Chief Economist Scott Brown discusses the latest market data.
The March Employment Report was strong. Nonfarm payrolls rose by 431,000 – less than expected but with upward revisions to January and February (a 562,000 monthly average in 1Q22).
Chief Economist Scott Brown discusses current economic conditions.
In his monetary policy testimony to Congress, Fed Chair Pro Tempore Powell solidified market expectations that the Federal Open Market Committee will raise short-term interest rates by 25 basis points on March 16 (and not by 50).
In his renomination hearing, Fed Chair Jerome Powell stressed that the key to maximum sustainable employment and financial stability was keeping inflation low.
As expected, the Federal Open Market Committee accelerated the reduction (“tapering”) of its monthly asset purchases (now expected to end in March rather than June). The policy statement indicated that “job gains have been solid in recent months and the unemployment rate has declined substantially.”
In his congressional testimony of November 30, Fed Chair Powell seemed to shift from cautious to hawkish. However, the evolution of the inflationary outlook had been underway for a while. The spike in inflation in the spring was narrow, the gain concentrated in a few categories.
The November Employment Report was a mixed bag. Nonfarm payrolls rose less than anticipated, but the unemployment rate fell sharply. The shortfall in payrolls (relative to expectations) likely reflects the usual noise in the monthly data, it might reflect difficulties in hiring, but it certainly doesn’t reflect weak labor demand.
You can learn a lot by talking to people. The economy is “strong,” but also “terrible.” Higher inflation is “transitory,” but also “likely to persist.” Fed policy is “behind the curve,” but also “appropriately positioned.” In truth, the outlook for growth, inflation, and monetary policy is evolving.
October inflation figures were higher than expected. More troublesome, the range of items with higher inflation, relatively narrow in the spring, appears to be widening. Inflation expectations for the next five years have risen. Higher inflation is dampening consumer sentiment.
Inflation figures surprised to the upside. The Consumer Price Index rose 0.9% in October (+6.2% year over year), up 0.6% (+4.6% year over year) excluding food and energy. Gasoline rose 6.1% (+49.6% year over year). Used vehicle prices rose 2.5% (+26.4% year over year).
As expected, the Federal Open Market Committee (FOMC) announced it would begin reducing (“tapering”) the monthly pace of asset purchases – currently $120 billion – by $15 billion per month but could go faster or slower depending on economic conditions.
As was widely expected, the Federal Open Market Committee announced the tapering of its monthly pace of asset purchases. The criteria for the lift-off in short-term interest rates is more stringent, but as Chair Powell admitted in his press conference, reaching full employment by the second half of next year is “certainly within the realm of possibility.”
As expected, the advance estimate of 3Q21 Gross Domestic Product showed a sharp slowing in growth. More timely data suggest that the economy regained some momentum into early 4Q21. Still, there are important questions regarding the labor market, inflation pressures, and Federal Reserve policy over the near term.
Earnings reports were mixed. Bond yields declined, as market participants generally expect the Fed to raise short-term interest rates earlier to get inflation under control.
Treasury reported a federal budget deficit of about $2.8 trillion (about 12% of GDP) for FY21. Barring a major unforeseen event, the deficit will fall considerably next year. By itself, that will be a negative for GDP growth, but a further strengthening in private-sector demand should more than offset that.
Expectations of the Fed’s liftoff in short-term interest rates have continued to inch forward and bond yields have moved moderately higher. However, investors remain optimistic, looking beyond recent concerns (the delta variant and supply chain and labor issues).
There was another “disappointing” gain in nonfarm payrolls in September (up 194,000, vs. a median forecast of +500,000), but it’s not as bad as it looks. Less hiring at the start of the school year resulted in a decline in (adjusted) education jobs.
While unlikely to occur, a default on U.S. debt would have serious impacts for global financial markets. Learn more.
Following the strong performance in the first half of the year, economic growth was bound to moderate in the second half. Growth is still expected to be strong by historical standards. Yet, it may be disappointing for some investors.
In a win (but not a complete victory) for “team transitory,” the Consumer Price Index rose less than expected in August (+0.3%, up just 0.1% excluding food and energy). Areas that were running hot a few months ago (used cars, vehicle rentals, car insurance, airfares) retreated.
“We have production bottlenecks and supply shortages in every economic recovery,” says Raymond James Chief Economist Scott Brown, but those issues – and inflation – are expected to ease with time.
The CPI rose more than expected in April, adding to inflation worries.
On Monday, the Treasury Department is expected to report a March budget deficit of about $658 billion, bringing the 12-month total to nearly $4.1 trillion, about 19% of GDP. Proponents argue that the added spending, with more to come, will help to ensure the recovery.
As the pandemic recedes and the economy reopens, we can expect strong job growth in the months ahead.
Economic data rarely follow a smooth path. Weather and external events have effects.
As expected, the Federal Open Market Committee left short-term interest rates unchanged and did not alter its monthly pace of asset purchases.
What sustained low interest rates could mean for the economy and your wallet.
In an online discussion, Fed Chair Powell repeated that the central bank is a long way from achieving its inflation and employment goals (implying no change in short-term rates or the money pace of asset purchases anytime soon).
Long-term interest rates have continued to rise. While part of the increase has been fed by inflation fears, those concerns are overdone.