Monday, September 25, 2023
HomeEconomyFor the Fed, a summer of rogue still hangs on inflation

For the Fed, a summer of rogue still hangs on inflation

Howard Schneider

WASHINGTON (Reuters) – Fed officials adjourn their July 26 – 27 policy meetings took an unusually long eight-week break before the next, sending their inboxes a larger-than-normal volume of U.S. inflation, jobs and economic data.

However, the interlude was more humble than clarification, as U.S. central bankers had little idea of ​​how their fight against inflation might end, instead acknowledging that the fight might take longer than expected longer.

It still seems possible to reduce price pressures without a sharp slowdown in the economy. Signs of a recession have eased since the last meeting of the Fed’s policy-setting committee.

Yet inflation shows no sign of abating.

It now looks likely that the Fed will raise interest rates by three-quarters of a percentage point next week, although Tuesday’s higher-than-expected consumer price data shed some light on that outlook Uncertainty – high.

What happened after that meeting is debatable. New economic forecasts, released to accompany the September 21 policy statement, will show what policymakers think will happen, but their recent track record has not been great.

First, bad news

Fed officials stunned in June with faster-than-expected inflation, then moderated in July with an annual pace of prices Growth is slowing.

That brief shining moment, which offered some hope of the worst possible ending, faded in August. While lower gasoline prices have helped to ease headline inflation — to a degree — the decline has been modest, but beneath it all, “core” prices of all kinds have risen unexpectedly. The consumer price index rose at an annual rate of 8.3% last month. Excluding volatile food and energy components, it registered 6.3%.

All in all, despite the Fed’s fastest rate hike since the beginning of the year 1980, inflation is moving sideways so far. To bring inflation down from its current annual pace to near the Fed’s 2% target, monthly increases would have to average around 0.2%, about a third of the average since the start of the year 2021.

(Graph: Interest rates rising, inflation sideways,

The most sobering thing is that the mechanism doesn’t work as expected. Many believe commodity prices will fall as supply chains improve, offsetting expected increases in service costs as people start traveling, dining out and catching up to the types of spending that have been constrained during the pandemic. Coronavirus disease pandemic.

Service inflation picked up. However, commodity prices have not yet fallen off a cliff and actually rose in August.

(Graphic: Services step in as commodity inflation eases,

More pain may be on the way. In recent weeks, Fed officials have pointed out that rising rents could keep inflation high for now, while continued wage growth — especially linked to prices in labor-intensive services — is also a concern. (Graphic: Hourly wage growth,

Now, good news

The full two months of new data since the Fed’s July meeting weren’t all bad.

In late August, revisions to first-half GDP and gross domestic income estimates eased recession fears. GDP still shrank, but by less than initially estimated; another measure of economic speed – incomes – continued to grow. Averaging the two, the US economy grew slightly between January and July.

What’s even more remarkable for the Fed is that the job market has not only remained strong, it’s started to behave the way policymakers want it to.

Two monthly jobs reports since the last Fed meeting showed economic growth 526, July jobs and 315, 000 August jobs, Fed The continued strength of the labor market is expected to withstand higher interest rates without being hit by mass layoffs. (Graphic: Salary growth remains strong, open. For the Fed’s hoped-for “soft landing” of low inflation and a healthy job market and a growing economy, upcoming job vacancy data needs to show job openings are falling.

Unemployment rose slightly in August, but Fed hopes the real release valve for wage pressures and labor market ‘tightening’ will come from employers scaling back hiring programs as the economy cools rather than paying wages for what they think they need Premiums are offered to workers who meet demand and increase profits.

The August data does show some potentially good trends for the Fed.

For example, the rise in the unemployment rate from 3.5% to 3.7% was driven by rising labor force participation—more people are not only working, but choosing to look for work.

Perhaps more importantly, the increase in the labor force is the product of a massive influx into the job market, not just (sometimes) a drop in turnover—an important distinction.

The number of non-labor workers transferred directly to jobs was 4.9 million in August, the largest number since the start of the pandemic. Likewise, the number of unemployed who gave up their jobs and left the labor force was the lowest at 1.3 million.

Both figures point to an increase in the size of the sorting labor force and an increase in “dependency” on the labor force, which helps ease wage pressures and also helps Reduce vacancy rates over time.




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