Fed interest rate hikes hits US: no more zeroes

 

Last week’s news of a hike, or rather a series of hikes, of the Fed interest rate gave some consolation to some people in some places, or to paraphrase Lincoln, to some of the people some of the time. It’s been clear for some time that inflation in the US had come to be the defining economic problem and after the Federal Reserve Bank had their two-day meeting there was rapt attention to what could be done to stem the tide of higher and higher prices on goods, that had been fed upon by consumer demand after the Covid lockdowns across the country.

With most Americans subsequently holding fat checking accounts, by not spending more that they could get from the supermarket, or the internet, and uncertainty abound, the flood gates were then thrown open, after the variants were tamed with vaccinations, and the lifting of mask mandates, the demands for new sofas, food processors, and the like became the norm.

Soon, production could not keep up with demand, as many of the overseas factories had been shuttered for fear of Covid, and ports were clogged with uncharted goods, due to a dearth of warehouse space and workers to unload.

At that time, it was thought to be transitional, and temporary but as the months grew it became a major economic problem, or as Sonai Desai Executive Vice President, chief investment officer, Franklin Templeton Fixed Income, told the Financial Times, “it’s the single most significant issue for America.”

The Fed has prepared to raise interest rates six more times this year, and five times in 2023, subject to change and Chair, Jerome Powell feels confident that the economy is durable enough to absorb these higher rates, designed to slow spending, as well as investments.

Observers, and media analysis, in part from The New York Times, have suggested that Powell  is hoping for a “soft landing,” while others have said that this is too little, too late, but with inflation reaching a 40 year high, desperate times called for desperate measures, says the old cliché.

Fueling all of these purchases are higher wages, as employers lure much needed workers. The issue, as seen by others, as well as the chair, is whether unemployment can remain low, with its recent figure of 3.8 percent, and some seeing this as optimistic.

Last fall the Financial Times noted that “labour infiltration” was becoming the norm, and cited Amazon as a major employer who identified the growing trend, along with McDonalds and Starbucks.

For Powell, it’s not only optimism but careful calibration by he, and members, to stave off a recession. And, that is no easy feat. 

Another feat is tapering the reserves, or asset purchases, which have long preoccupied GOP lawmakers; taking a look at what consumers can expect to face, is also of interest, for consumer expenditures fuel the American economy. 

FT also noted that “higher pay packages” were “showing wages and benefits rising at their fastest pace since 2001.”

As has been noted before, higher wages are offset by inflation causing a conundrum, if Powell wants to keep wages steady, but with the scheduled pay raises, tied to that goal, as well as avoiding recession, this is tricky business, for low to middling incomes, as Diane Swonk chief economist at Grant Thornton noted previously: “The costs for low-wage households to cover their commuting cost, grocery bills and rents are eating into the jump they have seen in wages.”

There is some good news on the financial front for consumers: “current federal student loan borrowers aren’t affected because those carry a fixed rate set by the government,” according to The New York Times; but those holding private loans can “expect to pay more.”

For those dependent on car ownership, that most have seen rise exponentially, can  expect to see an increase with average rates taking a rise to 4.39 in February, but some faith in the used car market has taken a decrease in interest rates from 7.83 percent, also, in February, down from 8.25 percent.

Think again about those aforementioned fattened bank accounts, yes, the bank “will pay more interest on deposits,” but not right away, with banking policies increasing rates, when they want increased deposits, and they have tons, ergo no incentive to do otherwise.

In a tilt to online banks they “pay better rates more quickly than larger institutions, according to Ken Tumin, founder of DepositAccounts.com . . ., according to The New York Times.

They also noted that CD’s can be poised to gain higher moves, again, especially with online banks; and, also equally true for money market mutual funds, with a corresponding rise from the feds.

Taking it all in, there are months ahead that will bear watching, taking into account both the expected and the unexpected. What happens, or doesn’t happen, especially with the invasion of Ukraine, is a deciding factor, and with possible shortages of grain, the road ahead for the US economy, not in isolation, but in concert with the world won’t make for an easy road, but this is a 21st century world.

Executive Vice President, Chief Investment Officer, Franklin Templeton Fixed Income

For US economy February Jobs Report roars in like a lion

It might not yet be March Madness, but the February Jobs report issued this first Friday in March has given wholly, and not unexpected, news to economists and the White House as they have grappled with a menu of worries, the war In Ukraine, as the top international issue; but the recovering jobs market, got a shot in the arm, a second one, if you count January’s, that gave a whopper, minus the fries to that select group.

Now with 678,000 non farm jobs the US economy can see a stronger path forward from the pre pandemic, with its loss of 10 million plus jobs that hit the nation with what has now resulted in, as The Hill noted, “Unprecedented demand for workers and resilient consumer spending helped power another strong month of job growth.”

While nothing is guaranteed, and with the war in Ukraine’s potential to drain oil reserves and affect the world economy, the bump in service hiring alone might be the banner, which has led those lagging industries.

Specifically, that gain of 179,000 in leisure and hospitality, and a corresponding gain in 124,000 jobs in bars and restaurants, a significant employer across the US, but especially in urban areas such as New York, Chicago, Los Angeles and Miami can give some solace to their workers.

Couple that with the less deleterious effect of the Omicron variant and decreasing case and hospitalizations of all Covid cases, and where in many large cities, the dropping of mask mandates, and vaccine requirements, the die seems to be cast for a robust jobs outlook.

While manufacturing is slack, construction increased by 60,000 after flat numbers in January.

One important data point, to use the colloquialism of the day, is that labor force participation was dormant, and while there was some movement of other workers returning to the workforce this is a key area that economists look to measure the temperature of the market.

There is some conjecture that many of the people who have stayed on the bench are older retirees, some who have not seen the benefits of masking mandates lifted, or those too unsure of a healthy and well ventilated environment conducive for working shoulder to shoulder, or those that have simply gotten too comfy in retirement.

For many Americans the higher wages received by desperate employers has increased worries for the inflationary prices, most notably at the gas pump where we have seen signs that seem like slot machine windows, where an average gallon of gas in Chicagoland has hit over $4.00, and in some cases, $ 4.65, an increase of a dollar, from last week.

A quick trip to the supermarket has seen increases in almost every category, and even the venerable Dollar Tree, justifiably proud of their one dollar price points are now $1.25, and yet some people, according to The New York Times: “despite strong job numbers, polls show the public thinks the U.S. economy is headed in the wrong direction.”

They also reported that some famous economists, namely the Nobel winner Joseph Stiglitz, said “we are not facing an inflation crisis.” 

Or, at least not like we had in the 1970s. But, that might not allay fears of the public, especially for an older public that remembers those days, and with the increasing aggression in the Ukraine, fuel might become an issue for the economy and also President Biden, who after his bump in the polls after the State of the Union address could face closer scrutiny, and criticism, much like Chicago mayors do after snow storms.

Despite all efforts “People are unhappy about inflation,” said former top adviser and economist Jason Furman, who also advised President Obama, added that rising wages are now being eaten up by higher prices.

Joined by Federal Reserve Chair Jerome Powell, who is going to raise interest rates for the first time in years, later in March, as a bulwark against the rising tide of inflation.

With a hot economy some are saying like Chris Waller, a Fed governor, that he is willing to “support more aggressive rate increases .  . “.

As a refresh, high inflation begins with high prices and rising wages. And, some economists are predicting that wages may stagnate, thus creating the perfect storm, last seen in the 1970s.

Average hourly wages rose nearly 5.1 percent over the last year, down from January’s 5.7 percent, as employers tried hard to lure employees to handle increased demand for goods and services.

For women, Blacks, and Latinx people the needle has hardly moved since January, and for the former, the lack of affordable child care, still carries weight. Until Congress can agree on  a plan forward without the politicization of policy, women will not be returning to work in great numbers.

Labor Force Participation has stayed flat at 62.3 and that worries some who would like to see a higher number, but as we have seen there are the happily retired, and those who, especially in service jobs, might not want to return to what they see as a still dangerous workplace, working shoulder to shoulder.

Another monetary concern is affordable housing and has resulted in many people leaving large urban areas in search of affordable housing as well as a slower pace of life. But, with housing especially in the American south, being cheaper, that leaves a void for a basic urban necessity.

The Brookings Institution has noted in a recent report the lack of housing being built in these areas affects even those with higher wages and professional degrees, with minimal housing built in affluent areas despite the desire from this group, but resisted by current residents.

They cited San Francisco as an example of adding “only one home for every seven new jobs created between 2010 and 2015, while rents increased more than 40% during the same period.”

The power of existing residents make their preferences known as better heeled and affluent, people call the shots, limiting housing for low and even moderate income families.

While these issues, especially inflation, play a role in how much to celebrate, as Daniel Zhao told The Hill, "Ultimately, however, today’s jobs report helps build confidence in the resilience of the recovery and its ability to continue driving jobs growth despite unanticipated headwinds.”