Interest Rates: The Federal Reserve said Wednesday it would pause its historic rate-hiking campaign as it waits for the effects to trickle further through the economy, but signaled that additional rate hikes are likely this year.
The vote to skip a rate increase this meeting was unanimous.
Since March 2022, Fed officials have raised the central bank’s benchmark interest rate 10 times in a row in an attempt to cool the US economy and battle inflation that is still double the Fed’s target.
From the LA Times: The Bank of England hiked its main interest rate by a bigger margin than expected to a 15-year high. Central banks in Norway, Switzerland and Turkey also raised borrowing rates.
In the United States, meanwhile, Federal Reserve Board Chair Jerome H. Powell reiterated his belief that inflation is still too high and that further increases to rates may be necessary. The Fed held interest rates steady at its last meeting after raising rates aggressively throughout 2022 and into 2023 to tame painfully high inflation. Inflation has cooled somewhat since last summer, but the Fed has signaled it may raise rates two more times this year as it tries to push inflation down to its stated goal of 2%.
Powell testified before a Senate committee Thursday, a day after appearing before a House committee.
Central banks worldwide have been raising interest rates to make borrowing more difficult and slow economic growth to stifle inflation. The strategy risks going too far in stalling growth and dragging economies into a recession. Economists and analysts have been warning that the U.S. could slip into a recession before 2023 ends, but resilient consumer spending and a strong job market have been bolstering the economy.
High interest rates, though, have already slowed manufacturing and other parts of the U.S. economy. They’ve also helped cause three high-profile failures in the U.S. banking system. The banking industry remains under pressure, even after the federal government acted quickly to provide support.
Bond yields rose. The yield on the 10-year Treasury rose to 3.79% from 3.73% late Wednesday. It helps set rates for mortgages and other important loans.
Stock indexes in Europe fell after the most recent rate increases. Britain’s FTSE 100 slipped 0.8%. The latest interest rate increase from the Bank of England marked its 13th hike in a row in its effort to combat stubbornly high inflation.
France’s CAC 40 shed 0.8% and Germany’s DAX fell 0.2%. Markets in Asia were mixed. Hong Kong and Shanghai were closed for the Dragon Boat Festival, a national holiday.
The U.S. stock market has been “taking a little bit of a breather” after a five-week rally, said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. The big focus in the coming weeks will probably be any economic data, including a big report on inflation next week, that could give investors a better sense of how the Fed will proceed.
The Labor Department reported Thursday that the number of Americans applying for unemployment benefits remained elevated last week, a possible sign that the Fed’s rate hikes are beginning to cool a surprisingly resilient labor market.
In the housing industry, sales of previously occupied homes strengthened last month, beating economists’ expectations for a slide.
Is the Inflation Battle Won? Not Yet-Inflation has come down from its 2022 heights, but economists are worried about its stubbornness. By Jeanna Smialek for the New York Times.
Inflation is beginning to abate meaningfully for American consumers. Gas is cheaper, eggs cost roughly half as much as they did in January and prices are no longer climbing as rapidly across a wide array of products.
But at least one person has yet to express relief: Jerome H. Powell, the chair of the Federal Reserve.
The Fed has spent the past 15 months locked in an aggressive war against inflation, raising interest rates above 5 percent in an attempt to get price increases back down to a more normal pace. Last week its officials announced that they were skipping a rate increase in June, giving themselves more time to see how the already enacted changes are playing out across the economy.
But Mr. Powell emphasized that it was too early to declare victory in the battle against rapid price increases.
The reason: While less expensive gas and slower grocery price adjustments have helped overall inflation to fall from its four-decade peak last summer, food and fuel costs tend to jump around a lot. That obscures underlying trends. And a measure of “core” inflation that strips out food and fuel is showing surprising staying power, as a range of purchases from dental care and hairstyling to education and car insurance continue to climb quickly in price.
Last week, Fed officials sharply marked up their forecast of how high core inflation would be at the end of 2023. They now see it at 3.9 percent, higher than the 3.6 percent they predicted in March and nearly twice their 2 percent inflation target.
The economic picture, in short, is playing out on something of a split screen. While the steepest price increases appear to be over for consumers — a relief for many, and a development that President Biden and his advisers have celebrated — Fed policymakers and many outside economists see continued reasons for concern. Between the subtle signs that inflation could stick around and the surprising resilience of the American economy, they believe that central bankers might need to do more to cool growth and rein in demand to prevent unusually elevated price increases from becoming permanent.
A fresh Consumer Price Index inflation report last week showed that inflation continued to moderate sharply on an overall basis in May. That measure helps to feed into the Fed’s preferred measure, the Personal Consumption Expenditures index, which it uses to define its 2 percent target. The fresh P.C.E. figures will be released on June 30.
Is a summer of fun to blame for inflation? Uncomfortably high inflation appears set to linger, forcing central bankers to inflict further pain on consumers and businesses by raising borrowing costs again and again.
But economists have spotted an unusual trend heading into the summer: Consumers are still splashing out on expensive but fun experiences, from nights out to concerts, despite surging prices.
Central bank chiefs on both sides of the Atlantic are sounding the alarm. The Bank of England raised interest rates by a higher-than-expected half-percentage point after failing to get a handle on the highest inflation of any Group of 7 country. The bank’s governor, Andrew Bailey, whose credibility is taking a pummeling, gave a cautionary explanation: “If we don’t raise rates now, it could be worse later.”
Hours later, Jay Powell, the Fed chair, told a Senate committee that he saw a similar threat. “We are committed to getting inflation under control,” he said, warning that at least one more increase is on the table.
Economists are seeing something weird in the inflation data. Consumers are splurging on pricey meals, through-the-roof airfare and expensive concert tickets. Some economists in Sweden even blamed Beyoncé fans for driving up prices of hotels and restaurants when they converged on the country last month to see the star kick off her world tour. In the U.S., others have seen a similar effect with hotel prices soaring in cities where Taylor Swift performs.
“It’s fun-flation, if you’re looking for a word,” Holger Schmieding, chief economist at Berenberg, told DealBook. And the data suggests this brand of inflation isn’t receding. “We’re looking at the summer of fun,” he said.
When inflation runs persistently high, consumers normally cut back. If they do spend, it is typically on so-called durable goods: a new washing machine, a car, a house. The thinking is that it’s prudent to bring forward such purchases if you believe you’ll spend more for them in the near future. Economists and central bankers are seeing a bit of that, but also higher spending on discretionary items, such as travel and nights out.
Some call the phenomenon “revenge spending,” the zeal to indulge in experiences now that Covid lockdowns are far in the past. (It helps that many still have pandemic savings to draw on, or have seen their wages surge in the past year.) Grant Fitzner, the chief economist of Britain’s Office for National Statistics, has singled out airfare, concert tickets and computer games as big drivers behind the country’s stubbornly high inflation.
A summer of fun could invite a tougher policy response this autumn. “The only way to get inflation down to 2 percent is to crush demand and slow down the economy in a more substantial way,” Torsten Slok, chief economist at Apollo Global Management, told The Financial Times.
A summer of fun could invite a tougher policy response this autumn. “The only way to get inflation down to 2 percent is to crush demand and slow down the economy in a more substantial way,” Torsten Slok, chief economist at Apollo Global Management, told The Financial Times.
from the Financial Times: UK inflation stays stuck at 8.7%-UK inflation remained stuck at 8.7 per cent in May, much worse than expectations of a drop to 8.4 per cent. The figures will reinforce expectations of multiple interest rate rises from the Bank of England, starting on Thursday with a rise of at least 0.25 percentage points from 4.5 per cent to 4.75 per cent.
From the New York Times: Return to Office Enters the Desperation Phase-The next stage of getting workers back at their desks includes incentives like $10 to the charity of their choice — and consequences like poor performance evaluations if they don’t make the trek in.
A wave of companies called workers back to the office this spring and summer: Disney said four days a week, Amazon swung with three (prompting a walkout from corporate workers), Meta and Lyft are aiming for September deadlines for many of their employees. Others devised new tactics to ensure their return-to-office policies stuck. Google, which has asked most workers to be in the office three days a week, announced that performance reviews could take into account lengthy unexplained absences from the office, and badge records could be reviewed to identify those consistent absences, said Ryan Lamont, a company spokesman.
Google employees will be granted the ability to work remotely only on an extremely rare basis. “We want to see Googlers connecting and collaborating in person, so we’re limiting remote work to exception only,” Mr. Lamont said.
These new policies come as business leaders accept that hybrid work is a permanent reality, with just over a quarter of full workdays in the country now done at home, and offices still at half their prepandemic occupancy. (Though that 50 percent occupancy metric combines Tuesdays and Wednesdays, when offices are bustling, with Fridays, when they tend to be ghost towns.)
Salesforce, the business software behemoth, announced that for a 10-day period, it will give a $10 charitable donation per day on behalf of any employee who comes into the office (or for remote employees who attend company events). A spokeswoman said it was only natural the company would want to find moments for “doing well and doing good.” But to some employees, it might feel like a tonal shift, given that the company’s previous workplace plans were announced with fanfare for a future in which much of its staff could be fully or partially remote forever. (The company emphasized that this remains the case.)
It’s not often that the entire white-collar business world gets thrown into an impromptu experiment — executives left to discern how to make multimillion-dollar decisions in between bursts of “you’re on mute,” employees figuring out how to forge friendships and nudge mentors for advice while sitting next to piles of their laundry.
And for the last three years, some office decision-making has come to feel like parents scrambling to impose rules on an unruly home: “Do this.” “Why?” “Because I said so.” But now some business leaders say that the results of their remote work experiment are in. They feel emphatically that they need some in-person time. After months of layoffs, especially in tech, their next business moves feel particularly consequential.
World Economy: European Central Bank Raises Rates to Highest Level Since 2001-Inflation is “projected to remain too high for too long,” the central bank said as it raised interest rates by a quarter point, and signaled more increases may be coming.
The European Central Bank raised interest rates to their highest level in more than two decades on Thursday and warned that there was further to go in order to stamp out inflation.
Unlike the Federal Reserve, which left interest rates unchanged on Wednesday, policymakers who set rates for the 20 countries that use the euro said they hadn’t even discussed pausing rate increases at this week’s policy meeting.
The bank lifted rates by a quarter of a percentage point, putting the deposit rate at 3.5 percent, the highest since 2001, as officials said inflation was forecast to remain too high for too long. It was the bank’s eighth consecutive increase. The move had been well telegraphed since the last meeting of the bank’s Governing Council in early May, when policymakers expressed concern about underlying inflation pressures from wage growth and corporate profits or the impact of rising food prices.
From the New York Times: China’s central bank cut key interest rates on Tuesday for loans issued by the state-controlled banking system, in the clearest sign yet of mounting concern in the Chinese government and corporate sector that the country’s economy is stalling.
The interest rate cut was small — a tenth of a percentage point for the country’s benchmark one-year and five-year interest rates for loans. But because almost all of the country’s corporate lending and mortgages are linked to the two rates, the reductions could have some effect on the overall pace of economic growth.
The move by the central bank, the People’s Bank of China, puts China at odds with policies in the West. The Federal Reserve spent over a year battling inflation by raising rates before pausing this month. The European Central Bank has also been pushing up interest rates in response to inflation.
But China has the opposite problem: Spending and private sector investment are so weak that businesses have been vying with one another to cut prices to keep customers. Consumer and producer prices fell for the four months through May.