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Weekly Update 2/10/2023: Fed Governors Speak

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  • Consumer future inflation sentiment remains stable


With the latest Federal Open Market Committee meeting now in the past, Fed governors are free to speak their minds on the economy and policy. At the Economic Club of Washington on Tuesday, Fed Chairman Jerome Powell did just that. Most of his comments related to how the tightness of the labor market was making the job of the Fed tougher. He commented: “It kind of shows you why we think this will be a process that takes a significant period of time.” He added that bringing inflation down to the Fed’s goal of 2% “is likely to take quite a bit of time. It’s not going to be, we don’t think, smooth. It’s probably going to be bumpy. So we think we’re going to have to do further [rate] increases, and we think we’ll have to hold policy at a restrictive level for some time.” Last week’s payroll report was stronger than expected and included upward revisions to previous reports. Hopes that a softening in labor trends was underway, such as a decline in temporary hiring or a drop in hours worked, reversed in January or were revised away. Markets moved sharply higher after his post-meeting press conference last week as investors detected less hawkishness than at prior events. The failure to push back strongly against investors’ views--namely that the path to bring inflation down this year would be easier than the Fed has signaled is likely--helped fuel that rally.

Other Fed governors added their thoughts this week as well. Fed Governor Lisa Cook on Wednesday said officials were committed to curbing inflation and further tightening was warranted. “We are not done yet with raising interest rates, and we will need to keep interest rates sufficiently restrictive,” she told an event in Washington. “We need to attain a sufficiently restrictive stance of policy,” New York Fed President John Williams told a Wall Street Journal live event in New York on Wednesday. “We’re going to need to maintain that for a few years to make sure we get inflation to 2%.” Governor Christopher Waller spoke to an audience at Arkansas State University the same day and added: “Though we have made progress reducing inflation, I want to be clear today that the job is not done. It might be a long fight, with interest rates higher for longer than some are currently expecting.” Minnesota Fed President Neel Kashkari, a noted inflation hawk, chimed in at the Boston Economic Club midweek: “There’s not yet much evidence, in my judgment, that the rate hikes that we’ve done so far are having much effect on the labor market. We need to bring the labor market into balance so that tells me we need to do more.” No surprise that Wednesday’s markets had a decidedly negative tone in trading. The yield curve reflected the more hawkish statements from the Fed members with the six month U.S. Treasury security yielding over 4.90% at week’s end.

Labor Market News

Initial unemployment claims rose for the first time in six weeks in the week ended February 4 according to the Labor Department. Filings rose 13,000 to 196,000 which was above the 190,000 median forecast in a Bloomberg survey of economists. Nevertheless, the four-week moving average fell to its lowest level since April of last year. Continuing claims, which include people who have already received benefits for a week or more, rose to 1.69 million in the week ended January 28. Even with the uptick, it was still the fourth consecutive week claims were below 200k suggesting continued tightness in the labor market. A recent survey of chief executives by the Conference Board showed that 57% of firms report some problems finding qualified workers. At least 80% expect to boost wages by at least 3% over the coming year. Thus, it remains a tough environment for employers even with some companies girding for a recession sometime this year or in 2024.

Inflation Expectations

The University of Michigan’s preliminary index for February showed a gauge of price expectations over the coming year rose to 4.2% from 3.9%. Over the next five to ten years, consumers expect inflation to rise 2.9%, unchanged from the prior two months. The report’s sentiment sector showed an index of current conditions rose to 72.6 from a January reading of 68.4 as a rebound in stock prices helped fuel personal finance optimism and spending. However, the sentiment outlook for future months eased to 62.3 from 62.7. “Combined with concerns over rising unemployment on the horizon, consumers are poised to exercise greater caution with their spending in the months ahead,” said Joanne Hsu, director of the survey, in a statement. On the whole, this was a good report because it showed that while near-term price pressures are being incorporated by consumers, the outlook for future periods remain anchored which is exactly what the Fed wants to see.

Next week we will get the much anticipated consumer price index (CPI) report for January to be released on Tuesday. On a year-over-year basis, a Bloomberg survey of economists calls for an annualized rise of 6.2% last month compared to 6.5% in December. Excluding food and energy, the so-called core CPI is expected to have risen 5.5% annualized last month versus 5.7% in the previous month. Will the markets get a love letter on Valentine’s Day? While we have seen disinflationary forces at work, the market may want to see a more precipitous deceleration. Given that CPI feeds into many financial markets (e.g., for determining the six-month rate on inflation-indexed government bonds) and transfer payments (e.g., Social Security benefits), it will have ramifications far and wide. The Fed will get next week’s CPI report and one additional readout in March before they convene for their regular open market committee meeting on March 22.


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