Fed Signals Smaller Rises but Ultimately Higher Rates Chairman Jerome Powell says too soon to talk about pausing rate increases
The increase approved Wednesday, the Fed’s fourth consecutive 0.75-point rate rise, lifts the central bank’s benchmark federal-funds to a range between 3.75% and 4%. After the decision, Chairman Jerome Powell said officials would contemplate a smaller hike at their next meeting in December. But he cautioned that they might raise borrowing costs next year more than they have projected.
“The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive,” he said at a news conference Wednesday.
Mr. Powell also warned that reducing the size of rate increases didn’t mean the Fed thought it was close to pivoting away from raising rates.
“It is very premature to be thinking about pausing,” said Mr. Powell. “We think we have a ways to go.” (…)
At their September policy meeting, most Fed officials projected that they would need to raise the benchmark rate to around 4.6% early next year. Officials didn’t release new rate projections Wednesday. Mr. Powell said that if they had, they would have been higher given recent strength in the labor market and high inflation readings. A higher path for interest rates suggests a greater risk of a recession, he said.
“The inflation picture has become more and more challenging over the course of this year, without question,” he said. “To the extent rates have to go higher and stay higher for longer, it becomes harder to see the path” that avoids a recession. (…)
While Mr. Powell said he didn’t think the Fed had raised interest rates too much, he repeated his view that it would be appropriate for the central bank to err on the side of overdoing it rather than underdoing it because he saw a bigger cost for the economy in allowing inflation to become entrenched. (…)
His comments opened the door to slowing rate rises as soon as December, though he said no decisions had been reached. He also said the Fed was not close to stopping rate rises and holding rates steady for a while. “We think there is some ground to cover before we meet that test,” Mr. Powell said. (…)
“I don’t think wages are the principal story of why prices are going up. I also don’t think that we see a wage-price spiral,” said Mr. Powell. “But…once you see it, you’re in trouble. So we don’t want to see it.”
Investors initially thought they had correctly anticipated the pivot. The official statement released at 14:00 was almost identical to the previous one but with some seemingly dovish additions such as “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.”
Mr. Powell’s 14:30 presser started softly, until, at 14:51, he answered a question with “Let me say this”, then went on to say that “it is very premature to think or discuss pausing” and made sure that the message was clear:
- inflation is not slowing as much as expected;
- consumer spending has not been impacted as much as expected by higher interest rates;
- the “very, very strong” labor market plus accumulated savings may require “more patience” before we see inflation recede to the 2% goal. “We will stick with this”.
Near the end of the presser, he said the official statement was important but added that “I control the messaging, that’s my job.”
His key message was this:
“The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive”.
MAXED OUT?
Consumers spend from disposable income and savings (more or less credit). American consumers tend borrow more when their income growth falls below what is deemed necessary for their desired standards of living. Post pandemic, income growth (blue) has slowed to a crawl while spending (black) is growing 3-4 times faster than in 2019 as consumer loans (red, ex-housing related) jumped 19% from their pandemic low and now represent 9.6% of disposable income, a historically high level, particularly considering where interest rates currently stand (back to 2001 on credit cards).
Debt servicing was still very low in Q2 (last data point below) but the recent jump in borrowing costs, applied to very high debt balances will boost debt servicing costs considerably in Q3 and through 2023.
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Eurozone manufacturing output falls at sharpest pace since initial COVID-19 wave as demand for goods plummets
The eurozone manufacturing sector slid further into contraction territory at the start of the fourth quarter as output and new orders fell at rates rarely surpassed across the 25 years of PMI data collection. Export demand also sank sharply as geopolitical uncertainty, high inflation and weaker economic conditions around the world weighed on foreign client spending.
With output requirements rapidly diminishing, eurozone manufacturers reduced their purchases of inputs to the quickest extent since May 2020. A further easing of supply-chain pressures was also recorded as more capacity was freed up at suppliers.
Meanwhile, having accelerated slightly in September, price pressures subsided at the start of the fourth quarter. Nevertheless, output charge and input cost inflation rates remained historically elevated.
The S&P Global Eurozone Manufacturing PMI® recorded in sub-50.0 territory for a fourth month in a row in October, signalling a sustained downturn in manufacturing sector conditions. At 46.4, the headline index fell from 48.4 in September to its lowest level since May 2020.
Of the monitored eurozone constituents, only Ireland saw an improvement during October. The remaining countries registered deeper manufacturing downturns, with the majority recording the fastest deterioration since the initial COVID-19 shock during the first half of 2020. Spain was the worst-performing nation during October, closely followed by Germany.
(…) According to panel comments, falling client demand was a key factor driving lower production volumes. The level of incoming new orders slumped during the latest survey period, reflecting shrinking demand from clients in markets across the eurozone and other parts of the globe. In over 25 years of data collection, the rate of decline seen in new orders during October has only been surpassed during periods of intense economic turbulence such as the global financial crisis period between 2008 and 2009 and the COVID-19 pandemic.
Euro area manufacturers were also faced with another steep increase in their operating costs during October. Energy prices were a major factor that drove expenses higher, according to anecdotal evidence. That said, the rate of input cost inflation eased and was the second-weakest since the start of 2021. (…)
Indeed, lower pressure on suppliers was partly a result of falling input demand. Buying activity fell at the quickest pace since May 2020 during October. Nevertheless, pre-production stocks rose as some companies accumulated safety-stock buffers to protect against price and supply risks.
Meanwhile, October survey data pointed to the fastest reduction in backlogs of work across the eurozone manufacturing sector since May 2020. A deficit of new work relative to output helped companies clear their pending orders. Nonetheless, employment growth was sustained and edged up fractionally.
Looking ahead, eurozone manufacturers continue to expect falling output volumes over the next 12 months. Excluding the months at the start of the pandemic, the Future Output Index registered its lowest reading since the series began in 2012 during October. High inflation, geopolitical uncertainty and worsening economic conditions globally underpinned the pessimistic outlook.
China Services PMI: October sees sustained slowdown in services activity
October saw a sustained slowdown in activity across the Chinese service sector, as ongoing efforts to stop the spread of COVID-19 disrupted business operations and weighed on demand. Positively, there was arise in services employment for the first time in 2022, with firms showing slightly more optimism towards the outlook.
On the inflation front, October data showed a slight pick-up in the rate of increase in prices charged by service providers to an eight-month high.This was despite a softening of cost pressures across the sector.
(…) At 48.4, down from 49.3, the latest reading was the lowest since May. That said, the rate of decline remained modest and far softer than seen during the much larger outbreak of COVID-19 in the spring.
Containment measures associated with the latest spate of infections acted to suppress demand during October.This was highlighted by a second successive monthly reduction in inflows of new business at Chinese services firms. The rate of decline eased and was only marginal, however. The slower fall in overall inflows of new work came despite a renewed downturn in new business from abroad.
Efforts to expand staffing capacity and enhance sales capabilities contributed to a rise in employment across the Chinese service sector in October. Although only modest, the increase in workforce numbers was nevertheless the most marked since May 2021 and ended a run of job losses stretching back to the start of the year. (…)
Turning to prices, October’s survey data pointed to a slightly faster rise in average fees charged by services companies in China. The rate of inflation was the quickest since February and above the series long-run average. Where output prices increased, this often reflected the pass-through of higher costs to customers, anecdotal evidence showed. Alongside a rise in oil-related prices, firms reported higher wage bills leading to an increase in operating expenses. That said, the overall rate of cost inflation was the second-slowest in the past 14 months.
Looking ahead, October saw a slight uptick in firms’ expectations for activity over the coming year. However, coming off a six-month low in September, the degree of optimism remained relatively subdued, amid ongoing concerns about the pandemic’s impact on growth prospects and challenging global market conditions.
