Tag: Jerome Powell

The Fed is expected to raise interest rates by three-quarters of a point and then signal it could slow the pace

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The Federal Reserve is expected to raise interest rates by three-quarters of a percentage point Wednesday and then signal that it could reduce the size of its rate hikes starting as soon as December.

Markets are primed for the fourth 75-basis point hike in a row, and investors are anticipating the Fed will slow down its pace before winding down the rate-hiking cycle in March. A basis point is equal to 0.01 of a percentage point.

“We think they hike just to get to the end point. We do think they hike by 75. We think they do open the door to a step down in rate hikes beginning in December,” said Michael Gapen, chief U.S. economist at Bank of America.

Gapen said he expects Fed Chair Jerome Powell to indicate during his press briefing that the Fed discussed slowing the pace of rate hikes but did not commit to it. He expects the Fed would then raise interest rates by a half percentage point in December.

U.S. Federal Reserve Board Chairman Jerome Powell takes questions from reporters after the Federal Reserve raised its target interest rate by three-quarters of a percentage point to stem a disruptive surge in inflation, during a news conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, June 15, 2022.

Elizabeth Frantz | Reuters

“The November meeting isn’t really about November. It’s about December,” Gapen said. He expects the Fed to raise rates to a level of 4.75% to 5% by spring, and that would be its terminal rate — or end point. The 75 basis point hike Wednesday would take the fed funds rate range to 3.75% to 4%, from a range of zero to 0.25% in March.

“The market is very fixated on the fact there’s going to be 75 in November, 50 [basis points] in December, 25 on Feb. 1 and then probably another 25 in March,” said Julian Emanuel, head of equity, derivatives and quantitative strategy at Evercore ISI. “So in reality, the market already thinks this is happening, and from my point of view, there’s no way the outcome of his press conference is going to be more dovish than that.”

The stock market has already rallied on expectations of a slowdown in rate hikes by the Fed, after a final 75 basis point hike Wednesday afternoon. But strategists also say the market’s reaction could be violent if the Fed disappoints. The challenge for Powell will be to walk a fine line between signaling less-aggressive hikes are possible and upholding the Fed’s pledge to battle inflation.

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For that reason, market pros expect the Fed chair to sound hawkish, and that could rattle stocks and send bond yields higher. Yields move opposite price.

“I think he’s going to try to execute the fine art of getting off the 75 [basis points] without creating euphoria and influencing financial conditions too easy,” said Rick Rieder, BlackRock chief investment officer of global fixed income. “I think the way the market is pricing, I think that’s what they’re going to do, but I think he’s really got to thread the needle on not getting people too excited about the direction of travel. Fighting inflation is their primary objective.”

As the Fed has raised interest rates, the economy is beginning to show signs of slowing. The housing market is slumping, as some mortgage rates have nearly doubled. The 30-year fixed rate mortgage was at 7.08% in the week of Oct. 28, up from 3.85% in March, according to Freddie Mac.

“I think [Powell] will say that four 75-basis point hikes is an awful lot and with this long and variable lag, you need to step back and see the impact. You’re seeing it in housing. You’re starting to see it in autos,” said Rieder. “You’re seeing it in some of the retailer slowdowns, and you’re certainly seeing it in the surveys. I think the idea that you’re slowing, it’s important how he describes it.”

The Fed should be dependent on incoming data, and while inflation is coming down, the pace of decline is unclear, Rieder said.

“If inflation continues to be surpisingly high, he shouldn’t shut off his options,” he said.

Consumer inflation in September ran at a hot 8.2% annual basis.

Gapen expects the economy to dip into a shallow recession in the first quarter. He said the equity market would be concerned if inflation were to stay so high the Fed would have to raise rates even more sharply than expected, threatening the economy even more.

“The markets want to be relieved, particualy the equity maket,” said Rieder. “I think what happens to the equity market and the bond market are different because of the technicals and the leverage. … But I think the market wants to believe that the Fed, they’re going to get to 5% and stay there for awhile. People are tired of getting bludgeoned, and I think they want to believe the bludgeoning is over.”

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November 1, 2022
Job openings hit 10.7M despite Fed attempts to cool economy

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WASHINGTON — U.S. job openings rose unexpectedly in September, suggesting that the American labor market is not cooling as fast as the inflation fighters at the Federal Reserve hoped.

Employers posted 10.7 million job vacancies in September, up from 10.3 million in August, the Labor Department said Tuesday. Economists had expected the number of job openings to drop below 10 million for the first time since June 2021.

For the past two years, as the economy rebounded from 2020’s COVID-19 recession, employers have complained they can’t find enough workers. With so many jobs available, workers can afford to resign and seek employment that pays more or offers better perks or flexibility. So companies have been forced to raise wages to attract and keep staff. Higher pay has contributed to inflation that has hit 40-year highs in 2022.

In another sign the labor market remains tight and employers unwilling to let workers go, layoffs dropped in September to 1.3 million, fewest since April. But the number of people quitting their jobs slipped in September to just below 4.1 million, still high by historical standards.

To combat higher prices, the Federal Reserve has hiked its benchmark interest rate five times this year and is expected to deliver another increase Wednesday and again at its meeting in December. The central bank is aiming for a so-called soft landing — raising rates just enough to slow economic growth and bring inflation down without causing a recession.

Fed Chair Jerome Powell has expressed hope that inflationary pressure can be relieved by employers cutting job openings, not jobs.

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November 1, 2022
Powell again is facing political pressure as worries mount over the economy

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Jerome Powell, chairman of the US Federal Reserve, speaks during a Fed Listens event in Washington, D.C., US, on Friday, Sept. 23, 2022.

Al Drago | Bloomberg | Getty Images

Political questioning of Federal Reserve Chair Jerome Powell about the central bank’s policy moves is intensifying, this time from the other side of the aisle.

No stranger to political pressure, the Fed chief this week found himself the focus of concern in a letter from Sen. Sherrod Brown. The Ohio Democrat warned in the letter about potential job losses from the Fed’s rate hikes that it is using to combat inflation.

“It is your job to combat inflation, but at the same time you must not lose sight of your responsibility to ensure that we have full employment,” Brown wrote. He added that “potential job losses brought about by monetary over-tightening will only worsen these matters for the working class.”

The letter comes with the Fed less than a week away from its two-day policy meeting that is widely expected to conclude Nov. 2 with a fourth consecutive 0.75 percentage point interest rate increase. That would take the central bank’s benchmark funds rate to a range of 3.75% to 4%, its highest level since early 2008 and represents the fastest pace of policy tightening since the early 1980s.

Without recommending a specific course of action, Brown asked Powell to remember the Fed has a two-pronged mandate — low inflation as well as full employment — and requested that “the decisions you make at the next FOMC meeting reflect your commitment to the dual mandate.”

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The last time the Fed raised interest rates, from 2016 to December 2018, Powell faced withering criticism from former President Donald Trump, who on one occasion called the central bankers “boneheads” and seemed to compare Powell unfavorably with Chinese President Xi Jinping when he asked in a tweet, “Who is our bigger enemy?”

Democrats, including then-presidential hopeful Joe Biden, criticized Trump for his Fed comments, insisting the central bank be free of political pressure when formulating monetary policy.

Standing firm

Brown’s stance was considerably more nuanced than Trump’s — though equally unlikely to move the dial on monetary policy.

“Chair Powell has made it pretty clear that the necessary conditions for the Fed to achieve its full employment objective is low and stable inflation. Without low and stable inflation, there’s no way to achieve full employment,” said Mark Zandi, chief economist for Moody’s Analytics. “He’ll stick to his guns on this. I don’t see this as having any material impact on decision making at the Fed.”

To be sure, while it’s most likely a reaction to a changing tone from some Fed officials and a slight shift in the economic data, market expectations for monetary policy have altered a bit.

Traders have made peace with the three-quarter point hike next week. But they now see just a 36% chance for another such move at December’s Federal Open Market Committee meeting, after earlier rating it a near 80% probability, according to CME Group data.

That change in sentiment has come following cautionary remarks about overly aggressive policies from several Fed officials, including Vice Chairman Lael Brainard and San Francisco regional President Mary Daly. In remarks late last week, Daly said she’s looking for a “step-down” point where the Fed can slow the pace of its rate moves.

“The democratization of the Fed is the issue for the market, how much power the other members have versus the chairman. It’s difficult to know,” said Quincy Krosby, chief equity strategist at LPL Financial. Regarding Brown’s letter, Krosby said, “I don’t think it’s going to affect him. … It’s not the pressure coming from the politicians, which is to be expected.”

A Fed spokesman acknowledged that Powell received the Brown letter and said normal policy is to respond to such communication directly. In the past, Powell has been generally dismissive when asked if political pressure can factor into decision making.

Employment data will be key

Along with the nudging from Brown, Powell also has faced criticism from others on Capitol Hill.

Sen. Elizabeth Warren, the ultra-progressive Massachusetts Democrat and former presidential contender, has called Powell dangerous and recently also warned about the impact rate hikes could have on employment. Also, Sen. Joe Manchin, D-W. Va., last year criticized Powell for what was seen as the Fed’s flat-footed response to the early rise of inflation.

“I don’t necessarily think that Powell will buckle to the political pressure, but I’m wondering whether some of his colleagues start to, some of the doves who have become hawkish,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “Employment’s fine now, but as months go on and growth continues to slow and layoffs begin to increase at a more notable pace, I have to believe that the level of pressure is going to grow.”

Payroll gains have been strong all years, but a number of companies have said they are either putting a freeze on hiring or cutting back as economic conditions soften. A slowing economy and stubbornly high inflation is making the backdrop difficult for the November elections, where Democrats are expected to lose control of the House and possibly the Senate.

With the high stakes in mind, both markets and lawmakers will be listening closely to Powell’s post-meeting news conference next Wednesday, which will come six days before the election.

“He knows the pressure. He knows that the politicians are increasingly nervous about losing their seats,” Krosby said. “There’s very little he could do at this point, by the way, to help either party.”

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October 26, 2022
US job openings sink amid higher rates and slower growth

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WASHINGTON — The number of available jobs in the U.S. plummeted in August compared with July, a sign that businesses may pull back further on hiring and potentially cool chronically high inflation.

There were 10.1 million advertised jobs on the last day of August, the government said Tuesday, down a huge 10% from 11.2 million openings in July. In March, job openings had hit a record of nearly 11.9 million.

Layoffs ticked up in August but remained at a historically low level. And slightly more people quit their jobs.

The sharp drop in job openings will be welcomed by the Federal Reserve. Fed officials have cited the high level of openings as a sign of strong labor demand that has compelled employers to steadily raise pay to attract and keep workers.

Smaller pay raises, if sustained, should ease inflationary pressures. In their effort to combat the worst inflation in 40 years, the central bank has raised its key short-term interest rate to a range of 3% to 3.25%, up sharply from nearly zero as recently as March.

Chair Jerome Powell and other Fed officials hope that their interest rate hikes — the fastest in roughly four decades — will cause employers to pull back on their efforts to hire more people. Fewer job openings, in turn, could reduce the pressure on companies to raise pay to attract and keep workers.

Tuesday’s figures arrive the same week that a key report on jobs and the unemployment rate is set to be released Friday. Economists forecast that it will show that employers added 250,000 jobs in September and that the unemployment rate remained 3.7% for a second straight month.

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October 4, 2022