When Will Fed Drop Rates Again
Stocks jump 3% after Jerome Powell calms fears that the Fed will raise interest rates too fast.
Stocks on Wall Street had their best day since 2022 on Wednesday, after Jerome H. Powell, the Federal Reserve chair, said that central bankers weren't considering exceptionally large increases in interest rates, calming investors who had begun to worry that the fight against inflation might push the economy into a recession.
The S&P 500 rose 3 percent, the biggest jump since May 2020, spiking after Mr. Powell's comment. Earlier on Wednesday, the Fed said it would lift interest rates by half a percentage point, an increase that was widely expected, and that it plans to shrink its bond holdings.
Bond yields, a proxy for investor expectations about interest rates, ticked lower. The yield on 10-year Treasury notes fell eight basis points, or 0.08 percentage points, to 2.92 percent.
Inflation is at its highest in four decades, and the Fed is quickly withdrawing monetary support as it looks to cool the economy down. It has created an uncertain outlook on Wall Street that has investors questioning whether this is the right moment to own risky assets like stocks, and whether the Fed could go too far as it tries to cool the economy down and might, in the worst case, cause a recession.
The S&P 500 was down more than 12 percent for the year at the end of trading on Tuesday, including an 8.8 percent plunge in April that was triggered by a sudden shift in views on what the Fed will do next. Some Wall Street analysts and investors had begun to raise the prospect that the central bank might increase rates by as much as 0.75 percentage points at one of its upcoming meetings.
Speaking during a news conference on Wednesday, Mr. Powell signaled that the Fed could continue to approve increases of as large as half a percentage point, but he was clear that an even larger increase — of 0.75 percentage points — was "not something the committee is actively considering."
"Market observers over the last week were starting to think that a 75 basis point increase was a possibility, even though it was a remote," said Emily Bowersock Hill, the chief executive of Bowersock Capital Partners, a financial management firm.
The "euphoria" in the stock market on Wednesday, Ms. Bowersock Hill said, also reflected the fact that the Fed didn't say anything that investors weren't already expecting.
Some of the factors driving inflation are out of the Fed's hands. The Russian invasion of Ukraine has added to trouble in the already fragile global supply chain and has raised energy and food costs around the world. A coronavirus outbreak in China is expected to add to bottlenecks and production slowdowns that have driven prices for goods higher.
The Fed acknowledged those risks in its policy statement Wednesday, saying that Russia's invasion of Ukraine and "related events are creating additional upward pressure on inflation and are likely to weigh on economic activity."
"In addition, Covid-related lockdowns in China are likely to exacerbate supply chain disruptions," they said."
Mr. Powell also acknowledged that the central bank's efforts to cool the economy without causing a recession would be tricky. "I do expect that this will be very challenging; it's not going to be easy," he said.
Half-point increases are 'on the table,' but Powell shoots down larger moves.
Mr. Powell signaled that the Fed could continue to approve larger-than-normal rate increases as it looks to cool the economy and tame rapid inflation.
"There is a broad sense on the committee that additional 50 basis point increases should be on the table at the next couple of meetings," Mr. Powell said. Wednesday's move marked the first time since 2000 that the Fed has increased rates by more than the typical 25 basis points — a quarter of a percentage point — and Mr. Powell's remarks signal that similarly large increases are likely at the next two meetings.
Asked whether an even bigger rate increase — 0.75 percent — was on the table, Mr. Powell said that was "not something the committee is actively considering."
Fed rate increases don't directly affect mortgages. But home rates will likely keep rising, too.
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Mortgage rates have climbed nearly two percentage points since the start of the year — the fastest pace in nearly four decades — making it even more expensive for prospective home buyers in an already overheated market.
Whether those rates climb further may hinge, in large part, on the effectiveness of the Federal Reserve's attempts to quickly tame inflation.
The Fed raised its benchmark interest rate by half a percentage point on Wednesday as the rate of inflation, driven largely by jumps in energy and food prices, has continued to grow. It was the largest rate increase by the Fed in more than 20 years.
Because the benchmark rate, known as the federal funds rate, directly and indirectly affects the cost of many loans, the increase is intended to raise borrowing costs, slowing demand and reining in price increases.
Mortgage rates aren't directly connected to the federal funds rate. They tend to track the yield on 10-year Treasury bonds, which is influenced by a variety of factors, including expectations for inflation.
"Inflation is the hub on the wheel," said Greg McBride, the chief financial analyst at Bankrate.com. The risk is that rates will keep going up "unless and until we get some sustained evidence that inflation has peaked and begins to recede," he added.
Though still low by historical standards, the rate on a 30-year fixed-rate mortgage averaged 5.10 percent for the week that ended April 28, according to Freddie Mac. That's their highest point in 12 years and up from 2.98 percent a year ago. The average was 3.11 percent at the end of 2021.
Higher mortgage rates, combined with the jump in home prices — the median existing home was about 15 percent more expensive in March versus the year prior — have eaten into what would-be home buyers can afford.
It has also dampened demand: Applications have fallen to their lowest levels since 2018, according to the Mortgage Bankers Association.
"Prospective home buyers have pulled back this spring as they continue to face limited options of homes for sale along with higher costs from increasing mortgage rates and prices," Joel Kan, the group's associate vice president of economic and industry forecasting, said last week.
With a down payment of 10 percent on the median home, the typical monthly mortgage payment is now $1,834 — up 49 percent from $1,235 a year ago, taking both higher prices and rates into account. And that doesn't include other non-negotiables, like property taxes, homeowner's insurance and mortgage insurance, which is often required on down payments of less than 20 percent.
Those costs add up over time. In a recent study, Jacob Channel, a senior economist analyst at LendingTree, using data from its online marketplace, found that the increase in rates from the start of the year could cost home buyers an extra $93,000, on average, over the life of a 30-year mortgage.
Supply chain pressures are continuing to feed inflation, the Fed says.
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Supply chain disruptions are continuing to fuel inflation in the United States, as the war in Ukraine and pandemic lockdowns in China push prices up and weigh on economic activity, Federal Reserve officials said in a statement Wednesday.
Russia's invasion of Ukraine and "related events are creating additional upward pressure on inflation and are likely to weigh on economic activity," officials said.
"In addition, Covid-related lockdowns in China are likely to exacerbate supply chain disruptions," they said, adding that the Fed remained "highly attentive to inflation risks."
The Federal Reserve raised interest rates by half a percentage point Wednesday, the largest increase since 2000, as it tries to subdue inflation by calming consumer demand.
But continued supply chain disruptions — over which American policymakers ultimately have little control — appear likely to complicate those efforts in the months to come.
Companies and consumers have had to contend with the disruptions since the start of the pandemic. The spread of the coronavirus winnowed pools of workers, shut down factories and triggered a surge in demand for goods as people shifted spending from vacations and movies to couches, toys and Peloton bikes. Shipping prices soared as delivery for products faced increasing delays.
At the beginning of this year, those issues appeared to be easing somewhat. But Russia's invasion of Ukraine in late February and prolonged lockdowns in major Chinese cities in recent weeks are once again making it more difficult for companies to deliver electronics, cars, energy, food and other products. Those supply chain issues appear likely to translate into further price increases, as companies and consumers vie for scarce supplies.
In a news conference Wednesday, Jerome H. Powell, the Fed chair, said disruptions to supply had been "larger and longer lasting than anticipated," and that the situations in Ukraine and China would both likely add to headline inflation.
"They are both capable of preventing further progress in supply chains healing or even making supply chains temporarily worse," he said.
"It's been a series of inflationary shocks that are really different from anything people have seen in 40 years," he added.
Data released by the Commerce Department Wednesday morning showed that consumer demand for imported goods and services remained strong. U.S. imports surged in March, resulting in a record $109.8 billion trade gap, a jump of 22.3 percent from February.
Powell says the Fed is aiming for a soft landing and to avoid a recession.
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Federal Reserve Chair Jerome H. Powell acknowledged that the central bank's attempt to guide inflation lower without causing a recession would be tricky, saying, "I do expect that this will be very challenging; it's not going to be easy."
With few exceptions, the Fed has tipped the economy into recession while trying to combat rapid inflation. Whether Mr. Powell's central bank can avoid such an outcome and achieve what is known as a "soft landing" is one of the big questions.
Mr. Powell said he was optimistic the Fed could tame prices without a "significant increase in unemployment" or a pronounced economic slowdown.
"I think we have a good chance to have a soft or soft-ish landing."
Mr. Powell reiterated several times how important "price stability" is to workers and the overall economy, saying that without it, "the economy doesn't work for anybody."
"We have a good chance to restore price stability without a recession," Mr. Powell said. "Businesses can't find the people to hire. They can't find them."
"There should be room, in principle, to reduce that surplus demand" without putting people out of work.
Powell says inflation is 'much too high' and that the Fed will move 'expeditiously' to bring it down.
Federal Reserve Chair Jerome H. Powell began his news conference by nodding to the pain that rising prices are causing consumers, saying that "inflation is much too high and we understand the hardship it is causing."
Mr. Powell, speaking just moments after the Fed raised interest rates by a half percentage point, said the central bank is "moving expeditiously to bring it back down."
"The labor market is extremely tight and inflation is much too high," he said, adding that the Fed has the tools it needs to get it closer to the Fed's 2 percent average target.
Mr. Powell acknowledged that there could be some pain as the Fed tries to achieve that goal but said the bigger risk was in not moving to tame inflation, which is running at its fastest pace in 40 years.
"Ultimately, getting supply and demand back in balance is what gives us 2 percent inflation," Mr. Powell said. "The big pain is in — over time — is in not dealing with inflation."
The Fed wants to fight inflation without a recession. Is it too late?
The Fed's response to hot inflation is already having visible effects: Climbing mortgage rates seem to be cooling some booming housing markets, and stock prices are wobbling. The months ahead could be volatile for both markets and the economy as the nation sees whether the Fed can slow rapid wage growth and price inflation without constraining them so much that unemployment jumps sharply and growth contracts.
"The task that the Fed has to pull off a soft landing is formidable," said Megan Greene, chief global economist at the Kroll Institute, a research arm of the Kroll consulting firm. "The trick is to cause a slowdown, and lean against inflation, without having unemployment tick up too much — that's going to be difficult."
Optimists, including many at the Fed, point out that this is an unusual economy. Job openings are plentiful, consumers have built up savings buffers, and it seems possible that growth will be resilient even as business conditions slow somewhat.
But many economists have said cooling price increases down when labor is in demand and wages are rising could require the Fed to take significant steam out of the job market, Jeanna Smialek reports for The New York Times. Otherwise, firms will continue to pass rising labor costs along to customers by raising prices, and households will maintain their ability to spend thanks to growing paychecks.
"They need to engineer some kind of growth recession — something that raises the unemployment rate to take the pressure off the labor market," said Donald Kohn, a former Fed vice chair who is now at the Brookings Institution. Doing that without spurring an outright downturn is "a narrow path." READ THE FULL ARTICLE →
A former top Fed official says slow nominations delayed inflation response.
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Randal K. Quarles, a Trump appointee who served as the Federal Reserve's vice chair for supervision and who left the central bank late last year, said that the Biden administration's slow nomination process delayed the Fed's response to rapid inflation as it became clear last autumn that rising prices were a real problem.
"Really by September of last year, it was clear that this was not principally a supply-driven inflation, this was an overstimulated demand-driven inflation," Mr. Quarles said, speaking on the Banking with Interest podcast released this week. "That's something that the Fed is designed to address."
Mr. Quarles said that while the Fed would have been "better served" by getting on top of rapid inflation starting then, such a response was "hard to do until there was clarity as to what the leadership going forward of the Fed was going to be."
President Biden was deciding whether to reappoint Jerome H. Powell as chair of the Fed and who to make the central bank's new vice chair, decisions he announced in late November. The problem with that from a policy perspective, Mr. Quarles seemed to suggest, was that it would have been difficult to head down a particular route when it was possible that the administration would put someone else at the head of the central bank.
"It has started acting, and again, I think it will get on top of it," he said. "I think it would have done so earlier had there just been a little more clarity about where the president was going to go with the appointment."
Mr. Powell pivoted on policy about a week after he was renominated, signaling that the central bank would speed up its withdrawal of economic support. He has described the pathway toward that change, explaining that it hinged on a series of data reports pointing to rapid inflation that were released in late October and early November.
Mr. Quarles also said he thinks the Fed will have to spur a recession to bring inflation under control, and he characterized the rapid price increases as the partial result of government stimulus.
"We'd had Trump's $900 billion going-away present, and Biden's $1.2 trillion welcome basket, on top of CARES Act stimulus that had been much more effective than we realized it would be," Mr. Quarles said, referring to the spending packages the government passed in December 2022 and March 2021. "OK, that's going to drive an inflationary process, one that the Fed can get on top of."
The Fed is expected to raise interest rates by half a percentage point at the conclusion of its two-day policy meeting on Wednesday afternoon.
Inflation bonds are earning eye-popping rates: 9.62 percent.
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There's not much good to say about inflation, with higher prices dogging consumers at the grocery store and the gas pump. But there is one bright spot: Government I bonds are earning eye-popping rates.
New I bonds — low-risk federal savings bonds indexed to inflation — issued through the end of October will earn an annualized rate of 9.62 percent for six months, the Treasury Department announced this week. The rate also applies to older I bonds that are still earning interest.
That represents the highest inflation rate the bonds have earned since they were introduced in 1998, said Ken Tumin, the founder of the financial website DepositAccounts.com. It means I bonds are earning far more than a typical federally insured savings account or certificate of deposit.
Because of the way rates are set on I bonds, people holding older bonds may be earning double-digit rates. An I bond rate has two parts: a fixed rate, set when the bond is issued, which stays the same for its 30-year life, and a variable rate, which is based on the six-month change of the Consumer Price Index and can reset twice a year, in May and November. The Treasury Department applies a formula to combine the two into a composite rate.
The fixed-rate component is currently zero — but it has been 3 percent or higher in the past. I bonds purchased through early 2001 are currently earning more than 13 percent, if holders haven't already redeemed them, according to the government's TreasuryDirect website.
The Treasury Department doesn't disclose its formula for setting the fixed rate, Mr. Tumin said. But as the Federal Reserve raises its benchmark interest rate, it seems "more likely" that the fixed rate on I bonds could nudge up at the next reset in November, Mr. Tumin said.
I bonds are considered quite safe. While it's possible that the combined rate could fall to zero (it has happened before), it's guaranteed not to go below that — so you'll at least get your initial investment back when you redeem the bond, according to the Treasury Department.
You can acquire up to $10,000 in I bonds per person, per year, on TreasuryDirect.gov. Plus you can buy up to $5,000 more using your federal income tax refund. (A couple filing a joint tax return can buy up to $25,000 per year.)
Keep in mind that you must hold I bonds for at least 12 months before redeeming them, and you'll be docked the last three months of interest as a penalty if you redeem before five years.
What questions do you have about investing?
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It's a challenging time to invest, with inflation and rising interest rates. Our columnist will help answer any questions you have.
What economists are watching for.
The Federal Reserve's decisions to raise its policy interest rate and prepare to shrink its massive bond holdings, working together, amount to a rapid withdrawal of monetary help — a sign that the central bank is getting serious about cooling down the economy and job market as rapid inflation persists.
Here is what economists and investors are watching for in the details of the Fed's policy statement and during the news conference scheduled for 2:30 p.m. Eastern time with Jerome H. Powell, the Fed chair.
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Interest rates: Economists are watching for signs that might confirm whether the Fed is likely to make half-point increases in June and July, as many investors expect.
The other wild card when it comes to rates? Whether an even bigger move is possible. James Bullard, the president of the Federal Reserve Bank of St. Louis, has suggested that increases of 0.75 percentage points could be warranted. His colleagues have yet to get on board, and some have said they would not favor such a large move.
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Balance sheet: The Fed swelled its balance sheet holdings to nearly $9 trillion as it bought government-backed bonds amid the pandemic. Now, it is preparing to begin to allow its assets to expire without reinvesting them, so that its balance sheet will start to shrink. That will push up longer-term borrowing costs like mortgage rates, and will likely take some vigor out of the stock market.
Wall Street will be looking for details on how quickly that will happen. Investors will also be attuned to any hints that the Fed might actually sell mortgage securities — something it has hinted could be a possibility down the road.
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Soft landing: The question on everyone's mind is whether the Fed can manage to temper rapid inflation without causing a recession. The central bank's preferred price index climbed 6.6 percent in the year through March, more than three times the Fed's goal for inflation of 2 percent on average over time.
Economists are hoping that supply chains will disentangle and allow price increases for goods like cars and couches to fade. But with wages, rents and restaurant bills also climbing, it could take time to wrestle annual price increases down to the central bank's target. And interest rates are a blunt tool for a maneuver as delicate as slowing down the economy without causing it to shrink.
Controlling inflation without causing a downturn is likely to take luck and skill, officials often acknowledge.
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What will this feel like? The Fed's moves will take some time to trickle out through the economy, but there are a few places to watch for the early signs. Mortgage rates have already moved up, which could cool down the hot housing market. Stock prices have wobbled as the Fed has signaled that cheap money will be less abundant.
As businesses find it more expensive to fund expansions and as consumer demand for housing, cars and other purchases that require financing declines, that could begin to slow other parts of the economy: most critically, the job market. While workers are in hot demand right now, the Fed is aiming to reduce breakneck hiring to a more sustainable pace in an effort to slow wage growth and prevent pay and prices from feeding on one another.
"That is going to feel different," said Karen Dynan, a former Treasury Department chief economist now at Harvard. "That is what the Fed is deliberately trying to do: restrain this labor shortage."
Source: https://www.nytimes.com/live/2022/05/04/business/fed-meeting-rates-inflation
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