© Reuters. FILE PHOTO: Federal Reserve building is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie/File Photo
By Howard Schneider
WASHINGTON (Reuters) – Price and wage increases running at multi-decade highs may challenge Federal Reserve officials this week as they try to maintain a balance between ensuring inflation remains contained and giving the economy as much time as possible to restore the jobs lost since the pandemic.
Investors on Monday continued to increase their expectations that high and persistent inflation would force the Fed to raise interest rates sooner and faster than policymakers have projected. Contracts in federal funds futures now imply three quarter-point rate increases next year, versus two as of late last week, according to data from the CME Group’s (NASDAQ:) FedWatch.
Purchasing managers, meanwhile, see price pressures continuing to build, with the Institute for Supply Management’s Price Index rising sharply as manufacturing firms shouldered higher input costs.
Though policymakers would prefer to remain patient in raising rates, the window for them to hold off may be narrowing, economists at Goldman Sachs (NYSE:) said as they became the latest to accelerate their rate hike call, moving it ahead a full year to July 2022.
By then, Goldman economist Jan Hatzius and others wrote that they expect inflation, as measured by the closely monitored core personal consumption expenditures price index, still to be above 3% – a run of inflation not seen since the early 1990s and one well above the Fed’s 2% target.
Aspects of the job market, particularly the labor force participation rate, are unlikely to have recovered to pre-pandemic levels, and would seemingly still be short of the “maximum employment” the Fed has promised to restore before raising interest rates. But at that point, the Goldman team wrote, Fed officials would “conclude that most if not all of the remaining weakness in labor force participation is structural or voluntary,” and proceed with rate hikes to be sure inflation remains controlled.
(GRAPHIC: The COVID inflation surge – https://graphics.reuters.com/USA-FED/INFLATION/akvezawxopr/chart.png)
“Since the (Federal Open Market Committee) last met in September, the unemployment rate has fallen further, average hourly earnings and the employment cost index have posted strong increases, inflation has remained high,” they wrote, challenging the Fed’s narrative that inflation will pass on its own without using a rate increase to tighten credit conditions and slow business and household purchases.
The Fed meets this week and will issue a new policy statement on Wednesday at 2 p.m. (1800 GMT), with a press conference following at 2:30 p.m. (1830 GMT) by Fed Chair Jerome Powell. Officials are expected to approve plans for scaling back their current $120 billion in monthly bond purchases that would phase them out completely by the middle of next year – a first step away from the core policies put in place in early 2021 to battle the economic fallout from the pandemic.
Fed officials have tried to separate that decision from their eventual, and more consequential, call on when to raise interest rates. The benchmark for a rate hike was established last year when the Fed said its policy interest rate would not be increased until the economy had returned to maximum employment, and “inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”
At the time, policymakers thought they would have ample time to eventually phase out the bond purchases with little risk of inflation. Even as prices started to accelerate earlier this year Fed officials argued the high pace would prove “transitory” and not rush them into a rate hike.
The timetable, however, may be collapsing on them.
Goldman economists now see a “seamless” handoff from the bond taper to rate increases next year, a view that parallels the view now prevailing in interest rate futures markets.
According to the CME Group, trading in federal funds futures contracts now implies a greater than 65% probability that the Fed will raise rates in June, right as the taper is expected to end. A second increase is expected in September and a third in December. A month ago, rates market indicators signaled less than a 20% likelihood of a rate hike as early as June and a comparably negligible probability for two hikes next year.
TRANSITORY THESIS ‘NOT AGED WELL’
It may be a confusing moment when it comes to inflation. Blamed at first on what were expected to be temporary supply disruptions and a bulge of consumer spending on goods that were becoming hard to find in some cases, the pace of price hikes has remained higher for longer than expected.
(GRAPHIC: “Broad-based” or not? “Broad-based” or not? – https://graphics.reuters.com/USA-FED/INFLATION/klpykzrowpg/chart.png)
Goods inflation is not only expected to ease next year, but actually reverse in a round of falling prices. But the cost of services is expected to make up the difference, and particularly if a recent jump in employee compensation proves persistent.
The rise in wages and benefits will present a particular challenge to the central bank to determine if employees are getting paid better because productivity is rising, or because job markets and the numbers of available workers have been thrown out of synch by the pandemic.
One would be seen as a positive development; the other as potentially raising inflation risks even higher.
“All this puts Powell in the hot seat at the November meeting to a much greater extent than seemed likely even a few weeks ago,” as he tried to balance a committee roughly evenly split between those ready to raise rates next year and those ready to show more patience, wrote Evercore ISI vice chair Krishna Guha.
“None of this proves that the transitory thesis will ultimately be wrong,” he wrote, but the “tests for believing that excess inflation will likely prove transitory have not aged well.”
Costs of electricity in Italy rose by more than 76% in August
Costs of electricity in Italy rose by 76.4% in August, compared with an average of 51.9% in the euro area. La Repubblica writes about it, citing the estimates of Italy’s Confartigianato, an association of small and medium-sized businesses.
“Italy has structural problems. Here the cost of gas and electricity has always been very high because of the nature of production and the fact that there has never been an appropriate energy plan. Therefore, the average electricity bill in Italy will continue to rise,” said the head of Confartigianato, Bruno Pannier.
According to him, now Italy can concentrate on the production of energy from renewable sources. In this matter, the country is in a better position than other countries of the European Union, in particular due to the climate.
The newspaper said that in July electricity and gas prices in France jumped by 23.8%; in Germany – by 46% and in Spain – 54.3%, while in Italy the increase was 59.1%.
Earlier we reported that Nord Streams was almost completely out of service due to malfunctions.
The situation in Europe is worsening. Rising food and energy prices are becoming a growing problem
The situation with rising food and energy prices in the EU soon will only get worse. This follows from the statement of the head of the European Central Bank Christine Lagarde.
British residents have already spent more than half of their savings. According to The Times, monthly expenditures on British energy prices are growing by a record £145. The pound itself reached a historic low against the dollar and almost equaled it. The sharp decline occurred after the decision of the British government to reduce taxes in the country.
Against this backdrop, Parliament began to prepare a vote of no confidence in the new Prime Minister, Liz Truss, who proposed new economic measures. The situation in Germany is also difficult. As German Finance Minister Christian Lindner admitted, he does not yet know how to fight gas prices.
“We are working in parallel with the commission on gas prices, which was created by the federal government. And so we will be looking for ways in which we can put price control into practice. I have an idea of what direction to think, but I don’t really want to go into all the details,” Ridus said.
Earlier, we reported that cryptocurrencies and the dollar began a showdown for the title of most profitable asset.
Nord stream sabotage? “Nord Streams” is almost completely out of order due to malfunctions
The Nord Stream and Nord Stream 2 gas pipelines are almost completely out of service due to various faults. Many are voicing opinions about sabotage on Nord Stream.
Both gas supply routes to Europe via the Baltic Sea bed are out of service. First there was the Nord Stream 2 accident, where the pressure on one of the lines dropped drastically. The cause of the leakage is currently being investigated. Then pressure dropped in both strings of Nord Stream, but the reason for the drop in pressure is still unknown. There are serious reasons to assume a Nord Stream attack.
The publication noted that the German authorities have already started working with the Danish authorities and local law enforcement agencies to find out the reason for the pressure drop in Nord Stream-2. However, it is not clear how the pipeline will be repaired, as it is under U.S. sanctions and bankruptcy proceedings, although it has been postponed until January 2023.
At the moment it is impossible to name the exact cause of the malfunctions that have occurred. However, the sudden drop in pressure may indicate not just a leak, but a much more serious problem. Also, this accident could have certain consequences for the entire gas market, and repairs could take quite a long time.
Earlier we reported that British banks had begun stopping some mortgage deals because of the pound falling against the dollar.
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