Category: Economy

Atlanta Federal Reserve President Raphael Bostic said Wednesday he anticipates hiking interest rates three or four times this year, but he stressed that the central bank isn’t locked into a specific plan.

Speaking on CNBC’s “Squawk Box,” the policymaker signaled a view that is less aggressive than the market’s on rates.

“In terms of hikes for the interest rates, right now I have three forecast for this year,” he said. “I’m leaning a little towards four, but we’re going to have to see how the economy responds as we take our first steps through the first part of this year.”

Market pricing currently is anticipating at least five and possibly six hikes of 0.25 percentage points each. Bank of America recently forecast seven moves as the central bank fights inflation running at its highest level in nearly 40 years.

In a recent interview with the Financial Times, Bostic garnered some attention when he said the first move might have to be 0.5 percentage points, or 50 basis points. The Fed has signaled that it likely will enact its first rate hike in more than three years at its March meeting.

Bostic did not commit in his CNBC interview to moving that quickly.

“For me, I’m thinking very much of a 25-basis-point perspective,” he said. “But I want everyone to understand that every option is on the table, and I don’t want people to have the view that we’re locked into a particular trajectory in terms of how our rates have to move over time. We’re really going to let the data show us to what extent a 50 basis point or 25 basis point move is appropriate.”

In a separate appearance Wednesday, Cleveland Fed President Loretta Mester said she’s expecting a rate hike in March though she did not commit to the pace at which she’d be comfortable.

“While the Omicron variant may weigh on activity in the near term, the high levels of inflation and the tightness in labor markets make a compelling case to begin recalibrating the stance of monetary policy.,” she said in a speech for the European Economics and Financial Center. “Barring an unexpected turn in the economy, I support beginning to remove accommodation by moving the funds rate up in March.”

Bostic’s comments come the day before the Labor Department will release its latest inflation reading as gauged by January’s consumer price index. Economists surveyed by Dow Jones expect the 12-month pace to run at 7.2%, which would be the fastest since early 1982.

However, Bostic said he’s more concerned with the monthly acceleration, which is projected at 0.4%, or slightly slower than December.

If the monthly rate can continue to moderate, that would be a signal that inflation is coming under control and the Fed won’t have to be as hawkish.

He does, though, think the Fed can start pulling back on its easy policy. Along with cutting its benchmark short-term borrowing rate to near-zero, the central has been buying billions of bonds each month, an operation that has ballooned its total asset holdings to just shy of $9 trillion.

Markets widely expect the Fed to allow proceeds from those holdings to start running off soon, with the only question being how much the balance sheet will shrink. Bostic said he thinks the early stages can be aggressive.

Bostic added that he remains positive on growth through the year and doesn’t think the Fed will have to deploy measures to slow the economy.

“The first part of the reduction I think we can do pretty significantly,” he said. “I think that we should really be looking into ways to remove that excess liquidity that the market has shown us exists so that we can then get into decisions about what the use of the balance sheet should look like in terms of a menu of tightening our policy.”

Mester said she also thinks the Fed can be aggressive in cutting the balance sheet.

She supports an approach in which the central bank would engage in outright sales of its $2.7 trillion in mortgage-backed securities to the point where the Fed’s holdings would consist exclusively of Treasurys, of which it currently holds $5.7 trillion.

When President Joe Biden nominated former Fed Chair Janet Yellen to run the Treasury Department, his rationale was simple: “No one is better prepared to deal with this crisis.”

The crisis to which he referred was a “K-shaped” economic recovery that had exacerbated inequality in the wake of a once-in-a-generation pandemic. The administration had a simple plan, and Yellen would help carry it out. Once hundreds of millions of Americans were vaccinated against Covid-19, and trillions of dollars in new government spending flowed into the economy, the world would return to normal under a supercharged recovery.

One year later, a different problem — inflation — is dampening the recovery, sucking the oxygen out of strategy sessions, angering voters and threatening Democrats’ razor-thin governing margins. This is happening despite warnings from economists and months of vows from the Federal Reserve and the White House it would be short-lived.

Yellen, having herself helmed the central bank, which is tasked with monitoring and managing inflation, would seem uniquely suited for a moment when inflation is hitting four-decade highs. So how did the Biden administration miss the warning signs, and end up in this position?

More than a dozen economists, current and former administration officials, and former Fed officials — requesting anonymity to speak candidly about private discussions — point to a confluence of issues, including heavy Fed influence across the administration, overreliance on traditional forecasting, the political pressure to spend big, and a lack of urgency in deciding who would run the Federal Reserve and carry out its mission of managing inflation.

“It’s always going to be an issue in any White House, how the policy and politics interact,” said a former Fed official, who requested anonymity to discuss private discussions with the administration. “I just think they miscalculated.”

The Fed and the White House declined to comment on the record.

When Yellen took office in early 2021, she moved quickly to staff up Treasury, which was understaffed after the departure of Trump administration political appointees and because her predecessor, Steven Mnuchin, had shrunk the department. To do so, Yellen poached experts in economics and labyrinthine political processes from the well she knew best — the Federal Reserve — causing a revolving door of new hires to spin even more quickly than normal.

Among those who came from the top ranks of the Fed to advise Yellen directly at Treasury: Linda Robertson, Michael Kiley and former Fed attorney Mary Watkins. Robertson and Kiley served on limited-term details and have since returned to the Fed, Robertson to shepherd the nominations of top Federal Reserve officials, and Kiley in a senior role overseeing financial stability. Watkins remains at Treasury as an attorney-advisor working on digital currencies.

A familiar joke began circling the halls of the Federal Reserve, comparing the Yellen Treasury to the administration of Italian Prime Minister Mario Draghi, who had been filling out his ranks with colleagues from his days working at the European Central Bank and the Bank of Italy.

“It was like, ‘The problem in the modern world is trying to ensure that administrations are independent of their central bank, not that the central bank is independent from the administration,” according to a second former Fed official who requested anonymity to discuss private discussions.

The Fed influx continued, reaching Treasury’s organizational masthead, White House policy positions and other regulatory agencies.

The two deputy directors of the White House’s National Economic Council — Daleep Singh and Sameera Fazili — have Fed and Treasury ties. The Council of Economic Advisers, which Yellen once chaired, features former Fed economists. And atop the Office of the Comptroller of the Currency, a banking regulator, sit two former Federal Reserve regulatory and legal officials whom Yellen recommended. 

Fed alums feature prominently in Treasury’s top personnel appointments. Nellie Liang, undersecretary for Domestic Finance, was previously the Fed’s founding director of financial stability. Acting general counsel Laurie Schaffer was previously the Fed’s deputy general counsel. And at least three deputy assistant secretaries with jurisdiction over financial regulation and macroeconomics hail from the Federal Reserve system. 

The result, according to several officials who requested anonymity because they were not authorized to speak publicly, is an agency that’s been described as operating like a “think tank,” in a “Fed-like posture,” and taking an “unusually analytic” approach to a traditionally fast-moving agency focused on implementing a firehose of policies and problem-solving measures to promote the president’s agenda. They tended to dwell on similar data as the Fed, a detail that became problematic as the pandemic rendered those models irrelevant.  

While the volume of former Fed personnel within the Treasury has increased communication between the administration and the central bank, the more formal channels are also well established.

Monthly lunches with the Council of Economic Advisers — the White House’s in-house forecasting shop — have largely resumed after a pause due to the pandemic and frequent personnel changes toward the end of the Trump administration. Fed Chairman Jerome Powell and Yellen trade views over a weekly breakfast, a tradition Yellen carried out when she chaired the central bank. 

Kevin Hassett, who broke bread with both Yellen and Powell when he chaired Trump’s Council of Economic Advisors, said Yellen would be better served by staff with a more balanced approach, but that the close bond between Treasury and Fed remains important.  

“They come at things from different angles,” Hassett told CNBC. “But I think they’re a good team.” 

Sarah Binder, an historian and senior fellow at Brookings Governance, notes that close coordination on monetary and fiscal policy is necessary in times of crisis but comes with an asterisk. 

“Certainly, trust is important,” says Binder, who researches Federal Reserve independence. “The only thing one might ask here is whether there is a danger of groupthink if that’s the only set of voices.”

Hassett was part of a trio of former White House economists, including Clinton Treasury Secretary Larry Summers and Obama CEA chair Jason Furman, who warned early in Biden’s term that inflation was afoot, when the government was more concerned with Covid. They parsed different data but arrived at the same conclusions: Trillions in stimulus spending being plowed back into the economy when companies couldn’t produce enough of what consumers wanted would drive prices higher.

“It’s obvious to a person who does macroeconomic modeling of the modern variety that inflation was going to take off,” Hassett told CNBC. Last April, Hassett declared that the inflation “fire was on” and by June determined that inflation would reach 7% by the end of the year.

Indeed, the consumer price index report for December showed that inflation grew at an annual rate of 7%, the hottest pace since 1982. Prices for core personal consumption expenditures, the Fed’s preferred inflation gauge, rose 4.9% in December compared to the prior year and rose 5.8% including gas and groceries.

At the beginning of 2021, traditional forecasts were far more muted: The private sector estimated 1.8% by year-end, the same as the Federal Reserve, and the Congressional Budget Office was tracking even lower at 1.5%. The White House’s own estimates — calculated by the “troika” of the Council of Economic Advisers, Treasury and the Office of Management and Budget — hewed closely to those figures. 

“We ultimately sort of came within spitting distance of where the Fed was, but we came there by our own independent analysis,” a Treasury official told CNBC. 

On virtual discussions in early spring, White House officials acknowledged the possibility of inflation wrought by stimulus and infrastructure spending, but the risk was dismissed by officials citing the political popularity of the policies and the desire to add more fuel to the economic recovery, according to three people involved in or briefed on discussions. 

In calling for passage of the $1.9 trillion pandemic stimulus bill, just a month after Congress approved a separate $900 billion package, Biden often lamented the small size of the $800 billion stimulus passed in 2009 during the financial crisis and the weak economic growth that followed.

“We have learned from past crises: The risk is not doing too much. The risk is not doing enough,” Biden told reporters from the Oval Office in late January. He signed the bill into law in March.

Yellen voiced support for the administration’s desire to “go big,” but was also circumspect on the possibility prices might rise. In a series of Sunday TV news appearances, she said inflation was a “risk” of stimulus, and in May, she went a step further — suggesting interest rates may need to rise to keep a lid on inflationary pressures, a comment she later walked back. 

“Janet [Yellen] was concerned about inflation for a long time,” Furman, the former Obama economist, told CNBC, differentiating the Treasury secretary’s approach from that of the White House. “There was a lot of wishful thinking that, like, everything increasing inflation would go away, but nothing new would emerge to cause inflation.” 

A Treasury spokesperson said Yellen believes the legislation backed by the president was sound economic policy that engendered a faster recovery than expected with less financial pain.

“Secretary Yellen would be the first to say there is more to be done and Treasury continues to work each day to foster a strong and equitable recovery,” the spokesperson added.

By the summer months, discussion — and acknowledgment — of inflation ramped up across the administration, according to multiple current and former officials. Internal estimates began to rise in reflection of that, they said. Private sector estimates rose to 3.7%, while the Congressional Budget Office and the Federal Reserve saw inflation closer to 3% by the end of the year. 

Treasury was coming around to the idea that prices would be going — and perhaps staying — higher than they had forecasted, the official said. For his part, Fed Chairman Powell mentioned in a July 14 congressional hearing that inflation was rising in “a number of categories of goods and services.”

The CEA was beginning to question the underlying thesis, too. A former Fed official recalls White House economist Heather Boushey raising the question about the cause of inflation during one of the monthly lunches during the summer, to wit, if the issue was one of supply — factory closures and transportation logjams and worker shortages limiting the goods that could get to consumers — that would work itself out.

But if the issue was demand — confident consumers with money burning a hole in their pocket — that could only be kept in check by the Federal Reserve.   

Publicly, the administration was still voicing hope the trend would be short-lived.

“Our experts believe and our data shows that most of the price increases we’ve seen were expected and expected to be temporary,” Biden said in July. By August, Yellen’s definition of “temporary” indicated the price increases would subside by the end of the year. 

By fall, as persistent inflation began to erode Biden’s approval rating, the administration shifted its message. Cabinet officials pounded the pavement, pointing to inflation as a sign the economy had strengthened, effectively implying the Fed might need to act. 

“Part of what’s happening is not only on the supply side, it’s the demand side,” said Transportation Secretary Pete Buttigieg on CNN on Oct. 18. “Demand is off the charts.” 

A week later, Yellen, ever aware of choosing careful language on a market-moving issue, laid out a significantly longer timeline for inflation pressures to ease, signaling they wouldn’t do so on their own. 

“The inflation rate will remain high into next year because of what’s already happened,” Yellen told CNN on Oct. 24. “But I expect improvement by the end of … by the middle to end of next year, second half of next year.”

While the White House was discussing short-term fixes to the supply chain and gas prices, tackling longer-term inflation falls to the Federal Reserve. But Biden had yet to decide whether he would keep Powell on to lead the Fed after his term expired in early 2022, putting the central bank in an awkward position of confronting a vexing monetary-policy decision without the clarity of who would be carrying it out. Yellen had advocated for a second Powell term, but progressive lawmakers behind the scenes were seeking assurances the Fed board would be refashioned with more liberal economists who would reflect their priorities. 

Then, on Nov. 8, Randal Quarles, a Fed governor appointed in 2017 by Trump, announced he would resign from the board 11 years before the end of his term, creating a vacancy that allowed Democrats to make up the majority of the seven-member board. 

The Quarles resignation served as something of a fulcrum for the shift that followed, though the extent to which is unclear. A person involved in the discussions told CNBC the new vacancy was a factor in the timing of Biden’s decision to renominate Powell as chairman. A second person briefed on the matter suggested the resignation was simply a “convenient rationale” for a decision that had simply been delayed. The White House disputed any link between Biden’s decision and Quarles’ resignation. 

By the time Biden nominated Powell to a second term and Lael Brainard as a vice chair in late November, #Bidenflation was trending on Twitter, and “transitory” — the Fed’s long-favored descriptor for the inflation trend — was being made into memes. Biden, Powell and Brainard all pledged publicly to tame inflation at the nomination ceremony.

In hindsight, current and former administration officials and the two former Fed officials said the administration’s best weapon in combating inflation would have been an earlier nomination that empowered the Fed to move sooner.

But Powell denies that personnel moves delayed the Fed’s pivot toward raising interest rates, which was announced a week after his nomination. He said in a press conference that he and his colleagues set to work on the strategy after parsing the early November data on jobs and inflation, after which several Fed officials publicly called for faster action.

“That doesn’t happen by accident,” Powell told reporters on Dec. 15. “They were out talking about taper before the president made his decision,” referring to the Fed’s move to scale back its bond-purchase program.

As Powell awaits confirmation, the White House remains optimistic inflation will ease through a combination of the Fed’s now-telegraphed interest rate hikes and an eventual return to normal as the pandemic subsides.

White House chief of staff Ron Klain told CNBC that Biden is not considering any personnel changes in the West Wing or Treasury stemming from inflation. 

The same models that underestimated inflation in 2021 now call for moderation by the end of 2022, right as midterm voters will have their say at the ballot box. 

Furman, the Obama administration veteran, said he fears inflation will get worse. But he also said the White House is wielding a better tool: realism.  

“One tool they were not using before but they have been for the last couple months is not overpromising,” Furman said. “There had been this claim that the inflation was about to go away. Now, they’re being much more realistic.”  

– CNBC’s Steve Liesman and Patrick Manning contributed reporting 

Long-term unemployment fell significantly in January, continuing a downward trajectory from its pandemic-era peak after having plateaued in recent months.

The number of Americans out of work for at least six months declined by 317,000 since December, to about 1.7 million in January, according to U.S. Department of Labor data issued Friday.

The long-term unemployed accounted for 25.9% of all unemployed Americans in January, down from 31.7% the month prior.

That monthly decline (5.8 percentage points) is the largest since March 2021, when long-term joblessness began a steady descent. Until January, the share had leveled off around 32% over the three prior months.

“What we’ve seen over the last year is a steady stream of workers back into the labor force and employment,” said Daniel Zhao, a senior economist at the career site Glassdoor.

“Long-term unemployment is a reflection of that,” he added. “As the recovery marches on, more opportunities open up for workers who’ve been unemployed for a longer period of time.”

Long stretches of unemployment pose serious financial risks for households. And a big share of long-term-jobless workers can weigh on the U.S. economy.

Aside from a prolonged lack of job income, it becomes more difficult to find another job as unemployment drags on. The odds of earning a lower future wage also increase.

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Skills may get rusty and connections to the workforce (like old networks and industry friends) break down. Businesses more readily pass over resumes with a big gap in work history.

The long-term jobless are also typically ineligible for unemployment benefits. A federal pandemic-era program paying benefits to such workers ended on Labor Day (and a few months earlier in many states).

Declining long-term joblessness came on the back of an unexpectedly strong January jobs report on Friday.

The U.S. economy added 467,000 jobs last month. The Labor Department also revised its job-growth estimates for November and December much higher — there were a combined 709,000 more jobs added those two months than initially thought.

Many economists had predicted a much weaker showing due to a surge of Covid-19 cases since early December fueled by the highly contagious omicron variant.

Elevated daily caseloads led some businesses to close their doors temporarily as illness caused staffing shortages and led to reduced customer demand.  

“Job growth can plow forward in the face of pandemic headwinds,” Zhao said.

However, the labor market hasn’t yet fully recovered to its prepandemic strength. While overall number of long-term unemployed fell by about 2 million people during 2021, their ranks are still 570,000 larger than in February 2020.

The U.S. economy also remains almost 3 million million jobs short of its prepandemic mark.

“I think we are on track for a strong job market recovery,” Zhao said. “But we’re not quite at the finish line yet.”

The January jobs report showed some signs of optimism for the U.S. labor recovery, particularly for Black workers, who have been disproportionately impacted by the pandemic.

U.S. payrolls added 467,000 jobs in the first month of the new year, the Labor Department reported Friday, surprising economists who expected Covid omicron outbreaks to impact hiring. The unemployment rate held fairly steady at 4% in January versus 3.9% in December.

For Black workers, the unemployment rate dipped to 6.9% last month from 7.1%. What’s more, the Black labor force participation rate rose to 62% in January — the same as white workers.

“We’ve seen this really encouraging closing of the Black-white labor participation gap, and it appears to have fully converged,” said Bradley Hardy, an economist at Georgetown University. “This is very much a result of the Black labor participation rate rising on a gradual basis, really throughout this pandemic over an almost two year period.”

The labor force participation rate “can oftentimes be a proxy for optimism and willingness to participate in the labor market,” Hardy said. “The fact that that’s actually a gap that is — for now, at least — closed is quite important.”

The improvement in unemployment was felt most acutely by Black women, whose unemployment rate fell to 5.8% last month from 6.2%.

The drop in the Black female unemployment rate in January comes after Black women were the only race and gender group whose unemployment rate worsened in December.

The month-to-month economic readings for Black women and other minority groups can be particularly volatile due to smaller population size, according to Elise Gould, senior economist at the Economic Policy Institute.

“The longer-term story is that Black workers have remained at an unemployment rate about twice as high as white workers and white workers’ unemployment rate is far lower than Black workers have ever experienced,” Gould said. The white unemployment rate was 3.4% in January.

Hardy also recommended looking at data over a two- to three-month basis.

“It’s cautious optimism that … the trend is continuing to head in the right direction. It’s good news,” Hardy said. “But at the same time, I think we have to remain vigilant about how we interpret the trend.”

Companies cut jobs in January for the first time in more than a year as the spread of the Covid omicron variant appeared to hit hiring, payroll processing firm ADP reported Wednesday.

Private payrolls fell by 301,000 for the month, well below the Dow Jones estimate for growth of 200,000 and a marked plunge from the downwardly revised 776,000 gain in December. It was the first time ADP reported negative job growth since December 2020.

The pandemic-sensitive leisure and hospitality industry was responsible for more than half of the decline, as companies reported a drop of 154,000. Trade, transportation and utilities cut 62,000 while the other services category declined by 23,000.

Manufacturing also lost 21,000 positions, while education and health services reported a drawdown of 15,000 and construction fell by 10,000.

Service-providing industries were responsible for 274,000 of the job losses, with goods producers falling by 27,000.

“The labor market recovery took a step back at the start of 2022 due to the effect of the omicron variant and its significant, though likely temporary, impact to job growth,” ADP’s chief economist, Nela Richardson, said.

The ADP numbers come two days before the more closely watched nonfarm payrolls count from the Labor Department. Wall Street expects that report to show a gain of just 150,000 jobs, though economists and White House officials are warning the month’s numbers could be rough due to omicron and statistical effects from the way the Labor Department compiles the data.

While ADP’s report could signal a weak number Friday, the two counts can differ substantially. In December alone, ADP’s total — initially put at 807,000 before the revision — was well above the Bureau of Labor Statistics’ count of 211,000 for private payrolls and 199,000 for the total nonfarm number.

From a business-size standpoint, the job losses were concentrated at small firms, with companies employing fewer than 50 people seeing a drop of 144,000. Businesses with more than 500 employees lost 98,000, while medium-sized firms declined by 59,000.

Federal Reserve officials are watching the jobs numbers closely. Policymakers have said they think the U.S. economy is around full employment, and they have teed up a series of interest rate increases this year.

Spurred by a massive inventory rebuild and consumers flush with cash, the U.S. economy last year grew at its fastest pace since 1984.

Don’t expect a repeat performance in 2022.

In fact, the year is starting with little growth signs at all as the late-year spread of omicron coupled with the ebbing tailwind of fiscal stimulus has economists across Wall Street knocking down their forecasts for gross domestic product.

Combine that with a Federal Reserve that has pivoted from the easiest policy in its history to hawkish inflation-fighters, and the picture has suddenly changed substantially. The Atlanta Fed’s GDPNow gauge is currently tracking a first-quarter GDP gain of just 0.1%.

“The economy is decelerating and downshifting,” said Joseph LaVorgna, chief economist for the Americas at Natixis and former chief economist for the National Economic Council under then-President Donald Trump. “It’s not a recession, but it will be if the Fed tries to get too aggressive.”

GDP surged at an impressive 6.9% in the fourth quarter of 2021 to close out a year in which the measure of all goods and services produced in the U.S. increased 5.7% on an annualized basis. That came after a pandemic-induced 3.4% decline in 2020, a year that saw the steepest but shortest recession in U.S. history.

But the path ahead is less certain.

Much of that end-of-year gain was fueled by an inventory rebuild that contributed fully 4.9 percentage points, or 71% of the total. Inventories were responsible for almost all of the third quarter’s 2.3% GDP increase.

At the same time, Tuesday’s ISM Manufacturing survey showed that the pace of new orders, while still showing gains, is slowing substantially.

Taken together, that’s not much of a recipe for sustained growth.

“Inventories are roughly back to where they should be,” said Mark Zandi, chief economist at Moody’s Analytics. “Then you’ve got growing headwinds from fiscal and monetary policy. So, yeah, growth starting the year will be very soft.”

Wall Street economists have been marking down their growth projections quickly.

Goldman Sachs slashed its first-quarter GDP outlook to 0.5%, down from 2%. The bank also cut its full-year view to 3.2%, well below the current 3.8% consensus.

“Growth is likely to slow abruptly in 2022, as fiscal support fades and, in the near term, virus spread weighs on services spending and prolongs supply chain disruptions,” Goldman economist Ronnie Walker said in a note for clients. “Q1 growth is likely to be particularly soft because the fiscal drag will be accompanied by a hit from Omicron.”

Likewise, Bank of America knocked down its first-quarter number to 1% from 4% and cut its full-year forecast to 3.6% from 4%, with risks to that forecast seemingly tilting to the downside.

Bank of America’s head of global economics research Ethan Harris cited four reasons for the downbeat outlook: omicron, the retreat in inventory build, less fiscal support, and a tighter Fed as well.

“We now expect a fiscal package about half the size of the Build Back Better Act, with less front-loaded fiscal stimulus. We think it will boost 2022 growth by just 15-20 [basis points], compared to our earlier estimate of 50bp,” Harris wrote. “Risks of a negative growth [first] quarter are significant, in our view.”

A basis point is 1/100th of a percentage point.

Bank of America has another wrinkle in its forecast: a call for seven 25-basis-point rate hikes this year. That’s considerably more aggressive than anywhere else on the Street, which is currently pricing in five hikes with about a 31% chance of a sixth, according to the CME.

Zandi said the Fed needs to be careful it doesn’t go too far in its fight against inflation, which is running at its highest rate in nearly 40 years.

“They run the risk of getting ahead of themselves and overdoing it. They have pivoted very hard here,” he said. “Market expectations are for five increases. Six is now entering into the debate and discussions. That feels like that could be a rate hike or two too far, given the growing headwinds in the economy.”

A gauge the Federal Reserve prefers to measure inflation rose 4.9% from a year ago, the biggest gain going back to September 1983, the Commerce Department reported Friday.

The core personal consumption expenditures price index excluding food and energy was slightly more than the 4.8% Dow Jones estimate and ahead of the 4.7% pace in November. The monthly gain of 0.5% was in line with expectations.

Along with the inflation numbers, personal income rose 0.3% for the month, a touch lower than the 0.4% estimate. Consumer spending declined 0.6%, less than the 0.7% estimate.

A separate Labor Department data point that Fed officials also watch closely showed that total compensation costs for civilian workers increased 4% over the past 12 months. That is the fastest pace in history for the employment cost index, a data set that goes back to the beginning of 2002.

However, the seasonally adjusted quarterly increase of 1% was less than the 1.2% forecast, putting some balm on fears of a wage price inflationary spiral.

The numbers come as rampant inflation is pushing the Fed into an aggressive pace of policy tightening.

Earlier this week, central bank officials indicated they are likely to begin raising interest rates as soon as March. Market pricing is pointing to five quarter-percentage point increases this year for benchmark short-term borrowing rates, which have been anchored near zero since the beginning of the Covid pandemic in early 2020.

Headline inflation rose at a 5.8% pace as measured by the PCE index, tied for the fastest pace since June 1982.

Markets viewed the data releases as positive, with stock market futures well off their morning lows.

Fed officials are worried about inflation pressures they had characterized through much of last year as “transitory.” While factors tied to the supply chain bottlenecks and powerful demand for goods over services have been a core cause of price increases, inflation has proven stronger and longer lasting than policymakers had figured.

One area of specific concern is wages and the possibility of a spiral where increases in pay push up prices and in turn drive inflation expectations higher.

“One quarter’s data prove nothing, but with labor participation creeping higher, and measures of excess demand flattening in recent months, it is reasonable to think that wage growth is unlikely to re-accelerate dramatically,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. “In the meantime, this report eases the immediate pressure on the [Federal Open Market Committee] to act aggressively; the sighs of relief from Fed Towers should be audible on Wall Street.”

The 4% employment cost index annual increase, though missing estimates for the quarter and below the 1.3% gain from the previous quarter, still represented a sharp gain from the 2.5% rise from a year ago. Compensation for private industry workers jumped 4.4%, which included a 5% increase in wages and salaries. Benefits costs rose 2.9%.

Compensation grew fastest for service occupations, which saw a 6.1% surge in 2021. Nursing and residential care compensation increased 5.7%.

Despite the gain in wages, consumer spending tailed off, falling 0.6% after gaining 0.4% in November.

The decline in spending came despite a 6.9% increase in gross domestic product in the fourth quarter, which closed out a year in which the economy accelerated at its fastest pace since 1984.

The U.S. economy grew at a much better-than-expected pace to end 2021 from sizeable boosts in inventories and consumer spending, and despite signs that the acceleration likely tailed off toward the end of the year.

Gross domestic product, the sum of all goods and services produced during the October-through-December period, increased at a 6.9% annualized pace, the Commerce Department reported Thursday. Economists surveyed by Dow Jones had been looking for a gain of 5.5%.

The increase was well above the unrevised 2.3% growth in the third quarter and came despite a surge in Covid omicron cases that likely slowed hiring and output as businesses dealt with large numbers of sick workers.

Gains came from increases in private inventory investment, strong consumer activity as reflected in personal consumption expenditures, exports, and business spending as measured by nonresidential fixed investment.

Across-the-board decreases in the pace of government spending subtracted from GDP, as did imports, which are measured as a drag on output.

The quarter brought an end to a 2021 that saw a 5.7% increase in annualized GDP, the strongest pace since 1984 as the U.S. tried to pull away from the unprecedented drop in activity during the early days of the coronavirus pandemic.

Markets reacted positively to the news, with stock futures posting gains while government bond yields were mixed.

“The strength of the economy last year stood in stark contrast to the collapse in activity in early 2020, but also speaks to the success of both the public and private sector in quickly adapting to the unprecedented challenges created by the pandemic,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “That being said, potential headwinds still exist, as the global risks associated with the COVID-19 pandemic persist.”

In other economic news Thursday, jobless claims totaled 260,000 for the week ended Jan. 22, slightly less than the 265,000 estimate and a decline of 30,000 from the previous week.

Also, orders for long-lasting goods declined 0.9% for December, worse than the estimate for a 0.6% drop. Orders for durables hit their lowest point since April 2020, reflecting an end-of-year slowdown as omicron cases skyrocketed. The decline was driven largely by a 3.9% slump in transportation orders.

The GDP report, though, reflected an overall solid period for the economy after output had slowed considerably over the summer. Supply chain issues tied to the pandemic coupled with robust demand spurred by unprecedented stimulus from Congress and the Federal Reserve led to imbalances across the economic spectrum.

Consumer activity, which accounts for more than two-thirds of GDP, rose 3.3% for the quarter. Gross private domestic investment, a gauge of business spending and inventory build, soared 32%.

Inventories added 4.9 percentage points to the headline growth, boosted in particular by motor vehicle dealers, the Bureau of Economic Analysis said.

Economic growth came as inflation surged in 2021, particularly in the second half of the year, as supply couldn’t keep up with strong demand, particularly for goods over services.

The U.S. heads into 2022 on uncertain footing, with Fed Chairman Jerome Powell warning Wednesday that growth in the early part of the year is slowing, though he views the economy overall as strong.

To that measure, the Fed telegraphed a March interest rate hike, the first since 2018. Central bankers also expect to end their monthly asset purchases the same month and to start unwinding their bond holdings shortly after.

Those tightening moves come in response to inflation running at its highest pace in nearly 40 years. Data on the Fed’s preferred inflation gauge, the personal consumption expenditures price index, will be released Friday morning.

The fourth-quarter data reflected those price pressures as well, with the price index for gross domestic purchases up 6.9% in the fourth quarter and 3.9% for the full year. The Fed considers 2% a healthy level for inflation, though a new policy approach adopted in 2020 allows for higher levels over a short period of time in the interest of generating full employment.

Powell said Wednesday that Fed officials believe they have largely achieved both ends of their employment/inflation mandate and are ready to start raising rates and otherwise tightening monetary policy.

Rising interest rates are causing big headaches for mortgage lenders, especially those who depend most on refinance business. Demand is simply drying up.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 3.72% from 3.64%, with points decreasing to 0.43 from 0.45 (including the origination fee) for loans with a 20% down payment. That rate was 77 basis points lower the same week one year ago.

As a result mortgage refinance applications, which are highly sensitive to daily rate moves, fell 13% for the week and were 53% lower year over year, according to the Mortgage Bankers Association’s seasonally adjusted index. Rates have now been moving higher for five straight weeks.

“After almost two years of lower rates, there are not many borrowers left who have an incentive to refinance,” wrote Joel Kan, an MBA economist, in a release. “Of those who are still in the market for a refinance, these higher rates are proving much less attractive to them.”

Mortgage applications to purchase a home fell just 2% for the week and were 11% lower than a year ago. Buyers are actually more active now than usual, as some are hoping to get a jump on the popular spring market. With mortgage rates rising, and home prices still soaring, some are concerned they will no longer be able to afford the home they want.

At an open house last Sunday in Waldorf, Maryland, there were already three offers before potential buyers were even let in the door to have a look.

“We thought that because of the winter months that it would slack off a little bit, prices would start to come back down to normal, but that’s not happening. It’s anguish, it’s pain, it’s agony,” said Rondie Robinson, who was house hunting with his wife and daughter.

That house was priced right around the national median, at $375,000, which is where supply is lean. Most of the buying activity is happening on the higher end, which is why the average purchase loan size set yet another record at $433,500.

Between rising rates and rising prices, “I’m caught between a rock and a hard place,” added Robinson.

Facing both turbulent financial markets and raging inflation, the Federal Reserve on Wednesday indicated it could soon raise interest rates for the first time in more than three years as part of a broader tightening of historically easy monetary policy.

In a move that came as little surprise, the Fed’s policymaking group said a quarter-percentage point increase to its benchmark short-term borrowing rate is likely forthcoming. It would be the first rise since December 2018.

Chairman Jerome Powell added that the Fed could move on an aggressive path.

“I think there’s quite a bit of room to raise interest rates without threatening the labor market,” Powell said at his post-meeting news conference. After being up strongly earlier, the major stock market averages turned negative shortly following Powell’s pronouncement.

The committee’s statement came in response to inflation running at its hottest level in nearly 40 years. Though the move toward less accommodative policy has been well telegraphed over the past several weeks, markets in recent days have been remarkably choppy as investors worried that the Fed might tighten policy even more than expected.

The post-meeting statement from the Federal Open Market Committee did not provide a specific time for when the increase will come, though indications are that it could happen as soon as the March meeting. The statement was adopted without dissent.

“With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the statement said. The Fed does not meet in February.

In addition, the committee noted the central bank’s monthly bond-buying will proceed at just $30 billion in February, indicating that program is expected to end in March as well at the same time that rates increase.

There were no specific indications Wednesday when the Fed might start to reduce bond holdings that have bloated its balance sheet to nearly $9 trillion.

However, the committee released a statement outlining “principles for reducing the size of the balance sheet.” The statement is prefaced with the notion that the Fed is preparing for “significantly reducing” the level of asset holdings.

That policy sheet noted that the benchmark funds rate is the “primary means of adjusting the stance of monetary policy.” The committee further noted that the balance sheet reduction would happen after rate hikes start and would be “in a predictable manner” by adjusting how much of the bank’s proceeds from its bond holdings would be reinvested and how much would be allowed to roll off.

“The Fed’s announcement that it will ‘soon be appropriate’ to raise interest rates is a clear sign that a March rate hike is coming,” noted Michael Pearce, senior U.S. economist at Capital Economics. “The Fed’s plans to begin running down its balance sheet once rates begin to rise suggests an announcement on that could also come as soon as the next meeting, which would be slightly more hawkish than we expected.”

Markets had been anxiously awaiting the Fed’s decision.

Investors had been expecting the Fed to tee up the first of multiple rate hikes, and in fact are pricing in a more aggressive schedule this year than FOMC officials indicated in their December outlook. At that time, the committee penciled in three 25 basis point moves this year, while the market is pricing in four hikes, according to the CME’s FedWatch tool that computes the probabilities through the fed funds futures market.

Traders are anticipating a funds rate by the end of the year of about 1%, from the near-zero range where it’s currently pegged.

Fed officials have been expressing concern lately about persistent inflation, following months of insisting that the price increases were “transitory.” Consumer prices are up 7% from a year ago, the fastest 12-month pace since the summer of 1982.

The durability of inflation has caused officials to rethink a strategy that has produced the easiest monetary policy in Fed history. The central bank slashed its benchmark rate to a target of 0%-0.25% in the early days of the Covid pandemic and has been buying billions of dollars in Treasurys and mortgage-backed securities each month.

“Part of this will be the Fed moving away from very high accommodative policy to substantially less accommodative policy and over time to a policy that’s not accommodative,” Powell said.

The bond-buying program, sometimes called quantitative easing, has brought the Fed’s total assets on its balance sheet to nearly $9 trillion. Powell said the Fed will wait a few months then probably start allowing some of the proceeds from its bond holdings to run off each month while reinvesting the rest. As things stand now, the Fed reinvests all of those proceeds.

“The balance sheet is substantially larger than it needs to be,” Powell said. “There’s a substantial amount of shrinkage in the balance sheet to be done. That’s going to take some time. We want that process to be orderly and predictable.”

Goldman Sachs said a few days ago that it expects the balance sheet reduction to start in June at a pace of $100 billion a month, about double the pace of the previous move of a runoff several years ago.