Tag: Central banking

Divided Bank of England leaves policy unchanged, says interest rates are ‘under review’

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A passageway near the Bank of England (BOE) in the City of London, U.K., on Thursday, March 18, 2021.

Hollie Adams | Bloomberg | Getty Images

LONDON — The Bank of England held interest rates steady at 5.25% on Thursday, with the announcement detailing the very divided opinions among board members.

The Monetary Policy Committee voted 6-3 in favor of holding rates, with two dissenters favoring a further 25 basis point hike and one voting for a quarter-point cut. This marked the first meeting since August 2008 that MPC members have voted to move interest rates in opposite directions at the same meeting.

“The MPC remains prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably,” the bank said in a statement.

“It will therefore continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation. On that basis, the Committee will keep under review for how long Bank Rate should be maintained at its current level.”

Sterling recouped the day’s losses against the dollar to trade roughly flat by early afternoon in London, at around $1.2677 to the pound.

Much of the market focus of late has been on when the central bank will start cutting interest rates from their current 15-year high.

U.K. headline inflation unexpectedly nudged upward to an annual 4% in December on the back of a rise in alcohol and tobacco prices, while the closely watched core consumer price index figure was unchanged at 5.1%.

However, it has remained on a general downward trajectory, while the bank’s key indicators of the labor market, wage growth and services inflation have all shown signs of easing.

The MPC notably dropped its prior warning that “further tightening” would be necessary if indications emerged of more persistent inflationary pressures, but stopped short of openly signaling that rate cuts were coming into view.

Inflation is projected to fall temporarily to the bank’s 2% target in the second quarter of this year before rising again in the third and fourth, due to the varying contribution of energy prices to annual comparisons.

Headline inflation is not expected to return to target again until late 2026, the bank’s newest Monetary Policy Report projected.

“Bank staff estimate that around two-thirds of the peak domestic impact of higher interest rates on the level of GDP has now come through, and that percentage is up from about half in November,” Governor Andrew Bailey said at Thursday’s news conference.

“The second key judgment is that excess demand is turning into excess supply. While we expect potential supply growth to remain subdued, a modest pickup in productivity and labor supply growth is sufficient for supply to outpace demand over the forecast period.”

Bailey added that the second round effects of domestic price and wage increases will take longer to unwind than they did to emerge, explaining why inflation is projected above the 2% target in the bank’s baseline projection despite the emergence of excess supply.

Rate cuts ‘sooner rather than later’

With the journey to sustainable 2% inflation not expected to be smooth, policymakers will be keen to avoid jumping the gun and cutting rates too early, suggested Lindsay James, investment strategist at Quilter Investors.

“Given the fragile nature of this economic environment, and the geopolitical risks playing out, Andrew Bailey and co will take a cautious approach rather than risk another inflation spike,” James said.

“What is likely to switch the conversation on rate cuts is if the 2% target is hit sooner than thought. However, we are beginning to see signs that the BoE may move soon as there was a vote at today’s meeting for a cut.”

Though the MPC will be keen to mirror the “data dependent” approach of its trans-Atlantic peers at the Federal Reserve, James contended that rate cuts will need to be introduced “sooner rather than later.”

“The U.K. economy is in somewhat of a malaise, and rates at this level for too long may end up being overly constrictive,” she said.

“It remains to be seen if a recession can be dodged, and even despite the improving backdrop, failure for economic growth to materialise may just spark the BoE into action.”

However, given that eight of the MPC’s nine members still advocated for rates to remain at the current or even higher levels, a serious conversation about loosening policy might still be a long way off, said Raj Badiani, principal economist at S&P Global.

“We expect four interest rate cuts this year with the first to occur in June. However, the exact timing remains uncertain because of still strong service and core inflation and unsustainable earnings growth,” Badiani said in an email.

“Very restrictive monetary policy condemns the economy to near-flat activity in the coming quarters. Millions of U.K. households face a further spin of their cost of living tensions, namely escalating housing costs, rising personal taxation and historical high food and energy prices.”

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February 1, 2024
Caixin survey shows China’s factory activity expanded for a third month in January, extending divergence with official data

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Several bills, each with a value of 100 Chinese renminbi, lie on a table.

Johannes Neudecker | Picture Alliance | Getty Images

China’s factory activity expanded for a third-straight month in January, a private-sector survey showed on Thursday, helped by the first expansion in new export orders in seven months.

Thursday’s print though, extended a divergence from official data that points to the patchy growth in the world’s second-largest economy and underscores the need for policy support.

The Caixin China manufacturing purchasing managers’ index was 50.8 in January, according to a release on Thursday, after also coming in at 50.8 in December. Economists expected the reading to hit 50.6, according to a Reuters poll. The 50-point mark separates expansion from contraction.

China’s National Bureau of Statistics released data Wednesday that showed the country’s official manufacturing PMI coming in at 49.2 in January, a fourth consecutive monthly contraction — compared with 49 in December.

“Overseas demand picked up slightly with new export orders expanding for the first time in seven months. Surveyed companies reported that the largest output increase was in investment goods, while the improvement in external demand was mainly seen in intermediate goods,” Wang Zhe, senior economist at Caixin Insight Group, said in Thursday’s release.

The divergence has largely been attributed to the differences in the survey samplings. The Caixin manufacturing PMI surveys around 650 private and state-owned manufacturers that tend to be more export-oriented and located in China’s coastal regions, while the official PMI surveys 3,200 companies across China.

Employment and price pressures

Still, there are some similar trends identified in both surveys.

Employment in China’s manufacturing sector trended down in the official survey released Wednesday as in the Caixin survey.

“Employment continued to decline. Cutting costs and improving efficiency remained companies’ top concerns, so the upturn in market activity failed to fully translate into new jobs,” Wang said.

“The labor market shrank in January for the 10th time in the past 11 months, though less drastically than in the previous month. Despite continued staff cuts, companies were able to reduce backlogs of work, with the gauge dipping moderately,” Wang added.

China’s manufacturing activity shrank for the fourth straight month in January

China has also been teetering on the verge of deflation for the last nine months, with producer prices declining for at least a year now.

“Price levels remained weak. Increases in input costs were limited due to the slight increase in raw material prices. The measure for input costs hit the lowest level since August.” Wang said.

“Output prices were even weaker, as growing market competition constrained companies’ bargaining power, pushing the gauge back into contractionary territory,” Wang added.

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January 31, 2024
Federal Reserve holds interest rates steady, sets the stage for cuts. What that means for your money

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The Federal Reserve announced Wednesday it will leave interest rates unchanged, setting the stage for rate cuts to come and paving the way for relief from the combination of higher rates and inflation that have hit consumers particularly hard.

Although Fed officials indicated as many as three cuts coming this year, the pace that they trim interest rates is going to be much slower than the pace at which they hiked, according to Greg McBride, chief financial analyst at Bankrate.

“Interest rates took the elevator going up; they are going to take the stairs coming down,” he said.

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Inflation has been a persistent problem since the Covid-19 pandemic, when price increases soared to their highest levels since the early 1980s. The Fed responded with a series of interest rate hikes that took its benchmark rate to its highest in more than 22 years.

The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.

The spike in interest rates caused most consumer borrowing costs to skyrocket, putting many households under pressure.

Below the surface, 60% of households are living paycheck to paycheck.

Greg McBride

chief financial analyst at Bankrate

“Below the surface, 60% of households are living paycheck to paycheck,” McBride said. Even as inflation eases, high prices continue to strain budgets and credit card debt continues to rise, he added.

Now, with rate cuts on the horizon, consumers will see some of their borrowing costs come down as well, although deposit rates will also follow suit.

From credit cards and mortgage rates to auto loans and savings accounts, here’s a look at where those rates could go in the year ahead.

Credit cards

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark, and because of the central bank’s rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to nearly 21% today — an all-time high.

Going forward, annual percentage rates will start to come down when the Fed cuts rates but even then, they will only ease off extremely high levels. With only a few potential quarter-point cuts on deck, APRs would still be around 20% by the end of 2024, McBride noted.

“The credit card rates are going to mimic what the Fed does,” he said, “and those interest rate decreases are going to be modest.”

Mortgage rates

Due to higher mortgage rates, 2023 was the least affordable homebuying year in at least 11 years, according to a report from real estate company Redfin.

Although 15- and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.

But rates are already significantly lower since hitting 8% in October. Now, the average rate for a 30-year, fixed-rate mortgage is 6.9%, up from 4.4% when the Fed started raising rates in March 2022 and 3.27% at the end of 2021, according to Bankrate.

Doug Duncan, chief economist at Fannie Mae, expects mortgage rates will dip below 6% in 2024 but will not return to their pandemic-era lows, which is little consolation for would-be homebuyers.

“We don’t see the affordability problem solved until supply increases substantially, interest rates come down and real incomes rise,” he said. “The combination of those things need to move together over time. It’s not going to be sudden.”

Auto loans

Even though auto loans are fixed, consumers are increasingly facing monthly payments that they can barely afford due to higher vehicle prices and elevated interest rates on new loans.

The average rate on a five-year new car loan is now more than 7%, up from 4% when the Fed started raising rates, according to Edmunds. However, rate cuts from the Fed will take some of the edge off the rising cost of financing a car — possibly bringing rates below 7% — helped in part by competition between lenders and more incentives in the market.

“There are some very encouraging signs as we kick off 2024,” said Jessica Caldwell, Edmunds’ head of insights.

“Incentives are slowly coming back as inventory improves,” she said, and “most consumers are looking for low APRs with longer loan terms, so the growth in those loans is helpful to lure consumers who have been sitting out due to adverse financing and pricing conditions.”

Savings rates

While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.

As a result, top-yielding online savings account rates have made significant moves and are now paying more than 5% — the most savers have been able to earn in nearly two decades — up from around 1% in 2022, according to Bankrate.

Although those rates have likely maxed out, “it will be another good year for savers even if we do see rates come down,” McBride said. According to his forecast, the highest-yielding offers on the market will still be at 4.45% by year-end.

Now is the time to lock in certificates of deposit, especially maturities longer than one year, he advised. “CD yields have peaked and have begun to pull back so there is no advantage to waiting.”

Currently, one-year CDs are averaging 1.75% but top-yielding CD rates pay over 5%, as good or better than a high-yield savings account.

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January 31, 2024
Forget a soft landing, there may be ‘no landing,’ economist says. Here’s what that would mean for you

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The Federal Reserve is expected to announce it will leave rates unchanged at the end of its two-day meeting this week, after recent reports showed the economy grew at a much more rapid pace than expected and inflation eased.

“In many ways, we already have a soft landing,” said Columbia Business School economics professor Brett House. “The Fed has threaded the needle of the economy very artfully with a kind of ‘Goldilocks‘ scenario.”

Gross domestic product grew at a much faster-than-expected 3.3% pace in the fourth quarter, fueled by a solid job market and strong consumer spending. However, inflation is still above the central bank’s 2% target, and that also opens the door to a “no-landing scenario,” according to Alejandra Grindal, chief economist at Ned Davis Research.

What a ‘no landing’ scenario means

“No landing means above-trend growth, and also above-trend inflation,” Grindal said, describing an economy that is “overheating.”

Inflation has been a persistent problem since the Covid pandemic, when price increases spiked to their highest levels since the early 1980s. The Fed responded with a series of interest rate hikes that took its benchmark rate to its highest in more than 22 years.

As of the latest reading, the current annual inflation rate is 3.4%, still above the 2% target that the central bank considers a healthy annual rate.

The combination of higher rates and inflation have hit consumers particularly hard. A “no landing” scenario also means more strain on household budgets and those with variable-rate debt, such as credit cards.

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While still elevated, inflation is continuing to make progress lower, possibly giving the Fed a green light to start cutting interest rates later this year.

“That looks like the soft landing has been more or less achieved and is likely to be sustained,” House said.

For consumers, this means relief from high borrowing costs — particularly for mortgages, credit cards and auto loans — may finally be on the way as long as inflation data continues to cooperate.

The alternative: A hard landing

Some experts still haven’t ruled out a recession altogether.

“The real danger here is that the Fed loosens prematurely, which is exactly what they did in the late 1960s,” said Mark Higgins, senior vice president for Index Fund Advisors and author of the upcoming book “Investing in U.S. Financial History: Understanding the Past to Forecast the Future.”

“The risks of allowing inflation to persist still far outweighs the risk of triggering a recession,” he said. “Their failure to do this in the late 1960s is one of the major factors that allowed inflation to become entrenched in the 1970s.”

According to Higgins, history suggests there could likely still be a recession before this is over.

To that point, 76% of economists said they believe the chances of a recession in the next 12 months is 50% or less, according to a December survey from the National Association for Business Economics.

“It’s normal for an economy to go through periods of expansion and contractions,” Higgins said. “In the short term it will be painful, in the long term we are better off doing what is necessary to return to price stability.”

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January 29, 2024
Watch: ECB President Christine Lagarde speaks after rate decision

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European Central Bank President Christine Lagarde is due to give a press conference following the bank’s latest monetary policy decision.

The ECB on Thursday held interest rates steady for the third meeting in a row. The bank was widely expected to leave policy unchanged in light of the sharp fall in euro zone inflation.

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January 25, 2024
German regulator urges banks to set aside bumper profits for bad news on the horizon

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The headquarters of German banks Deutsche Bank (L) and Commerzbank in Frankfurt, Germany.

FRANK RUMPENHORST | DPA | Getty Images

Banks should be setting aside recent bumper profits to provision for clients defaulting on loans as the impact of higher interest rates feeds into the economy, according to the president of the country’s regulator.

The banking industry enjoyed a windfall in 2023 as lenders reaped the benefits of central banks’ interest rate hikes while keeping deposit rates low.

Central banks around the world tightened monetary policy aggressively over the last two years in a bid to tame soaring inflation, but focus has now turned to when the likes of the U.S. Federal Reserve, the European Central Bank and the Bank of England will start cutting policy rates again.

Though economies have been surprisingly resilient in the face of rising borrowing rates, many policymakers have warned that the impact on households and businesses has yet to be fully felt.

The head of the German regulator (the Federal Financial Supervisory Authority which is better known as BaFin) told CNBC Tuesday that while the shock from rate increases has been “digested in the banking books,” there could be further troubles ahead.

“The difficulties that come from this rate environment for the clients of the banking sector — whether that’s in the real estate sector or in the real economy — we haven’t seen that flow through yet,” he told CNBC’s Annette Weisbach, adding that it “won’t be easy” to repeat the profitability expected in 2023 and 2024 as rates remain historically high.

“So firms have to be very wary about provisioning requirements about not only letting the shareholders profit from this good year that they’ve had, but put as much aside to deal with the costs that are coming because they will come.”

Deutsche Bank, Germany’s largest lender, beat third-quarter expectations with a 1.031 billion euro ($1.12 billion) net profit, and promptly said it would increase and accelerate shareholder payouts.

Insolvencies ‘pre-programmed’ to rise

The euro zone economy is widely expected to be in recession and Germany in particular is projected to face a prolonged slump, having contracted by 0.3% year-on-year in 2023, as high inflation and interest rates bit into growth.

However, many banks have yet to meaningfully increase their loan loss provisions. Branson said the market should expect them to start this year, and some may have already begun setting aside more money for bad loans in the final quarter of 2023.

“We’ve seen things happen in the commercial real estate market, which we’ve maybe predicted for a long time but now are crystallizing, so as I said 2024 and the years thereafter, they’re not going to be as easy as 2023,” Branson said.

He added that lenders should “keep the powder dry for the more difficult times,” including investing in operational security and stability, such as protection against cyberattacks.

Company insolvencies have yet to meaningfully pick up in the way that would be expected during a rapid incline in interest rates. However, Branson noted that the figures have thus far been “artificially low” due to a prolonged prior period of extremely low interest rates and the massive fiscal stimulus from governments to tackle the Covid-19 pandemic and energy crisis in recent years.

“So I think it’s almost pre-programmed that insolvencies will begin to rise again and that’s in a way normal for banks that they’ll also have have to deal with some credit losses in their books,” he said.

“That’s why we’re a bit skeptical the profitability will continue to rise after such a good 2023, and that’s why the banks have to look carefully now about what they need to provision.”

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January 24, 2024
Treasury yields nudge higher ahead of key data releases

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U.S. Treasury yields nudged slightly higher on Tuesday, as market participants await the release of key economic data points later in the week.

At 5:52 a.m. ET, the yield on the benchmark 10-year Treasury note was around 3 basis points higher at 4.128% while the yield on the 30-year Treasury bond was up around 2.9 basis points at 4.345%.

Yields move inversely to prices.

Investors are trying to gauge when the Federal Reserve will begin cutting interest rates, which will be a key determinant of the trajectory for markets and the economy this year.

Two significant pieces of economic data are on the slate this week: a preliminary fourth-quarter GDP growth figure is due on Thursday, followed by the Commerce Department’s closely-watched personal consumption expenditures price index for December on Friday.

Despite the uncertain rate outlook, risk-on sentiment remained robust on Monday, as the Dow Jones Industrial Average and the S&P 500 both notched all-time highs.

“It’s an economy proving to be more resilient than many thought and it’s one that is supported by the prospect of central banks cutting rates, and that’s a great environment for bonds and it’s a great environment for risky assets,” PGIM Principal and Global Investment Strategist Guillermo Felices told CNBC’s “Squawk Box Europe” on Tuesday.

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January 23, 2024

Moody's is negative on Asia's sovereign creditworthiness in 2024 as China growth slows

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Moody’s Investors Service has a negative outlook for sovereign creditworthiness in Asia-Pacific this year, due to China’s slower economic growth as well as tight funding and geopolitical risks.

China’s rebound from the Covid-19 pandemic wasn’t as fast as several economists had expected at the start of 2023. The country’s GDP for the last three months of 2023 rose by 5.2%, according to the National Bureau of Statistics, missing estimates of 5.3% in a Reuters poll.

In a Jan. 15 report, Moody’s predicted China’s real GDP growth would slow to 4% this year and next, from an average of 6% between 2014 and 2023. The credit rating agency said the slowdown in China’s growth “significantly influences” APAC economies because of its strong integration in global supply chains.

Goldman Sachs and Morgan Stanley, among other major international investment banks, predict China’s economy to grow at a slower pace of 4.6% in 2024, down from 5.2% expected for 2023.

Tight funding

On top of the “lackluster situation in China,” tight funding conditions will also weigh on Asia-Pacific sovereigns, Christian De Guzman, senior vice president at Moody’s Investors Service, told CNBC.

“This is also predicated on global liquidity conditions where we really don’t see the Fed easing until the middle of the year,” Guzman said on CNBC’s “Squawk Box Asia” on Monday.

“And Asia-Pacific central banks – we don’t see much decoupling [from] global liquidity conditions there.”

The Federal Reserve in December voted to hold interest rates at a 22-year high, but expects three cuts to come in 2024 as inflation eases.

The Moody’s report said high interest rates will prevent material gains in debt affordability, though rates are expected to ease gradually. As a result, international financing will remain difficult for lower-rated sovereigns, it concluded.

Geopolitical risks

Guzman also said strategic tensions between China and the U.S. will persist.

China is a top trading partner for most Asian nations, while the U.S. remains an important economic partner as well. As the wedge between China and the U.S. widens, it may be increasingly difficult to maintain this balancing act, according to a 2018 World Economic Forum report.

That could also mean opportunities for countries with large manufacturing bases and improving infrastructure such as India, Malaysia, Thailand and Vietnam, as companies diversify supply chains away from China to mitigate geopolitical risks, the Moody’s report wrote.

Broadly firmer growth driven by domestic demand and regional trade amid easing financial conditions could improve the region’s outlook to stable, said Moody’s.

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January 21, 2024
DNB CEO: Many signs that we have reached top of the rate curve

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Kjerstin Braathen, CEO of Norway’s largest bank DNB, said that there are “many signs saying that we have reached the top of the interest rate curve.” However, she said the timeline for lowering rates was less certain.

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January 17, 2024
Mortgages, auto loans, credit cards: Expert predictions for interest rates in 2024

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The Federal Reserve‘s effort to bring down inflation has so far been successful, a rare feat in economic history.

The central bank signaled in its latest economic projections that it will cut interest rates in 2024 even with the economy still growing, which would be the sought-after path to a “soft landing,” where inflation returns to the Fed’s 2% target without causing a significant rise in unemployment.

“Rates are headed lower,” said Tim Quinlan, senior economist at Wells Fargo. “For consumers, borrowing costs would fall accordingly.”

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Most Americans can expect to see their financing expenses ease in the year ahead, but not by much, cautioned Greg McBride, chief financial analyst at Bankrate.

“We are in a high interest rate environment, and we’re going to be in a high interest rate environment a year from now,” he said. “Any Fed cuts are going to be modest relative to the significant increase in rates since early 2022.”

Although Fed officials indicated as many as three cuts coming this year, McBride expects only two potential quarter-point decreases toward the second half of 2024. Still, that will make it cheaper to borrow.

From mortgage rates and credit cards to auto loans and savings accounts, here are his predictions for where rates are headed in the year ahead:

Prediction: Credit card rates fall just below 20%

Because of the central bank’s rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to nearly 21% today — an all-time high.

Going forward, annual percentage rates aren’t likely to improve much. Credit card rates won’t come down until the Fed starts cutting and even then, they will only ease off extremely high levels, according to McBride.

“The average rate will remain above the 20% threshold for most of the year,” he said, “and eventually dip to 19.9% by the end of 2024 as the Fed cuts rates.”

Prediction: Mortgage rates decline to 5.75%

Thanks to higher mortgage rates, 2023 was the least affordable homebuying year in at least 11 years, according to a report from real estate company Redfin.

But rates are already significantly lower since hitting 8% in October. Now, the average rate for a 30-year, fixed-rate mortgage is 6.9%, up from 4.4% when the Fed started raising rates in March of 2022 and 3.27% at the end of 2021, according to Bankrate.

McBride also expects mortgage rates to continue to ease in 2024 but not return to their pandemic-era lows. “Mortgage rates will spend the bulk of the year in the 6% range,” he said, “with movement below 6% confined to the second half of the year.”

Prediction: Auto loan rates edge down to 7%

When it comes to their cars, more consumers are facing monthly payments that they can barely afford, thanks to higher vehicle prices and elevated interest rates on new loans.

The average rate on a five-year new car loan is now 7.71%, up from 4% when the Fed started raising rates, according to Bankrate. However, rate cuts from the Fed will take some of the edge off of the rising cost of financing a car, McBride said, helped in part by competition between lenders.

McBride expects five-year new car loans to drop to 7% by the end of the year.

Prediction: High-yield savings rates stay over 4%

Top-yielding online savings account rates have made significant moves along with changes in the target federal funds rate and are now paying more than 5% — the most savers have been able to earn in nearly two decades — up from around 1% in 2022, according to Bankrate.

Even though those rates have likely peaked, “yields are expected to remain at the highest levels in over a decade despite two rate cuts from the Fed,” McBride said.

According to his forecast, the highest-yielding offers on the market will still be at 4.45% in the year ahead. “It will still be a banner year for savers when those returns are measured against a lower inflation rate,” McBride said.

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January 3, 2024
The U.S. avoided a recession in 2023. What’s the outlook for 2024? Here’s what experts are predicting

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Grocery items are offered for sale at a supermarket on August 09, 2023 in Chicago, Illinois.

Scott Olson | Getty Images

Heading into 2023, the predictions were nearly unanimous: a recession was coming.

As the year comes to a close, the forecasted economic downturn did not arrive.

So what’s in store for 2024?

An economic decline may still be in the forecast, experts say.

The prediction is based on the same factors that prompted economists to call for a downturn in 2023. As inflation has run hot, the Federal Reserve has raised interest rates.

Typically, that dynamic has triggered a recession, defined as two consecutive quarters of negative gross domestic product growth.

Some forecasts are optimistic that can still be avoided in 2024. Bank of America is predicting a soft landing rather than a recession, despite downside risks.

More than three-fourths of economists — 76% — said they believe the chances of a recession in the next 12 months is 50% or less, according to a December survey from the National Association for Business Economics.

“Our base case is that we have a mild recession,” said Larry Adam, chief investment officer at Raymond James.

That downturn, which may be “the mildest in history,” may begin in the second quarter, the firm predicts.

Of the NABE economists who also see a downturn in the forecast, 40% say it will start in the first quarter, while 34% suggest the second quarter.

Americans who have struggled with high prices amid rising inflation may feel a downturn is already here.

To that point, 56% of people recently surveyed by MassMutual said the economy is already in a recession.

Layoffs, which made headlines at the end of 2023, may continue in the new year. While 29% of companies shed workers in 2023, 21% of companies expect they may have layoffs in 2024, according to Challenger, Gray & Christmas, an outplacement and business and executive coaching firm.

To prepare for the unexpected, experts say taking these three steps can help.

1. Reduce your debt balances

More than one third — 34% — of consumers went into debt this holiday season, down from 35% in 2022, according to LendingTree.

The average balance those shoppers are taking away is $1,028, well below last year’s $1,549 and the lowest since 2017.

But higher interest rates mean those debts are more expensive. One-third of holiday borrowers have interest rates of 20% or higher, LendingTree reports.

Meanwhile, credit card balances topped a record $1 trillion this year.

Certain moves can help control how much you pay on those debts.

First, LendingTree recommends automating your monthly payments to avoid penalties for late payments, including fees and rate increases.

If you have outstanding credit card balances that you’re carrying from month to month, try to lower the costs you’re paying on that debt, either through a 0% balance transfer offer or a personal loan. Alternatively, you may try simply asking your current credit card company for a lower interest rate.

Importantly, pick a debt pay down strategy and stick to it.

2. Stress-test your finances

Much of how a recession may affect you comes down to whether you still have a job, Barry Glassman, a certified financial planner and founder and president of Glassman Wealth Services, told CNBC.com earlier this year. Glassman is also a member of CNBC’s Financial Advisor Council.

An economic downturn may also create a situation where even those who are still employed earn less, he noted.

Consequently, it’s a good idea to evaluate how well you could handle an income drop. Consider how long, if you were to lose your job, you could keep up with bills, based on savings and other resources available to you, he explained.

“Stress-test your income against your ongoing obligations,” Glassman said. “Make sure you have some sort of safety net.”

3. Boost emergency savings

Even having just a little more cash set aside can help ensure an unforeseen event like a car repair or unexpected bill does not sink your budget.

Yet surveys show many Americans would be hard pressed to cover a $400 expense in cash.

Experts say the key is to automate your savings so you do not even see the money in your paycheck.

“Even if we do get through this period relatively unscathed, that’s all the more reason to be saving,” Mark Hamrick, senior economic analyst at Bankrate, recently told CNBC.com.

“I have yet to meet anybody who saved too much money,” he added.

Another advantage to saving now: Higher interest rates mean the potential returns on that money are the highest they have been in 15 years. Those returns may not last, with the Federal Reserve expected to start cutting rates in 2024.

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December 26, 2023
UK inflation slide fuels rate cut bets and jolts markets

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LONDON, UK – Sept. 2021: People seen dining outdoors in Soho in London in September 2021.

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LONDON — U.K. inflation fell by more than expected to hit 3.9% in November, in the lowest annual reading since September 2021.

Economists polled by Reuters had expected a modest decline in the headline consumer price index to 4.4%, after the 4.6% annual reading of October surprised to the downside by dropping to a two-year low.

Month on month, the headline CPI fell by 0.2%, compared with a consensus forecast of a 0.1% increase.

The Core CPI — which excludes volatile food, energy, alcohol and tobacco prices — came in at an annual 5.1%, well below a 5.6% forecast.

The surprisingly large falls prompted a spike in bets that the Bank of England will cut interest rates in 2024, which manifested in a sharp fall in British bond yields.

The yield on the U.K. 10-year government bond, or gilt, sunk to an eight-month low, dropping 11 basis points to around 3.54%. Yields move inversely to prices. Meanwhile, the U.K.’s FTSE 100 was the only major European stock index in positive territory on Wednesday, climbing 0.8% by midmorning London time.

The Office for National Statistics said the largest downward contributions came from transport, recreation and culture, and food and nonalcoholic beverages.

The Bank of England last week maintained a hawkish tone as it kept its main interest rate unchanged at 5.25%. The Monetary Policy Committee reiterated that policy is “likely to need to be restrictive for an extended period of time.”

The central bank ended a run of 14 straight interest rate hikes in September, as policymakers looked to wrestle inflation back down toward the bank’s 2% target from a 41-year high of 11.1% in October 2022.

U.K. Finance Minister Jeremy Hunt cheered the Wednesday figures and said the country was “starting to remove inflationary pressures from the economy.”

“Alongside the business tax cuts announced in the Autumn Statement this means we are back on the path to healthy, sustainable growth,” he said in a statement.

“But many families are still struggling with high prices so we will continue to prioritise measures that help with cost of living pressures.”

Significant fall ‘undermines’ Bank of England caution

The Bank of England has repeatedly pushed back against market expectations for significant cuts to interest rates in 2024, noting last week that “key indicators of U.K. inflation persistence remain elevated.”

Suren Thiru, economics director at ICAEW, said the “startling” fall in inflation recorded Wednesday will reassure households that there is a “light at the end of the tunnel,” with easing core CPI figures showing that underlying price pressures are relenting.

“The likely squeeze on wages from rising unemployment and a stagnating economy should help to continue to keep them on a downward trajectory,” he said by email.

“These inflation numbers suggest that the Bank of England is too pessimistic in its rhetoric over when interest rates could start falling. A deteriorating economy could push the Bank to start loosening policy by the Autumn, particularly if inflationary pressures continuing easing.”

A ‘glimmer of relief’

Richard Carter, head of fixed interest research at Quilter Cheviot, said the latest inflation print adds to a sense of “cautious optimism” in the U.K. relative to the cost-of-living crisis and bond market chaos of last year.

Despite the drop in CPI, he noted that the broader economic picture remains “complex, marred by stagnation and subdued growth prospects.”

The U.K. economy contracted by 0.3% month on month in October, after flatlining in the third quarter.

“This stagnation, leaving the output no higher than it was in January, paints a picture of an economy struggling to rebound from a series of unprecedented challenges,” Carter said over email, while acknowledging that the pace at which inflation is slowing offers a “glimmer of relief” for households.

“The pressures are manifold – from the cost of living crisis, volatile energy markets, Brexit aftershocks, to enduring productivity issues. These factors have collectively dampened economic prospects and consumer confidence.”

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December 19, 2023
We're still constructive on Japanese banks for 2024, Goldman Sachs says

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Makoto Kuroda of Goldman Sachs says “there are positives to potentially lower Fed rates, such as lower dollar funding costs or lower unrealized loss on U.S. Treasurys.”

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December 19, 2023
Bank of Japan sticks to ultra-easy monetary policy in light of 'extremely high uncertainties'

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Kazuo Ueda, governor of the Bank of Japan (BOJ), gestures as he speaks during a news conference at the central bank’s headquarters in Tokyo, Japan, on Tuesday, Oct. 31, 2023.

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Japan’s central bank expectedly left its ultra-loose monetary policy unchanged at its final policy meeting this year in light of “extremely high uncertainties” affecting the world’s third-largest economy, pushing any likely unwinding to the new year.

The Bank of Japan decided unanimously to keep interest rates at -0.1%, while also sticking to its yield curve control policy that keeps the upper limit for 10-year Japanese government bond yield at 1% as a reference.

“With extremely high uncertainties surrounding economies and financial markets at home and abroad, the Bank will patiently continue with monetary easing, while nimbly responding to developments in economic activity and prices, as well as financial conditions,” the BOJ said in a policy statement Tuesday.

The Japanese yen weakened after the BOJ decision and was trading at about 143.5 against the greenback in midday trade, while the Nikkei 225 stock index climbed 1%. Yields on the 10-year Japanese government bonds were largely unchanged.

With Bank of Japan’s possible unwinding of its ultra-loose monetary policy being challenged by a slowing economy and cooling inflation, most economists expect Governor Kazuo Ueda to only make changes next year, once the annual spring wage negotiations confirm a trend of meaningful wage increases.

Ueda is due to meet the press in Tokyo later Tuesday, where he may offer forward guidance on the BOJ’s future path of action.

Comments from Ueda earlier in December had raised expectations of a change in monetary policy, sparking a rally in the yen. The BOJ has been cautious in unwinding its long-held ultra-loose monetary policy, wary that any premature move could jeopardize recent nascent improvements.

Inflation outlook

On Friday, the Japanese central bank also said it expects core inflation — which it defines as inflation that excludes food prices — to stay above 2% through fiscal 2024. Despite core inflation exceeding its stated 2% target for 19 consecutive months, the BOJ has “patiently continued” with its super accommodative monetary policy.

The so-called “core core inflation” — inflation minus food and energy prices — has exceeded BOJ’s 2% target for 13 straight months now.

For the BOJ, the preference is for inflation to be driven by domestic demand, which is more sustainable and stable. The bank believes wage increments would translate into a more meaningful spiral, encouraging consumers to spend.

‘The one risk I worry about’: Bond expert says Japan hiking cycle could spark a decade of repatriation

Japan’s umbrella labor union, Rengo, said in October that it would demand wage hikes of at least 5% at next year’s spring wage negotiations. The union managed to secure the biggest raise in three decades at this year’s talks in March.

The BOJ’s monetary policy is complex and multi-faceted due to the various quantitative easing tools it has used to reflate the world’s third-largest economy in the last three decades.

Its super-easy posture also sets it apart as an outlier at a time when other major central banks have raised rates to combat stubbornly high inflation. This policy divergence has partly accounted for pressures on the Japanese yen and government bonds.

This is a developing story. Please check back for more updates.

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December 18, 2023
European Central Bank holds rates and trims its inflation forecast

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BRUSSELS, BELGIUM – NOVEMBER 27: Christine Lagarde, President of the European Central Bank speaks during the European Parliament’s Committee on Economic and Monetary Affairs (ECON) meeting in Brussels, Belgium on Nevember 27, 2023. (Photo by Dursun Aydemir/Anadolu via Getty Images)

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The European Central Bank on Thursday held interest rates steady for the second meeting in a row, as it revised its growth forecasts lower and announced plans to speed up the shrinking of its balance sheet.

The bank was widely expected to leave policy unchanged in light of the sharp fall in euro zone inflation, as investors instead chase signals on when the first rate cut may come and assess the ECB’s plans to shrink its balance sheet.

“The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary,” it said in a statement. However, the ECB switched language around inflation from describing it as “expected to remain too high for too long,” saying instead that it will “decline gradually over the course of next year.”

The latest staff macroeconomic projections see average real GDP expanding 0.6% in 2023, from a prior forecast of 0.7%. They estimate GDP will expand by 0.8% in 2024, from 1%, previously. The forecast for 2025 was unchanged, at 1.5%.

Headline inflation is meanwhile seen averaging 5.4% in 2023, 2.7% in 2024 and 2.1% in 2025. It had previously forecast readings of 5.6% this year, 3.2% in 2024 and 2.1% in 2025. The ECB now also released a new estimate for 2026, at 1.9%.

The ECB cautioned that domestic price pressures remain elevated, primarily because of growth in the cost of labor. Members see core inflation, excluding energy and food, averaging 5% this year and 2.7% in 2024, 2.3% in 2025, and 2.1% in 2026.

It said that tighter financing conditions were dampening demand and helping control inflation, adding that growth would be subdued in the short term before recovering due to the rise in real incomes and improved foreign demand.

The decision keeps the central bank’s key rate at a record high of 4%.

The ECB also announced that reinvestments under its pandemic emergency purchase programme (PEPP), a temporary asset purchase scheme, would complete at the end of 2024.

The transition will be gradual, with a reduction in the PEPP portfolio by 7.5 billion euros ($8.19 billion) per month on average over the second half of 2024, it said, after the Governing Council agreed to “advance the normalisation of the Eurosystem’s balance sheet.” It means all the tools the central bank uses to determine monetary policy are now in tightening mode, after it stopped reinvestments this summer under its Asset Purchase Program, a bond-buying stimulus package started in mid-2014 to tackle low inflation.

“I think most people thought [the announcement on PEPP] would come a little bit later, might come in the rate cut debate and was the sort of price that the doves would have to pay,” James Smith, developed market economist at ING, told CNBC’s Joumanna Bercetche after the announcement.

Fall in inflation

Euro zone year-on-year inflation has moderated from 10.6% in October 2022 to 2.4% in the most recent reading in November. That has put the ECB’s 2% target within grasp, even as officials note the threat that wage pressures and energy market volatility will cause a potential resurgence.

It has also fueled bets on cuts next year, with some analysts and market pricing both suggesting trims could come before the summer.

Asked about the timing of cuts at a news conference following the announcement, ECB President Christine Lagarde told CNBC’s Annette Weisbach that the central bank was “data dependent, not time dependent.”

“Clearly when we look at our inflation outlook, look at the projections, we see inflation at 2.1% in 2025 … and the path to get there is flatter than it was before, which lowers the risk of inflation expectations deanchoring,” Lagarde said.

“A lot of indicators are showing that underlying inflation comes below expectations, with a decline across all components.”

She continued, “So, should we lower our guard? We ask ourselves that question. No, we should absolutely not lower our guard.”

A major reason for that is the continued risk from domestic inflation, Lagarde said, adding that there is a need to assess fresh wage data in the spring.

Market reaction

European exchanges gained ground through Thursday, with the regional Stoxx 600 index reaching its highest level since January 2022, while European bonds rallied.

After the ECB news, the euro extended gains to trade 0.8% higher against the dollar at $1.095. It also moved from a slight loss to trade flat against the British pound.

The moves partly reflected the U.S. Federal Reserve’s Wednesday decision to hold rates steady and release the latest “dot plot” rate trajectory from its members, triggering expectations of a dovish pivot from major central banks.

Gains held after the Bank of England also announced a rate hold at midday U.K. time, even as its committee said monetary policy was “likely to need to be restrictive for an extended period of time.”

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December 14, 2023
Watch: ECB President Christine Lagarde speaks after rate decision

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[The stream is slated to start at 8:45 a.m. ET. Please refresh the page if you do not see a player above at that time.]

European Central Bank President Christine Lagarde is due to give a press conference following the bank’s latest monetary policy decision.

The ECB on Thursday held interest rates steady for the second meeting in a row, as it revised its growth forecasts lower.

The bank was widely expected to leave policy unchanged in light of the sharp fall in euro zone inflation, as investors instead chase signals on when the first rate cut may come and assess the ECB’s plans to shrink its balance sheet.

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December 14, 2023
'Bonds are back' as markets enter a 'new paradigm,' says HSBC Asset Management

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The HSBC Holdings Plc headquarters building in Hong Kong, China.

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LONDON — Markets have entered a “new paradigm” as the global order fragments, while heightened recession risk means that “bonds are back,” according to HSBC Asset Management.

In its 2024 investment outlook, seen by CNBC, the British lender’s asset management division said that tight monetary and credit conditions have created a “problem of interest” for global economies, increasing the risk of an adverse growth shock next year that markets “may not be fully prepared for.”

HSBC Asset Management expects U.S. inflation to fall to the Federal Reserve’s 2% target in late 2024 or in early 2025, with the headline consumer price index figures of other major economies also set to drop to central banks’ targets over the course of next year.

The bank’s analysts expect the Fed to begin cutting rates in the second quarter of 2024 and to trim by more than the 100 basis points priced in by markets over the remainder of the year. They also anticipate that the European Central Bank will follow the Fed, and that the Bank of England will kickstart a cutting cycle but will lag behind its peers.

“Nevertheless, headwinds are beginning to build. We believe further disinflation is likely to come at the price of rising unemployment, while depleting consumer savings, tighter credit conditions, and weak labour market conditions could point to a possible recession in 2024,” Global Chief Strategist Joseph Little said in the report.

A new paradigm

The rapid tightening of monetary policy by central banks over the last two years, Little suggested, is leading global markets towards a “new paradigm” in which interest rates remain at around 3% and bond yields stick around 4%, driven by three major factors.

Firstly, a “multi-polar world” and an “increasingly fragmented global order” are leading to the “end of hyper-globalisation,” Little said. Secondly, fiscal policy will continue to be more active, fueled by shifting political priorities in the “age of populism,” environmental concerns and high levels of inequality. Thirdly, economic policy is increasingly geared towards climate change and the transition to net-zero carbon emissions.

“Against this backdrop, we anticipate greater supply side volatility, structurally higher inflation, and higher-for-longer interest rates,” Little said.

“Meanwhile, economic downturns are likely to become more frequent as higher inflation restricts the ability of central banks to stimulate economies.”

Over the next 12 to 18 months, HSBC AM expects investors to place greater scrutiny on corporate profits and the ongoing debate over the “neutral” rate of interest, along with a heightened focus on labor market and productivity trends.

‘Bonds are back’

Markets are now largely pricing a “soft landing” scenario, in which major central banks return inflation to target without tipping their respective economies into recession.

HSBC AM believes the increased risk of recession is being overlooked and is positioning for defensive growth alongside a prevailing view that “bonds are back.”

“A weaker global economy and slowing inflation are likely to present a supportive environment for government bonds and challenging conditions for equities,” Little said.

“Therefore, we see selective opportunities in parts of global fixed income, including the U.S. Treasury curve, parts of core European bond markets, investment grade credits, and securitised credits.”

HSBC AM is cautious on U.S. stocks, due to high earnings growth expectations for 2024 and a stretched market multiple — the level at which shares trade versus their expected average earnings — relative to government bond markets. The report analysis sees European stocks as relatively cheap on a global basis, which limits downside unless a recession materializes.

“Japanese stocks may be an outperformer among developed markets, in our view, due to attractive valuations, the end of unconventional monetary policy, and a high-pressure economy in Japan,” Little said.

He added that idiosyncratic trends in emerging markets also warrant a selective approach rooted in corporate fundamentals, earnings visibility and risk-adjusted rewards. If the Fed cuts rates significantly in the second half of 2024 as the market expects, Indian and Mexican bonds and Chinese A-share stocks — domestic shares that are dominated in yuan and traded on the Shanghai and Shenzhen exchanges — would be some of HSBC AM’s top emerging market picks.

India’s post-pandemic rebound and rapidly growing markets and Japan’s continued exit from unconventional monetary policy render them as attractive sources of diversification, Little suggested, while Chinese growth is widely projected at around 5% this year and 4.5% in 2024, but could also benefit from further fiscal policy support.

“Asian equities are in a stronger position in terms of growth and are likely to remain a relative bright spot in the global context,” Little said.

“Regional valuations are generally attractive, foreign investor positioning remains light, while stabilising earnings should be the key driver of returns next year.”

Asian credit should also enjoy a much better year as global rates peak, most regional economies perform well and Beijing offers an additional fiscal boost, he added.

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December 13, 2023
The Federal Reserve's period of rate hikes may be over. Here's why consumers are still reeling

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The Federal Reserve announced it will leave interest rates unchanged Wednesday, in a move that many believe will conclude the central bank’s rate hike cycle and set the stage for rate cuts in the year ahead.

The Fed has raised interest rates 11 times since March 2022 — the fastest pace of tightening since the early 1980s. The spike in interest rates caused consumer borrowing costs to skyrocket while inflation remained elevated, putting many households under pressure.

Although the central bank indicated it will continue to pursue its 2% inflation target, “the real question at this stage is when they’ll begin cutting,” said Columbia Business School economics professor Brett House.

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The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.

Here’s a look back at how the central bank’s rate hike cycle affected everything from mortgage rates and credit cards to auto loans and student debt, and what may happen to borrowing costs next.

Credit card rates jumped to nearly 21% from 16%

Most credit cards come with a variable rate, which has a direct connection to the Fed’s benchmark rate.

After the previous rate hikes, the average credit card rate rose from 16.34% in March 2022 to nearly 21% today — an all-time high.

Between high inflation and record interest rates, consumers will end the year with $100 billion more in credit card debt, according to data from WalletHub. Not only are balances higher, but more cardholders are carrying debt from month to month.

Going forward, APRs aren’t likely to improve much. Credit card rates won’t come down until the Fed starts cutting and even then, they will only ease off extremely high levels, according to Greg McBride, chief financial analyst at Bankrate.

“Credit card debt is high-cost debt in any environment but that’s particularly true now and that’s not going to change,” he said.

Mortgage rates hit 8%, up from 3.2%

Although 15-year and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy, anyone shopping for a new home lost considerable purchasing power, partly because of inflation and the Fed’s period of policy tightening.

In fact, 2023 was the least affordable homebuying year in at least 11 years, according to a report from real estate company Redfin.

“Mortgage rates rocketed higher from record lows to more than 20-year highs,” McBride said.

After hitting 8% in October, the average rate for a 30-year, fixed-rate mortgage is currently 7.23%, up from 4.4% when the Fed started raising rates in March of 2022 and 3.27% at the end of 2021, according to Bankrate.

A “For Sale” sign outside a house in Edmonton, Alberta, in Canada on Oct. 22, 2023.

Nurphoto | Nurphoto | Getty Images

Already, though, housing affordability is showing signs of improvement heading into the new year.

“Market sentiment has significantly shifted over the last month, leading to a continued decline in mortgage rates,” said Sam Khater, Freddie Mac’s chief economist. “The current trajectory of rates is an encouraging development for potential homebuyers,” he added, kickstarting a “modest uptick in demand.”

McBride also expects mortgage rates to ease in 2024 but not return to their pandemic-era lows. “You are still looking at rates in the 6s, not rates in the 3s or 4s,” he said.

Auto loan rates surpassed 7%, up from 4%

Even though auto loans are fixed, car prices had been rising along with the interest rates on new loans, leaving more consumers facing monthly payments that they could barely afford.

The average rate on a five-year new car loan is now 7.72%, up from 4% when the Fed started raising rates, according to Bankrate.

“The largest segment of consumers financing a new car today has a 7.9% APR,” said Ivan Drury, Edmunds’ director of insights. “That’s a far cry from those spring 2020 pandemic deals of 0% financing for 84 months that drove significant sales of large trucks and SUVs.”

But despite high interest rates, vehicle affordability is improving, with new car prices decreasing year over year and sales incentives increasing.

“The new-vehicle market is shifting to a buyer’s market, not a seller’s market,” according to Cox Automotive research.

Federal student loans are at 5.5%, up from 3.73%

Federal student loan rates are also fixed, so most borrowers weren’t immediately affected by the Fed’s moves. But undergraduate students who took out new direct federal student loans this year are paying 5.50%, up from 4.99% in the 2022-23 academic year and 3.73% in the 2021-22 academic year.

Private student loans tend to have a variable rate tied to the prime, Treasury bill or another rate index, which means those borrowers are paying even more in interest. How much more, however, varies with the benchmark.

Now that federal student loan payments have restarted after a three-year reprieve, interest is also accruing again, and the transition back to payments has proved painful for many borrowers.

However, if the Fed cuts rates in 2024, that may open the door to some refinancing opportunities, which could help.

High-yield savings rates topped 5%, up from 1%

While the Fed has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.

The savings account rates at some of the largest retail banks, which were near rock bottom during most of the Covid-19 pandemic, are currently up to 0.46%, on average, according to the Federal Deposit Insurance Corporation.

Top-yielding online savings account rates have made more significant moves and are now paying over 5% — the most savers have been able to earn in nearly two decades — up from around 1% in 2022, according to Bankrate.

Even though those rates are peaking, “from a savings standpoint, 2024 is still going to be a really good year for savers because inflation is likely to decline faster than the yields on savings accounts,” McBride said.

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December 13, 2023
Why Fed rate hikes take so long to affect the economy, and why that effect may last a decade or more

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The U.S. economy continues to grow despite the 5.5% benchmark federal funds interest rate set by the Federal Reserve in 2023.

The Fed’s leaders expect their interest rate decisions to eventually slow that growth.

The increase in borrowing costs that stems from Fed decisions does not affect all consumers immediately. It typically affects people who need to take new loans — first-time homebuyers, for example. Other dynamics, such as the use of contracts in business, can slow the ripple of Fed decisions through an economy.

“It might not all hit at once, but the longer rates stay elevated, the more you’re going to feel those effects,” said Sarah House, managing director and senior economist at Wells Fargo.

“Consumers did have additional savings that we wouldn’t have expected if they had continued to save at the same pre-Covid rate. And so that’s giving some more insulation in terms of their need to borrow,” said House. “That’s an example of why this cycle might be different in terms of when those lags hit, versus compared to prior cycles.”

A 1% interest rate increase can reduce gross domestic product by 5% for 12 years after an unexpected hike, according to a research paper from the Federal Reserve Bank of San Francisco.

“It’s bad in the short term because we worry about unemployment, we worry about recessions,” said Douglas Holtz-Eakin, president of the American Action Forum, referring to the paper’s implications for central bank policymakers. “It’s bad in the long term because that’s where increases in your wages come from; we want to be more productive.”

Some economists say that financial markets may be responding to Federal Reserve policy more quickly, if not instantaneously. “Policy tightening occurs with the announcement of policy tightening, not when the rate change actually happens,” said Federal Reserve Governor Christopher Waller in remarks July 13 at an event in New York.

“We’ve seen this cycle where the stock market moved more quickly in some cases, more slowly in other cases,” said Roger Ferguson, former vice chair of the Federal Reserve. “So, you know, this question of variability comes into play, as in how long it’s going to take. We think it’s a long time, but sometimes it can be faster.”

Watch the video above to see why the Fed’s interest rate hikes take time to affect the economy.

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December 12, 2023