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Explainer-Charting the Fed’s data flow

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Explainer-Charting the Fed's data flow
© Reuters. FILE PHOTO: A cyclist passes the Federal Reserve building in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie/File Photo

By Howard Schneider

The Federal Reserve held its benchmark overnight interest rate steady at its Sept. 19-20 policy meeting. New data will shape whether the U.S. central bank continues to stand pat at its Oct. 31-Nov. 1 meeting or proceed with another rate increase.

The Fed’s target policy rate has been raised to the 5.25%-5.50% range from near zero in March of 2022, and inflation measured by the Fed’s preferred personal consumption expenditures price index (PCE) was 3.5% in August, compared to a peak of 7% last summer.

Fed Chair Jerome Powell has said the pieces of the low-inflation “puzzle” may be aligning, but he does not trust it yet.

Here is a guide to some of the numbers shaping the policy debate:

JOB OPENINGS: (Released Oct. 3, next release Nov. 1)

Powell keeps a close eye on the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) for information on the imbalance between labor supply and demand, and particularly on the number of job openings for each person without a job but looking for one. In August that key ratio clung to its downward trend as the Fed’s rate hikes have slowed labor market demand. It’s now about 1.5-to-1, compared with the nearly two jobs for every person seeking work during most of 2022. Levels around 1.2 were considered tight for the U.S. labor market before the pandemic.

INFLATION (Released Sept. 29, next release Oct. 12):

A key inflation measure fell in August, adding to what many economists feel is likely to be a steady disinflation. The PCE price index, stripped of volatile food and energy costs, rose 3.9% on a year-over-year basis compared to 4.3% in July, and recent month-to-month increases have averaged close to the Fed’s 2% target. The headline rate did increase slightly, from 3.4% to 3.5%, but largely on the basis of energy costs. The Fed uses the PCE measures to set its 2% inflation target, but the decline in the “core” measure will be seen as evidence of slower price increases ahead.

Consumer price inflation rose for the second straight month, to 3.7% in August versus 3.2% in July. But the rise was largely the result of higher gas prices, which can be volatile and which Fed officials discount in analyzing price trends. More important to the central bank, underlying “core” inflation stripped of energy and food costs continued its decline, falling to 4.3% on a year-over-year basis compared to 4.7% in July.

While the overall picture is somewhat mixed, the inflation data in recent months likely doesn’t change the policy outlook. But it does highlight the time it may take for Fed officials to be confident in a continued inflation decline.

INFLATION EXPECTATIONS (Released Sept. 29, next release Oct. 13)

Consumers’ estimates of what inflation will average over the next 12 months and the next five years fell notably in September, the University of Michigan reported. At the one-year horizon, the inflation expectation fell to 3.2% from 3.5% in August. At five years, the reading fell to 2.8% from 3.0%.

The declines will be comforting to Fed officials who worry that rising inflation expectations can make consumers act in ways that will keep actual inflation higher. The one-year rate, notably, is now around its 40-year average.

RETAIL SALES (Released Sept. 14, next release Oct. 17):

Retail sales rose more than expected in August, increasing 0.6%. While that was largely due to higher gasoline prices, a separate measure of sales more directly related to economic output also rose slightly even though economists expected it to decline. Even as prior months’ sales were revised lower, the August report showed household spending likely still adding to overall economic growth that has been on the central bank’s radar as an inflationary risk.

PRODUCER PRICES (Released Sept. 14, next release Oct. 11)

The producer price index (PPI) for August jumped 0.7%, the largest monthly increase since the peak of the Fed’s inflation worries in June of 2022. Goods prices spiked a full 2%, another reason the central bank will be reluctant to declare its inflation battle over. Yet much of that was due to a jump in fuel prices, the sort of thing the Fed will discount. An index of service industry prices rose just 0.2%, and a measure of retailer and wholesaler margins fell, reinforcing arguments that inflation should continue to fall.

EMPLOYMENT (Released Sept. 1, next release Oct. 6):

The U.S. economy added 187,000 jobs in August, more than economists expected, in a sign of continued labor market strength. But the August report also contained more than a little evidence that a slowdown is underway. Prior months’ gains were revised lower, with June job growth showing just 105,000 positions added, while the unemployment rate rose to 3.8% from 3.5% as more people joined the labor market.          

Hourly wages grew at a brisk 4.3% on a year-over-year basis, but just 0.2% on a monthly basis, the smallest such jump this year.

Investors viewed the overall data as leaning against any further Fed rate increases.

BANK DATA: Released every Thursday and Friday

To some degree the Fed wants credit to become more expensive and less available. That is how increases in its policy rate influence economic activity. But bank failures in the spring threatened broader stress in the industry and a worse-than-anticipated credit crunch. Weekly data on bank lending shows bank credit has fallen on a year-over-year basis since the middle of July.

Bank borrowing from the Fed spiked around the failure of Silicon Valley Bank, but has declined since.


Fed pivot to interest-rate cuts seen likely to start in May

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Fed pivot to interest-rate cuts seen likely to start in May
© Reuters. FILE PHOTO: The Federal Reserve building is seen in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts/File Photo

By Ann Saphir

(Reuters) – A stronger-than-expected U.S. labor market won’t keep the Federal Reserve from pivoting to a series of interest-rate cuts next year, but it could take until May for it to deliver the first reduction, traders bet on Friday.

Employers added 199,000 workers to their payrolls in November, the Labor Department’s monthly jobs report showed, more than the 180,000 that economists had expected, and the unemployment rate unexpectedly fell to 3.7%, from 3.9% in October.

Hourly earnings ticked up 0.4% from a month earlier, more than expected and an acceleration from the prior month. But the labor force participation rate also rose, to 62.8%, easing the prospect that an overheated job market will short-circuit progress on the Fed’s inflation battle.

A separate report Friday showed U.S. consumer sentiment improved more than expected in December as households saw inflation pressures easing.

The U.S. central bank is expected to keep rates in the current 5.25%-5.50% range when it meets next week, leaving policy on hold since July. Traders before Friday’s jobs report had put about a 60% probability on a March start to Fed rate cuts, but after the data reduced that to just under 50%, with a first reduction seen as more likely to come in May.

Further rate cuts are priced in for the rest of 2024, with the policy rate seen ending the year in the 4%-4.25% range as the Fed adjusts borrowing costs downward not as an antidote to a weaker labor market but rather to keep pace with an expected continued cooling in inflation.

The pace of that improvement in inflation will help determine the timing of the Fed’s pivot to rate cuts, analysts said.

“We maintain our call for the Fed to start cutting rates by mid-year, but it is contingent on inflation continuing to trend lower and further weakening in economic activity,” wrote Nationwide economist Kathy Bostjancic after the report.

Fed policymakers will release their own views of where the economy, inflation, and interest rates will go next year when they wrap up their last meeting of the year on Wednesday. 

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US consumers’ moods brighten as inflation worries subside – UMich

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US consumers' moods brighten as inflation worries subside - UMich
© Reuters. FILE PHOTO: A person arranges groceries in El Progreso Market in the Mount Pleasant neighborhood of Washington, D.C., U.S., August 19, 2022. REUTERS/Sarah Silbiger/File Photo

(Reuters) -U.S. consumer sentiment perked up much more than expected in December, snapping four straight months of declines, as households saw inflation pressures easing, a survey showed on Friday.

The University of Michigan’s preliminary reading of its Consumer Sentiment Index shot up to 69.4, the highest since August, from November’s final reading of 61.3.

The median expectation among economists in a Reuters poll had been for the index to edge up to 62.0.

“Consumer sentiment soared 13% in December, erasing all declines from the previous four months, primarily on the basis of improvements in the expected trajectory of inflation,” survey Director Joanne Hsu said in a statement.

The survey’s preliminary gauge of current conditions rose to 74.0 from last month’s final level of 68.3, while the expectations index climbed to 66.4, the highest since July, from 56.8 in November.

Consumers’ outlook for inflation in the year ahead plunged to 3.1% – the lowest since March 2021 – from November’s final expectation of 4.5%. The 1.4 percentage point decline was the largest monthly drop in one-year inflation expectations in 22 years.

Over a five-year horizon, consumers expect inflation to average a three-month low of 2.8%, down from 3.2% in November, which had been the highest since March 2011, when it reached the same level.

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Russian inflation accelerates in November, rate hike beckons

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Russian inflation accelerates in November, rate hike beckons
© Reuters. FILE PHOTO: People shop at a local market in the town of Rostov in the Yaroslavl Region, Russia April 15, 2023. REUTERS/Evgenia Novozhenina/File Photo

MOSCOW (Reuters) – Inflation in Russia accelerated in November, data from state statistics service Rosstat showed on Friday, cementing expectations that the central bank will hike interest rates as it meets for the final time this year on Dec. 15.

The central bank has now raised rates by 750 basis points since July, including an unscheduled emergency hike in August, under pressure from a weak rouble, tight labour market and strong consumer demand. Analysts widely expect another hike, to 16%, next week.

High interest rates are one of several irksome economic challenges facing President Vladimir Putin, who on Friday said he would run again for president next year, although none seem insurmountable thanks to Russia’s success in evading a Western oil price cap helping to drive a recovery in economic growth.

In November, annual inflation stood at 7.48% year-on-year, up from 6.69% a month earlier and just shy of analysts’ expectations of a 7.6% reading.

The data suggests that annual inflation will exceed the central bank’s expectation of year-end inflation at the upper end of the 7.0%-7.5% range, which is well above its 4% target.

On a monthly basis, the consumer price index (CPI) rose 1.11% in November after a 0.83% increase in October, the data showed, coming just below analyst forecasts of a 1.2% increase. That was the fastest monthly rise since April 2022.

In the week up to Dec. 4, consumer prices rose 0.12%, separate Rosstat data showed.

Russian households regularly cite inflation as a major concern, with many having no savings after a decade of economic crises, while rising prices dragged living standards down across the country.

Rosstat gave the following details:

RUSSIAN CPI Nov 23 Oct 23 Nov 22

Mth/mth pct change +1.11 +0.83 +0.37

– food +1.55 +1.35 +0.40

– non-food +0.53 +0.55 +0.06

– services +1.23 +0.48 +0.76

Y/Y pct change +7.48 +6.69 +11.98

Core CPI y/y pct change +6.36 +5.50 +15.06

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