Personal Consumption Expenditures Archives

Stunning jobs report paves way for Fed’s soft landing, rebuffs recession talk

February 3, 2023

The January jobs report stunned Friday morning, showing the U.S. economy adding more than half a million jobs when economists expected fewer than 200,000. It was the strongest monthly job growth since July and snapped a 5-month slowdown.

Meanwhile, the unemployment rate dropped to 3.4%, its lowest rate since May 1969 and down from December’s 3.5%.

It is a surprisingly good showing amid widespread tech layoffs, slowing growth overall and higher interest rates. The Federal Reserve just hiked its lending rate for the eighth time in less than a year, bringing the federal funds target rate range to 4.5% to 4.75%.

“We had seen the jobs numbers slowing down since the summer of 2022 when we started seeing the first impact of the high interest rates, so today’s number took everyone by surprise,” ZipRecruiter lead economist Sinem Buber said. “But it’s really good news because it tells us that the labor market is stronger than we thought and the Federal Reserve still has some room to increase the interest rates further if that is what it takes to keep the prices under control.“

The Fed opted for a 25-basis-points hike on Wednesday, its first “normal-sized” hike since March, in its effort to combat inflation. The Fed’s preferred inflation gauge, personal consumption expenditures, showed a 5% annual rise in December, far above the 2% target. But despite the strong job growth, Buber believes the Fed will stick to its path of moderated, ongoing hikes for now.

“I think we will follow with another 25 basis points in March and probably one more in May as well,” Buber said. “But today’s number tells us that if the inflation is not going to slow down at the pace that they want it to then they are ready to go with more rate hikes in the second half of 2023. That is definitely not something the market wanted to see.”

January’s jobs report “defied all the expectations of a potential recession,” Buber said. Economic experts have been predicting the country will enter a recession since last year, but the labor market continues rebuffing that possibility.

“There is a chance for a soft landing for us to see disinflationary path coming with no cost at the labor market side,” Buber said.

It’s a possibility even the Fed has yet to predict. In its last projections, the Open Market Committee forecasted the unemployment rate will rise to 4.6% in 2023 as a result of the rate-hike campaign.
Fed shows resolve in interest rate hikes but market still sees pivot in 2023

January 4, 2023

Minutes from the Federal Reserve’s latest meeting show officials worried the market could undermine the Fed’s efforts to bring down prices. Despite rumblings of a Fed pivot, the minutes revealed the committee’s resolve in bringing down inflation, including officials’ consensus on keeping interest rates high through 2023.

“Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability,” the minutes read.

Markets have previously priced in a Fed pivot later in 2023, where the Fed would start cutting its interest rate amid a weakening economy. Basically, the Fed’s statement reads that if markets don’t believe the Fed will be as restrictive as it says it will be, it could lessen the impact of those restrictions on bringing down inflation.

In November, the Fed’s preferred inflation gauge showed a 5.5% annual increase, well above the 2% target but below June’s 7% peak. As the Fed has raised its benchmark interest rate to cool prices, many Fed officials note how strong the labor market has remained throughout.

That said, more than two-thirds of economists surveyed by the Wall Street Journal are betting the U.S will have a recession in 2023. They cite red flags like dwindling household savings, the housing market decline and banks tightening lending standards, all which tie back to the Fed hiking interest rates.

According to Fed data, a recession occurs around every time bank tightening standards have peaked the past 30 years.

But in his last press conference, Fed Chair Jerome Powell noted the committee is not debating what type of recession Fed monetary tightening could have. The word recession is only mentioned three times in the December meeting minutes, with staff noting the possibility of a recession in the next year is plausible.
Fed moderates December interest rate hike but signals it’s still climbing

December 14, 2022

The Federal Reserve hiked its benchmark interest rate by 50 basis points Wednesday, marking the seventh hike of the year in the committee’s efforts to battle inflation. The federal funds target rate is now between 4.25% and 4.5%, the highest it has been since the start of 2008.

The less aggressive half-point rise in December follows four straight meetings where the Open Market Committee opted for three-quarter-point hikes. In June, 75 basis points was the largest rate hike in 28 years. By November, the move was borderline banal. But the slowdown in monetary tightening in December is a signal the Fed is seeing impacts of its hikes on the economy, despite indicating ongoing increases in the rate are necessary.

On Tuesday, the consumer price index showed an annual rise of 7.1% for November, two percentage points lower than June’s peak of 9.1%. However, despite the welcome decline, the current inflation rate is still historically high. Outside of this past year, consumer prices have not reached this rate since 1982.

The Fed’s more closely-watched inflation measure, personal consumption expenditures, hit a 6% annual increase in October, exactly three times the Fed’s target inflation rate of 2%.

“The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases, but it will take substantially more evidence to give confidence that inflation is on a sustained downward path,” Federal Reserve Chair Jerome Powell said.

This is the Federal Reserve’s final Open Market Committee meeting of the calendar year. The next 2-day meeting will convene Jan. 31 with a possible rate hike announcement on Feb. 1, 2023.

“I would say it’s our judgment today that we’re not sufficiently restrictive policy stance yet is why we say that we would expect that ongoing hikes will be appropriate,” Powell said.

The Fed said in moving further into restrictive monetary territory, it will keep in mind the cumulative tightening along with lagging effects of its policies on the economy and inflation. However, the committee noted that there is still modest growth in spending in the U.S., along with robust job gains and low unemployment, while inflation remains too high.

In a survey of economic projections, Fed members overwhelmingly forecast that the target rate would climb above 5% in 2023. They also project unemployment will rise to 4.6% in the coming year, nearly a point higher than it is today.

“There will be some softening in labor market conditions,” Powell said. “I wish there were a completely painless way to restore price stability. This is the best we can do.”
Inflation eased more than expected, consumer prices increase 7.7% on year

November 10, 2022

Inflation is easing as consumer prices in October rose 7.7% from a year ago, the lowest annual gain since January 2022. The increase recorded by the Bureau of Labor Statistics was below analyst expectations of 7.9%.

Monthly prices also fell below expectations, up 0.4% compared to 0.6% expected. Annual core inflation, which strips out food and energy, dropped down from the four-decade high it set last month to a 6.3% annual rate.

The headline numbers had markets soaring Thursday morning, the Dow rose 800 points at market open because of the news. Traders indicated they think this could be enough to slow the pace of the Federal Reserve’s rate hikes, which have been at breakneck speed for months. For four straight meetings, the Fed has raised the benchmark interest rate by 75 basis points, once considered a jumbo hike.

The Fed hinted at slowing the pace during its last meeting and the market now believes it will hike the rate in December by 50 basis points. But Fed Chair Jerome Powell also warned that the interest rate level they will need to reach to effectively crush inflation will be higher than previously thought. The current target rate is 3.75%-4%, the highest it has been since the beginning of 2008.

Beyond the headline

After three straight months of declines, the energy index did tick up slightly in October, up 1.8% on the month and 17.6% on the year. But prices continued to fall in October for used cars and apparel, down 2.4% and 0.7% month over month respectively. Medical services also saw a slight decline of 0.6% while medical care commodities was flat.

The shelter index, which carries about a third of the weight of the consumer price index, is still heated at 6.9% increase for the year, keeping core inflation high while other categories drop. Rent prices in October were up 7.5% annually, according to the index.

Groceries are still up 12.4% on the year in October, but only up 0.4% on the month, which is the smallest monthly increase since December 2021. The BLS said prices for fruit, vegetables and dairy all declined the month of October.
Why the Fed’s favorite inflation gauge is much lower than better known CPI

October 27, 2022

Inflation is synonymous with the consumer price index, which comes out less than two weeks after the end of each month. But there’s more than one way to measure inflation, and CPI is not the Federal Reserve‘s favorite one.

When Fed Chair Jerome Powell says “My colleagues and I are strongly committed to bringing inflation back down to our 2% goal,” he means personal consumption expenditures price index, which is running roughly two percentage points lower than the consumer price index this year.

What’s the difference between PCE and CPI?

There are three main differences between these two inflation measures. The first difference is where the data comes from. CPI, which is released by the Bureau of Labor Statistics, surveys households to determine consumer prices. PCE, which is released by the Bureau of Economic Analysis, surveys suppliers to find out how much they’re selling and what they’re charging.

“They’re both basically trying to measure the same thing,” Fitch Ratings Chief Economist Brian Coulton said. “They take a basket of goods and services, which is supposed to represent what the typical American household spends their money on, and measures how much the price of buying that basket has gone up.”

But those baskets look a little different, which brings us to the second split, health care and basket weights. CPI looks only at health costs directly drawing from Americans’ wallets, while PCE includes the cost of health care incurred by government programs like Medicare and Medicaid, as well as private insurers.

That difference is evident in the weight of items in each basket. Medical care is a much bigger part of the pie in PCE – 22.3% compared with CPI’s 8.8% – while CPI places enormous weight on housing – 42.1% compared with PCE’s 22.6%.

“The fact that rents are growing more rapidly than underlying inflation as a whole, that’s driving this unusual difference at the moment” Coulton said.

The third major difference is the frequency with which each index adjusts weights in each basket. PCE does a better job capturing real world buying behavior by frequently adjusting weights.

“When the price of say gasoline goes up, or the price of meat goes up, what tends to happen is that consumers, households will spend less on those products, or more on cheaper products,” Coulton explained. “So the weight of say beef would go down if it gets more expensive.”

But the CPI currently only updates weights every two years, so beef might carry more weight than it should, leading to a higher overall inflation rate. Starting in January 2023, the BLS plans to update weights every year instead.

Why is CPI more well known?

“We’ve long used PCE because we think it’s just better at capturing the inflation that people actually face in their lives,” Powell said during a press conference.

Despite its long standing as the Fed’s favorite gauge, Coulton explained why PCE is an after thought for the public.

“I think first mover advantage is a very big deal for the CPI,” he said. “The fact that number comes out first means it gets most of the attention. And the PCE sort of follows up.”

The PCE is usually released about two weeks after the CPI and roughly four weeks after the month it’s measuring, at which point Coulton said the conversation has mostly moved on.

But while the Fed relies on PCE anyway, with the current, stark gap between the two indexes, the Federal Open Market Committee cannot ignore what CPI is telling it on the Fed’s path to 2% inflation. In August, CPI increased at an annual rate of 8.3%, while the PCE price index showed an annual increase of 6.2%.

“If PCE is 2% and the CPI is 2.5%, they’d be quite okay with that because that’s this historical wedge between the two,” Coulton said. “But if it stays at 3-4%, I think they’d be thinking, ‘Well, there’s an element of the inflation process here that has not come back and we need to be cautious about loosening policy too much.’”

Throughout 2022, the Fed has been on a historic, aggressive rate hike campaign in an effort to cool four-decade high inflation, which has in turn pummeled the stock market and created cracks in the unusually strong labor market.

Stunning jobs report paves way for Fed’s soft landing, rebuffs recession talk

Fed shows resolve in interest rate hikes but market still sees pivot in 2023

Fed moderates December interest rate hike but signals it’s still climbing

Inflation eased more than expected, consumer prices increase 7.7% on year

Why the Fed’s favorite inflation gauge is much lower than better known CPI

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