Today is interest-rate day in Europe as we wait for the ECB and the Bank of England. But the world background was set last night in New York by the US Federal Reserve,
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/2 to 4-3/4 percent.
This bit was also significant.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.
As everybody voted for a 0.25% increase. That was in line with my expectation and indeed from our Bank of Canada leading indicator last week. Let me give the Federal Reserve credit here for stating the votes explicitly as for example the ECB does not meaning people end up asking President Lagarde and there is no check on her truthfulness.
However even such a big deal is now in the past and we move smoothly o to what happens next? So let us examine the US economy.
The US Economy
The Atlanta Fed GDP nowcast tells us this.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2023 is 0.7 percent, unchanged from January 27 after rounding.
So 0.2% as we would count it which is not much. Indeed in ordinary times if such a state still exists such a growth rate would have the Federal Reserve thinking about interest-rate cuts not rises. Especially if we add this from Chair Powell’s opening statement.
The U.S. economy slowed significantly last year, with real GDP rising at a below-trend pace of 1 percent. Recent indicators point to modest growth of spending and production this quarter.
He then confessed a lot of it was down to his actions.
Consumer spending appears to be expanding at a subdued pace, in part reflecting tighter financial conditions over the past year. Activity in the housing sector continues to weaken, largely reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed investment.
Inflation
This of course has been something of an X-Factor trumping the situation above. Over again to Chair Powell.
Inflation remains well above our longer-run goal of 2 percent. Over the 12 months ending in December, total PCE prices rose 5.0 percent; excluding the volatile food and energy categories, core PCE prices rose 4.4 percent.
As you can see they are still trying to spin the core inflation line in spite of having to start the statement with this.
My colleagues and I understand the hardship that high
inflation is causing, and we are strongly committed to bringing inflation back down to our
2 percent goal.
Inflation in food and energy has affected people the most. But the situation forced their hand and even their brightest PhD students could not come up with an inflation number below 4.4%. Doing it ignores the reality the central bankers have been forced to confess to.
My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation.
A sort of new version of “I cannot eat an I-Pad”
However looking ahead the situation is beginning to turn.
The inflation data received over the past three
months show a welcome reduction in the monthly pace of increases
The next bit is not a little curious because if they really believed that then they could have increased interest-rates by 0.5%.
And while recent developments are encouraging, we will need substantially more evidence to be confident that
inflation is on a sustained downward path.
Jobs
The official line continues to be this and the emphasis is mine.
Despite the slowdown in growth, the labor market remains extremely tight, with the unemployment rate at a 50-year low, job vacancies still very high, and wage growth elevated.
I would argue that arguing wage growth is “elevated” must come in the context of it being rather thin when compared to inflation. But the Federal Reserve must also be aware of this from last year.
From March 2022 to June 2022,
The difference between the number of gross job gains and the number of gross job losses yielded a net
employment loss of 287,000 jobs in the private sector during the second quarter of 2022.
That was from the Bureau of Labor Statistics on the 25th of January and is a bombshell. You will realise how much when I point out that they originally claimed there were 1.1 million job gains. So there has been a downwards revision of some 1.4 million. This provides us with several contexts as we remind ourselves that we were assured the US could not be in recession back then due to the labour market being so strong. Also such large revisions provide quite a context for the non-farm payroll numbers which in that context are smaller than the margin of error. Finally the jobs market looks a fair bit weaker now.
Comment
The statement came with by now usual rhetoric.
Even so, we have more work to do. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the
economy does not work for anyone.
That clearly suggests more interest-rate rises are on there way. Or it would if central bankers were ever clear about such things.
“If I seem unduly clear to you, you must have misunderstood what I said.”
That was Alan Greenspan to a Senate Select Committee back in 1987. I think that the real message came in the previous couple of sentences.
Over the past year, we have taken forceful actions to tighten the stance of monetary policy. We have covered a lot of ground, and the full effects of our rapid tightening so
far are yet to be felt.
The first is essentially PR where they are hoping the media will pick up on and use the word “forceful” to influence perceptions. The second is more important as it hints that they think they may have done enough already.
Indeed my Never believe anything until officially denied line may be getting a hearing as this.
FED‘S POWELL: RATE CUTS WILL NOT BE APPROPRIATE THIS YEAR, ACCORDING TO MY FORECAST AND THAT OF MY COLLEAGUES. ( @financialjuice )
Led to this.
Swap contracts tied to this year’s Fed meetings show approximately 50 basis points of rate cuts are now firmly priced between the June policy peak of 4.90% to the 4.40% overnight lending rate tied to the December policy meeting. ( Bloomberg)
Will we get one more rise or was that it?