate hikes because the current drivers are stickier and not as sensitive to tighter monetary policy, he cautioned. Fitzpatrick said the recent upward moves in inflation are more closely analogous to tax increases. While Stanley opines that the Fed is still far removed from hiking interest rates further, doing so will remain a possibility so long as inflation remains elevated above the 2% target. “I think by and large inflation will come down and they’ll cut rates later than we thought,” Stanley said. “The question becomes are we looking at something that’s become entrenched here? At some point, I imagine the possibility of rate hikes comes back into focus.”

One interest rate cut coming now, but signs of inflation will trigger a rate hike

Nicole Goodkind, 5-23, 24,, Dow falls more than 600 points, notching worst day of the year

The Dow tumbled by more than 600 points Thursday, notching its worst day of 2024, as all three major indexes closed lower. The drop came even after AI-darling Nvidia delivered stellar quarterly earnings and announced a 10-for-1 stock split. Chipmaker Nvidia (NVDA) soared more than 9% as the wider market dropped lower, highlighting a lack of market breadth. (Nvidia is not one of the 30 stocks that comprise the Dow Jones Industrial Average.) Boeing (BA) weighed on markets on Thursday, dropping more than 7.5% after the beleaguered aircraft manufacturer said its cash flows were worse than expected this year. That caused concern amongst investors that its debt ratings could be classified as junk bonds. The S&P 500 and Nasdaq Composite, which began the day at new intraday highs, fell by 0.7% and 0.4%, respectively. The Dow, meanwhile, closed lower by 606 points, or 1.5%. Strong data The selloff came after the Purchasing Managers Index for May, expected to fall slightly, came in 3.5 percentage points higher, the highest level since last June. That’s an indication that the economy is not being held back by inflation, even though price hikes have started to ease once more. “Tech is the only industry sector not in the red,” wrote Louis Navellier of Navellier Investing in a note to clients on Thursday. “If you don’t have NVIDIA in your index it’s not a good day.” Labor data also came in stronger than expected on Thursday morning: Weekly initial jobless claims totaled 215,000, slightly below the analyst consensus of 220,000, according to FactSet data. April new home sales missed estimates on Thursday, coming in at an annualized rate of 634,000 versus 678,000 expected. Fewer homes being built indicates that there’s less economic confidence on the part of builders and that they’re having more difficulty borrowing the money to build them. Fed fears The Federal Reserve spooked markets on Wednesday afternoon when they released the notes from their last policy meeting. The minutes showed that “various” officials said they would be willing to raise interest rates if necessary and that there were doubts as to whether financial conditions are restrictive enough to keep inflation from resurging. Goldman Sachs CEO David Solomon also said Wednesday at an event hosted by Boston College that the Fed probably won’t begin to cut rates this year. The Federal Reserve building is seen in Washington, U.S., January 26, 2022. RELATED ARTICLE Fed officials aren’t easing Wall Street’s nerves “I’m still at zero cuts,” he said. “I think we’re set up for stickier inflation.” “The bond market set the dour mood that we see across much of the market,” wrote Interactive Brokers chief strategist Steve Sosnick on Thursday. US Treasury yields rose Thursday on the positive economic news. “Coming on the back of yesterday’s ‘higher for longer’ Fed Minutes, bond traders were in no mood to hear about a strengthening economy,” wrote Sosnick. “In theory, a stronger economy should be good for companies, and thus stocks, but because we are all so obsessed with the Federal Reserve and other central bank policymakers, we see most stocks trending lower as bond prices fall.” Those central bank worries have pushed investors to slash their expectations for interest rate cuts from the Fed. They’re now anticipating just one cut this year, in December, according to the CME FedWatch tool. That’s down from six at the beginning of the year.

Higher inflation hurts the poor and causes a rate hike

Jeff Cox, 5-22, 24, CNBC, Federal Reserve minutes indicate worries over lack of progress on inflation,

Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee’s 2 percent objective,” the summary stated. The minutes also showed “various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.” Federal Reserve officials grew more concerned at their most recent meeting about inflation, with members indicating that they lacked the confidence to move forward on interest rate reductions. Minutes from the April 30-May 1 policy meeting of the Federal Open Market Committee released Wednesday indicated apprehension from policymakers about when it would be time to ease. The meeting followed a slew of readings that showed inflation was more stubborn than officials had expected to start 2024. The Fed targets a 2% inflation rate, and all of the indicators showed price increases running well ahead of that mark. “Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee’s 2 percent objective,” the summary said. “The recent monthly data had showed significant increases in components of both goods and services price inflation.” The minutes also showed “various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.” Several Fed officials, including Chair Jerome Powell and Governor Christopher Waller, have said since the meeting that they doubt the next move would be a hike. The FOMC voted unanimously at the meeting to hold its benchmark short-term borrowing rate in a range of 5.25%-5.5%, a 23-year high where it has been since July 2023. “Participants assessed that maintaining the current target range for the federal funds rate at this meeting was supported by intermeeting data indicating continued solid economic growth,” the minutes said. Since then, there have been some incremental signs of progress on inflation, as the consumer price index for April showed inflation running at a 3.4% annual rate, slightly below the March level. Excluding food and energy, the core CPI came in at 3.6%, the lowest since April 2021. However, consumer surveys indicate increasing worries. For instance, the University of Michigan consumer sentiment survey showed the one-year outlook at 3.5%, the highest since November, while overall optimism slumped. A New York Fed survey showed similar results. Stocks held in negative territory while Treasury yields were mostly higher following the minutes release. Upside inflation risk? Fed officials at the meeting noted several upside risks to inflation, particularly from geopolitical events, and noted the pressure that inflation was having on consumers, particularly those on the lower end of the wage scale. Some participants said the early year increase in inflation could have come from seasonal distortions, though others argued that the “broad-based” nature of the moves means they shouldn’t be “overly discounted.” Committee members also expressed worry that consumers were resorting to riskier forms of financing to make ends meet as inflation pressures persist. “Many participants noted signs that the finances of low- and moderate-income households were increasingly coming under pressure, which these participants saw as a downside risk to the outlook for consumption,” the minutes said. “They pointed to increased usage of credit cards and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans.” Officials were largely optimistic about growth prospects though they expected some moderation this year. They also said they anticipate inflation ultimately to return to the 2% objective but grew uncertain over how long that would take, and how much impact high rates are having on the process. Immigration was mentioned on multiple occasions as a factor both helping spur the labor market and to sustain consumption levels. Market lowering rate-cut expectations Public remarks from central bankers since the meeting have taken on a cautionary tone. Fed Governor Waller on Tuesday said that while he does not expect the FOMC will have to raise rates, he warned that he will need to see “several months” of good data before voting to cut. Last week, Chair Jerome Powell expressed sentiments that weren’t quite as hawkish in tone, though he maintained that the Fed will “need to be patient and let restrictive policy do its work” as inflation holds higher. Markets have continued to adjust their expectations for cuts this year. Futures pricing as of Wednesday afternoon after the release of the minutes indicated about a 60% chance of the first reduction still coming in September, though the outlook for a second move in December receded to only a bit better than a 50-50 coin flip chance. Earlier this year, markets had been pricing in at lease six quarter-percentage point cuts.

Economy resilient, recessions don’t lead to downturns and the economy rebounds

Sean Williams, 3-17, 24, Is Wall Street on the Verge of a Crash? The Fed’s Most-Trusted Recession Indicator Weighs In.,

Even though the stock market doesn’t mirror the performance of the U.S. economy, corporate earnings do ebb and flow based on the health of the economy. Historically, two-thirds of the S&P 500’s drawdowns have occurred after, not prior to, a recession being declared by the National Bureau of Economic Research. Put another way, a recession would, indeed, be expected to decisively knock the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite off their respective perches. While a rapid crash may not occur, meaningful downside would be the expectation. Truth be told, the NY Fed’s trusted recession probability tool is just one of a couple of metrics that appears to spell trouble for the U.S. economy and stock market. In particular, M2 money supply is meaningfully contracting for only the fifth time since 1870, and the Conference Board Leading Economic Index (LEI) is working on one of its longest consecutive declines dating back more than 60 years. All signs appear to point to a sizable downturn for the Dow Jones, S&P 500, and Nasdaq Composite. While this may not be the rosiest of near-term forecasts, patience has a way of righting the ship when it comes to investing on Wall Street. For example, in the 78 years since World War II ended, the U.S. economy has navigated its way through a dozen recessions. Only three of these 12 downturns reached 12 months in length, and none surpassed 18 months. Based on what history tells us, recessions are short-lived events. Conversely, periods of economic growth tend to stick around for multiple years. While there are a few instances of short-lived expansions, there are two periods of growth since 1945 that lasted at least a decade. Statistically speaking, it’s a considerably smarter move to bet on the American economy (and its underlying businesses) to grow over time. It’s a similar story on Wall Street. According to analysts at Bespoke Investment Group, there’s a marked disparity between bear and bull markets in the S&P 500. Last June, Bespoke published a dataset that revealed the length of every bear and bull market in the S&P 500 dating back to the start of the Great Depression in September 1929. The 27 S&P 500 bear markets have lasted an average of just 286 calendar days (about 9.5 months), with the longest enduring 630 calendar days in 1973 to 1974. By comparison, the average S&P 500 bull market has lasted for 1,011 calendar days (roughly two years and nine months), with 13 of the 27 bull markets since September 1929 sticking around for a longer number of calendar days than the lengthiest S&P 500 bear market. No matter what the U.S. economy or Wall Street has thrown investors’ way, patience has always paid off. Eventually, stock market corrections and bear markets are cleared away by bull market rallies. Even if 2024 turns out to be a rough year for equities, it could represent a blessing in disguise for opportunistic long-term investors.

Consumer spending decreasing

Jennifer Sor, 3-14, 24, Business Insider, Recession odds are ‘very high’ as economy looks poised to see an unemployment wave and plunging consumer spending, chief economist says,

On a policy level, that could mean the Fed may hold rates higher for longer than the market expects. Traders in the fed funds futures market earlier this year had been pricing in as many as seven cuts totaling 1.75 percentage points; that since has eased to three cuts. Along with the surprisingly strong inflation data, consumers are showing signs of letting up on their massive shopping spree over the past few years. Retail sales increased 0.6%, but that was below the estimate and came after a downwardly revised pullback of 1.1% in January, according to numbers adjusted seasonally but not for inflation. Over the past year, sales increased 1.5%, or 1.7 percentage points below the headline inflation rate and 2.3 points below the core rate that excludes food and energy.

Debt will increase

Vivien Lou Chen, 11-9, 23, Market Watch, Citadel’s Ken Griffin sees high inflation lasting for decades,

Billionaire Ken Griffin, head of the Miami-based hedge-fund manager Citadel, said higher baseline inflation may go on for decades, caused by structural changes that are pushing the world toward de-globalization. Speaking at a Bloomberg forum in Singapore on Thursday, Griffin said this will have an impact on the cost of funding the U.S. deficit. He added that the U.S. is “spending on the government level like a drunken sailor,” and that higher interest rates are something the government hadn’t counted on “when we went on the spending spree.” The country had more than $33 trillion in national debt as of September and a fiscal deficit of almost $1.7 trillion for the fiscal year to date since October 2022. Read: Who is Ken Griffin? 5 things to know about the hedge-fund billionaire who just gave Harvard $300 million. Griffin’s comments came ahead of Thursday afternoon’s 30-year Treasury bond auction, which went badly and produced weaker-than-expected demand. Thursday’s sale was one of a trio of government auctions that have taken place since Tuesday, totaling $112 billion. The U.S.’s current fiscal situation is unsustainable and Americans realize “something is not quite right,” Griffin said, according to Bloomberg. Meanwhile, he said, there are multiple trends “that are pushing us toward de-globalization.” Griffin referred to what he calls the “peace dividend,” or economic boost that countries enjoy during periods of peace, and said that’s “clearly at the end of the road” given wars between Russia-Ukraine and Israel-Hamas. “We are likely to see higher real rates and we’re likely to see higher nominal rates.” Treasury yields jumped on Thursday, sending the policy-sensitive 2-year rate BX:TMUBMUSD02Y to its highest 3 p.m. Eastern time level since Oct. 31 as investors focused on the possibility of more action by the Federal Reserve. Meanwhile, all three major stock indexes DJIA SPX COMP ended the day lower. Speaking at a separate event earlier this week, Griffin said that investors need to invest in China since it’s no longer preferable to be only in U.S. companies. Also this week, he told the Financial Times that the Securities and Exchange Commission should focus on banks instead of hedge funds in tackling the risks arising from basis trades.

Massive debt now

Everett Kelley is national president of the American Federation of Government Employees, AFL-CIO, which is the nation’s largest federal employee union, representing 750,000 federal and D.C. government employees, November 4, 2023, Everett Kelley is national president of the American Federation of Government Employees, AFL-CIO, which is the nation’s largest federal employee union, representing 750,000 federal and D.C. government employees, The Hill, On debt commission, don’t trust partisan wolf in bipartisan sheep’s clothing,

Our national debt as of this writing is about $33.7 trillion. That means the wealthiest 1 percent of Americans could write a check to wipe out the entire national debt today and still be left with $14.8 trillion — or about $4.4 million per person. That would leave each individual with four times the average wealth of an American household today.

No alternative to the US dollar

Sargen, 10-13, 23, Nicholas Sargen, Ph.D. is an economic consultant with Fort Washington Investment Advisors and is affiliated with the University of Virginia’s Darden School of Business.  He has authored three books including Global Shocks: An Investment Guide for Turbulent Markets, The Hill, This time around, war in Israel shouldn’t upend the market,

Finally, another consideration that mitigates the risk of an oil price spike is the strength of the U.S. dollar, which has appreciated by 10 percent on a trade-weighted basis over the past two years. Moreover, there currently is no viable alternative to challenge the status of the U.S. dollar as the world’s reserve currency. This is in marked contrast to what happened in the 1970s when the dollar was perennially weak as the United States became a high-inflation country. Consequently, OPEC members were motivated to raise the price of oil at that time to recoup some of the loss of their purchasing power resulting from oil being denominated in dollars.

High debt crushes the economy

Jordan Cohen and Dominik Lett, CATO, 2023, Congress Should Worry about Biden’s Emergency Spending Request,

High and rising national debt suppresses private investment, reduces incomes, and increases risk of a sudden fiscal crisis. Excessive federal debt weakens the economy, which undermines the foundation of America’s military strength. If Congress agrees with President Biden that Ukraine, disaster relief, and border security merits additional funding, it should fund them through regular appropriations and by staying within established spending limits.

China will drag-down the global economy

Phil Rosen Aug 19, 2023, China’s economy is flailing. Here’s how its problems could spill into global markets.,, Business Insider

China’s economy is facing headwinds ranging from an unstable property market to weak consumer demand. Experts told Insider that a worsening scenario in China bodes poorly for global markets and other economies like the US. Both Janet Yellen and Joe Biden have recently warned of China’s spillover risks. China has built itself into a world power with a massive impact on the global economy through decades of steady growth, huge trade volumes, and an expanding, productive population. After President Xi Jinping lifted Beijing’s extreme “zero-COVID” policies in December, experts expected that Chinese demand and business would come roaring back so strong that the entire world economy would feel the effects of its reopening. But the opposite has happened, and experts say the repercussions of China’s economic stumbles could reverberate well beyond its borders. The world’s second-largest economy looks strikingly weak coming out of the pandemic, and its troubles have ballooned to such an extent this month that Treasury Secretary Janet Yellen warned of China’s risks to the US the same week President Joe Biden likened it to a “ticking time bomb.” Chinese officials have warned experts against painting the economy in a negative light, though the data paint a clear picture of an economy in trouble. Tuesday data — which came less than an hour after a surprise rate cut from China’s central bank — showed China’s industrial production, retail sales, and exports all performed weaker than expected, and the report omitted youth unemployment, which had hit a record high of 21.3% in the prior month. All this is unfolding against a backdrop of an unstable property sector, headlined most recently by a bankruptcy filing by Evergrande, the most heavily indebted property developer in the world, and Country Garden Holdings’ two missed coupon payments on its bonds. Here’s what all this could mean for the rest of the world’s markets. Collapsing trade Given its major role in global trade, none of these troubles are China’s alone. Alfredo Montufar-Helu, the head of the China Center at the Conference Board, told Insider that the country still accounts for about 30% of global growth, and any domestic slippage will have far-reaching implications on markets around the world. “Unlike during the Great Financial Crisis, China will not drive the global economic recovery in the aftermath of the COVID-19 pandemic,” he said. “As its economy continues facing downward pressures, its growth momentum might slow down further, in turn exacerbating the already significant pressures that the global economy is facing.”

One way this is already being felt is in the softening of Chinese demand, which has led to a sharp drop in trade. This week’s data showed China’s exports have declined for three consecutive months, and imports have slipped for five months. On the plus side, lower demand dampens inflationary pressures, which could potentially make life easier for the Federal Reserve and other central banks as they continue to battle high prices in their economies. Yet, this can have a negative impact on producers and exporters in the US and other markets, Montufar-Helu said, and replacing the missing demand may not be easy. Keith Hartley, chief executive of supply-chain analytics firm LevaData, noted that China consumes a significant portion of the world’s commodities, and softer demand there means an inventory glut for US companies and shrinking profits, as well as less business for countries that rely on commodity exports. “For the US, sectors like agriculture and manufacturing reliant on exporting to China could see reduced sales, potentially causing economic slowdown and job losses,” Hartley told Insider. While a prolonged slump for Chinese exports could weigh on nations’ manufacturing industries and disrupt supply chains, he said it also opens the door for other countries like the US to diversify their sourcing strategies, and begin relocating manufacturing outside of China. Exporting deflation American companies with ties to China are already feeling the effects of the slowdown. A handful of chemical and manufacturing companies have reported lower second-quarter sales, and some have pulled back their outlook for the rest of the year, as Insider’s Noah Sheidlower wrote Thursday. As a result of widespread declines in China’s consumer prices, many Americans could see pricier cars and personal-care products, and some companies could lose revenue and resort to layoffs. “One of the biggest risks is that China starts exporting deflation to the world, hurting corporate profits in the U.S. and around the world,” Dexter Roberts, a senior fellow at the Atlantic Council, told Insider. “A Chinese slump would hurt both the many American companies that derive a significant portion of their revenues from China, and those who may not be directly invested or sell to China, but would be hurt by global deflation.” Housing crash Slumping domestic demand in China and weak consumer spending largely stems from risks in the domestic property market, but there are spillover risks from that sector as well. The Conference Board’s Montufar-Helu said housing assets are estimated to account for around 70% of Chinese households’ wealth, and the uncertainty is making people hold onto their cash rather than spend it. Property market tumult is weighing on China’s overall growth, he said, by crimping industrial output, discouraging spending, eroding government revenue levels, and increasing risks across the financial sector. “The real estate boom over the past decade attracted considerable amounts of foreign capital, including from the US,” Montufar-Helu said. “Chinese developers are facing significant liquidity constraints, and so the likelihood of them defaulting on US-denominated bonds is growing.” And as the housing crisis deepens, it will become harder to China to right the ship, creating a lasting drag on future global growth. David Roche, president and global strategist at Independent Strategy, said in a CNBC interview this week that the Chinese economic model is now “washed up on the beach” with little chance of a rebound.

The Fed is out of stabilizers/tools to prevent economic downturns

EL-Erian, 11-22, 22, MOHAMED A. EL-ERIAN is President of Queens’ College at Cambridge University. He also serves as Professor of Practice at the Wharton School, Senior Global Fellow at the Lauder Institute, and an adviser to Allianz and Gramercy Funds Management, Not Just Another Recession Why the Global Economy May Never Be the Same,

But the longer central banks extended what was meant to be a time-limited intervention—buying bonds for cash and keeping interest rates artificially low—the more collateral damage they caused. Liquidity-charged financial markets decoupled from the real economy, which reaped only limited benefits from these policies. whole The rich, who own the vast majority of assets, became richer, and markets became conditioned to think of central banks as their best friends, always there to curtail market volatility. Eventually, markets started to react negatively to even hints of a reduction in central bank support, effectively holding central banks hostage and preventing them from ensuring the health of the economy as a. All this changed with the surge in inflation that began in the first half of 2021. Initially misdiagnosing the problem as transitory, the Fed made the mistake of enabling mainly energy and food price hikes to explode into a broad-based cost-of-living phenomenon. Despite mounting evidence that inflation would not go away on its own, the Fed continued to pump liquidity into the economy until March 2022, when it finally began raising interest rates—and only modestly at first. But by then inflation had surged above 7 percent and the Fed had backed itself into a corner. As a result, it was forced to pivot to a series of much steeper rate hikes, including a record four successive increases of 0.75 percentage points between June and November. Markets recognized that that the Fed was scrambling make up for lost time and started worrying that it would keep rates higher for longer than would be good for the economy. The result was financial market volatility that, if sustained, could threaten the functioning of global financial markets and further damage the economy.

Wage increases boost consumer spending

Sarah Chaney Camban, 11-24, 21, WSJ, U.S. Recovery Accelerates on Spending, Labor Market Growth,

Wage increases will be a key source of spending power for consumers as they run through savings accumulated from multiple rounds of government stimulus. Americans were saving at an annualized rate of $1.322 trillion in October, compared with $5.764 trillion in March, when a fresh round of stimulus started reaching bank accounts. “We’re seeing the growth baton being passed from the public sector to the private sector,” said Mr. Daco of Oxford Economics. The personal-saving rate, which is saving as a percentage of after-tax income, was 7.3% in October, in line with pre-pandemic levels. The booming job market has been a boon for Caleb Waack’s career. The 28-year-old starts a new job in data engineering for an online mattress firm next Monday, his third since the pandemic began. Mr. Waack said he seized on extra time from working remotely to study up on programming, helping him transition from automotive engineering to consumer goods and, ultimately, to his chosen field of data science. He said he received an offer for his new job within a week of applying, compared with a five-week turnaround time for the role he took in mid-2020. “The labor market is scorching hot,” said Mr. Waack, who lives in De Pere, Wis. “The salary increase is—it’s significant, definitely higher than inflation. It’s an employees’ market, right?” Covid-19 is still disrupting the economy and poses a risk to the outlook. Virus cases have risen this month, and some public-health experts warn that cases could continue to climb as people gather indoors during the winter.