Tag: FOMC

The Week Ahead –  With Few Economic Stats, Earnings Reports Will Take on Added Importance

Posted on by phoffman@channelchek.com

The Trading Week is Light on Data and Heavy On Quarterly Earnings Reports

After last week’s lower-than-expected CPI and PPI inflation readings, the markets are far less certain what the FOMC will decide at their policy meeting July 25-26. Clarity is not going to come from addresses by any Fed Presidents as they enter a blackout period where they are forbidden to speak on the subject between July 15 and July 27. One report that the markets will be focused on during the week involves unemployment, which, if up, may cause the markets to rally – remember we are still in a period where bad economic news causes a positive stock market reaction.

Investors looking for direction may find it in the earnings reports as major banks, metals producers, and closely followed tech companies will be releasing their quarterly earnings reports.

Monday 7/17

•             8:30 AM ET, The New York State Manufacturing Index is expected to drop to negative 7 for June after unexpectedly climbing 38 points to +6.6 in May 2023, from a four-month low of -31.8 in May.

Tuesday 7/18

•             8:30 AM ET, The consensus for Retail Sales for June is up 0.4% after unexpectedly rising 0.3% month-over-month in May, following a 0.4% increase in April, which beat forecasts of a 0.1% decline. It’s clear the ability to forecast has been economic numbers, especially consumer activity has been difficult.

•             8:55 AM ET, The Johnson Redbook Index is forecast to show a year-over-year, same week, increase of 1.1%, for the week ending July 15. This would follow a 1.6% increase the prior reading. The Redbook is a sample of large US general merchandise retailers representing about 9,000 stores. By dollar value, the Index represents over 80% of the equivalent ‘official’ retail sales series collected and published by the US Department of Commerce.

•             9:15 AM ET, Industrial Production is expected to have risen by 0.1% in June, after declining by 0.2% from a month earlier in May.

•             9:15 AM ET, Manufacturing Production is expected to be flat month over month for June after rising 0.1% in May.

•             9:15 AM ET, Capacity Utilization is expected to have remained in a non-inflationary low 79.5% rate during June. When industries are bumping up against capacity, costs will increase as operations become less efficient because less effective resources are called on to produce, thus increasing the cost of each unit of production.

•             10:00 AM ET, Federal Reserve Vice Chair for Supervision Michael S. Barr will be speaking on fair lending practices at the National Fair Housing Alliance National Conference. The Fed is in a blackout period this week, so it is expected that there will be no discussion of monetary policy.

Wednesday 7/19

•             8:30 AM ET, Building permits consensus forecast for June is for 1.505 million after May’s strong 1.486 million.

•             8:30 AM ET, Housing Starts month over month for May increased by 21.7%, the forecast is for a decline of 10.2% for June.

•             10:30 AM ET,  The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the US, whether produced here or abroad. The inventory level impacts prices for petroleum products.

Thursday 7/20

•             8:30 AM ET, Initial Jobless Claims are expected to have increased the week ended July 15 to 245,000 from 237,000 the prior week. Employment data ahead of the July 25-26 FOMC meeting, in the absence of any fresh inflation data until the 28th has the potential to move markets.

•             10:00 AM ET, Existing home sales in the US, which include completed transactions of single-family homes, townhomes, condominiums, and co-ops, is expected to decline by 1.2% month over month for June. This would follow a small increase of 0,2% the previous reading.

Friday 7/21

•             No major economic releases scheduled.

What Else

The FOMC meeting is Tuesday and Wednesday during the last full week in July. The Fed can do one of three things, lower rates, raise rates, keep rates unchanged. Like all good multiple choice questions, one of these answers can be eliminated. On Thursday of last week (July 13), Federal Reserve Board Gov. Christopher Waller said he was not swayed by June’s benign consumer inflation data and said he wants the central bank to go ahead with two more 25-basis-point rate hikes this year. “I see two more 25-basis-point hikes in the target range over the four remaining meetings this year as necessary to keep inflation moving toward our target,” Waller said this in an address to The Money Marketeers on NYU, a bond market club with some of the most powerful fixed income professionals as members. If the Fed is data dependent and there is little new data since the last inflation readings, Waller’s position is not likely to change.

Paul Hoffman

Managing Editor, Channelchek

Is this the Soft Landing They Told Us Could Not Happen?

Posted on by phoffman@channelchek.com

Weighing in on Powell’s Chances of a Hard Landing

Is the U.S. economy headed toward a soft landing? While rare, the numbers are beginning to argue in favor on the side of a soft landing versus a hard one. An economic soft landing is a situation in which the Federal Reserve is able to slow economic growth without causing a recession. A hard landing, on the other hand, is a situation in which the central bank’s efforts to slow down economic growth lead to a recession. Recent inflation reports, employment numbers, and economic growth figures are looking more and more like monetary policy over the past year and a half, may be defying past performance; the U.S. might be able to avoid a situation where the economy shrinks (negative growth).

Background

The Federal Reserve has been facing a difficult challenge for almost two years as inflation spiked well above the Fed’s 2% target. In fact increases in prices were at a 40-year high as inflation began to soar toward double-digits. Fed monetary policy, which effectively controls the money in the economy, that in turn impacts interest rates, has been acting to raise rates to bring inflation under control. Less money increases the cost of that money (rates), which dampens economic activity.

There has been, and continues to be, a risk that the Fed raises interest rates too high or too quickly, this is the hard landing economic path. The hard landing scenario is more common than soft landings.

The Federal Reserve has a miserable record of achieving soft landings. There have been a few occasions when the Fed has been able to slow down economic growth without causing a recession. One example of success is 1994-1995. During this period the Fed raised interest rates by 2.5% from a starting point of 4.25% in order to bring inflation under control. However, the economy continued to grow during this period, and there was no recession.

Today’s Scenario

The current state of the U.S. economy is uncertain. Inflation is at a 40-year high, and the Fed has been raising interest rates in an effort to bring it under control. However, there is a risk that the Fed will raise interest rates too high or too quickly, which could lead to an economic hard landing, with job losses and negative growth. In fact, after an FOMC meeting in November, Fed Chair Powell said it would be easier to revive the economy if they overtighten, than it would be to lower it if they don’t tighten enough. So to the Fed Chair, a hard landing is better than no landing at all.

There has been a high level of concern amongst stakeholders in the U.S. economy.  One reason is that the U.S. economy is already slow. GDP growth in the first quarter of 2023 was 2.0%, and it is expected to slow in the second quarter. Maintaining  growth while pulling money from the system to reduce stimulus is a difficult maneuver. In fact, it usually ends as a hard, undesirable economic landing.

Another factor that is of concern this time around is the state of the housing market. Home prices rallied with low interest rates during and post pandemic. A fall-off in housing would have a ripple effect throughout the economy, leading to job losses and lower consumer spending. So far, housing has held up as new home sales are strong, and demand for existing homes remains elevated as homeowners with low mortgage rates are deciding to stay put.

Where from Here?

On Monday (July 11), Loretta J. Mester, president and CEO of the Federal Reserve Bank of Cleveland, warned during an address in San Diego that the central bank may need to keep hiking rates as inflation has remained “stubbornly high.” Fed governors go into a blackout period on July 15 as they always do before an FOMC meeting. That meeting will be held on July 25-26. So there is no telling if the voting FOMC members are going to dial back their hawkishness in light of this week’s more favorable CPI report that shows yoy inflation at 3%.  

The Fed’s favored inflation gauge is PCE. The next PCE report is not to be released until July 28, after the July FOMC meeting. The previous report showed that in May, inflation was running at 3.8% over 12 months.

The banking system, which showed some cracks back in March, seems to be shored up; although some problems still exist, a full-scale banking crisis does not seem likely. The Fed would obviously like to keep it this way.

Employment gains were the smallest in 2-1/2 years in June, however the unemployment rate is close to historically low levels and wage growth is still strong, so although wages are not fully working their way into the final cost of goods or services, the industries having to pay the higher wages are likely absorbing some of the cost, which could pull from profits.

Part of the Fed’s tightening has been the less talked about quantitative tightening. This reduces the Fed’s balance sheet which swelled as part of the reaction to the pandemic.  Reducing this in a meaningful way will take time, but even if the Fed remains paused on rate hikes, there is still $90 billion scheduled to be pulled from the economy each month as maturities will be allowed to mature from the Fed’s holdings without being rolled. This my eventually cause U.S. Treasury rates and mortgage rates to tick up as increased Treasury borrowing, and decreased Fed ownership may put downward pressure on prices.

Take Away

The recent CPI report is causing some that argued a soft landing is achievable to celebrate and those that thought it impossible to consider it a possibility. The chances appear greater, and a soft landing is certainly a desirable outcome for stock prices and U.S. economy stakeholders. From here, there are a number of factors that can increase the risk of a hard landing, they include the pace of additional interest rate hikes, and the behavior of the housing markets. We’re entering a period where we will not hear any commentary from Fed governors, and the next major inflation indicator comes after the FOMC meeting, so markets will be on the edge of their seats until July 26 at 2 PM Eastern.

Paul Hoffman

Channelchek, Managing Editor

Sources

https://www.macrotrends.net/2015/fed-funds-rate-historical-chart

https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20220126.pdf

https://www.bea.gov/data/gdp/gross-domestic-product#:~:text=Real%20gross%20domestic%20product%20(GDP,real%20GDP%20increased%202.6%20percent.

https://www.pionline.com/economy/cooling-inflation-gives-investors-momentary-breather-asset-managers-say

https://www.bea.gov/data/personal-consumption-expenditures-price-index#:~:text=The%20PCE%20price%20index%2C%20released,included%20in%20the%20GDP%20release.

Pause, Pivot, or Push Higher – What to Review After the FOMC Announcement

Posted on by phoffman@channelchek.com

The FOMC Member’s Change in Sentiment is a Big Focus

Whether the Fed moves rates up after the June FOMC or not could mean little to whether there is additional drag on the economy. The short end of the yield curve, where savers benefit, has risen each time the Fed has raised rates. Out further, the 10-year T-Note, which is the benchmark for 30-year mortgages and from which corporate 10-year notes are spread, has been remarkably steady. Nine months ago, when Fed Funds were 3.00%- 3.25%, the 10-Year Treasury yielded 3.76%. Today the Fed Funds target rate is 5.00-5.25%, the 10-Year is still at 3.76%. This may be why the Fed has had a difficult time reeling in inflation, longer interest rates, where they impact the economy most, had reached 4.25% last October, the Fed has since tightened 200bp, and 10-year rates have traded around 50 bp lower     since the October high, despite the tightening. And for the same reason, mortgage rates are lower now than they were last October.

Summary Of Economic Projections

More meaningful for market participants might be the Summary of Economiuc Projections (SEP). Outside of a normal knee-jerk reaction after Wednesday’s policy announcement, or a quick trade that can be had off Powell’s press conference remarks, what the Fed members now expect by year-end is a better indication of any new mindset on monetary policy.  

The Summary of Economic Projections includes estimates from the FOMC members showing where they see rates at the end of 2023 (and beyond). At the March meeting (see below), most of the Fed policymakers saw rates staying at current levels, with a few signaling additional hikes may be coming. While Powell will answer questions at the press conference that may be indicative of what they are thinking, the change in the SEP numbers (released in the statement after the meeting) is a better indicator of whether the Fed is now more hawkish or dovish.

Source:  Board of Governors of the Federal Reserve System

A big shift toward expectations of higher rates would indicate a more hawkish stance. It will be useful to note how projections have evolved compared to March – Chair Powell will, of course, provide further color through his press conference.

Pause, Pivot, or Push Higher

Has the view changed with recent economic data? Was the view in March skewed by what could have turned into a banking crisis? We’ll see in hard numbers, without reading between any lines. We can see in black and white what the aggregate thinking is of the members when behind closed doors, where the important discussions happen – inside the FOMC meeting room.

After the announcement, Channelchek subscribers will receive a summary in their email of the announcement, changes in language from previous meetings, and the new SEP to compare any change in sentiment (subscribe at no cost).

While the actual impact on the overall economy of a 25bp move compared to a Fed pause may have little impact on the economy, company earnings, or even Treasury Bonds, each time the Fed raises overnight rates, there are investors that are more comfortable with a larger allocation of cash. Depending on where “uninvested” assets are held, they may be earning near 5%. This is a risk to stock prices as some investors may find be comfortable with money market returns for a larger portion of their portfolios. Fewer assets in the stock market have a depressing effect on prices.

Take Away

While pre and post-Fed meeting investor conversations tend to swirl around words like, “pause”, “pivot”, and “tighten”, the Fed’s overall change in rate expectations, which they have the most control over, is more telling than any polished statement or press briefing. These numbers are on the SEP report.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://ycharts.com/indicators/10_year_treasury_rate

The FOMC Minutes Define Two Determinants of Future Policy

Posted on by phoffman@channelchek.com
Image Credit: Federal Reserve (Flickr)

Federal Open Market Committee Minutes Reveal Uncertainty

The Federal Reserve released the minutes of its last Federal Open Market Committee (FOMC) meeting. They show the Fed, as a whole, at the May 2-3 meeting as less than clear as to the near-term direction of monetary policy. The U.S. central bank officials are best described as believing they need to be nimble and react, keeping their options open rather than have a plan to continue raising interest rates or hold them steady after future meetings.

Fed officials remained concerned about inflation. Conversations and debates centered on the impact of tighter financial conditions and the degree of lag with which monetary policy would have an impact. According to the meeting minutes, the expected lag could mean their tightening campaign is nearly finished.

This release provided long-awaited insight and shed a modicum of light on how seriously Fed officials were considering changing course or holding interest rates steady when they met last month.

Actual Decision

Federal Reserve officials moved unanimously to raise interest rates at the central bank’s meeting on monetary policy in May despite significant debate at the time over whether pausing tightening efforts would instead be the more prudent move.

The minutes from the Fed’s May 2-3 meeting show concerns and offer clues as to what is important to various factions of the FOMC.

Key Language in Minutes

Banking

“Participants noted that risks associated with the recent banking stress had led them to raise their already high assessment of uncertainty around their economic outlooks. Participants judged that risks to the outlook for economic activity were weighted to the downside, al­though a few noted the risks were two-sided.”

In their discussion, various participants commented on developments in banking, noting that the banking system was sound and resilient. They also patted themselves on the back, saying that, “actions taken by the Federal Reserve in coordination with other government agencies had served to calm conditions in that sector, but that stresses remained.”

 Some participants noted that the banking sector was well-capitalized overall. The belief is that “the most significant issues in the banking system appeared to be limited to a small number of banks with poor risk-management practices or substantial exposure to specific vulnerabilities.”

U.S. Debt Ceiling

“Some participants also noted concerns that the statutory limit on federal debt might not be raised in a timely manner, threatening significant disruptions to the financial system and tighter financial conditions that weaken the economy.”

Inflation

“Regarding risks to inflation, participants cited the possibility that price pressures could prove more persistent than anticipated because of, for example, stronger-than-expected consumer spending and a tight labor market, especially if the effect of bank stress on economic activity proved modest.”

A few members felt further tightening could bring supply and demand imbalances more in line and reduce inflation pressures.

“Some participants cited the possibility that further tightening of credit conditions could slow household spending and reduce business investment and hiring, all of which would support the ongoing rebalancing of supply and demand in product and labor markets and reduce inflation pressures.”

Lag of Policy on Economy

A number of members saw evidence that policy was on track to rebalance price pressures and having its desired effect.

“In discussing the policy outlook, participants generally agreed that in light of the lagged effects of cumulative tightening in monetary policy and the potential effects on the economy of a further tightening in credit conditions, the extent to which additional increases in the target range may be appropriate after this meeting had become less certain.”

“Participants agreed that it would be important to closely monitor incoming information and assess the implications for monetary policy.”

There are two factors that the FOMC minutes noted would be determinants to whether additional policy actions would be needed, they are:

“…the degree and timing with which cumulative policy tightening restrained economic activity and reduced inflation, with some participants commenting that they saw evidence that the past years’ tightening was beginning to have its intended effect.”

“… the degree to which tighter credit conditions for households and businesses resulting from events in the banking sector would weigh on activity and reduce inflation, which participants agreed was very uncertain.”

“Some participants commented that, based on their expectations that progress in returning inflation to 2 percent could continue to be unacceptably slow, additional policy firming would likely be warranted at future meetings.”

“Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary.”

“Almost all participants stated that, with inflation still well above the Committee’s longer-run goal and the labor market remaining tight, upside risks to the inflation outlook remained a key factor shaping the policy outlook. A few participants noted that they also saw some downside risks to inflation.”

Uncertainty

Some participants commented at the meeting that they, “saw evidence that the past years’ tightening was beginning to have its intended effect.”

The members seemed to not have a handle on the impact of the health of the banking industry’s impact, the minutes read, “the degree to which tighter credit conditions for households and businesses resulting from events in the banking sector would weigh on activity and reduce inflation, which participants agreed was very uncertain.”

 Take Away

The path forward for monetary policy is, as the Federal Reserve has continually stated, data dependent. The clarity of trends of the data is unclear in part because of any expected lag, the health of banking, and the stickiness of inflation.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/monetarypolicy/fomcminutes20230503.htm

May’s FOMC Meeting and the Statement Pivot

Posted on by phoffman@channelchek.com
Image Source: Federal Reserve

The FOMC May Now Apply Less Brake Pedal to the Economy

The Federal Open Market Committee (FOMC) voted to raise overnight interest rates from a target of 4.75% – 5.00%. to the new target of 5.00% – 5.25%. This 25bp move was announced at the conclusion of the Committee’s May 2023 meeting. The monetary policy shift in bank lending rates had been expected but concerns of the impact of tightening on some economic sectors, including banking, had been called into question and left Fed-watchers unsure if the Fed would clearly indicate a pause in the tightening cycle. Inflation which had been easing somewhat going into the last FOMC held in March has since reversed direction and remains elevated.

As for the U.S. banking system, which is part of the Federal Reserves responsibility, the FOMC statement reads, “The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.”

As for inflation which is hovering at more than twice the Fed’s target, the post FOMC statement reads, “The Committee remains highly attentive to inflation risks.” Both of these quotes can be viewed as not trying to panic markets in either direction.

There were few clues given in the statement about any next move, causing some to believe that the Fed is now going to take a wait-and-see position as previous rate hikes play out in the economy. The statement was shorter than previous releases following a two-day FOMC meeting, but it ended with the following forward-looking actions:

“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

Fed Chair Powell generally shares more thoughts on the matter during a press conference beginning at 2:30 after the statement.

Paul Hoffman

Managing Editor, Channelchek

Will the Fed Tighten in May and Walk Away?

Posted on by phoffman@channelchek.com
Image Credit: Focal Foto

A Bull Market Across Sectors May Come Out of the Next FOMC Meeting?

As U.S. GDP for the first quarter of 2023 showed a significant slowdown, expectations that the Federal Open Market Committee (FOMC) is near the end of the tightening cycle have increased among investors. The Fed announcement after the May 2-3 meeting could change the mindset of the stock, bond, and real estate markets. While a strong consumer is still fueling economic growth, as indicated by the most recent Consumer Spending numbers, government spending is also high and less related to economic momentum, yet it helped support the declining Gross Domestic Product figure.

The U.S. economy slowed at the start of 2023, which implies that the bold Fed moves have worked to cool business activity. During this same period, stock market values have risen after a dismal 2022, bonds have become stronger, and housing prices have shown signs of life.

Background

U.S. Gross Domestic Product grew by a 1.1% annualized rate during the first three months of the year. This is less than half the pace of the 2.6% growth reported for the previous quarter – which was slower than the previous quarter. The slowing trend is certainly expected and undoubtedly being monitored by FOMC members.

The slowdown from the previous quarter was largely the result of a decline in business investment and residential fixed investment, which includes money spent on home buying and construction, according to the data set. While layoffs made headlines, the job market remained strong during the first quarter.

The banking system showed weakness as asset values plummeted and deposit levels decreased. Also impacting banks is commercial real estate. The risk of default in the commercial real estate market has grown as office and retail property valuations are seen as headed lower by as much as 40%, with nearly $1.5 trillion in debt due for repayment by the end of 2025.

Could a Full-Fledged Bull Market Follow?

While there is a Wall Street adage that says, “sell in May and walk away.” A post-meeting announcement that suggests the Fed is finished taking shots at the economy could cause a relief rally as worry about increasingly expensive capital abates. Unless this worry is replaced by a new one, a broad-based upward trend may develop.

The trend in economic growth is slowing, perhaps even headed for a recession, but markets are no longer expecting a hard landing. Ashard-landing expectations work their way even further out of the market psyche, more willingness to buy should lead to higher stock prices.

Bond markets and real estate have also been positive recently. The direction in interest rates, when the Fed does indicate it is done hiking Fed Funds levels, would either fall because of knowledge that the Fed is done, or generate inflation fears which cause concern that would be reflected as higher rates along the curve. Real Estate values are tightly linked to interest rates and could take its direction from the bond market direction.  

Take Away

We’re in the part of the economic cycle where bad news (lower GDP) is seen as good news. The economy has been slumping for a few quarters, and the markets are continually forward-looking. This slump may be cause for the Fed to suggest an end to its relentless tightening phase. Equity markets could rid themselves of a year-long worry.

Nothing is certain; however, the markets that have already been rising this year in anticipation of an end to the Fed moves could make an even more decisive move upward.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://fred.stlouisfed.org/series/CPIAUCNS

https://ycharts.com/indicators/10_year_treasury_rate_h15

https://www.google.com/search?q=are+commercial+real+estate+defaults+rising&rlz=1C1CHZN_enUS934US934&oq=are+commercial+real+estate+defaults+rising&aqs=chrome..69i57j33i160l2.10358j1j15&sourceid=chrome&ie=UTF-8

Minutes and Other Indicators are Now Showing Less Agreement on Policy by the FOMC

Posted on by phoffman@channelchek.com
Image Credit: Federal Reserve (Flickr)

The March FOMC Minutes Show the Fed is Less Aligned

We may be entering a period when we have a Federal Reserve that is split on the direction of monetary policy. This could be the case as early as the May 2-3 FOMC meeting. At least, that is one indication that arose from the just-released minutes of the Committee from the March 21-22 meeting. U.S. economic activity was strong leading up to the meeting, then the collapse of two banks occurred. The concerns that followed prompted several Federal Reserve officials to consider whether the central bank should pause its aggressive pace of hiking interest rates.

Split Federal Reserve

The minutes offer insight into what may follow this year. Over the past ten sessions, the FOMC minutes showed the central bank’s focus has been on quickly tightening policy to squelch persistent inflation. Now after nine consecutive interest-rate hikes and quantitative tightening, the conversation has shifted from wondering how fast they can move to whether and when the Fed should pause. At least, it has for some of the Committee members. Soft landings are seldom successfully orchestrated by monetary policy changes; more often, they set the stage for a recession.

In public addresses since the March meeting, Fed officials have appeared to be somewhat split on the way forward. Chicago Fed President Austan Goolsbee, for example, said on April 11 that the Fed needs to be cautious. “We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation,” Goolsbee said.

Less concerned about a recession and more concerned about winning the war on inflation, Cleveland Fed President Loretta Mester said last week she believes the correct move is for the Fed to continue tightening “a little bit higher” before pausing as the economy and inflation adjusts.

Bank Failure Considerations

The March monetary policy meeting was surrounded by uncertainty for both Fed watchers and some FOMC members. The meeting took place only days after the collapse of Silicon Valley Bank and Signature Bank. Other indicators of a strong economy pointed to an aggressive move from the voting members. But, with the banking sector wounded or perhaps worse, it remained a nailbiter up until 2 pm on March 22 when the Federal Open Market Committee announced a quarter-point interest-rate hike.

While all has since been quiet related to U.S. banks, at the time, the extent of the problem was far from known. The potential economic impact it could have, led Fed staff to project a mild recession starting later in 2023, according to the minutes. This tells financial markets and others impacted by Fed moves that some Fed officials were seriously considering holding steady on rates.

The minutes show, the combination of “slower-than-expected progress on disinflation,” a tight labor market, and the view that the new emergency lending programs had stabilized the financial sector, allowed the central bank to again raise rates. The minutes indicated, “Many participants remarked that the incoming data before the onset of the banking sector stresses had led them to see the appropriate path for the federal funds rate as somewhat higher than their assessment at the time of the December meeting.” Reading on, the minutes said, “After incorporating the banking-sector developments, participants indicated that their policy rate projections were now about unchanged from December.”

Take Away

Although they are released several weeks after each meeting, the Fed minutes are always closely watched for clues as to how central-bank officials are feeling and where monetary policy is likely heading over the next several weeks or months. The indication from these minutes, behind a backdrop of Fed regional president addresses, indicate a less than unified Fed. Unless there is a good deal of unexpected trouble within the banking sector or economy or a clear tick up in economic measures such as employment, the May 3 post-meeting announcement on policy will be tough to forecast.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/newsevents/pressreleases/monetary20230412a.htm

https://news.yahoo.com/wall-street-split-on-feds-next-move-as-financial-sector-buckles-after-bank-failures-150737804.html

https://www.barrons.com/articles/march-fed-meeting-minutes-today-cf27aa2?mod=hp_LATEST

March’s FOMC Meeting and the Changed Statement

Posted on by phoffman@channelchek.com
Image Source: The Federal Reserve

The FOMC Remains Highly Attentive to Inflation Risks

The Federal Open Market Committee (FOMC) voted to raise overnight interest rates from a target of 4.50% – 4.75%  to the new target of 4.75% – 5.00%. This was announced at the conclusion of the Committee’s March 2023 meeting. The monetary policy shift in bank lending rates after the last meeting had been viewed as certain but recently called into question as the banking system’s health came into question. Some point to the rapid ratcheting of rates as a chief cause of the banking concerns. However, inflation is viewed by the Fed as a problem that can’t be ignored. In fact february’s statement after the meeting made mention of “inflation easing.” This statement shows the Fed left that out and instead provided that inflation, “remains elevated.”

As for the U.S. banking system, which is part of the Federal Reserves responsibility, the FOMC statement reads, the “U.S. banking system remains sound and resilient.”

There were few clues given in the statement about the size of a next move if any. Powell generally shares more thoughts on the matter during a press conference beginning at 2:30 after the statement.

Below are notable excerpts from the announcement of today’s change in monetary policy:

From the Fed Release March 22, 2023

“Recent indicators point to modest growth in spending and production. Job gains have picked up in recent months and are running at a robust pace; the unemployment rate has remained low. Inflation remains elevated.

The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-3/4 to 5 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

Take Away

A key phrase in the statement is, “The Committee remains highly attentive to inflation risks.” The Fed is faced with core inflation that has been trending up, despite its historic one-year of aggressively tightening policy.

For investors, higher interest rates can weigh on stocks as companies that rely on borrowing may find their cost of capital has increased. The risk of inflation also weighs heavily on the markets. For stock market investors, they may find that fixed-income investments that pay a known yield may, at some point, be preferred to equities. For these reasons, higher interest rates are of concern to the stock market investor. However, rising rates devalue bond values held in a portfolio, so there are concerns in both markets.

The market has been holding rates down across the curve as the Fed has been working to increase them. There is no indication as to whether this behavior will continue.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/newsevents/pressreleases/monetary20230322a.htm

The Central Banks High Wire Act

Posted on by phoffman@channelchek.com
Image Credit: Federal Reserve

Worst Bank Turmoil Since 2008 – Fed is Damned if it Does and Damned if it Doesn’t in Decision Over Interest Rates

The Federal Reserve faces a pivotal decision on March 22, 2023: whether to continue its aggressive fight against inflation or put it on hold.

Making another big interest rate hike would risk exacerbating the global banking turmoil sparked by Silicon Valley Bank’s failure on March 10. Raising rates too little, or not at all as some are calling for, could not only lead to a resurgence in inflation, but it could cause investors to worry that the Fed believes the situation is even worse than they thought – resulting in more panic.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of, Alexander Kurov, Professor of Finance and Fred T. Tattersall Research Chair in Finance, West Virginia University.

What’s a Central Banker to Do?

As a finance scholar, I have studied the close link between Fed policy and financial markets. Let me just say I would not want to be a Fed policymaker right now.

Break It, You Bought It

When the Fed starts hiking rates, it typically keeps at it until something breaks.

The U.S. central bank began its rate-hiking campaign early last year as inflation began to surge. After initially mistakenly calling inflation “transitory,” the Fed kicked into high gear and raised rates eight times from just 0.25% in early 2022 to 4.75% in February 2023. This is the fastest pace of rate increases since the early 1980s – and the Fed is not done yet.

Consumer prices were up 6% in February from a year earlier. While that’s down from a peak annual rate of 9% in June 2022, it’s still significantly above the Fed’s 2% inflation target.

But then something broke. Seemingly out of nowhere, Silicon Valley Bank, followed by Signature Bank, collapsed virtually overnight. They had over US$300 billion in assets between them and became the second- and third-largest banks to fail in U.S. history.

Panic quickly spread to other regional lenders, such as First Republic, and upset markets globally, raising the prospect of even bigger and more widespread bank failures. Even a $30 billion rescue of First Republic by its much larger peers, including JPMorgan Chase and Bank of America, failed to stem the growing unease.

If the Fed lifts interest rates more than markets expect – currently a 0.25 percentage point increase – it could prompt further anxiety. My research shows that interest rate changes have a much bigger effect on the stock market in bear markets – when there’s a prolonged decline in stock prices, as the U.S. is experiencing now – than in good times.

Making the SVB Problem Worse

What’s more, the Fed could make the problem that led to Silicon Valley Bank’s troubles even worse for other banks. That’s because the Fed is at least indirectly responsible for what happened.

Banks finance themselves mainly by taking in deposits. They then use those essentially short-term deposits to lend or make investments for longer terms at higher rates. But investing short-term deposits in longer-term securities – even ultra-safe U.S. Treasurys – creates what is known as interest rate risk.

That is, when interest rates go up, as they did throughout 2022, the values of existing bonds drop. SVB was forced to sell $21 billion worth of securities that lost value because of the Fed’s rate hikes at a loss of $1.8 billion, sparking its crisis. When SVB’s depositors got the wind of it and tried to withdraw $42 billion on March 9 alone – a classic bank run – it was over. The bank simply couldn’t meet the demands.

But the entire banking sector is sitting on hundreds of billions of dollars’ worth of unrealized losses – $620 billion as of Dec. 31, 2022. And if rates continue to go up, the value of these bonds will keep going down, which fundamentally weakens banks’ financial situation.

The Fed has been aggressively raising rates to stem the rapid increase in prices for items such as food.

Risks of Slowing Down

While that may suggest it’s a no-brainer to put the rate hikes on hold, it’s not so simple.

Inflation has been a major problem plaguing the U.S. economy since 2021 as prices for homes, cars, food, energy and so much else jump for consumers. The last time consumer prices soared this much, in the early 1980s, the Fed had to raise rates so high that it sent the U.S. economy into recession – twice.

High inflation quickly cuts into how much stuff your money can buy. It also makes saving money more difficult because it eats at the value of your savings. When high inflation sticks around for a long time, it gets entrenched in expectations, making it very hard to control.

This is why the Fed jacked up rates so fast. And it’s unlikely it’s done enough to bring rates down to its 2% target, so a pause in lifting rates would mean inflation may stay higher for longer.

Moreover, stepping back from its one-year-old inflation campaign may send the wrong signal to investors. If central bankers show they are really concerned about a possible banking crisis, the market may think the Fed knows the financial system is in serious trouble and things are more dire than previously thought.

So What’s a Fed to Do

At the very least, the complex global financial system is showing some cracks.

Three U.S. banks collapsed in a matter of days. Credit Suisse, a 166-year-old storied Swiss lender, was teetering on the edge until the government orchestrated a bargain sale to rival USB. A $30 billion rescue of regional U.S. lender First Republic was unable to arrest the drop in its shares. U.S. banks are requesting loans from the Fed like it’s 2008, when the financial system all but collapsed. And liquidity in the Treasury market – basically the blood that keeps financial markets pumping – is drying up.

Before Silicon Valley Bank’s collapse, interest rate futures were putting the odds of an increase in rates – either 0.25 or 0.5 percentage point – on March 22 at 100%. The odds of no increase at all have shot up to as high as 45% on March 15 before falling to 30% early on March 20, with the balance of probability on a 0.25 percentage point hike.

Increasing rates at a moment like this would mean putting more pressure on a structure that’s already under a lot of stress. And if things take a turn for the worse, the Fed would likely have to do a quick U-turn, which would seriously damage the Fed’s credibility and ability to do its job.

Fed officials are right to worry about fighting inflation, but they also don’t want to light the fuse of a financial crisis, which could send the U.S. into a recession. And I doubt it would be a mild one, like the kind economists have been worried the Fed’s inflation fight could cause. Recessions sparked by financial crises tend to be deep and long – putting many millions out of work.

What would normally be a routine Fed meeting is shaping up to be a high-wire balancing act.

The FOMC’s March Meeting Considerations

Posted on by phoffman@channelchek.com
Image Credit: Federal Reserve (Flickr)

Will Systemic Risks to the Banking System Override Inflation Concerns When the Fed Meets?

Yes, the Federal Reserve’s central objective is to help maintain a sound banking system in the United States. The Fed’s regional presidents are currently in a blackout period (no public appearances) until after the FOMC meeting ends on March 22. So there is little for markets to go on to determine if the difficulties being experienced by banks will hinder the Fed’s resolve to bring inflation down to 2%. Or if the systemic risks to banks will override concerns surrounding inflation. Below we discuss some of the considerations the Fed may consider at the next meeting.

The Federal Reserve’s sound banking system responsibility is part of its broader responsibility to promote financial stability in the U.S. economy. The Fed does its best to balance competing challenges through monetary policy to promote price stability (low-inflation), maintaining the safety and soundness of individual banks, and supervising and regulating the overall banking industry to ensure that it operates in a prudent and sound manner.

While the headline news after the Fed adjusts monetary policy is usually about the Fed Funds target, the Fed can also adjust Reserve Requirements for banks. Along with that, the rate paid on these reserves, Interest on Excess Reserves (IOER). Another key bank rate that is mostly invisible to consumers is the Discount Rate. This is the interest rate at which banks can borrow money directly from the Federal Reserve. The discount rate is set by the Fed’s Board of Governors and is typically higher than the Federal Funds rate.

Banks try to avoid going to the Discount Window at the Fed because using this more expensive money is a sign to investors or depositors that something may be unhealthy at the institution. Figures for banks using this facility are reported each Thursday afternoon. There doesn’t seem to be bright flashing warning signs in the March 9 report. The amount lent on average for the seven-day period ending Thursday March 9, had decreased substantially, following a decrease the prior week. While use of the Discount Window facility is just one indicator of the overall banking systems health, it is not sending up red flags for the Fed or other stakeholders.

The European Central Bank Raised Rates

There is an expression, “when America sneezes, the world catches a cold.” The actions of the central bank in Europe, (the equivalent of the Federal Reserve in the U.S.) demonstrates that the bank failures in the U.S. are viewed as less than a sneeze. The ECB raised interest rates by half of a percentage point on Thursday (March 16). This is in line with its previously stated plan, even as the U.S. worries surrounding the banking system have shaken confidence in banks and the financial markets in recent days.

The ECB didn’t completely ignore the noise across the Atlantic; it said in a statement that its policymakers were “monitoring current market tensions closely” and the bank “stands ready to respond as necessary to preserve price stability and financial stability in the euro area.”

While Fed Chair Powell is restricted from making public addresses during the pre-FOMC blackout period, it is highly likely that there have been conversations with his cohorts in Frankfurt.

The Fed’s Upcoming Decision

On March 14, the Bureau of Labor Statistics (BLS) reported core inflation (without volatile food and energy) rose in February. Another indicator, the most recent PCE index released on February 24 also demonstrated that core prices are rising at a pace faster than the Fed deems healthy for consumers, banking, or the economy at large. The inflation numbers suggest it would be perilous for the Fed to pause its tightening efforts now.

What has so far been limited to a few U.S. banks is not likely to have been a complete surprise to those that have been setting monetary policy for the last 12 months. It may have surprised most market participants, but warning signs are usually picked up by the FRS, FDIC, and even OCC well in advance. And before news of a bank closure becomes public. Yet, the FOMC continued raising rates and implementing quantitative tightening. The big difference today is, the world is now aware of the problems and the markets are spooked.

The post-meeting FOMC statement will likely differ vastly from the past few meetings. While what the Fed decides to do remains far from certain, what is certain is that inflation is still a problem, and rising interest rates mathematically erode the value of bank assets. At the same time, money supply (M2) is declining at its fastest rate in history.  At its most basic definition, M2 is consumer’s cash position, including held at banks. As less cash is held at banks, some institutions may find themselves in the position SVB was in; they have to sell assets to meet withdrawals. The asset values, which were “purchased” at lower rates, now sell for far less than were paid for them.

This would seem to put the Fed in a box. However, if it uses the Discount Window tool, and makes borrowing easier by banks, it may be able to satisfy both demands. Tighter monetary policy, while providing liquidity to banks that are being squeezed.

Take Away

What the Fed will ultimately do remains far from certain. And a lot can happen in a week. Bank closings occur on Friday’s so the FDIC has the weekend to seize control. So if you’re concerned, don’t take Friday afternoons off.

If the Fed Declines to raise rates in March it could send a signal that the Fed is weakening its fight against inflation. This could cause rates to spike higher in anticipation of rising inflation. Everyone loses if that is the case, consumers, banks, and those holding U.S. dollars.

The weakness appears to be isolated in the regional-bank sector and was likely known to the Fed prior to the closing of the banks.

Consider this, only two things have changed for Powell since the last meeting, one is rising core CPI. The other is that he will have to do an even better job at building confidence post-FOMC meeting. Business people and investors want to know that the Fed can handle the hiccups along the path to stamping out high inflation.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/releases/h41/20230309/

https://www.bls.gov/news.release/cpi.nr0.htm

The Pace of Tightening is Too Slow, Says FOMC Member

Posted on by phoffman@channelchek.com
Image: CNBC TV (YouTube)

Upcoming PCE Data May Revise St. Louis Fed President’s Increasingly Hawkish Stance

Federal Reserve Chair Jerome Powell testified before Congress in June of last year and said there is a risk the Fed could go too far raising rates. He didn’t believe overdoing it was a “top risk” to the economy. The greater risk, he thought, was that wage and price pressures could possibly keep inflation at a boiling point. He reiterated this position a few months later, saying it is easier to restart the economy if the FOMC is too heavy on the brake pedal rather than too unaggressive and left needing to do even more later. Today, FOMC members seem to agree, at least the St. Louis Fed President does, but he’s not alone. The non-voting member of the Committee says he wants to step up the pace of tightening.

A full percentage point of tightening is needed, and sooner is better, according to James Bullard, who is the President of the St. Louis Federal Reserve. The hawkish comments were made on CNBC February 22nd, but they echo those he made the previous week during his slide presentation titled: Disinflation: Progress and Prospects, deliveredto businesses in Jackson Tennessee. The comments come as inflation is still well above the Fed’s target and not receding toward the 2% goal at a pace that is in line with achieving the target.

Image Source: “Disinflation: Progress and Prospects” (J. Bullard, February 16, 2023)

During the CNBC interview, Bullard said the “risk now is inflation doesn’t come down and reaccelerates.” He used the 1970’s entrenched inflation experience as an example. Explaining that when rising prices become the norm over a long period of time, they become the mindset, the expectation, and then self-fulfilling. Bullard expressed that this is undesirable.

While speaking about where he expects the peak in Fed Funds should be this tightening cycle, he explained he supports a rate near 5.375%. Currently, the Fed targets 4.50% to 4.75%.

Another Fed president has also been vocal recently. Cleveland Fed President Loretta Mester, like Bullard, is a non-voting member this year. Last week she said she saw a “compelling economic case” for a 50 basis-point interest-rate hike at the Fed’s Jan 31- Feb 1 meeting. This conversation is expected to be reflected in the FOMC minutes being released this week. The markets may start reacting to comments of members that supported a more aggressive posture than the 25 basis points the Fed decided upon.

Image Source: “Disinflation: Progress and Prospects” (J. Bullard, February 16, 2023)


The next FOMC meeting is to be held March 21-22. Over the next month, there will be only one more look at the PCE index and several more employment reports. Overall the markets have recently begun to behave more in line with the data and Fed rhetoric. Bonds have begun trading off, although yields still price in much lower inflation, and the stock market, which traded up in January, appears to understand that if the economy wasn’t hot, there would be no reason for the Fed to throw cold water on it.

Expectations for a rate hike at the next meeting can change over the next month. Currently, according to the CME Fedwatch gauge, a 25 bp hike is where speculators have congregated. However, a 50 basis-point hike has gained popularity. The odds have moved up to 24% from 12.2% a week ago, according to the gauge.

Take Away

On the trading desk we label market moving news stories and interviews from influential policymakers, “tape bombs.” This is because as they come across news tapes (like Bloomberg), they could do damage to your positions.

The evenings before each trading week (usually Sunday), Channelchek emails to subscribers known events scheduled during the upcoming week that could become “tape bombs” to your holdings. Subscribe to Channelchek here to be sure you receive these potential risks before the action starts that week.

Paul Hoffman

Managing Editor, Channelchek

Ongoing Increases in the Overnight Interest Rate Target Can be Expected Says FOMC Statement

Posted on by phoffman@channelchek.com
Image Source: Federal Reserve (Flickr)

Jerome Powell and FOMC Will “continue to monitor the implications of incoming information”

The Federal Open Market Committee (FOMC) voted to raise overnight interest rates from the previous target of 4.25% – 4.50% to the new target of 4.50% – 4.75%. This was announced at the conclusion of the Committee’s first scheduled meeting of 2023. The monetary policy shift in bank lending rates was as expected by economists and the markets as the overwhelming consensus was for a 25 bp move.  It has been less than 12 months since the Fed began this tightening cycle, overnight rates since the beginning of last year have increased from near 0.00% to the current target of up to 4.75%.

One recent market focus has been that inflation has been, by most measures, trending lower each month.  While lower increases may suggest that inflation is successfully being wrung out of the system, Powell and the other FOMC members have a 2% target for inflation which guides their policy. The current level is more than two times as high. The art of being the nation’s top bankers and economists trying to provide a soft landing for the still strong economy, is difficult. The result of the actions taken by the Fed can only be seen in the rearview mirror, months after the action.

Synopsis of Fed Decisions

The Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the primary credit rate to 4.75 percent, effective February 2, 2023. In a related decision, the Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 4.65 percent, effective February 2, 2023.

Text from Federal Reserve’s Statement February 1, 2023

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation has eased somewhat but remains elevated.

Russia’s war against Ukraine is causing tremendous human and economic hardship and is contributing to elevated global uncertainty. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/2 to 4-3/4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Take-Away

Higher interest rates can weigh on stocks as companies that rely on borrowing may find their cost of capital has increased. The risk of inflation also weighs on the markets. Additionally, investors find that alternative investments that pay a known yield may, at some point, be preferred to equities. For these reasons, higher interest rates are of concern to the stock market investor. However, an unhealthy, highly inflationary economy also comes at a cost to the economy, businesses, and households.

The statement suggests the Fed continues to remain data dependent, but expects further increases will follow. The statement did not provide strong guidance as to what to expect following future meetings.

Chairman Powell’s 2:30 PM ET press conference can be viewed here.

Paul Hoffman

Managing Editor, Channelchek

The Week Ahead – FOMC Policy Decision & Briefing Amidst Key Earnings Reports

Posted on by phoffman@channelchek.com

The Fed May Try to Talk Rates Up While Increasing Overnight Levels by a Lower Amount

There will be plenty for the market to digest this week. While all ears will be on what Fed Chairman Powell says following Wednesday’s FOMC policy announcement, investors will get to also digest a barage of earnings reports. The quarterly reports, from various sectors, may set the tone for their industries. These include reporting on Monday by Advanced Micro (AMD), Amgen (AMGN), Caterpillar (CAT), Exxon Mobil (XOM), McDonald’s (MCD), Pfizer (PFE), and United Parcel (UPS). On Tuesday Meta Platforms (META) will be one of the most talked about, then on Wednesday the market gets a barrage from tech and pharmaceutical companies as Alphabet (GOOGL), Amazon.com (AMZN), Apple (AAPL), Bristol-Myers (BMY), Eli Lilly (LLY), Honeywell (HON), Merck (MRK), and Qualcomm (QCOM) are all scheduled to report operating performance.

Monday 1/30

  • With no consequential economic releases, market direction may take its tone from earnings reports from a wide swath of industries (see tickers above).

Tuesday 1/31

  • The first of 2023’s eight scheduled two-day FOMC meetings begins.
  • 8:30 AM ET, Employment Cost Index is expected to have risen 1.1% for the fourth quarter. For the last five quarters, large gains of 1 percent and more have been keeping wage inflation a concern.
  • 8:30 AM ET, After jumping 7 points in December, the consumer confidence index is expected to firm only 0.7 of a point to 109.0 in January. The pattern in consumer attitudes and spending is often the largest influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and possibly higher stock prices as a result.

Wednesday 2/1

  • 7:00 AM ET, the Mortgage Bankers’ Association (MBA) compiles various mortgage loan indexes. The purchase applications index measures applications at mortgage lenders. This is a leading indicator for single-family home sales and housing construction. The composite index is expected to come in at 27.9%, while the Purchase applications are expected to show a reading of 24.7%. The data provides a gauge of not only the demand for housing, but economic momentum.
  • 9:45 AM ET, Construction Spending, for December is expected to slip 0.1 percent after moving 0.2 percent higher in November. Spending has been flat in recent months as gains in non-residential construction have been offset by declines on the residential side.
  • 10:00 AM ET, Job Openings and Labor Turnover Survey (JOLTS), which have been steady to lower, are expected to fall to 10.2 million in December versus 10.458 million in November.
  • 2:00 PM ET, FOMC meeting concludes with statement of policy shift. The Fed is expected to reduce its rate hike magnitude to 25 basis points. A 0.25% increase would raise the overnight Fed Funds rate range up to 4.50% –  4.75%.
  • 2:30 PM ET, Fed Chair Powell’s press briefing. The purpose of the briefing is to provide additional context to the FOMC’s policy decisions and to allow for questions-and-answers with the press. There has been concern that the market has been pushing rates down out in terms beyond two years to maturity. This could be a undermining the Fed’s stated objective by tightening. If this is true, the briefing may be filled with language that tries to convince the bond markets, that the Fed is determined to slow the economy by pushing rates up.

Thursday 2/2

  • 7:30 AM ET, the Challenger Job Cut report counts and categorizes announcements of corporate layoffs based on mass layoff data from state departments of labor. The job-cut report doesn’t distinguish between layoffs scheduled for the short-term or the long term, or whether job cuts are handled through attrition or actual dismissals. Also, the job-cut report does not include jobs eliminated in small batches over a longer time period. Unlike most economic data, this series is not adjusted for seasonal variation.  
  • 8:30 AM ET, Nonfarm Productivity is expected to rise to a 2.4 percent annualized rate in the fourth quarter versus growth of 0.8 percent in the third quarter. Unit labor costs, which rose 2.4 percent in the third quarter, are expected to rise to a 1.5 percent rate in the fourth quarter.
  • 10:00 AM ET, Factory Orders are expected to rise 2.2 percent in December following  November’s steep 1.8 percent drop. The expected increase comes in the wake of a surge in aircraft orders.

Friday 2/3

• 8:30 AM ET, Nonfarm Payroll is expected to have grown 185,000 in January versus 223,000 in December which was the eighth straight month and tenth of the last eleven that payroll growth exceeded the average economists expectation.  Average hourly earnings in January are expected to rise 0.3 percent on the month for a year-over-year rate of 4.4 percent.

What Else

The tone of the chatter that is expected to come from Fed officials is one of continued hawkishness. The Fed’s preferred inflation measure (PCE) was at 4.4% for all of 2022, and has been trending downward. This is more than double the stated target of 2%. The question they are now facing is, whether they should soon pause tightening and observe the impact of previous moves. Or if the solid employment numbers and strong bank reserve positions leave room for continuing the war on inflation through aggressive overnight rate hikes. Powell’s press conference after the 2 pm announcement on Wednesday should reveal quite a bit.

Paul Hoffman

Managing Editor, Channelchek