Has Fed Hit the Brakes Hard Enough?

 

Federal-funds rate target, at 5.25% to 5.5%, is relatively high in nominal and inflation-adjusted terms

Because of lags, the question of whether growth perseveres or rolls over in the face of past interest-rate hikes might well be resolved in the next six months.

Fed raises short-term interest rates to cool inflation by slowing demand, hiring and wage growth. 

It does that through the ripple effects on broader financial conditions such as stock prices and long-term bond and mortgage rates. 

The interest rate that achieves financial conditions that keep the economy at full strength and inflation steady is called “neutral.” 

To slow growth and reduce inflation, the Fed must push rates above neutral.

Some business executives, economists and Fed officials say solid growth suggests rates might not be that far above neutral right now. 

“We thought we had two feet on the brakes, but maybe we in fact only have one foot on the brakes, and that’s why we haven’t seen as much of a reduction in demand,” Minneapolis Fed President Neel Kashkari said.

Higher housing prices and a stock market up nearly 20% since November are boosting wealth and thus supporting consumption, especially of high-income households. 

“For consumers of lower-to-moderate income, they’ve burned through that. It is gone, and they are struggling. That’s why they’re loading up on credit-card debt.”

The price of bitcoin has recently surged to records, a sign of exuberant risk-taking.

Nick Timiraos WSJ 17 March 2024

https://www.wsj.com/economy/the-feds-challenge-has-it-hit-the-brakes-hard-enough-a7760be6

US Credit Card Debt Past $1 Trillion

Fotnot: Det är 1.000 miljarder, dollar. 

https://englundmacro.blogspot.com/2023/12/revenge-spending-drives-us-credit-card.html

En junisänkning  i USA går inte att utesluta 

Man kan anklaga Wall Street för mycket, men inte för att sätta stopp på börsfesten i förtid när investerarna väl fått upp ångan.

Om räntesänkningen skjuts långt in på framtiden, eller följs av ännu en lång period av avvaktande från Feds sida, är det en påminnelse om centralbankens varning från ifjol – räntan måste förbli hög under längre tid. 

Då blir det tufft för börsen att ånga vidare.

Felicia Åkerman DI 18 mars 2024

https://www.di.se/analys/da-skjuts-sankningen-framat-igen/

US unemployment rate is near historic lows

Consumers seem to have a higher propensity to spend – perhaps due to greater confidence in job security, or even a generational shift away from precautionary saving, with the aftermath of the 2007-09 financial crisis now more distant. 

US unemployment rate is near historic lows, at under 4%, despite what Fed officials describe as a “restrictive” interest rate. 

Futures trading suggests about a 3.5% benchmark Fed rate in a few years’ time — a full percentage point more than Fed policymakers’ latest long-run forecast, which is set to be updated at the March 19-20 policy meeting.

The Fed Board has two divisions that make domestic and international economic forecasts, as well as a policy strategy unit, in Washington. There were more than 700 full-time equivalent staff members for 2023, with a $202 million budget.

Fed policymakers will have the chance at putting forward a fresh assessment of the economy’s underlying shifts when the central bank begins a new strategic review later this year. 

The last one, in 2020, focused on how to address persistent undershooting of the 2% inflation target.

It proved ill-timed, as it wrapped up just before the cost of living began to surge.

Bloomberg 17 March 2024

https://www.bloomberg.com/news/articles/2024-03-17/rates-in-2024-markets-react-as-powell-s-fed-stays-course