Economy Daily

Economic downturn coming

Greg Ip, 1-14, 21, Wall Street Journal, Bond Market Forecasts Bad Economic News, https://www.wsj.com/articles/bond-market-forecasts-bad-economy-11642098186

With the best job growth in over 40 years, inflation a national obsession and the Federal Reserve preparing to raise interest rates, it is easy to forget how different the world was before the pandemic. The global environment then was marked by sluggish growth, lackluster investment, worryingly low inflation and low interest rates. Which could be where the U.S. is headed again. The bond market seems to be betting on it. Even with U.S. inflation at a near-40 year high of 7%, 10-year Treasury yields are below 2%. Real bond yields—that is, adjusted for expected future inflation—are negative 0.2%, and have been mostly negative since the start of the pandemic, only the second such episode in 30 years. Even as the Fed moves up plans to raise interest rates, markets have revised down how high they are likely to get. They see the federal-funds rate, now near zero, reaching only 2% in 2025, which would be slightly negative in real terms. Investors, of course, may simply be wrong. Since the start of the year, investors appear to have reassessed the interest-rate outlook. Bonds have sold off, with the 10-year Treasury yield, which moves in the opposite direction to its price, jumping to 1.7% from 1.5% at the end of 2021. The Federal Reserve building in Washington, D.C. The Fed has moved up plans to raise interest rates, but markets have revised down how high they are likely to get. Yet there are good reasons to think today’s sizzling economy may be just a temporary respite. Looked at over the longer term, real yields have been declining for decades. Olivier Blanchard, the former chief economist at the International Monetary Fund, makes this point in a new book, “Fiscal Policy Under Low Interest Rates.” In it he notes that safe interest rates—in other words, those on risk-free government debt—have been declining in the U.S., Western Europe, and Japan for 30 years. “Their decline is due neither to the Global Financial Crisis of the late 2000s, nor to the current Covid crisis, but to more persistent factors,” he writes. “Something has happened in the last 30 years, which is different from the past.” Several years ago, former Treasury Secretary Larry Summers argued a persistent shortfall of investment amid a glut of global savings was holding down both growth and interest rates, a situation he called “secular stagnation,” a term first used in the 1930s. “Secular stagnation was the issue of the moment in the late 1930s,” Mr. Summers said at The Wall Street Journal’s CEO Council Summit in December. “Once rearmament and World War II began, and there was a massive fiscal expansion, it was no longer the issue. In the same way, after we’ve had a 15%-of-GDP fiscal expansion, secular stagnation is not the issue of this moment.” New warnings That is why early last year Mr. Summers switched from warning about secular stagnation to warning that fiscal and monetary stimulus threatened to send inflation sharply higher. Yet he thinks it more likely than not that secular stagnation will return in a few years’ time: That is a “natural interpretation” of why markets expect real interest rates to remain so low, he said. Sluggish Signals Interest rates and demographics indicate that the current moment of high inflation and hot growth may not last Sources: Federal Reserve Bank of Philadelphia (expected inflation); Federal Reserve (bond yields); WSJ analysis (Treasury yield); Cornerstone Macro (rates) This possibility also weighs on the minds of Fed officials. Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said in supporting higher rates this year that he is weighing two opposing risks. One is that high inflation becomes embedded in the public’s behavior, which would require even higher interest rates later on. The other is that after Covid-19 passes, the world returns to the pre-pandemic regime of low growth and low inflation. That regime, he wrote on the publishing site Medium, was driven by “demographics, trade, and technology factors. It is unlikely that these underlying forces have gone away.” Slower population growth reduces demand for cars, houses and other durable goods, and the need for business to expand capacity. Lengthened life expectancy means people spend more of their lives retired, so they save more in anticipation. In combination, these effects tend to hold down interest rates. The pandemic intensified the trend of slowing population growth around the world. The U.S. population grew just 0.1% in the year to July—the slowest on record—as both birthrates and immigration plummeted. With retirements accelerating because of the pandemic, the U.S. labor force ended last year 1.4% smaller than before the pandemic. China’s population barely rose in 2020, and its population in the 15 to 59 age range shrank 5% in the preceding decade. The government has responded with alarm. A state-backed newspaper briefly urged Communist Party members to have more children, and access to vasectomies and abortion has reportedly diminished. Annual Population Growth Rates This driver of economic growth has been low and falling in these key economies A hit to productivity Apart from population, the main contributor to growth is productivity, and that too appears to have suffered during the pandemic. While businesses stepped up digitization by investing more in e-commerce, cloud computing and artificial intelligence, productivity has still suffered because of Covid-19 protocols and restrictions, and sweeping changes in where, and whether, people chose to work. The recent rise in inflation suggests the U.S. can’t grow as fast as before without straining productive capacity. Some of those barriers to growth are likely to persist even after the pandemic passes. Meanwhile, Chinese investment has slowed under the impact of its own Covid-19 restrictions and cooling property sector. As a result, its excess savings are once again being recycled to the rest of the world. One indicator of that excess, China’s trade surplus, rose 53% in the 12 months through November to $673 billion from two years earlier. Those surpluses are apt to continue if a shrinking labor force and reduced property investment continue to weigh on Chinese domestic demand. A return to a low-growth, low-inflation, low-interest-rate world has a positive side. It would mean rich asset valuations are less likely to represent a bubble. Stocks are trading at near-record price-earnings ratios, but those ratios are justifiable if real interest rates remain around zero. Federal debt, which since 2019 has shot from 80% to around 100% of GDP, is more easily sustained with low rates, although slower growth works in the opposite direction. Indeed, one reason interest rates may be low is that investors think the Fed won’t raise them so much for fear of a stock market crash. It raised rates above 2.25% in 2018, then reversed course when stock and commodity markets wobbled. What if investment and economic growth weaken, but inflation stays high? If inflation settles at, say, 3.5%, as some economists expect, then bond yields could also double to 3.5% with real rates remaining zero. In the U.S., though, high and volatile inflation eventually led to higher real interest rates, while in other countries such as Japan, stagnant growth and low inflation have gone hand in hand. For now, investors think inflation is coming down, and will average 2.5% over the next 10 years, based on the yields on regular and inflation-indexed bonds. But Joe Gagnon, an economist at the Peterson Institute for International Economics, warns: “Bond markets have never predicted an outburst of inflation. So why would we think they can now?” He adds: “They respond very quickly when inflation starts to rise.”

Slow growth now

Alan Rappeport, January 11, 2022, New York Times, https://www.nytimes.com/2022/01/11/business/world-bank-2022-growth.html, The World Bank warns that the pandemic will slow economic growth in 2022.

WASHINGTON — The World Bank said on Tuesday that the pace of global economic growth was expected to slow in 2022, as new waves of the pandemic collide with rising prices and snarled supply chains, blunting the momentum of last year’s recovery. This projection underscores the stubborn nature of the public health crisis, which is widening inequality around the world. The pandemic is taking an especially brutal toll on developing countries, largely owing to rickety health care infrastructure and low vaccination rates. “The Covid-19 crisis wiped out years of progress in poverty reduction,” David Malpass, the World Bank president, wrote in an introduction to the report. “As government’s fiscal space has narrowed, many households in developing countries have suffered severe employment and earning losses — with women, the unskilled and informal workers hit the hardest.” Global growth is expected to slow to 4.1 percent this year, from 5.5 percent in 2021, according to the World Bank. Output is expected to be weaker, and inflation is likely to be hotter than previously thought. The World Bank said growth rates in most emerging markets and developing economies outside East Asia and the Pacific would return to their prepandemic levels, still falling short of what would be needed to recoup losses during the pandemic’s first two years. The slowdown in these regions will be more abrupt than what advanced economies will experience, leading to what the World Bank describes as “substantial scarring” to output. Income inequality is widening both within and between countries, the World Bank said, and could become entrenched if disruptions to education systems persist and if high national debt hinders the ability of nations to support their low-income populations. Globally, the prospect of higher interest rates and withdrawal of fiscal support could take a toll on low-income countries while they are already vulnerable. Growth in the world’s two largest economies, the United States and China, is poised to moderate considerably. The World Bank said that the recently passed infrastructure law would do little to buttress growth in the United States in the near term and that pandemic restrictions were curbing consumer spending and residential investment in China. The World Bank is recommending stronger debt relief initiatives to help poor countries as well as urging support for policies that will strengthen their financial systems and improve local infrastructure in ways that will spur growth. Easing global supply chain bottlenecks, particularly for Covid vaccine doses, will be crucial.

’22 growth strong

Hugh Son, 1-10, 22, Jamie Dimon sees the best economic growth in decades, more than 4 Fed rate hikes this year, https://www.cnbc.com/2022/01/10/jamie-dimon-sees-the-best-economic-growth-in-decades-more-than-4-fed-rate-hikes-this-year.html

Jamie Dimon said the U.S. is headed for the best economic growth in decades. Dimon, the longtime CEO and chairman of JPMorgan Chase, said his confidence stems from the robust balance sheet of the American consumer. Dimon said that while the underlying economy looks strong, stock market investors may endure a tumultuous year as the Fed goes to work. Jamie Dimon said the U.S. is headed for the best economic growth in decades. “We’re going to have the best growth we’ve ever had this year, I think since maybe sometime after the Great Depression,” Dimon told CNBC’s Bertha Coombs during the 40th Annual J.P. Morgan Healthcare Conference. “Next year will be pretty good too.” Dimon, the longtime CEO and chairman of JPMorgan Chase, said his confidence stems from the robust balance sheet of the American consumer. JPMorgan is the biggest U.S. bank by assets and has relationships with half of the country’s households. “The consumer balance sheet has never been in better shape; they’re spending 25% more today than pre-Covid,” Dimon said. “Their debt-service ratio is better than it’s been since we’ve been keeping records for 50 years.” Dimon said growth will come even as the Fed raises rates possibly more than investors expect. Goldman Sachs economists predicted four rate hikes this year and Dimon said he would be surprised if the central bank didn’t go further. “It’s possible that inflation is worse than they think and they raise rates more than people think,” Dimon said. “I personally would be surprised if it’s just four increases.” Ark Innovation fund rebounds from tech-driven rout as Cathie Wood calls markets ‘irrational’ Here are Bank of America’s favorite chip stocks for 2022 Dimon has expressed expectations for higher rates before. Banks tend to prosper in rising-rate environments because their lending margins expand as rates climb. Indeed, bank stocks have surged so far this year as rates climbed. The KBW Bank Index jumped 10% last week, the best start to a year on record for the 24-company index. However, Dimon said that while the underlying economy looks strong, stock market investors may endure a tumultuous year as the Fed goes to work. “The market is different,” Dimon said. “We’re kind of expecting that the market will have a lot of volatility this year as rates go up and people kind of redo projections.” “If we’re lucky, the Fed can slow things down and we’ll have what they call a `soft landing’,” Dimon added. The bank was forced to move its annual healthcare conference to a virtual format because of the spread of the omicron variant of Covid-19.

More rate hikes coming, inflation will not slow

Sargen, 12-18, 21, Nicholas Sargen, Ph.D., is an economic consultant and is affiliated with the University of Virginia’s Darden School of Business. He is the author of “Global Shocks: An Investment Guide to Turbulent Markets.”, https://thehill.com/opinion/finance/586336-get-ready-for-a-larger-than-expected-interest-rate-spike-in-2022, Get ready for a larger-than-expected interest rate spike in 2022

As investors assess what is in store for 2022, they should not lose sight of what has transpired over the past two years. What stands out is that the COVID-19 pandemic is different than any prior global shock in the last 50 years. When it struck in early 2020, the economy suffered its steepest decline on record as businesses and schools were shuttered. But it also rebounded quickly as businesses reopened, and it has since recouped all of the output declines and most job losses. The economy has also experienced the steepest rise in inflation in three decades. The quick recovery is testimony to the unprecedented fiscal and monetary policy response that occurred, as well as to the resilience of U.S. businesses and the workforce that has been facilitated by the digital economy. The vigorous policy response in turn provided cover for investors to add risk to their portfolios. Stock market returns since late March 2020 have exceeded any comparable period in U.S. history with the major indices doubling in value. And there has been no meaningful correction over that period. Looking ahead, the investment landscape will likely prove trickier for several reasons. First, the COVID-19 pandemic is proving more difficult to eradicate than many had anticipated. Second, the Fed has signaled it will likely raise interest rates to curb inflation. Third, much of the good economic news has been priced into markets. Of these, the hardest to forecast is the pandemic. One of the key lessons from the delta variant, however, is that it did not produce lasting damage to the economy because businesses and schools remained open. Accordingly, Federal Reserve Chair Jerome Powell told lawmakers that the economic effect of the omicron variant would not be “remotely comparable” to what occurred at the onset of the pandemic. But it could influence monetary policy if the economy slowed. The focus of investors currently is on the prospect of Fed tightening to curb inflation. After being in denial earlier, the Fed now recognizes the pickup in inflation this year is not transitory and could persist into 2022 and 2023. At the December Federal Open Market Committee (FOMC) meeting, the Fed announced it would speed up its tapering of bond purchases to conclude in March 2022, and it increased the projections for the federal funds rate. The median forecast of FOMC members now calls for three rate hikes in both 2022 and 2023, with a terminal rate of 2 percent-2.25 percent by 2024. The looming issue is whether this gradual glide path of rate increases will be sufficient to bring inflation back to the Fed’s average annual target of 2 percent. I am skeptical for several reasons. First, the median projections of Fed members for the coming year call for real GDP growth of 4 percent and the unemployment rate to fall to 3.5 percent, which suggests the economy will be approaching its long-term potential. Second, inflation expectations are becoming embedded in wages, which have risen steadily and are now approaching 4 percent. Third, while supply-chain disruptions may ease as the coronavirus pandemic abates, the housing component of the Consumer Price Index is likely to stay elevated. Finally, fiscal and monetary policies are still accommodative.

Feds will raise rates three times over the next year, more inflation and greater rate hikes will tube the markets

Sargen, 12-18, 21, Nicholas Sargen, Ph.D., is an economic consultant and is affiliated with the University of Virginia’s Darden School of Business. He is the author of “Global Shocks: An Investment Guide to Turbulent Markets.”, https://thehill.com/opinion/finance/586336-get-ready-for-a-larger-than-expected-interest-rate-spike-in-2022, Get ready for a larger-than-expected interest rate spike in 2022

As investors assess what is in store for 2022, they should not lose sight of what has transpired over the past two years. What stands out is that the COVID-19 pandemic is different than any prior global shock in the last 50 years. When it struck in early 2020, the economy suffered its steepest decline on record as businesses and schools were shuttered. But it also rebounded quickly as businesses reopened, and it has since recouped all of the output declines and most job losses. The economy has also experienced the steepest rise in inflation in three decades. The quick recovery is testimony to the unprecedented fiscal and monetary policy response that occurred, as well as to the resilience of U.S. businesses and the workforce that has been facilitated by the digital economy. The vigorous policy response in turn provided cover for investors to add risk to their portfolios. Stock market returns since late March 2020 have exceeded any comparable period in U.S. history with the major indices doubling in value. And there has been no meaningful correction over that period. Looking ahead, the investment landscape will likely prove trickier for several reasons. First, the COVID-19 pandemic is proving more difficult to eradicate than many had anticipated. Second, the Fed has signaled it will likely raise interest rates to curb inflation. Third, much of the good economic news has been priced into markets. Of these, the hardest to forecast is the pandemic. One of the key lessons from the delta variant, however, is that it did not produce lasting damage to the economy because businesses and schools remained open. Accordingly, Federal Reserve Chair Jerome Powell told lawmakers that the economic effect of the omicron variant would not be “remotely comparable” to what occurred at the onset of the pandemic. But it could influence monetary policy if the economy slowed. The focus of investors currently is on the prospect of Fed tightening to curb inflation. After being in denial earlier, the Fed now recognizes the pickup in inflation this year is not transitory and could persist into 2022 and 2023. At the December Federal Open Market Committee (FOMC) meeting, the Fed announced it would speed up its tapering of bond purchases to conclude in March 2022, and it increased the projections for the federal funds rate. The median forecast of FOMC members now calls for three rate hikes in both 2022 and 2023, with a terminal rate of 2 percent-2.25 percent by 2024. The looming issue is whether this gradual glide path of rate increases will be sufficient to bring inflation back to the Fed’s average annual target of 2 percent. I am skeptical for several reasons. First, the median projections of Fed members for the coming year call for real GDP growth of 4 percent and the unemployment rate to fall to 3.5 percent, which suggests the economy will be approaching its long-term potential. Second, inflation expectations are becoming embedded in wages, which have risen steadily and are now approaching 4 percent. Third, while supply-chain disruptions may ease as the coronavirus pandemic abates, the housing component of the Consumer Price Index is likely to stay elevated. Finally, fiscal and monetary policies are still accommodative. Financial markets have taken the news in stride thus far, as the Fed’s forecasts are in line with what investors were anticipating. Bondholders, nonetheless, should realize that even if inflation subsides to the Fed’s 2 percent target in the next few years, they in effect will be accepting negative yields in real terms throughout this period. So, why would they do so? My take is that investors’ expectations about inflation and interest rates have been shaped by the experience following the 2008 Global Financial Crisis, when economic growth and inflation were subdued for a decade. This outcome is consistent with prior bouts of financial crises, as Carmen Reinhart and Kenneth Rogoff spell out in their article “Recovery from Financial Crises.” By comparison, the coronavirus pandemic is a completely different type of shock that did not inflict lasting damage on the economy and the financial system. While it has taken a heavy toll on people’s lives and well-being, it has also unleashed unforeseen changes in the way business is conducted and how people go about providing for their livelihood. Throughout the travail, what stands out is that many U.S. companies are highly adaptable and experienced increased productivity while others have seen their businesses disrupted. Radio City Music Spectacular shuts down amid COVID-19 spike in NYC Overnight Health Care — Presented by Rare Access Action Project —… As a result of the policy support during the pandemic and the resilience of the American economy, the U.S. stock market has posted outsized returns in the past two years that far exceed other developed markets. To a large extent, the gains this year reflected a strong rebound in corporate profits, with earnings for S&P 500 companies up by 40 percent. Going forward, however, investors should lower their return expectations as the economy and earnings normalize while interest rates rise. How well the stock market performs will hinge to a large extent on how inflation fares. If it recedes as the Fed expects and interest rate increases are gradual, valuations are likely to remain high. But should inflation prove to be persistent, and the Fed is compelled to accelerate the pace of rate hikes, the stock market would become vulnerable and the bull-run could end. For this reason, I believe caution is warranted.

More rate hikes coming, inflation will not slow

Sargen, 12-18, 21, Nicholas Sargen, Ph.D., is an economic consultant and is affiliated with the University of Virginia’s Darden School of Business. He is the author of “Global Shocks: An Investment Guide to Turbulent Markets.”, https://thehill.com/opinion/finance/586336-get-ready-for-a-larger-than-expected-interest-rate-spike-in-2022, Get ready for a larger-than-expected interest rate spike in 2022

As investors assess what is in store for 2022, they should not lose sight of what has transpired over the past two years. What stands out is that the COVID-19 pandemic is different than any prior global shock in the last 50 years. When it struck in early 2020, the economy suffered its steepest decline on record as businesses and schools were shuttered. But it also rebounded quickly as businesses reopened, and it has since recouped all of the output declines and most job losses. The economy has also experienced the steepest rise in inflation in three decades. The quick recovery is testimony to the unprecedented fiscal and monetary policy response that occurred, as well as to the resilience of U.S. businesses and the workforce that has been facilitated by the digital economy. The vigorous policy response in turn provided cover for investors to add risk to their portfolios. Stock market returns since late March 2020 have exceeded any comparable period in U.S. history with the major indices doubling in value. And there has been no meaningful correction over that period. Looking ahead, the investment landscape will likely prove trickier for several reasons. First, the COVID-19 pandemic is proving more difficult to eradicate than many had anticipated. Second, the Fed has signaled it will likely raise interest rates to curb inflation. Third, much of the good economic news has been priced into markets. Of these, the hardest to forecast is the pandemic. One of the key lessons from the delta variant, however, is that it did not produce lasting damage to the economy because businesses and schools remained open. Accordingly, Federal Reserve Chair Jerome Powell told lawmakers that the economic effect of the omicron variant would not be “remotely comparable” to what occurred at the onset of the pandemic. But it could influence monetary policy if the economy slowed. The focus of investors currently is on the prospect of Fed tightening to curb inflation. After being in denial earlier, the Fed now recognizes the pickup in inflation this year is not transitory and could persist into 2022 and 2023. At the December Federal Open Market Committee (FOMC) meeting, the Fed announced it would speed up its tapering of bond purchases to conclude in March 2022, and it increased the projections for the federal funds rate. The median forecast of FOMC members now calls for three rate hikes in both 2022 and 2023, with a terminal rate of 2 percent-2.25 percent by 2024. The looming issue is whether this gradual glide path of rate increases will be sufficient to bring inflation back to the Fed’s average annual target of 2 percent. I am skeptical for several reasons. First, the median projections of Fed members for the coming year call for real GDP growth of 4 percent and the unemployment rate to fall to 3.5 percent, which suggests the economy will be approaching its long-term potential. Second, inflation expectations are becoming embedded in wages, which have risen steadily and are now approaching 4 percent. Third, while supply-chain disruptions may ease as the coronavirus pandemic abates, the housing component of the Consumer Price Index is likely to stay elevated. Finally, fiscal and monetary policies are still accommodative.

Feds will raise rates three times over the next year, more inflation and greater rate hikes will tube the markets

Sargen, 12-18, 21, Nicholas Sargen, Ph.D., is an economic consultant and is affiliated with the University of Virginia’s Darden School of Business. He is the author of “Global Shocks: An Investment Guide to Turbulent Markets.”, https://thehill.com/opinion/finance/586336-get-ready-for-a-larger-than-expected-interest-rate-spike-in-2022, Get ready for a larger-than-expected interest rate spike in 2022

As investors assess what is in store for 2022, they should not lose sight of what has transpired over the past two years. What stands out is that the COVID-19 pandemic is different than any prior global shock in the last 50 years. When it struck in early 2020, the economy suffered its steepest decline on record as businesses and schools were shuttered. But it also rebounded quickly as businesses reopened, and it has since recouped all of the output declines and most job losses. The economy has also experienced the steepest rise in inflation in three decades. The quick recovery is testimony to the unprecedented fiscal and monetary policy response that occurred, as well as to the resilience of U.S. businesses and the workforce that has been facilitated by the digital economy. The vigorous policy response in turn provided cover for investors to add risk to their portfolios. Stock market returns since late March 2020 have exceeded any comparable period in U.S. history with the major indices doubling in value. And there has been no meaningful correction over that period. Looking ahead, the investment landscape will likely prove trickier for several reasons. First, the COVID-19 pandemic is proving more difficult to eradicate than many had anticipated. Second, the Fed has signaled it will likely raise interest rates to curb inflation. Third, much of the good economic news has been priced into markets. Of these, the hardest to forecast is the pandemic. One of the key lessons from the delta variant, however, is that it did not produce lasting damage to the economy because businesses and schools remained open. Accordingly, Federal Reserve Chair Jerome Powell told lawmakers that the economic effect of the omicron variant would not be “remotely comparable” to what occurred at the onset of the pandemic. But it could influence monetary policy if the economy slowed. The focus of investors currently is on the prospect of Fed tightening to curb inflation. After being in denial earlier, the Fed now recognizes the pickup in inflation this year is not transitory and could persist into 2022 and 2023. At the December Federal Open Market Committee (FOMC) meeting, the Fed announced it would speed up its tapering of bond purchases to conclude in March 2022, and it increased the projections for the federal funds rate. The median forecast of FOMC members now calls for three rate hikes in both 2022 and 2023, with a terminal rate of 2 percent-2.25 percent by 2024. The looming issue is whether this gradual glide path of rate increases will be sufficient to bring inflation back to the Fed’s average annual target of 2 percent. I am skeptical for several reasons. First, the median projections of Fed members for the coming year call for real GDP growth of 4 percent and the unemployment rate to fall to 3.5 percent, which suggests the economy will be approaching its long-term potential. Second, inflation expectations are becoming embedded in wages, which have risen steadily and are now approaching 4 percent. Third, while supply-chain disruptions may ease as the coronavirus pandemic abates, the housing component of the Consumer Price Index is likely to stay elevated. Finally, fiscal and monetary policies are still accommodative. Financial markets have taken the news in stride thus far, as the Fed’s forecasts are in line with what investors were anticipating. Bondholders, nonetheless, should realize that even if inflation subsides to the Fed’s 2 percent target in the next few years, they in effect will be accepting negative yields in real terms throughout this period. So, why would they do so? My take is that investors’ expectations about inflation and interest rates have been shaped by the experience following the 2008 Global Financial Crisis, when economic growth and inflation were subdued for a decade. This outcome is consistent with prior bouts of financial crises, as Carmen Reinhart and Kenneth Rogoff spell out in their article “Recovery from Financial Crises.” By comparison, the coronavirus pandemic is a completely different type of shock that did not inflict lasting damage on the economy and the financial system. While it has taken a heavy toll on people’s lives and well-being, it has also unleashed unforeseen changes in the way business is conducted and how people go about providing for their livelihood. Throughout the travail, what stands out is that many U.S. companies are highly adaptable and experienced increased productivity while others have seen their businesses disrupted. Radio City Music Spectacular shuts down amid COVID-19 spike in NYC Overnight Health Care — Presented by Rare Access Action Project —… As a result of the policy support during the pandemic and the resilience of the American economy, the U.S. stock market has posted outsized returns in the past two years that far exceed other developed markets. To a large extent, the gains this year reflected a strong rebound in corporate profits, with earnings for S&P 500 companies up by 40 percent. Going forward, however, investors should lower their return expectations as the economy and earnings normalize while interest rates rise. How well the stock market performs will hinge to a large extent on how inflation fares. If it recedes as the Fed expects and interest rate increases are gradual, valuations are likely to remain high. But should inflation prove to be persistent, and the Fed is compelled to accelerate the pace of rate hikes, the stock market would become vulnerable and the bull-run could end. For this reason, I believe caution is warranted.

Inflation will not slow

Peter Santilli, 12-17, 21, Wall Street Journal, Inflation Is Near a 40-Year High. Here’s What It Looks Like., https://www.wsj.com/articles/inflation-is-near-a-40-year-high-heres-what-it-looks-like-11639737004?mod=hp_lista_pos5

U.S. inflation climbed to a 39-year high in November, as strong consumer demand collided with supply constraints. Overall, the level of consumer prices leapt 6.8% last month from a year earlier, the Labor Department said. But prices didn’t change at the same rate for all goods and services. A surge in prices for gasoline and other energy sources, along with prices for cars, have been the primary drivers of this year’s inflation burst. Meanwhile, prices for services like education and medical care rose just slightly. The consumer-price index rose 6.8% in November from the same month a year ago. The core index, which excludes the more-volatile food and energy categories, increased by 4.9%. Prices for energy and transportation made the biggest jumps among the broad categories shown here. Drilling down into some subcategories related to energy and transportation, we need to expand the range of our color scale to capture wider swings. Prices for vehicles have risen sharply and those for gasoline are nearly 60% higher than a year ago. Moving on to food and tightening the range of the scale, we can see that price gains for beef and pork are at the top of the items shown here. A snapshot of some apparel and other wearable items shows prices declined early in the pandemic but this year have been moving steadily higher than those levels. Much of these differences are the result, in one way or another, of the Covid-19 pandemic. This year’s explosive growth in auto prices is due largely to a semiconductor shortage, which was caused in part by the pandemic but also by trade policy. Much of the rise in food and energy prices comes down to pandemic-related production problems, though also to weather and geopolitical factors. Prices for airline fares and hotels have tended to swing with Covid-19 infection rates, as consumers adjust travel plans to their risk of getting sick. Still, inflation in prices of many goods and services hit multidecade highs in November, regardless of the differing underlying factors. The highs signal that price pressures are broadening beyond the goods and services directly affected by Covid and related supply-chain bottlenecks. For example, apparel prices began picking up early in the pandemic, after a long deflationary stint. Housing costs are also climbing, driven by a leap in prices for home energy, furniture and, increasingly, rent. This broadening of price pressures is important because it could signal that inflation will remain elevated into 2022 and beyond—even after Covid-related disruptions abate. Economists generally expect price pressure caused by supply constraints to ease next year as sidelined workers return to the labor force, consumer demand for goods calms down and production ramps up. However, those sources of price pressures may be replaced by more persistent ones. For instance, many economists are closely watching the rise in rent, since it makes up nearly one-third of the consumer-price index and tends to influence inflation’s future path.

Fed will raise rates

Anneken Tappe, 12-17, 21, CNN, https://www.cnn.com/2021/12/17/investing/dow-stock-market-today-omicron/index.html

The Nasdaq Composite (COMP), which was the biggest loser Thursday as tech stocks came under fire, also initially traded in the red before turning green. It finished the session 0.1% lower. Earlier this week, the Federal Reserve announced it will roll back its pandemic stimulus program at a faster pace. It also revealed that the bank’s policymakers expect more interest rate hikes next year than they did just a few months ago. The Bank of England went even further and actually raised its benchmark rate this week. Central banks around the world are turning hawkish to combat the high inflation spurred by the recovery. In the United States, one measure of prices climbed to its highest level in 39 years in November. Even though the Fed’s move was no surprise, it’s bitter medicine for the market.

Inflation will increase

Summers, 12-16, 21, Lawrence Summers is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and an economic adviser to President Barack Obama from 2009 through 2010 Washington Post, pinion: The Fed’s words still don’t measure up to the challenge of inflation, https://www.washingtonpost.com/opinions/2021/12/16/lawrence-summers-fed-inflation/

In fact, there is significant reason to think inflation may accelerate. The consumer price index’s shelter component, which represents one-third of the index, has gone up by less than 4 percent, even as private calculations without exception suggest increases of 10 to 20 percent in rent and home prices. Catch-up is likely. More fundamentally, job vacancies are at record levels and the labor market is still heating up, according to the Fed forecast. This portends acceleration rather than deceleration in labor costs — by far the largest cost for the business sector. Meanwhile, the pandemic-related bottlenecks central to the transitory argument are exaggerated. Prices for more than 80 percent of goods in the CPI have increased more than 3 percent in the past year. With the economy’s capacity growing 2 percent a year and the Fed’s own forecast calling for 4 percent growth in 2022, price pressures seem more likely to grow than to abate.

Rates need to be raised more than 3 times to control inflation

Summers, 12-16, 21, Lawrence Summers is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and an economic adviser to President Barack Obama from 2009 through 2010 Washington Post, pinion: The Fed’s words still don’t measure up to the challenge of inflation, https://www.washingtonpost.com/opinions/2021/12/16/lawrence-summers-fed-inflation/

This all suggests that policy will need to restrain demand to restore price stability. How much tightening is required? No one knows, and the Fed is right to insist that it will monitor the economy and adjust. We do know, however, that monetary policy is far looser today — in a high-inflation, low-unemployment economy — than it was about a year ago when inflation was below the Fed’s target and unemployment was around 8 percent. With relatively constant nominal interest rates, higher inflation and the expectation of future inflation have led to dramatic reductions in real interest rates over the past year. This is why bubbles are increasingly pervasive in asset markets ranging from crypto to beachfront properties and meme stocks to tech start-ups.The implication is that restoring monetary policy to a normal posture, let alone to applying restraint to the economy, will require far more than the three quarter-point rate increases the Fed has predicted for next year. This point takes on particular force once it is recognized that, contrary to Powell’s assertion, almost all economists believe there is a lag of about a year between the application of a rate change and its effect. Failure to restore policy neutrality next year means allowing two more years of highly inflationary monetary policy.

Inflation at an all-time high

Rachel Siegel, 12-10, 21, Washington Post, Prices climbed 6.8% in November compared with last year, largest rise in nearly four decades, as inflation spreads through economy, https://www.washingtonpost.com/business/2021/12/10/inflation-november-cpi-fed-biden/

Prices rose 6.8 percent in November to a nearly 40-year high, compared with a year ago, as inflation continues to squeeze households and businesses nationwide and complicate the political environment for Congress and the White House. Data released Friday by the Bureau of Labor Statistics showed that prices rose 0.8 percent in November compared with October, with inflation spreading further throughout the economy, including to areas that had not been previously hurt by the coronavirus pandemic. The increases were driven by broad-based price hikes in most of the categories tracked, similar to October. Indexes for gasoline, shelter, food, used cars and trucks and new vehicles were among the larger contributors. Airline fares also increased. Also, rents have been climbing, influenced by soaring home prices and supply chain issues limiting construction of new homes. Friday’s inflation report showed rent was up 0.4 percent in November compared with the month before. The energy index was up 3.5 percent in November, and measures of gasoline were up 6.1 percent. Recent moves by the Biden administration intended to bring prices down at the pump aren’t reflected in Friday’s data. The price increases can be seen in the grocery store aisles, as food companies including Campbell Soup, Kraft Heinz and Mondelez have all announced higher prices on items that include soup, macaroni and cheese, crackers, and cookies. Dollar Tree also announced it’s hiking prices on most products to $1.25. BLS data showed that “food at home,” namely groceries was up 6.4 percent in the past year, and that “food away from home” also climbed 5.8 percent. The November data marked the largest 12-month increase since June 1982, around a period when inflation was more of a scourge on daily life than most millennials have ever known. Current inflation dynamics have been spurred by a devastating pandemic that roiled the global economy, upsetting the workforce and supply chains, along with stimulus measures that helped unleash high demand for goods. Friday’s inflation data is only the latest example of how severely inflation looms over the economic recovery. Top officials at the White House and Fed have maintained that unsustainably high prices won’t become a permanent feature of the economy, and that policymakers, if necessary, have the right tools to get inflation under control. But over the past few months, they’ve been forced to back away from their initial message that inflation is temporary, or “transitory,” because that position became increasingly at odds with what was unfolding in the economy — and the ways people experience it.

Inflation increasing, rates will increase

Reade Pickert and Matthew Boeslerm, December 9, 2021, Inflation Near 40-Year High Shocks Americans, Spooks Washington, https://finance.yahoo.com/news/inflation-near-40-high-shocks-120000359.html

(Bloomberg) — The U.S. is poised to enter Year Three of the pandemic with both a booming economy and a still-mutating virus. But for Washington and Wall Street, one Covid aftershock is starting to eclipse almost everything else. Already-hot inflation is forecast to climb even further when November data comes out on Friday, to 6.8%. That would be the highest rate since Ronald Reagan was president in the early 1980s — and in the lifetimes of most Americans. Higher prices helped deliver a banner year for U.S. business, which is posting its fattest profit margins since the 1950s. But for Joe Biden’s administration and the Federal Reserve -– who didn’t see it coming — the sudden return of inflation, largely dormant for decades before 2021, is looking increasingly traumatic. It’s likely to drive some big changes in the coming year, as the Fed pivots toward raising interest rates and the president heads into midterm elections with slumping approval ratings. How did it happen? Essentially, the pandemic made it harder for the world to produce stuff and move it around. The government shored up incomes in the crisis like never before, so households remained eager to spend. And a combination of lockdowns and Covid caution meant their purchasing power was focused on consumer goods instead of services. That’s why there are long lines of cargo ships stretching off the coast of Los Angeles waiting to dock, while used-car dealers keep hiking prices and a global commodities rally leaves Americans paying more at grocery stores and gas pumps. Hotspots to Everywhere A year ago, economists were forecasting 2% inflation for 2021. The pandemic had depressed prices early on, and everyone expected a rebound. But Fed Chair Jerome Powell’s prediction that it would be temporary, and not very large, was widely shared. The first hint that inflation was about to really accelerate came in February, said Omair Sharif, president of research company Inflation Insights LLC. “Something was bubbling under the surface — and more specifically in autos.” A pandemic-driven shortage of semiconductors was holding back production of new cars, so buyers — including rental firms, who’d sold off their fleets earlier in the crisis — were bidding up the prices of old ones. Americans had the cash. In contrast to the last recession, when fiscal austerity held back the recovery, Congress kept the stimulus flowing. On top of the $2.2 trillion rescue package in the spring of 2020, when the pandemic arrived, came another $900 billion in December 2020, then $1.9 trillion more in March after Biden took office. But consumers remained reluctant to spend money in gyms or restaurants, say, where they might catch Covid-19 -– so they bought more goods instead. Shortages of materials, and workers, were creating bottlenecks all along the supply chain. Ports got jammed. Imports kept breaking records. “It was a demand shock,” says Aneta Markowska, chief financial economist at Jefferies. “It’s the U.S. consumer essentially that caused this inflationary impulse, by just buying more stuff than the global economy can produce.” Commodity Stories With other countries recovering too, albeit less exuberantly, globalized commodities like oil were rebounding. U.S. pump prices are about 50% higher than a year ago. The commodity surge wasn’t limited to energy. One of the pandemic inflation’s headline-grabbing episodes came in lumber markets, where prices jumped about 70% from early March to early May –- adding steam to an incipient housing boom. When the lumber bubble burst, some — including Powell — cited it as an example of how pandemic inflation could soon fade. But global food prices, after a lull in June and July, started climbing again. Helped by some bad weather around the planet, they were up 27% in the 12 months through November, reflecting jumps in everything from meat and wheat to coffee and cooking oil. Grocery chain Kroger Co. “saw higher product cost inflation in most categories” in the third quarter, Chief Financial Officer Gary Millerchip said on a Dec. 2 earnings call. “We are passing along higher cost to the customer where it makes sense to do so.” For American business, those higher costs included wage bills. Employers were struggling to increase headcount fast enough to meet soaring demand. In June, Chipotle Mexican Grill Inc. made headlines by hiking prices some 4% to offset pay raises. Plenty more companies would join them as the year went on. At least in the eyes of the market, September’s CPI report was the turning point, when inflation spread well beyond a handful of hotspots. The overall rise in the index was muted -– but food and shelter contributed more than half of it, with rents jumping the most in two decades. While Bloomberg Economics predicts inflation close to 7% for another few months, there’s widespread agreement that it will come down at some point next year. Energy markets are already signaling some relief, with oil down about 15% since late October, presaging lower fuel and transportation costs in 2022. Durable goods inflation is projected to slow as the pandemic recedes and households return to more-normal spending patterns.

Inflation will slow, the labor market will determine how much it will slow

Reade Pickert and Matthew Boeslerm, December 9, 2021, Inflation Near 40-Year High Shocks Americans, Spooks Washington, https://finance.yahoo.com/news/inflation-near-40-high-shocks-120000359.html

One offset to that may be housing costs. Bloomberg Economics’ David Wilcox says they could be rising at a 6% to 7% pace by next summer, about double the rate in the years before the pandemic. Maybe the biggest unknown in 2022 is wages, already rising faster than at any point in the decade-long expansion that ended with the arrival of Covid-19. “The question for me isn’t whether inflation will slow,” said Markowska at Jefferies. “The question is, are we going back to 2? Are we going back to 3? What’s the medium-term destination? And that’s, I think, going to be determined by the labor market.”

Inflation transitory, will moderate

Abigail Ng, 12-9, 21 , CNBC, Anthony Scaramucci says he sees inflation as transitory, not a long-term problem, https://www.cnbc.com/2021/12/09/scaramucci-says-he-sees-inflation-as-transitory-not-a-long-term-issue.html

Inflationary pressures in the global economy are temporary and won’t be long-term problems, according to hedge fund investor Anthony Scaramucci. The founder and managing partner of SkyBridge Capital said he believes rising prices are related to supply chain constraints and will ease once the bottlenecks are resolved. “I don’t see the inflation being long term. I think this is a transitory aftermath of the crisis,” he told CNBC’s “Capital Connection” on Wednesday. In October, consumer prices in the U.S. surged by 6.2%, the biggest jump in more than 30 years. Market experts are split on whether inflation is temporary or not. Mohamed El-Erian, chief economic advisor at Allianz, told CNBC last month that the Fed is losing credibility over its view that rising prices are transitory. Fed Chairman Jerome Powell last week said the central bank uses the term to mean that the current increase in prices won’t leave a permanent mark on the economy. “I think it’s probably a good time to retire that word and try to explain more clearly what we mean,” he said. Scaramucci also said the Fed is likely to move slowly with regard to reducing the pace of its monthly bond purchases. That’s in part because there are still uncertainties about additional Covid variants, he said, noting that many in the U.S. remain unvaccinated and that could lead to an “elongation” of the pandemic. Additionally, there are deflationary forces in the form of technology and oil prices, he added. Stocks should be fine when the Fed starts raising rates next year, history shows Asked what trades he recommends, Scaramucci named cryptocurrency exchange Coinbase and software company MicroStrategy. “Those are two trades I don’t think we can live without,” he said. He also said the “sluggishness” in cryptocurrencies such as bitcoin and ethereum are to do with profit taking, and that both are “set up nicely for the beginning of the year” when he expects more institutional investors to buy the coins.

Inflation will continue

Greg In, 12-8, 21, Wall Street Journal, This Inflaiton Defies the Old Model, https://www.wsj.com/articles/this-inflation-defies-the-old-models-11638978991?mod=hp_major_pos2#cxrecs_s

Last April, economists thought inflation would be around 2.5% right now. Instead, it’s over 6%. Even by the forgiving standards of economic forecasting, that’s a miss of epic proportions. Explanations come in two schools. The demand school blames President Biden and the Federal Reserve for administering too much stimulus. The supply school blames pandemic-related bottlenecks and supply chains. In fact, it’s becoming clear that neither demand nor supply by itself is to blame. Rather, this inflation was made possible only by strong demand interacting with restricted supply. The U.S. hasn’t seen anything like this combination except, perhaps, in the aftermath of World War II. Then, Mr. Biden’s Council of Economic Advisers has noted, pent up demand coincided with war-induced shortages. This makes the solution elusive: fixing supply is largely beyond the means of the White House and Fed, but treating the problem as one of only demand could damage the economy. First, consider demand. Federal spending and lower interest rates influence inflation indirectly, by bolstering aggregate demand which drives down unemployment. As the labor market tightens and spare capacity diminishes, firms get pricing power and workers win higher wages. This inverse relationship between unemployment and inflation, called the Phillips curve, was factored into economists’ spring forecasts that found Mr. Biden’s $1.9 trillion stimulus, enacted in March, would have only a slight impact on inflation. David Mericle, chief U.S. economist at Goldman Sachs, puts the impact at 0.1 to 0.2 percentage points at most. Joel Prakken, chief U.S. economist at IHS Markit, said: “No way can the current inflation rate be accounted for by the impact of fiscal stimulus through the usual Phillips curve channels.” Federal Reserve Chairman Jerome Powell discussed in a Senate hearing the factors driving continued inflation and the risk the Omicron variant poses for the economy. Photo: Al Drago/Bloomberg News What about the supply side? Global developments that pushed up oil and gas prices explain some of the rise in inflation; core inflation, which excludes energy and food, was 4.6% in October. Core inflation has been heavily influenced by shortages of inputs, such as semiconductors for automobiles, and bottlenecks such as for oceangoing freight. Yet most other advanced economies have suffered similar disruptions, and their inflation has risen less than that of the US. What sets the U.S. apart is the combination of constricted supply in many sectors and stimulus-inflated demand. Normally, an industry responds to higher demand mostly by raising output and only partly by raising prices. (Economists would say the supply curve slopes up). Sometimes, though, supply is fixed (the supply curve is vertical). This characterizes the oil market. In 2008, demand from China surged when producers had little spare capacity. Oil prices rocketed to records, lifting inflation around the world. The auto market this year resembles the oil market of 2008. Ordinarily, auto manufacturers can meet increased demand with ease. But this year, as low interest rates and pandemic-triggered needs drove up demand, supply has been fixed because of a lack of semiconductor chips. The result: a huge jump in prices that, according to IHS Markit, explains roughly a third of the rise in the Federal Reserve’s preferred core inflation measure. Many economists note the boost to inflation is concentrated in goods. That’s because the pandemic diverted consumer spending away from services such as restaurant meals toward goods such as groceries. Nonetheless, the unusual dynamics are spreading to services as well. The Covid-19 pandemic diverted consumer spending away from services such as restaurant meals toward goods such as groceries. The cost of shelter, for example, depends heavily on home prices which are up 14% so far this year, according to Freddie Mac. Don’t blame the Fed: the decline in mortgage rates since 2019 can at most explain 5 percentage points of the increase, a Federal Reserve Bank of New York review of various studies concludes. Don’t blame investors or speculators, either: cash buyers’ share of home buying is normal, according to Freddie Mac. Prices are up so much because demand is being funneled into just a few segments of the market. Demand has been especially strong for entry-level existing homes in smaller interior markets with limited inventory such as Idaho, whereas the “gateway” markets of New York, Los Angeles, and San Francisco, Boston, Washington, D.C., and Miami are experiencing significant out-migration, according to Freddie Mac. The resulting price dynamics can be “explosive,” said Sam Khater, Freddie’s chief economist. Even the labor market features rising demand and fixed supply. Demand for workers has jumped as businesses reopen and consumers spend stimulus checks and stock market wealth. But the supply hasn’t responded, especially of lower-paid workers on which many service industries depend. In the hotel and restaurant industry, even though demand and employment have yet to return to pre-pandemic levels, a severe shortage of workers has caused job vacancies to double from their-prepandemic level. As a result, both wages and prices in the sector are rising briskly. The unusual origins of this inflation mean the solution isn’t straightforward. Ideally it will recede painlessly as distortions to demand and supply self-correct. Rising semiconductor output will eventually cure the shortage of cars. A receding virus and less generous federal relief should coax some workers to fill job vacancies. Households may have all the furniture, exercise equipment and pizza they want. But that process could take a while; meanwhile, higher inflation could become self-perpetuating through price and wage-setting behavior. Then, the solution to this unfamiliar inflation becomes painfully familiar: higher interest rates and perhaps a recession.

Stock FUTURES are up

Harry Robertson, 12-1, 1, Business Insider, US stock futures rebound from another Omicron sell-off despite Jerome Powell hawkishness, https://markets.businessinsider.com/news/stocks/stock-market-today-us-futures-dow-jones-omicron-jerome-powell-2021-12

US stock futures rallied Wednesday as global stocks rebounded from the latest Omicron-driven sell-off, as investors weighed Federal Reserve Chair Jerome Powell’s hawkish comments on bond-buying and inflation. S&P 500 futures were 1.19% higher, Dow Jones futures were up 0.89%, and futures for the tech-heavy Nasdaq 100 were 1.36% higher, suggesting a higher open for markets at the start of a new month. Uncertainty around the severity and impact of the newly detected Omicron coronavirus variant has caused volatility in stocks after months of calm and regular record highs. “The only winner in December [is] likely to be volatility, as the street sells everything on any negative Omicron headline, and then buys everything back on any hint that the new variant isn’t as serious as we all thought,” Jeffrey Halley, senior market analyst at Oanda, said in a daily note. Stocks began tumbling Tuesday after Moderna CEO Stephane Bancel told the Financial Times that vaccines were likely to be much less effective against the variant. The S&P 500 fell 1.9% Tuesday as hawkish comments from Powell also drove selling. It put the benchmark US stock index 2.9% below its record closing high of 4,704.54, reached on November 18. But comments from the Israeli health minister on Omicron appeared to be contributing to a more positive tone Wednesday. Nitzan Horowitz said “there are initial indications that those who are vaccinated with a vaccine still valid or with a booster will also be protected from this variant,” according to CNN. That followed scientists at the University of Oxford saying Tuesday “there is no evidence so far” that Omicron is resistant to current vaccines. European stocks rebounded along with US futures, after falling sharply Tuesday, with the continent-wide Stoxx 600 up 1.09%. Hong Kong’s Hang Seng rose 0.78% overnight, while Tokyo’s Nikkei 225 gained 0.41%. Bond yields, which move inversely to prices, rose as investors moved away from safe-haven assets in favour of equities. The yield on the key 10-year US Treasury note climbed 5.4 basis points to 1.495%. It remained well below the recent one-month high of 1.666% touched on November 24, however, in a sign that investors want to own safer assets in the face of rising coronavirus risks. Short-term bond yields jumped Tuesday and pushed higher Wednesday after the Fed’s Powell told lawmakers that it’s “probably a good time to retire” the word “transitory” to describe inflation and considered an earlier-than-expected end to tapering asset purchases. Markets interpreted Powell’s comments as hawkish — that is, as a sign that the Fed is set to become more aggressive in tackling inflation by raising interest rates and cutting back on bond buying. The 2-year Treasury note yield rose 6.5 basis points to 1.495% Wednesday, from as low as 0.429% the previous day. It is seen as the security most sensitive to interest rates.

Inflation increasing now

Paul Hanon, 12—1, 21, Wall Street Journal, https://www.wsj.com/articles/global-inflation-set-to-be-higher-for-longer-says-oecd-11638356853?mod=hp_lead_pos2, Global Inflation Set to Be Higher for Longer, Says OECD

The pickup in inflation rates around the world will be longer-lasting and sharper than previously anticipated, with a growing risk that households and businesses grow accustomed to faster price rises, the Organization for Economic Cooperation and Development said in its latest forecasts for the global economy. But the Paris-based research body’s chief economist also warned that should the new Omicron variant of the coronavirus sidestep existing vaccines, the world economy could face a sharper slowdown than previously expected and a round of price declines similar to those seen in the early months of the pandemic. Releasing the last of its four reports on the economic outlook this year, the OECD said it now expects consumer-price inflation in the U.S. to average 4.4% in 2022, up from 3.1% when it last released forecasts in September. It said it now expects inflation in the eurozone to be 2.7%, up from 1.9%. The new forecasts were made before the discovery of the Omicron variant. The OECD also expects inflation to be above the U.S. Federal Reserve’s 2% target at 2.5% in 2023, although it expects eurozone inflation to be just below the European Central Bank’s target at 1.8% in the same year. In an interview with The Wall Street Journal, OECD Chief Economist Laurence Boone said there is a growing risk that households and businesses will come to expect that higher inflation rates will persist. That is the outcome that central bankers fear most, since it opens the way for a vicious cycle of higher wage settlements and price rises intended to cover those higher costs. Federal Reserve Chairman Jerome Powell discussed in a Senate hearing the factors driving continued inflation and the risk the Omicron variant poses for the economy. Photo: Al Drago/Bloomberg News With inflation rates having surprised policy makers over recent months, there is an associated risk that households and businesses will lose confidence in the reassurances being offered by some central banks that higher inflation will prove to be temporary. “That’s a concern,” Ms. Boone said. “People have been saying that higher inflation is transitory for 10 months or so.

Fed perceives that inflation will slow to a healthy level now

Jeff Cox, 11-27, 21, https://www.cnbc.com/2021/11/27/the-current-inflation-run-is-similar-to-other-episodes-in-us-history-but-with-important-differences.html The current inflation run is similar to other episodes in history, but with important differences

Leaders such as Federal Reserve Chairman Jerome Powell, Treasury Secretary Janet Yellen and Biden administration officials view inflation as temporary and almost wholly driven by factors unique to the pandemic. Once those factors subside, they see inflation drifting lower, eventually getting around the 2% level the Fed considers emblematic of a healthy and growing economy

The 1970s prove that strong unions will boost wages and trigger inflation

Jeff Cox, 11-27, 21, https://www.cnbc.com/2021/11/27/the-current-inflation-run-is-similar-to-other-episodes-in-us-history-but-with-important-differences.html The current inflation run is similar to other episodes in history, but with important differences

Mark Zandi, the chief economist at Moody’s Analytics, feels that way even though he says there are close parallels between the current predicament and the runaway inflation of the 1970s. For one, he said the waves in that inflation shock were both demand-driven and the product of supply issues because of the oil embargoes back then. Unions that were able to negotiate cost of living increases in contracts also boosted the wage-price spiral.

Economy strong, new variant won’t slow it

Justin Lahart, 11-26, 21. WSJ. https://www.wsj.com/articles/u-s-economy-could-enjoy-post-holiday-glow-11637928001?mod=hp_lista_pos5, U.S. Economy Could Enjoy Post-Holiday Glow, New Variant or No

By now it is clear that the economy should be closing out the year on a high note, with Americans spending money over the holidays and reengaging in many of the activities that they missed out on during last year’s damped-down festivities, even with the emergence of a new virus variant. Even in normal times, the shift in the economy from December to January is abrupt. Consumer spending drops, highway and airline traffic thins and hundreds of thousands of workers brought on temporarily for the holidays leave their jobs. If it wasn’t for the adjustments that government statistical agencies make for seasonal swings, gross domestic product would register a contraction in the first quarter from the fourth quarter every single year. But the pandemic, and all the economic imbalances it has fomented, make getting a read on what January might look like particularly hard. Covid-19 cases are, unfortunately, rising, and there is a danger that this year’s holiday gatherings and travel will exacerbate the increase. Worse, now there is a fast-spreading new strain of the virus that might be better able to infect people who are vaccinated than previous variants were. That could dent sales—an analysis by economists at JPMorgan Chase finds that spending has softened in states where Covid-19 cases have risen the most in recent weeks, relative to other places. Moreover, while it seems likely that even after the holidays, most Americans will have ample savings relative to before the pandemic, that may not be as true for people lower down the income ladder, leading to some curtailment of spending. That said, predicting where Covid-19 cases might be headed is something of a fraught exercise. Already 37 million people have gotten their boosters, and more children are now getting vaccinated: The virus’s opportunities for transmission could decline, especially if the vaccines prove effective against the new variant. Moreover, with Covid-19 generally not nearly as dangerous for vaccinated people as for the unvaccinated, and with new antiviral drugs from Pfizer and Merck looking as if they could become available soon, many consumers may view Covid-19 as less risky than in the past. Meanwhile, companies ought to experience some easing of the labor and supply chain strains they have been facing. A lot of people coming off holiday jobs will be looking for work again and available to hire. And with holiday goods no longer clogging up transportation networks, getting supplies will be easier. Many businesses might look at it as a good time to secure necessary labor and rebuild depleted inventories. As a result, some of the seasonal swoons in activity that typically occur when the calendar flips might be diminished—translating into gains after they go through the seasonal-adjustment process. This holiday season is looking a lot different from last year’s. This January will look a lot different, too.

CNBC, 11-26, 21, https://www.cnbc.com/2021/11/27/fed-bostic-says-he-remains-open-to-faster-taper-1-or-2-rate-hikes-in-2022.html, Fed’s Bostic says he remains open to faster taper and one or two rate hikes in 2022

If the new omicron coronavirus variant follows the pattern seen with previous variants, it should cause less of an economic slowdown than the delta variant, Bostic said. Atlanta Federal Reserve President Raphael Bostic said on Friday he is hopeful that the momentum of the U.S. economy will carry it through the next wave of the coronavirus pandemic, and said he remains open to accelerating the pace of the central bank’s bond taper. Earlier on Friday, the World Health Organization said it was designating the new omicron variant, first identified in South Africa, as being “of concern.” If the new omicron coronavirus variant follows the pattern seen with previous variants, it should cause less of an economic slowdown than the delta variant, Bostic said. “We have a lot of momentum in the economy right now,” Bostic said during an interview with Fox News, citing strong jobs growth. “And that momentum, I’m hopeful, will be able to carry us through this next wave, however it turns out.” Bostic reiterated that he is open to speeding up the pace at which the central bank slows down its asset purchases so officials can have greater flexibility to respond to surging inflation. It could be “reasonable,” Bostic said, for the Fed to potentially conclude its asset purchases by the end of the first quarter next year, or early in the second quarter, if the economy continues on the same trajectory. At the current pace, Fed officials would be done tapering purchases by the middle of next year. Policymakers will meet again on Dec. 14-15.

One rate hike, which markets have priced in now.  Greater inflation means a double rate hike

CNBC, 11-26, 21, https://www.cnbc.com/2021/11/27/fed-bostic-says-he-remains-open-to-faster-taper-1-or-2-rate-hikes-in-2022.html, Fed’s Bostic says he remains open to faster taper and one or two rate hikes in 2022

According to CME’s FedWatch tool, money market traders were pricing in a 53.7% chance of at least one rate hike by the Federal Open Market Committee’s June meeting as of Friday afternoon, down from an 82.1% chance on Wednesday. Bostic said on Friday that he has not ruled out any possible actions and said it is “certainly possible” for the Fed to raise interest rates at least twice next year if inflation remains elevated. “We’re not going to let inflation get out of control,” Bostic said.

Investors already expecting a three quarter point rate increase

Nick Timaraos, 11-24, 21, WSJ, Fed Officials Debated Inflation Concerns, Taper Pace at November Meeting, https://www.wsj.com/articles/fed-officials-debated-inflation-concerns-taper-pace-at-november-meeting-11637780402?mod=hp_lead_pos3

Investors have dialed up expectations of interest-rate increases by the Fed next year. The probability of a rate increase by May rose above 50% on Wednesday, and expectations of at least three quarter-point rises by the end of 2022 has risen to nearly 65%, according to futures market prices tracked by CME Group. Brisk demand for goods, disrupted supply chains, temporary shortages and a rebound in travel have pushed 12-month inflation to its highest readings in decades. Core inflation, which excludes volatile food and energy prices, rose 4.1% in October from a year earlier, according to the Fed’s preferred gauge.

Economy up, consumer spending rebound

Sarah Chaney Camban, 11-24, 21, WSJ, U.S. Recovery Accelerates on Spending, Labor Market Growth, https://www.wsj.com/articles/consumer-spending-personal-income-inflation-october-2021-11637710533?mod=hp_lead_pos2

The U.S. economy showed broad-based signs of acceleration heading into the end of the year, with consumers ramping up spending, businesses stepping up investment and jobless claims falling to historic lows. Household spending rose 1.3% in October from a month earlier, while personal income increased 0.5% last month, the Commerce Department said Wednesday. Consumers are benefiting from a strong labor market. And they are spending at a faster pace than inflation, which recently hit a three-decade high. Jobless claims, a proxy for layoffs, fell to 199,000 last week, the lowest weekly level in 52 years, the Labor Department separately said. The sharp decline in unemployment claims suggests rising wages and bountiful job openings could continue to buttress consumer spending—the economy’s main engine—despite fading government stimulus and dwindling savings. “Consumer demand remains quite strong,” said Gregory Daco, chief U.S. economist at Oxford Economics. “People are looking to travel. They’re still looking to eat out. They’re still looking to make purchases for the end-of-the-year holidays.” Elevated inflation, stoked by strong demand and limited goods and labor supply, poses a risk to the economy, though. Federal Reserve officials at their meeting earlier this month signaled greater doubts over how long it would take for inflation to abate and how soon they would need to raise interest rates to cool the economy, minutes from the meeting released on Wednesday showed. Consumers increased spending on goods, including big-ticket and smaller purchases, by 2.2% in October. Spending on services, which were hit hard by the pandemic, is showing glimmers of improvement. Outlays on services grew 0.9% last month, an acceleration from the preceding two months. Some sectors that are particularly vulnerable to the pandemic are starting to see a pickup and are in a much better position than a year earlier. For instance, international travel to major U.S. airports rose in November after the U.S. lifted its travel ban on Europeans, Jefferies economists said in a note. Spending among tourists could help boost U.S. retail sales, the economists said. Companies such as manufacturers face higher material and shipping costs, as well as labor and parts shortages that could delay some shipments this holiday season. Still, early signs suggest that global supply-chain problems are abating. In Asia, Covid 19-related factory closures, energy shortages and port-capacity limits have eased in recent weeks. Demand for goods remains hot even though computer-chip shortages have dented factory output for months. New orders for motor vehicles and parts jumped 4.8% from September to October, one of the largest increases among sectors, the Commerce Department said in a report on durable goods released Wednesday. A separate Federal Reserve report from earlier in November said production of vehicles rose 18% last month. New orders for nondefense capital goods excluding aircraft, a closely watched proxy for business investment, were up 0.6% in October compared with the previous month, Commerce Department data show. Business investment has grown solidly this year. In an economy where there is a shortage of workers, companies are investing in machinery and technology that make their existing employees more productive, said Gus Faucher, chief economist at PNC Financial Services Group Inc. “I suspect that will remain strong through 2022,” he said. Strong consumer demand for everything from apparel to electronics to hardware is boosting sales at several of the biggest U.S. retailers, despite rising prices. The retail chains Target Corp. and TJX Cos. said they were able to sidestep supply-chain snarls to post strong sales in the most recent quarter and stock up with goods for Black Friday and the holiday season. Employers across the economy report they are struggling to find workers to keep pace with demand. Retailers, hospitality, leisure and logistics firms are strapped and have been raising pay to avoid staff shortages during the critical holiday shopping and travel season.

Wage increases boost consumer spending

Sarah Chaney Camban, 11-24, 21, WSJ, U.S. Recovery Accelerates on Spending, Labor Market Growth, https://www.wsj.com/articles/consumer-spending-personal-income-inflation-october-2021-11637710533?mod=hp_lead_pos2

Wage increases will be a key source of spending power for consumers as they run through savings accumulated from multiple rounds of government stimulus. Americans were saving at an annualized rate of $1.322 trillion in October, compared with $5.764 trillion in March, when a fresh round of stimulus started reaching bank accounts. “We’re seeing the growth baton being passed from the public sector to the private sector,” said Mr. Daco of Oxford Economics. The personal-saving rate, which is saving as a percentage of after-tax income, was 7.3% in October, in line with pre-pandemic levels. The booming job market has been a boon for Caleb Waack’s career. The 28-year-old starts a new job in data engineering for an online mattress firm next Monday, his third since the pandemic began. Mr. Waack said he seized on extra time from working remotely to study up on programming, helping him transition from automotive engineering to consumer goods and, ultimately, to his chosen field of data science. He said he received an offer for his new job within a week of applying, compared with a five-week turnaround time for the role he took in mid-2020. “The labor market is scorching hot,” said Mr. Waack, who lives in De Pere, Wis. “The salary increase is—it’s significant, definitely higher than inflation. It’s an employees’ market, right?” Covid-19 is still disrupting the economy and poses a risk to the outlook. Virus cases have risen this month, and some public-health experts warn that cases could continue to climb as people gather indoors during the winter.

Economy rebounding, unemployment low, consumer spending up

Paul Wiseman, 11-24, 21, AP, US jobless claims hit 52-year low after seasonal adjustments, https://apnews.com/article/coronavirus-pandemic-business-health-economy-jobless-claims-a774386e727ad7c917a669f5712deb32

WASHINGTON (AP) — The number of Americans applying for unemployment benefits plummeted last week to the lowest level in more than half a century, another sign that the U.S. job market is rebounding rapidly from last year’s coronavirus recession. Jobless claims dropped by 71,000 to 199,000, the lowest since mid-November 1969. But seasonal adjustments around the Thanksgiving holiday contributed significantly to the bigger-than-expected drop. Unadjusted, claims actually ticked up by more than 18,000 to nearly 259,000. The four-week average of claims, which smooths out weekly ups and downs, also dropped — by 21,000 to just over 252,000, the lowest since mid-March 2020 when the pandemic slammed the economy. Since topping 900,000 in early January, the applications have fallen steadily toward and now fallen below their prepandemic level of around 220,000 a week. Claims for jobless aid are a proxy for layoffs. Overall, 2 million Americans were collecting traditional unemployment checks the week that ended Nov. 13, down slightly from the week before. “Overall, expect continued volatility in the headline figures, but the trend remains very slowly lower,” Contingent Macro Advisors wrote in a research note. Until Sept. 6, the federal government had supplemented state unemployment insurance programs by paying an extra payment of $300 a week and extending benefits to gig workers and to those who were out of work for six months or more. Including the federal programs, the number of Americans receiving some form of jobless aid peaked at more than 33 million in June 2020. The job market has staged a remarkable comeback since the spring of 2020 when the coronavirus pandemic forced businesses to close or cut hours and kept many Americans at home as a health precaution. In March and April last year, employers slashed more than 22 million jobs. But government relief checks, super-low interest rates and the rollout of vaccines combined to give consumers the confidence and financial wherewithal to start spending again. Employers, scrambling to meet an unexpected surge in demand, have made 18 million new hires since April 2020 and are expected to add another 575,000 this month. Still, the United States remains 4 million short of the jobs it had in February 2020. Companies now complain that they can’t find workers to fill job openings, a near-record 10.4 million in September. Workers, finding themselves with bargaining clout for the first time in decades, are becoming choosier about jobs; a record 4.4 million quit in September, a sign they have confidence in their ability to find something better.

No inflation control now

AP, 11-23, 24, https://apnews.com/article/coronavirus-pandemic-joe-biden-health-business-richard-nixon-ae06d5cccf066239f9aa7f06491c7698, Biden aims to do what presidents often can’t: Beat inflation,

WASHINGTON (AP) — LBJ tried jawboning. Richard Nixon issued a presidential edict. The Ford administration printed buttons exhorting Americans to “Whip Inflation Now.” Over the years, American presidents have tried, and mostly floundered, in their efforts to quell the economic and political menace of consumer inflation. Now, President Joe Biden is giving it a shot. Confronting a spike in gasoline and other consumer prices that’s bedeviling American households, Biden on Tuesday ordered the release of 50 million barrels of oil from the U.S strategic petroleum reserve. The move, done in coordination with several other major nations, is intended to contain energy costs. Oil markets, having anticipated the move, were unimpressed with the details: Oil prices actually rose on the news. It was just the latest step Biden has taken to show he is doing everything he can to combat inflation as gasoline and food prices, in particular, have imposed a growing burden on American households. On Monday, he announced that he would reappoint Jerome Powell as chair of the Federal Reserve, a move meant in part to reassure financial markets that Washington is serious about containing consumer prices. Last month, he announced a deal to ease supply backlogs at the Port of Los Angeles by extending operations there to 24 hours a day, seven days a week. ADVERTISEMENT Yet none of the president’s actions is considered likely to make a meaningful dent in surging prices anytime soon. “I don’t think the president has many levers to pull to bring down the rate of inflation any time soon,” said Mark Zandi, chief economist at Moody’s Analytics. “The things he is doing are positive, and there’s no downside to them … but they are on the margins. They’re not going to move the dial very much.” Inflation is always a tough foe, made even more complicated by the unusual recovery from the pandemic recession, with shortages of supplies and workers and shipping bottlenecks forcing up prices. The government’s consumer price index skyrocketed 6.2% in the 12 months that ended in October — the sharpest such jump since 1990. Coming after nearly four decades of more or less stable prices, the CPI news represents a “once-in-a-generation uptick in inflation,” said Sarah Binder, a George Washington University political scientist who studies the Fed. “The problem is pretty stark because it’s something that voters notice. It’s hard to escape the impact of a spike in inflation on your daily life, whether it’s buying milk or buying gas.’’ The average price of regular gasoline has shot up to $3.40 a gallon from $2.11 a year ago, according to AAA. Compounding the pain and heightening the pressure on Biden, inflation has been outpacing Americans’ income. Adjusted for price increases, average hourly wages were actually down 1.2% last month compared with a year earlier. “Inflation is painful, and it’s always political,” said Diane Swonk, chief economist at the accounting and consulting firm Grant Thornton. WHAT’S BEHIND THE PRICE SPIKE? It’s partly the consequence of very good news. The world economy — and America’s in particular — rebounded with unexpected speed and strength from last year’s brief but intense recession. It was a result of super-low interest rates, massive government spending and, eventually, the broad rollout of vaccines that allowed more of the economy to reopen. The swiftness of the rebound caught businesses off guard. A year and a half ago, they were bracing for the worst — laying off workers, letting shelves and warehouses go bare, reducing investment and factory output. And energy companies did the same: They cut production of oil and gas as demand for transportation fuels plummeted. Once demand came roaring back, they were unprepared. They found themselves scrambling to call back workers and buy enough to fill customer orders. Ports and freight yards couldn’t handle the traffic. Countries competed over boatloads of overpriced liquid natural gas. Periodic COVID-19 outbreaks shut down Asian ports and factories. Global supply chains broke down. As costs rose, many businesses found that they could pass the burden along to consumers in the form of higher prices. In the meantime, many families had banked their government relief checks and built up their savings. Some critics also blamed Biden’s $1.9 trillion emergency aid package for overheating the economy and contributing to inflation pressures.

Inflation likely to stabilize, more inflation causes rate hikes, killing the economy

Sebastian Mallaby, 11-22, 21, SEBASTIAN MALLABY is Paul A. Volcker Senior Fellow for International Economics at the Council on Foreign Relations. His forthcoming book, The Power Law: Venture Capital and the Making of the New Future, will be published in January 2022, Is Inflaiton here to Stay? https://www.foreignaffairs.com/articles/2021-11-22/inflation-here-stay

Early in the COVID-19 pandemic, in Foreign Affairs, I wrote that advanced economies were entering a new age: the age of magic money. Because inflation seemed dormant, central banks faced no penalty for conjuring money out of thin air. And because this money would drive interest rates lower, governments would likewise face no penalty for borrowing. A period of expansive government beckoned. Countries with firmly anchored prices would be empowered to assist citizens in extraordinary ways, courtesy of magic money. Eighteen months on, this thesis seems both true and troubled. True, because the advanced economies’ response to the pandemic has been genuinely extraordinary. In 2020 and 2021, the U.S. government has propped up the economy by running budget deficits worth a combined 27.0 percent of one year’s GDP, far more than the cumulative 18.5 percent in 2009–10, following the global financial crisis. Thanks to this unprecedented stimulus, a miraculous recovery has ensued. Relative to the eve of the pandemic, U.S. consumers are richer, wages are up, businesses have more cash on hand, and real GDP is higher. Compare that with the painful rebuilding after the financial crash, when it took ten quarters for real output to exceed its mid-2008 high point. Other advanced economies—Japan, the euro area, and the United Kingdom—have experienced something similar. Expansive government programs have boosted household disposable income above the pre-pandemic level. Yet the magic money thesis is simultaneously in trouble, because its premise—dormant inflation—has been battered. In the United States, the Federal Reserve’s preferred measure of core inflation came in at 3.6 percent in the year to September, a 30-year record. Across the 38 economies of the Organization for Economic Cooperation and Development, core inflation stands at 3.2 percent. This past June, I updated my analysis of magic money in Foreign Affairs and noted that inflation was stirring but suggested that this might be temporary; further, I argued that if inflation were to persist, the Fed would act to control it. Both these claims seem weaker now. In the past five months, core inflation has stayed obstinately high, and a rising chorus of commentary insists that the Fed is “behind the curve.” It is time to update my update. Even if the age of magic money really has ended, it has been a remarkable phase in economic history. As Matthew Klein of The Overshoot newsletter observes, the huge pandemic stimulus had three possible consequences. Companies and citizens might have taken the government handouts and nervously saved them, in which case magic money would have failed to spark recovery. At the other extreme, the private sector could have spent the handouts all at once, in which case there would have been hyperinflation. Instead, the economy followed a middle path, and the outcome has been pretty close to the ideal one. On the one hand, output has recovered fast. On the other hand, core inflation at 3.6 percent is a manageable problem. Magic money has worked extraordinarily well. If one parachutes from a great height and lands within yards of the target, that’s victory. Second, although inflation has been more sustained and broader than expected, it may yet turn out to be transitory. In the near term, the world is short of fundamentals such as semiconductors, housing space, and energy, so price pressures may get worse before they get better. The digitization of everything, accelerated by the pandemic, has made the chip shortage especially painful; Goldman Sachs notes that the average new car contains 50 percent more semiconductors than it did just three years ago. But in the medium term, the supply factors pushing prices up seem more temporary than permanent. Production bottlenecks are likely to smooth themselves out as the world puts the pandemic behind it. Workers are likely to rejoin the labor force as more people get vaccinated and oral antiviral therapies to treat COVID-19 become more readily available. Meanwhile, energy prices are more likely to fall than to rise, given their currently high level. Something similar can be said of the demand side of the inflation outlook. For now, too much demand is chasing too few goods, particularly the durable goods that have pushed prices upward. But by this time next year, the government stimulus will be waning. Consumers will have run down some of the financial reserves resulting from government largess and a dearth of spending opportunities during the pandemic. The service sector should be back to normal, absorbing some of the demand that is currently pushing up durable goods prices. Factor in the Fed’s measured withdrawal of stimulus, and the United States may gradually return to price stability. Under this scenario, magic money will have proved extraordinarily effective in 2020–21—and will likely get rolled out again whenever the next crisis arrives. MAGIC KINGDOM Of course, the outlook will darken if people come to expect continuous inflation. Given that the current supply-and-demand disruptions will persist into next year, workers may get into the habit of pushing for higher pay because they expect prices to go up, while businesses may raise prices reflexively because they expect higher wage costs. Already, investors are betting that inflation will average more than three percent over the next five years, though they also believe that the rate will come down in the subsequent five-year period. How people form inflation expectations is not well understood, so it’s hard to gauge this risk. But it is clearly not zero. Another risk comes from the extraordinary state of the financial markets. U.S. fund managers have piled into the stock market on the TINA theory: the idea that with bonds yielding virtually nothing, “there is no alternative” to stocks. As a result, in the past year, stocks have jumped by about a quarter relative to earnings and are way above their long-term average. Housing prices and crypto assets have followed suit. If inflation turns out to be worse than it looks now, the Fed may be forced to surprise the markets with higher rate hikes. That could trigger a financial bust, which would damage the real economy. Magic money has worked extraordinarily well. In short, this drama is not over. If inflation expectations rise further, and if a consequent Fed tightening punctures markets, the age of magic money may indeed have ended. The perils of massive budget stimulus will have been exposed, although these may still pale relative to the perils of doing too little in a crisis. To reduce the risk of this negative scenario, the Fed should signal its concern: it should taper asset purchases faster, stand ready to raise interest rates sooner, and stop talking about unemployment. A calm forewarning of tougher tightening is better than delay followed by clampdown. Yet a brighter future remains the most probable one. If supply stabilizes and demand subsides, measured tightening may turn out to be enough. By the start of 2023, inflation will have stabilized at or just above the two percent target—a bit higher than before, partly because of the jolt to expectations from the current inflation blip and partly because the ongoing transition to green energy will require major investments that will boost the cost of capital. The fact that inflation and interest rates will settle somewhat higher than before will be all to the good. The fear of “secular stagnation”—the worry that the economy can grow only with interest rates close to zero—will have been alleviated. Higher interest rates will discipline borrowers and render the financial system a bit less prone to bubbles. If the U.S. economy can reach that healthy equilibrium, today’s inflation scare will soon be forgotten. The world will move on. The Fed will have won. And the age of magic money will continue

Inflation baked in for the long-term

David Javier, 11-19, 21, https://finance.yahoo.com/news/yes-fatter-paychecks-really-do-stoke-inflation-morning-brief-101151680.html, Yes, fatter paychecks really do stoke inflation: Morning Brief

It should be noted outright that in a society that’s become polarized by class and surging inequality, it’s become incredibly difficult to discuss the role wages play in pushing up inflation. It gets subsumed by facile accusations that those trying to make the argument somehow disdain the working class — which those of us here at the Morning Brief certainly do not. Meanwhile, the finer points often get lost in the soundbite-driven world of social media and opinionated cable TV. With all that being said, it should be noted that our current problem with soaring prices is, at its core, an issue of unusually high COVID-era demand stoked by massive intervention from the Federal Reserve and Uncle Sam. That point was recently articulated by at least two Obama-era officials, Steve Rattner and Larry Summers. For those unaware, consumer spending, and all the conspicuous consumption that goes along with it, comprises a whopping 70% of gross domestic product. The reason why this matters is because wages, which the Morning Brief has pointed out on several occasions, have risen quite significantly during the pandemic after a prolonged period of stagnation. Given the worker shortage and historically high numbers of people quitting their jobs, employers are more likely than not to hike pay even further. On its face, this is a good thing. But in a nutshell, behavioral economics tells us that the more money people have, the more they will spend. And as I pointed out in Thursday’s edition, ample evidence suggests that free-spending workers are loading up on revolving credit. That, of course, stimulates demand in an economy that’s powered mostly by the consumer — thus stoking the inflationary problem best summarized by Rattner as “too much money chasing too few goods.” Most reasonable people rightly applaud the idea of middle and working classes making more money. Yet the rapid pace of (long overdue) wage hikes is stoking both demand and prices alike, and creating shortages just about everywhere. Pointing to the Atlanta Fed’s wage growth tracker that showed two consecutive months of growth over 4%, veteran Wall Street watcher Peter Boockvar noted this week that those readings “are the two highest … since 2008 and in Q1 this year it averaged 3.4% and in Q2 it was 3.1%.” Meanwhile, a National Federation of Independent Businesses survey — the voice of the small business sector, which accounts for at least 40% of economic activity — reported that compensation hit its highest in nearly 40 years, Boockvar pointed out. A net 44% of NFIB respondents said they boosted pay, and 32% plan to do so in the next few months. “The trend is clear with wages and worker leverage,” the analyst added. Taken together, these factors are contributing to what Tom Tzitzouris, head of fixed income research at Strategas, stated candidly recently was a “wage-price spiral” adding to the supply and labor backlogs. “That tells us that people who work for a living — high income or low income — believe they have pricing power. And once they believe that, then inflation has real legs,” the analyst warned. “It doesn’t mean that we are going to see an acceleration in inflation, it just means that this inflation is going to be sticky — potentially 3%+ [in headline consumer prices] for the next decade or at least for the remainder of this business cycle,” Tzitzouris added. “As long as wages are rising towards where inflation is, that tells us that the wage-price spiral is still in effect,” he said.

Interest rate increases coming

Reuters, November 18, 2021, Fed to hike in Q4 next year; inflation to remain above target until 2024: Shrutee Sarkar, reuters.com

BENGALURU, Nov 19 (Reuters) – The Federal Reserve will raise interest rates late next year, earlier than expected just a month ago, in a landmark shift from the emergency measures it took to backstop the U.S. economy during the COVID-19 pandemic, according to a Reuters poll. Most respondents said the Fed should move even sooner to combat inflation, which hit a 30-year high last month and economists say it will stick above the central bank’s target until at least 2024. The shift in economists’ expectations for a first rate hike to next year from early 2023 predicted in an October survey puts them more in line with market expectations, and follows recent news U.S. inflation hit a 30-year high last month. With disrupted global supply chains and a sharply-improved job market, the Fed, like most major central banks, is expected to move sooner rather than later. The Nov. 15-18 poll predicted the Fed would raise rates by 25 basis points to 0.25-0.50% in Q4 2022, followed by two more hikes in Q1 and Q2 2023. The fed funds rate was expected to reach 1.25-1.50% by the end of 2023. But nearly two-thirds of economists, 27 of 42, who responded to an additional question on what they recommended the Fed ought to do said the Fed should raise rates earlier, by the end of September next year. “The double-whammy of a cost and wage push into prices is likely leaving the Fed uncomfortable. The risks of earlier hikes – next summer, if not before – are on the rise,” said Michelle Meyer, U.S. economist at Bank of America Securities. “To the extent that inflation expectations march higher over the longer run and consumers continue to react negatively to higher prices on the view that they will prove persistent, the more likely the Fed will damper the inflationary pressure with tighter monetary policy.” High inflation is a concern for central banks around the world, some of which have already raised rates or are close to doing so. The Fed, for its part, is expected to taper its $120 billion in monthly bond purchases from this month. The consensus view for change in the core personal consumption expenditures (PCE) price index, the Fed’s key inflation gauge, was predicted to stay above 4% this quarter and next, double the 2% target. It’s then forecast to slow in the second half of 2022, along with growth. Those forecasts were upgraded from last month. “The whiff of stagflation is getting stronger as shortages worsen, leading to surging prices and weaker real GDP growth. Shortages of goods and intermediate inputs will eventually ease, although not for at least six to 12 months,” said Paul Ashworth, chief North America economist at Capital Economics. “But the drop in the labour force appears to be more permanent, which suggests the pandemic could have a long-term scarring effect on potential GDP after all.” After expanding 6.7% in the second quarter on an annualized basis, U.S. economic growth was expected to have slowed to 2.0% in the third quarter before expanding 4.8% this quarter. That compared with 3.8% and 5.0% predicted in October for the third and fourth quarters, respectively. On average, the economy was expected to grow 3.9% next year, 2.6% in 2023 and 2.3% in 2024. That compared with previous forecasts of 4.0% for 2022, 2.5% for 2023 and 2.2% in 2024. While the unemployment rate was predicted to range between 3.6% and 4.3% until the end of 2023, over 55% of 39 respondents who answered another question said consumer spending in the U.S. would improve over the coming year.

Inflation high now

Bloomberg, 11-11, 21, Straits Times, Inflation threatens to return to US politics in replay of 1980, https://www.straitstimes.com/world/united-states/inflation-threatens-to-return-to-us-politics-in-replay-of-1980

ASHINGTON (BLOOMBERG) – “Is it easier for you to go and buy things in the stores than it was four years ago?” Ronald Reagan asked days before his sweeping 1980 presidential election victory. That simple question looms as a decisive factor in next year’s congressional ballot. Inflation is now running at its highest in a generation, with a report Wednesday (Nov 10) showing that consumer prices surged at a 6.2 per cent annual pace in October. Nearly all economic forecasters expect it to cool in the coming year, but the key question for President Joe Biden and congressional Democrats is how quickly and how much. While Mr Biden argues that inflation will be pulled down by his forthcoming US$1.75 trillion (S$2.37 trillion) social-spending Bill, along with a US$550 billion infrastructure plan he will soon sign, Republicans are hammering exactly the opposite argument: cash drops by the government are driving up prices. Even some Democrats are echoing GOP fiscal concerns, complicating the outlook for the pending legislative package. At stake in how quickly inflation recedes, and in the debate over the cause and remedy of the escalation in prices, is control of Congress. In next November’s midterm elections, Democrats’ razor-thin majorities of both chambers will be up for grabs. It’s effectively the first national election where inflation will be a prime issue since Reagan’s win over President Jimmy Carter. “We’ve never recorded as many people talking about high home prices or high appliance prices or high TV prices,” said Mr Richard Curtin, who oversees the University of Michigan Consumer Sentiment Survey, a key gauge of household attitudes. “We get a large share of people talking about the reduction of their living standards due to inflation,” made worse because “consumers see no effective economic policies that would restrain inflation,” he said.

Inflation will slow in ‘22

Bloomberg, 11-11, 21, Straits Times, Inflation threatens to return to US politics in replay of 1980, https://www.straitstimes.com/world/united-states/inflation-threatens-to-return-to-us-politics-in-replay-of-1980

Treasury Secretary Janet Yellen said in an interview that aired Tuesday on National Public Radio’s “Marketplace” that she expects inflation next year to be “closer to the 2% that we consider normal.” Outside forecasters largely agree. The median estimate of economists surveyed by Bloomberg is for a 2.8 per cent rate in the third quarter of next year, on the eve of the election, with 2.4 per cent seen for the final three months of 2022. Gasoline futures are trading about 18 cents per gallon lower for next October compared to current levels, signalling prices at the pump should ease. But much depends on the course of the pandemic, and things may get worse before they improve, with no guarantee that supply-chain bottlenecks will have fully cleared. Gasoline futures are trading about 18 cents per gallon lower for next October compared to current levels. PHOTO: EPA-EFE Meantime, rising prices at grocery check-out lines and the gas pump are already unsettling the public, and much of the country is in for more sticker shock when winter heating bills start arriving.

Miniscule impact from reconcilliation

Bloomberg, 11-11, 21, Straits Times, Inflation threatens to return to US politics in replay of 1980, https://www.straitstimes.com/world/united-states/inflation-threatens-to-return-to-us-politics-in-replay-of-1980

But most economists don’t see a near-term impact on inflation from the fiscal packages. It can take years for infrastructure projects to affect transport and other costs, for example. And the ramping up of social safety-net support could in the meantime add fuel to already strong demand. “The spending is front-loaded,” said Dr Jason Furman, a former senior economic adviser in the Obama administration who’s now a professor at Harvard University. Inflation could be boosted by “a few tenths of a percentage point” next year, he said. Longer term, any inflation impact would be “miniscule” and could work in either direction. With American payrolls about 4 million lower today than they were before the pandemic, the biggest impact on inflation over the next year is likely to be how quickly people return to the labour force, Dr Furman said. “Inflation right now is more uncertain than at any point in many decades. We’re in such an unprecedented situation that our biggest lesson from the last year should be humility in our forecasts.” A key Democratic swing voter in the Senate, Joe Manchin of West Virginia, is worried enough about the idea that he’s held up consideration of the social spending Bill the White House and congressional leaders are trying to get enacted. He’s yet to commit to voting for the draft package.

Inflation increasing

Paul Wiseman, 11-11, 21, EXPLAINER: Why US inflation is so high, and when it may ease, https://apnews.com/article/coronavirus-pandemic-business-health-jason-furman-prices-77dc786442ccc3ed8092a7647716d682

WASHINGTON (AP) — Inflation is starting to look like that unexpected — and unwanted — houseguest who just won’t leave.

For months, many economists had sounded a reassuring message that a spike in consumer prices, something that had been missing in action in the U.S. for a generation, wouldn’t stay long. It would prove “transitory,” in the soothing words of Federal Reserve Chair Jerome Powell and White House officials, as the economy shifted from virus-related chaos to something closer to normalcy. Yet as any American who has bought a carton of milk, a gallon of gas or a used car could tell you, inflation has settled in. And economists are now voicing a more discouraging message: Higher prices will likely last well into next year, if not beyond. On Wednesday, the government said its consumer price index soared 6.2% from a year ago — the biggest 12-month jump since 1990. ADVERTISEMENT “It’s a large blow against the transitory narrative,” said Jason Furman, who served as the top economic adviser in the Obama administration. “Inflation is not slowing. It’s maintaining a red-hot pace.’’ And the sticker shock is hitting where families tend to feel it most. At the breakfast table, for instance: Bacon prices are up 20% over the past year, egg prices nearly 12%. Gasoline has surged 50%. Buying a washing machine or a dryer will set you back 15% more than it would have a year ago. Used cars? 26% more. Although pay is up sharply for many workers, it isn’t nearly enough to keep up with prices. Last month, average hourly wages in the United States, after accounting for inflation, actually fell 1.2% compared with October 2020. Economists at Wells Fargo joke grimly that the Labor Department’s CPI — the Consumer Price Index — should stand for “Consumer Pain Index.” Unfortunately for consumers, especially lower-wage households, it’s all coinciding with their higher spending needs right before the holiday season. The price squeeze is escalating pressure on the Fed to shift more quickly away from years of easy-money policies. And it poses a threat to President Joe Biden, congressional Democrats and their ambitious spending plans. ___ WHAT CAUSED THE PRICE SPIKES? Much of it is the flipside of very good news. Slammed by COVID-19, the U.S. economy collapsed in the spring of 2020 as lockdowns took effect, businesses closed or cut hours and consumers stayed home as a health precaution. Employers slashed 22 million jobs. Economic output plunged at a record-shattering 31% annual rate in last year’s April-June quarter. Everyone braced for more misery. Companies cut investment. Restocking was put off. And a brutal recession ensued. ADVERTISEMENT Yet instead of sinking into a prolonged downturn, the economy staged an unexpectedly rousing recovery, fueled by massive government spending and a bevy of emergency moves by the Fed. By spring, the rollout of vaccines had emboldened consumers to return to restaurants, bars and shops. Suddenly, businesses had to scramble to meet demand. They couldn’t hire fast enough to plug job openings — a near record 10.4 million in August — or buy enough supplies to fill customer orders. As business roared back, ports and freight yards couldn’t handle the traffic. Global supply chains became snarled. Costs rose. And companies found that they could pass along those higher costs in the form of higher prices to consumers, many of whom had managed to sock away a ton of savings during the pandemic. “A sizeable chunk of the inflation we’re seeing is the inevitable result of coming out of the pandemic,” said Furman, now an economist at the Harvard Kennedy School. Furman suggested, though, that misguided policy played a role, too. Policymakers were so intent on staving off an economic collapse that they “systematically underestimated inflation,” he said. “They poured kerosene on the fire.” A flood of government spending — including President Joe Biden’s $1.9 trillion coronavirus relief package, with its $1,400 checks to most households in March — overstimulated the economy, Furman said. “Inflation is a lot higher in the United States than it is in Europe,” he noted. “Europe is going through the same supply shocks as the United States is, the same supply chain issues. But they didn’t do nearly as much stimulus.’’ In a statement Wednesday, Biden acknowledged that “inflation hurts Americans’ pocketbooks, and reversing this trend is a top priority for me.” But he said his $1 trillion infrastructure package, including spending on roads, bridges and ports, would help ease supply bottlenecks. ___ HOW LONG WILL IT LAST? Consumer price inflation will likely endure as long as companies struggle to keep up with consumers’ prodigious demand for goods and services. A resurgent job market — employers have added 5.8 million jobs this year — means that Americans can continue to splurge on everything from lawn furniture to new cars. And the supply chain bottlenecks show no sign of clearing. “The demand side of the U.S. economy will continue to be something to behold,” says Rick Rieder, chief investment officer for global fixed income at Blackrock, “and companies will continue to have the luxury of passing through prices.” Megan Greene, chief economist at the Kroll Institute, suggested that inflation and the overall economy will eventually return to something closer to normal. “I think it it will be ‘transitory’,” she said of inflation. “But economists have to be very honest about defining transitory, and I think this could last another year easily.’’ “We need a lot of humility talking about how long this lasts,” Furman said. “I think it’s with us for a while. The inflation rate is going to come down from this year’s blistering pace, but it’s still going to be very, very high compared to the historical norms we have been used to.”

Inflation will stabilize mid next year

Erin Doherty, 11-10, 21, https://www.axios.com/consumer-price-index-october-inflation-60151fa5-0191-4b8b-9c8a-5fc43e1a47ba.html, Inflation at its highest in 30 years

What they’re saying: “We expected inflation would get worse before it got better, but not this much worse. Particularly painful is the increase in food prices as we approach the holidays, and the rise in energy prices as we plan to travel more to family get-togethers,” Robert Frick, corporate economist with Navy Federal Credit Union, wrote in a research note. “However, both those increases are likely to be temporary, and the forecasts that inflation overall will drop early-to-mid-next year still seems credible,” he added.

Economic fundamentals are strongFelix Solomon, 11-9, 21, https://www.axios.com/economy-inflation-stocks-good-pessimism-biden-997e1f94-f600-4475-8cc3-811fd5cf247c.html, The economy is great, but voters don’t believe it

By the numbers: Economic strength is undeniable, both in the country overall and at the household level. The economy is expected to grow 5.7% this year. Almost 6 million jobs were created just between January and October; the unemployment rate is now just 4.6%. The quit rate, the standard barometer of workers’ optimism, hit an all-time record high of 2.9% in August. Average earnings are up 3.5% this year and 4.9% annually, to $31 per hour. Checking accounts are 50% fatter than they were pre-pandemic, while the bottom 50% of the population now has more than $3 trillion in household wealth — up 32% just in the first half of this year, and up 55% from before the pandemic. Stocks hit a new record high every day last week (and yesterday, too), and are up more than 30% year-t0-date.

Growth outlook strong

Hope King, 11-9, 21, A dose of optimism from JPMorgan, https://www.axios.com/economic-optimism-jpmorgan-94364feb-4f23-4d2f-857b-2174f90700c1.html

With 2021 soon in the rearview, the economic tumult of 2020 is looking more and more like a faded “scar,” J.P. Morgan Asset Management’s team told reporters on Monday. Why it matters: “Bold” and coordinated fiscal and monetary policies not only helped soften the pandemic’s blow — they also set up conditions for more corporate and economic growth, they said. The big picture: The passage of the $1.2 trillion infrastructure bill on Friday is a further example of the U.S. government’s willingness to spend in order to drive economic activity, said David Kelly, the firm’s chief global strategist. That, along with strong corporate profits and low-interest rates, points to strong capital spending in the U.S. over the next 10 to 15 years, he said. Yes, but: Global growth will likely moderate compared to the last decade, as expansion in China — the world’s second-largest economy — slows down. The bottom line: “[T]he growth outlook is pretty good, all things considered — and certainly, it does not look like the global economy has been in any way permanently scarred by the pandemic,” Kelly said.