Evelyn Reynolds

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    Jobs Gains Heat Up Even as the Federal Reserve Looks for Cooling

    Federal Reserve officials are likely to keep a close eye on the job market’s strength in light of September jobs data, which showed that employers hired at an unexpectedly rapid clip.Employers added 336,000 jobs last month, sharply more than the 170,000 economists had predicted. Fed officials have been keeping careful track of the labor market’s strength as they try to assess both how much more they need to raise interest rates to bring inflation under control and how long borrowing costs should stay high.That pace of hiring suggested that the labor market continues to chug along even in the face of the Fed’s 19-month campaign to cool the economy by raising borrowing costs. Central bankers have lifted rates to a range of 5.25 to 5.5 percent, and suggested at their September meeting that they could make one more rate move in 2023 before holding borrowing costs at a high level throughout 2024.The question now is whether policymakers will see the job market resilience as a welcome development — or a concerning one. The Fed’s next meeting is Oct. 31 to Nov. 1, so policymakers will not receive another employment report before they need to make their next rate decision.Fed officials had embraced a recent slowdown in hiring — and that trend now seems far less certain. But the September jobs report did contain some evidence that the economy is simmering down. The data showed that pay grew at only a modest pace in September, for instance.Given that, the strong job gains alone might not be enough to force the Fed to make another rate increase this year. Officials are likely to continue to watch other incoming data — including an inflation report set for release on Oct. 12 — as they contemplate whether borrowing costs need to rise further.Employment data “continues to say it’s a strong labor market, but it is getting a little bit less tight than we saw before,” Loretta J. Mester, the president of the Federal Reserve Bank of Cleveland, said during a CNN International interview on Friday afternoon. Given that wage growth continued to cool, she said the fresh report “doesn’t really change my view that we have a strong labor market and yet — and good — we also see inflation progress.”Economists noted that a few key developments could slow growth this autumn, which could also keep the Fed from reacting too sharply to the fresh hiring figures. Longer term interest rates in financial markets have climbed sharply in recent weeks, for example, and that will make it more expensive for consumers to finance a car or house purchase and for businesses to expand.“In isolation, economic data would probably justify the Fed hiking at the November meeting — what gives me pause for thought is the fact that long-term yields have increased significantly,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “They will have to weigh how much the recent rise in yields and tightening in financial conditions has done the job for them.”Ms. Mester had previously said that she was in favor of a rate move at the Fed’s upcoming meeting if economic data held up, but added a caveat to that expectation on Friday, in light of the market moves.She said she would make the rate decision “once I get in the room in November — at our next meeting — about whether that’s still true, because there’s other things happening in financial markets.”The jobs report initially made Wall Street wary that the Fed might raise interest rates further, something that would weigh on corporate profits and stock valuations. The S&P 500 slipped just after the report. But stocks rebounded throughout the day — suggesting that investors became less worried as they digested the data, and determined that it suggested economic resilience but not necessarily overheating.Some of that comfort could have come from the news on wages. Average hourly earnings were up 4.2 percent from a year earlier, the mildest increase since June 2021.Unemployment was also in line with what the Fed has been expecting. Officials have continued to predict that unemployment would probably rise slightly as the economy slowed, to about 4.1 percent, which would still be low by historical standards. The rate stood at 3.8 percent as of September, up slightly from 3.4 percent earlier this year.And although September hiring was strong, speed bumps lay ahead for the economy. The recent increase in mortgage rates and other borrowing costs is likely to squeeze growth just as the economy faces other challenges — including the resumption of student loan payments, strikes at car manufacturers and in other industries and dwindling consumer savings piles.“The auto union workers strike will weigh on job growth in October while easing consumer spending and more cautious business activity will lead to slower labor demand,” Gregory Daco, the chief economist at EY-Parthenon, wrote in a note following the report.If officials decide to leave interest rates unchanged at the upcoming meeting, they will have one final opportunity to adjust them this year when they meet on Dec. 12-13.Joe Rennison More

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    Here’s where the jobs are for September 2023 — in one chart

    The strongest sector for job growth in September was leisure and hospitality, according to the Bureau of Labor Statistics.
    Government hiring picked up in September with a net gain of 73,000 jobs.
    The job market has continued to defy expectations of a significant slowdown.

    The U.S. labor market saw broad gains in September in a surprisingly strong jobs report that sparked a quick sell-off in the bond market.
    The strongest sector for job growth in September was leisure and hospitality, according to the Bureau of Labor Statistics. The 96,000 net jobs gain last month was more than the combined total for August and July.

    Bars and restaurants were the strongest group within leisure and hospitality, adding 61,000 jobs.
    Government hiring also picked up in September with a net gain of 73,000 jobs. That is up sharply from the 6,000 jobs added in the same month a year ago.
    State government education accounted for 29,000 of those jobs this year.
    The job market has continued to defy expectations of a significant slowdown, and in fact, the numbers for August and July were revised upward. That could be a sign that more workers are joining the labor market, either through immigration or by coming off the sideline, said Jason Furman, Harvard professor and former National Economic Council director.
    “We’re creating jobs at a clip of nearly 300,000 a month over the last three months. That is way above what you need for the normal replacement rate, but we have seen a higher participation rate. So maybe what we’re seeing here is a labor supply, not labor demand,” Furman said on CNBC’s “Squawk Box.”

    “Some evidence for that is average hourly earnings. It isn’t just the low number this month. Over the last three months, they’ve risen at a 3.4% annual rate. If that continues, that is fully consistent with inflation in the mid-to-low 2s,” Furman added.
    One variable in the monthly jobs report is the labor disputes that are roiling several industries.
    The health-care subsector added 41,000 jobs, down from its 12-month average. The data for the BLS survey was collected in mid-September, so this number does not reflect the Kaiser Permanente strikes.
    On the other hand, the information sector’s job losses were due largely to shrinking employment in motion picture and sound recordings. The BLS said this was largely due to labor disputes, as productions are mostly halted with the Screen Actors Guild still on strike. More

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    Payrolls soared by 336,000 in September, defying expectations for a hiring slowdown

    Nonfarm payrolls increased by 336,000 for the month, better than the Dow Jones consensus estimate for 170,000.
    Average hourly earnings rose 0.2% for the month and 4.2% from a year ago, compared to respective estimates for 0.3% and 4.3%.
    The unemployment rate was 3.8%, compared to the forecast for 3.7%.
    Leisure and hospitality led job growth, followed by government and health care.

    Job growth was stronger than expected in September, a sign that the U.S. economy is hanging tough despite higher interest rates, labor strife and dysfunction in Washington.
    Nonfarm payrolls increased by 336,000 for the month, better than the Dow Jones consensus estimate for 170,000 and more than 100,000 higher than the previous month, the Labor Department said Friday in a much-anticipated report. The unemployment rate was 3.8%, compared to the forecast for 3.7%.

    Stock market futures turned sharply negative following the report and Treasury yields jumped. Dow futures were down more than 250 pints, while the 10-year Treasury yield soared 0.17 percentage point to 4.87%, up around its highest levels since the early days of the financial crisis.
    The payrolls increase was the best monthly number since January.
    “Slowdown? What slowdown? The U.S. labor market continues to exhibit amazing strength, with the number of new jobs created last month nearly twice as large as expected,” said George Mateyo, chief investment officer at Key Private Bank.
    Investors have been on edge lately that a resilient economy could force the Federal Reserve to keep interest rates high and perhaps even hike more as inflation remains elevated.
    Wage increases, however, were softer than expected, with average hourly earnings up 0.2% for the month and 4.2% from a year ago, compared to respective estimates for 0.3% and 4.3%.

    Still, traders in the fed funds futures market increased the odds of a rate increase before the end of the year to about 44%, according to the CME Group’s tracker.
    “Clearly it’s moving up expectations that the Fed is not done,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “All else equal, it probably moves the start point for rate cuts, which has been a moving target, to later in 2024.”
    Sonders said the bond market is “in the driver’s seat” as far as stocks go, a trend that accelerated earlier in the week after the Labor Department reported a jump in job openings for August.
    From a sector perspective, leisure and hospitality led with 96,000 new jobs. Other gainers included government (73,000), health care (41,000) and professional, scientific and technical services (29,000). Motion picture and sound recording jobs fell by 5,000 and are down 45,000 since May amid a labor impasse in Hollywood.
    Service-related industries contributed 234,000 to the total job growth, while goods-producing industries added just 29,000. Average hourly earnings in the leisure and hospitality industry were flat on the month, though up 4.7% from a year ago.
    The private sector payrolls gain of 263,000 was well ahead of a report earlier this week from ADP, which indicated an increase of just 89,000.
    In addition to the powerful September, the previous two months saw substantial upward revisions. August’s gain is now 227,000, up 40,000 from the prior estimate, while July went to 236,000, from 157,000. Combined, the two months were 119,000 higher than previously reported.
    The household survey, used to calculate the unemployment rate, was a bit lighter, rising 215,000.
    The labor force participation rate, or those working against the total size of the workforce, held steady at 62.8%, still a half percentage point below the pre-Covid pandemic level. The rate for those in the 25-to-54 age group also was unchanged at 83.5%. A more encompassing measure of unemployment that includes discouraged workers and those holding part-time positions for economic reasons edged down to 7%.
    The September report comes at a critical time for the markets and economy.
    Treasury yields have surged and stocks have slumped amid concern that a still-hot economy could keep Federal Reserve policy tight. The central bank has raised interest rates 5.25 percentage points since March 2022 in an attempt to curb inflation that is still running well ahead of the Fed’s 2% target.
    In recent days, multiple policymakers have said they are still concerned about inflation. They largely have cautioned that while another rate hike before the end of the year is an open question, rates are almost certain to stay at an elevated level for “some time.”
    Though market pricing puts little chance on the Fed hiking again, the higher-for-longer narrative has been causing angst for investors. Higher interest rates raise the cost of capital and run counter to the easy monetary policy that has underpinned Wall Street strength for much of the past 14 years.
    A strong job market is central to the rates equation.
    Policymakers feel that a tight labor picture will continue to put upward pressure on wages which then will push prices higher. Fed officials have said they don’t believe wages played a role in the initial inflation surge in 2021-22, but have become more of a factor lately. More

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    Inflation is ‘always going to be a risk’ with the U.S. economy now fundamentally changed, ADP chief economist says

    ADP’s monthly report on Wednesday showed that private payrolls rose by just 89,000 in September, well below a Dow Jones consensus estimate of 160,000 and down from an upwardly revised 180,000 in August.
    Though jobs reports have been traditionally viewed as a lagging indicator, Richardson noted that the relationship between the labor market and monetary policy has been overhauled in the course of the current cycle.

    A help wanted sign on a storefront in Ocean City, New Jersey, US, on Friday, Aug. 18, 2023. Surveys suggest that despite cooling inflation and jobs gains, Americans remain deeply skeptical of the president’s handling of the post-pandemic economy. Photographer: Al Drago/Bloomberg via Getty Images
    Al Drago | Bloomberg | Getty Images

    Inflation is “always going to be a risk” in the U.S. due to structural changes in the labor market, according to Nela Richardson, chief economist at payroll processing firm ADP.
    Last year, with inflation spiraling out of control across major economies in the aftermath of the Covid-19 pandemic, the U.S. Federal Reserve began a run of interest rates hikes that would take the Fed funds rate target range from 0.25-0.5% in March 2022 to a 22-year high of 5.25-5.5% in July 2023.

    Prior to that, interest rates had remained low for a decade as central banks around the world looked to stimulate their respective economies in the wake of the global financial crisis.
    Speaking to CNBC’s “Squawk Box Europe” on Friday, Richardson said the past 10 years of U.S. economic growth had been driven by low interest rates as policymakers focused on negating recession in the absence of inflationary pressures.
    “This was an economy built on very close to zero interest rates for 10 years of economic expansion, and that was OK because inflation was super low,” she said.

    “But now inflation has awakened, and if you look at demographic trends, labor shortages are not going away. It’s getting better but that’s a structural change in the labor market because of the aging of the U.S. population, so what that means is inflation is always going to be a risk, it’s going to prop up, and so going back to zero or near rock bottom interest rates is going to be difficult to support the economy.”
    Richardson added that the “training wheels have come off” the U.S. economy and that both businesses and consumers are now having to “ride a regular bike.”

    Despite fears of a recession on the back of the Fed’s extraordinary run of monetary policy tightening, the U.S. economy has remained surprisingly robust. The rate-setting Federal Open Market Committee paused its hiking cycle in September and sharply increased its economic growth projections, now forecasting 2.1% growth in GDP this year.
    Meanwhile, inflation is coming back toward the Fed’s 2% target and the labor market tightness that some economists feared was adding to inflationary pressures has shown signs of abating, though unemployment still remains relatively low by historic comparisons.
    ADP’s monthly report on Wednesday showed that private payrolls rose by just 89,000 in September, well below a Dow Jones consensus estimate of 160,000 and down from an upwardly revised 180,000 in August.

    This offered a contrasting signal to a Labor Department report earlier in the week in which job openings posted a surprising jump in August, rising to their highest level since the spring and reversing a recent trend of declines.
    Markets, and Fed policymakers, then turned their attention Friday’s nonfarm payrolls report for further indications as to the health of the U.S. labor market.
    Nonfarm payrolls increased by 336,000 for the month, vastly exceeding a Dow Jones consensus estimate of 170,000 jobs added. The unemployment rate was 3.8%, slightly above the 3.7% consensus estimate.
    Richard Flynn, managing director at Charles Schwab UK, said investors would interpret the jobs report as a sign that there is a “healthy level of demand in the labour market.”
    “Job growth has been a key driver of economic resilience recently, balancing out weaknesses in areas such as housing and consumer goods,” he said in an email Friday.
    “The strong figures released today should help to keep fears of recession at bay and offer optimism for economic sectors that are likely on their way to stability.”
    Though jobs reports have been traditionally viewed as a lagging indicator, ADP’s Richardson noted that the relationship between the labor market and monetary policy has been overhauled in the course of the current cycle.
    “I think there is a feedback loop that is underappreciated. People say the labor market or a good jobs picture is lagging, but the jobs picture is actually feeding current Federal Reserve policy, so it’s not just going in just one direction, there’s a feedback loop in between and these effects can amplify,” she explained.
    “A simple relationship no longer exists. We are in a complex period of the global economy, not just the U.S., and the actions taken by the Fed affect the labor market but vice versa. So we can’t just say ‘oh this is lagging, six to nine months of Fed policy is going to show up in the labor market’ — the labor market is driving Fed policy now.” More

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    Why the Jobs Report Might be Pivotal for a Jittery Stock Market

    Stocks are sliding, government bond yields are soaring, and investors are reacting strongly to incremental economic information, parsing it for even the slightest hints about the path ahead. .Such sensitivity among investors has left markets jittery — veering between fears that the economy is running too hot and worries about a downturn so sharp that the country tumbles into recession.The squeamishness is most apparent in the $25 trillion market for U.S. Treasuries, where yields on government bonds have risen to highs not seen since 2007. Though the jump in bond yields in part reflects bets on a strong economy, the moves have fanned out into the stock market, too. For stock investors, higher yields are generally a negative — and the S&P 500 index is on track for its fifth consecutive weekly decline.After the government reported on Friday that employers added 336,000 jobs in September, sharply higher than economists had expected, stock futures, which allow investors to bet on the market before the official start of trading, dropped and government bond yields rose near a 16-year high.It’s all about interest rates.There are many different interest rates that matter. There is the rate that the Federal Reserve sets, which is a target for overnight borrowing costs. There are consumer and corporate borrowing rates, like those on credit cards or mortgages. And then there are government debt yields, which partly track the Fed’s policy rate but stretch out over much longer periods and factor in other information such as inflation and economic growth.Arguably the most important of these rates is the yield on the 10-year Treasury bond, a measure of what it would cost the U.S. government to borrow money from investors for 10 years, but also a crucial input to virtually every other long-term interest rate in the world, making it a cornerstone of the global financial system.It also influences how companies are valued and, therefore, it holds sway over the stock market. Higher treasury yields indicate higher costs for consumers and businesses, which typically weigh on the market.This week, the yield on the 10-year Treasury bond rose above 4.80 percent, its highest level since 2007, from 4.57 percent at the end of last week. After coming off that high point in the days before the jobs data was released, the yield quickly snapped back above 4.8 percent after the report on Friday. S&P 500 futures pointed to another decline, adding to a 1.6 percent loss for the week. The S&P 500 is down about 7 percent in the more than two months that the yield has been rising.Rates have been rising for a while. What’s so scary now?The Fed has been raising interest rates for roughly 18 months, but the yield on 10-year Treasuries had remained fairly steady for the first half of 2023, oscillating in a range of 3.5 to 4 percent.Over that period, the S&P 500 rallied nearly 20 percent, buoyed by better-than-expected corporate profits, slowing inflation, a resilient economy and greater consensus about the end of the Fed’s rate-raising cycle.But persistently strong economic data has led to higher expectations for growth, while concerns that inflation could remain stubbornly too high have raised expectations that the Fed may have to keep rates elevated for longer than previously thought to finish the job of taming prices. As a result, in early August, the yield on the 10-year bond began a swift ascent.That move has upended some of the market’s long-held assumptions. After a period of relative stability, investors are re-evaluating what higher rates could mean for consumers and companies, catalyzing a sell-off in the stock market. The S&P 500 slumped nearly 5 percent in September, its worst month of the year so far.Add in a sharply appreciating dollar — also tied to rising interest rates — and wild swings in the cost of oil, and the outlook for the economy has become more uncertain.“All these things thrown into a blender — the uncertainty and the speed of how things are moving — is what has kept the market uneasy,” said George Goncalves, head of U.S. macro strategy at MUFG Securities.Is congressional turmoil a factor?The recent brush with a government shutdown and the removal of Kevin McCarthy as House speaker on Tuesday did not rattle markets on their own, but it did highlight the government’s instability, a few months after narrowly averting a potentially devastating debt default.Rising interest rates have compounded concerns about the government’s finances, with the prospect of high rates focusing attention on the rising costs of servicing the United States’ mammoth debt pile and persistent budget deficits.At the moment, unemployment is low and the economy is performing better than many expected. Should growth slow, the fiscal challenge facing Washington will intensify, said Ajay Rajadhyaksha, global chairman of research at Barclays.And assuming no cuts in spending and that rates remain elevated, Mr. Goncalves said, higher deficits could beget higher yields, which in turn could push deficits higher. More

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    Rates Are Jumping on Wall Street. What Will It Do to Housing and the Economy?

    A run-up in longer-term interest rates could help the Federal Reserve get the economic cool-down it wants — but it also risks a bumpy landing.Heather Mahmood-Corley, a real estate agent, was seeing decent demand for houses in the Phoenix area just a few weeks ago, with interested shoppers and multiple offers. But as mortgage rates pick up again, she is already watching would-be home buyers retrench.“You’ve got a lot of people on edge,” said Ms. Mahmood-Corley, a Redfin agent who has been selling houses for more than eight years, including more than five in the area.It’s an early sign of the economic fallout from a sharp rise in interest rates that has taken place in markets since the middle of the summer, when many home buyers and Wall Street traders thought that borrowing costs, which had risen rapidly, might be at or near their peak.Rates on longer-term government Treasury bonds have been climbing sharply, partly because investors are coming around to the belief that the Federal Reserve may keep its policy rate higher for longer. That adjustment is playing out in sophisticated financial markets, but the fallout could also spread throughout the economy.Higher interest rates make it more expensive to finance a car purchase, expand a business or borrow for a home. They have already prompted pain in the heavily indebted technology industry, and have sent jitters through commercial real estate markets.The increasing pressure is partly a sign that Fed policy is working: Officials have been lifting borrowing costs since March 2022 precisely because they want to slow the economy and curb inflation by discouraging borrowing and spending. Their policy adjustments sometimes take a while to push up borrowing costs for consumers and businesses — but are now clearly passing through.New homes for sale in Mesa, Ariz. Mortgage rates are flirting with 8 percent, up from less than 3 percent in 2021.Caitlin O’Hara for The New York TimesYet there is a threat that as rates ratchet higher across key parts of financial markets, they could accidentally wallop the economy instead of cooling it gently. So far, growth has been resilient to much higher borrowing costs: Consumers have continued to spend, the housing market has slowed without tanking, and businesses have kept investing. The risk is that rates will reach a tipping point where either a big chunk of that activity grinds to a halt or something breaks in financial markets.“At this point, the amount of increase in Treasury yields and the tightening itself is not enough to derail the economic expansion,” said Daleep Singh, chief global economist at PGIM Fixed Income. But he noted that higher bond yields — especially if they last — always bring a risk of financial instability.“You never know exactly what the threshold is at which you trigger these financial stability episodes,” he said.While the Fed has been raising the short-term interest rate it controls for some time, longer-dated interest rates — the sort that underpin borrowing costs paid by consumers and companies — have been slower to react. But at the start of August, the yield on the 10-year Treasury bond began a relentless march higher to levels last seen in 2007.The recent move is most likely the culmination of a number of factors: Growth has been surprisingly resilient, which has led investors to mark up their expectations for how long the Fed will keep rates high. Some strategists say the move reflects growing concerns about the sustainability of the national debt.“It’s everything under the sun, but also no single factor,” said Gennadiy Goldberg, head of interest rate strategy at TD Securities. “But it’s higher for longer that has everyone nervous.”Whatever the causes, the jump is likely to have consequences.Higher rates have already spurred some financial turmoil this year. Silicon Valley Bank and several other regional lenders imploded after they failed to protect their balance sheets against higher borrowing costs, causing customers to pull their money.Policymakers have continued to watch banks for signs of stress, especially tied to the commercial real estate market. Many regional lenders have exposure to offices, hotels and other commercial borrowers, and as rates rise, so do the costs to finance and maintain the properties and, in turn, how much they must earn to turn a profit. Higher rates make such properties less valuable.The yield on the 10-year Treasury bond in August began a relentless march higher to levels last seen in 2007.Hiroko Masuike/The New York Times“It does add to concerns around commercial real estate as the 10-year Treasury yield rises,” said Jill Cetina, an associate managing director at Moody’s Investors Service.Even if the move up in rates does not cause a bank or market blowup, it could cool demand. Higher rates could make it more expensive for everyone — home buyers, businesses, cities — to borrow money for purchases and expansions. Many companies have yet to refinance debt taken out when interest rates were much lower, meaning the impact of these higher interest rates is yet to fully be felt.“That 10-year Treasury, it’s a global borrowing benchmark,” said Greg McBride, chief financial analyst for Bankrate.com. “It’s relevant to U.S. homeowners, to be sure, but it’s also relevant to corporations, municipalities and other governments that look to borrow in the capital markets.”For the Fed, the shift in long-term rates could suggest that its policy setting is closer to — or even potentially at — a level high enough to ensure that the economy will slow further.Officials have raised rates to a range of 5 to 5.25 percent, and have signaled that they could approve one more quarter-point increase this year. But markets see less than a one-in-three chance that they will follow through with that final adjustment.Mary Daly, president of the Federal Reserve Bank of San Francisco, said markets were doing some of the Fed’s work for it: On Thursday, she said the recent move in longer-term rates was equivalent to “about” one additional interest rate increase from the Fed.Yet there are questions about whether the pop in rates will last. Some analysts suggest there could be more room to rise, because investors have yet to fully embrace the Fed’s own forecasts for how long they think rates will remain elevated. Others are less sure.“I think we’re near the end of this tantrum,” Mr. Singh said, noting that the jump in Treasury yields will worsen the growth outlook, causing the Fed itself to shift away from higher rates.“One of the reasons that I think this move has overshot is that it’s self-limiting,” he said.Plenty of people in the real economy are hoping that borrowing costs stabilize soon. That includes in the housing market, where mortgage rates are newly flirting with an 8 percent level, up from less than 3 percent in 2021.In Arizona, Ms. Mahmood-Corley is seeing some buyers push for two-year agreements that make their early mortgage payments more manageable — betting that after that, rates will be lower and they can refinance. Others are lingering on the sidelines, hoping that borrowing costs will ease.“People take forever now to make a decision,” she said. “They’re holding back.”” More

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    How strikes are (and aren’t) reflected in the jobs report.

    Three of the country’s major automakers are facing an expanding strike that started on Sept. 15. Hollywood producers and screenwriters reached a contract agreement late last month to end a 148-day walkout, but striking actors are still locked in negotiations.How all that is reflected in government employment data is complicated.The government counts workers who go on strike as “employed but not at work.” That means the strikers should not have a direct effect on the unemployment rate. But the impact of the strikes could be seen in the monthly jobs report’s separate count of payroll jobs. And the walkouts can cause what analysts describe as collateral damage.For example, companies that provide services to film crews may be idled, and automakers’ suppliers could see a decline in orders, prompting layoffs.The jobs data counts anyone who was paid during the survey’s reference week — in this case, the week of Sept. 10 — as being at work. But if the auto dispute is not resolved by mid-October, the impact could begin to show up in the next jobs report. More

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    Higher Rates Stoke a Growing Chorus of Deficit Concerns

    A long period of higher interest rates would make the government’s large debt pile costly, a possibility that is fueling a conversation about debt sustainability.The U.S. government’s persistent budget deficit and growing debts were low on Wall Street’s list of worries when interest rates were at rock bottom for years. But borrowing costs have risen so sharply that it is causing many investors and economists to fret that the United States’ big debt pile could prove less sustainable.Federal Reserve officials have raised interest rates to about 5.3 percent since early 2022 in a bid to control inflation. Officials predicted at their meeting last month that interest rates could remain high for years to come, shaking expectations among investors who had bet on rates falling notably as soon as next year.The realization that the Fed could keep borrowing costs high for a long time has combined with a cocktail of other factors to send long-term interest rates soaring in financial markets. The rate on 10-year Treasury bonds has been climbing since July, and reached a nearly two-decade high this week. That matters because the 10-year Treasury is like the market’s backbone: It helps drive many other borrowing costs, from mortgages to corporate debt.The exact cause of the latest run-up in Treasury rates is hard to pinpoint. Many economists say a combination of drivers is probably helping to drive the pop — including strong growth, fewer foreign buyers of America’s debt, and concerns about debt sustainability in and of itself.What’s clear is that if rates remain elevated, the federal government will need to pay investors more interest in order to fund its borrowing. America’s gross national debt stands just above $33 trillion, more than the total annual output of the American economy. The debt is projected to keep growing both in dollar figures and as a share of the economy.While the climbing cost of holding so much debt is stoking conversations among economists and investors about the appropriate size of the government’s annual borrowing, there is no consensus in Washington for deficit reduction in the form of either higher taxes or big spending cuts.Still, the renewed concern is a stark reversal after years in which mainstream economists increasingly thought that the United States might have been too timid when it came to its debt: Years of low interest rates had convinced many that the government could borrow cheap money to pay for relief in times of economic trouble and investments in the future.The deficit as a share of the economy rose this year under President Biden even though the economy was growing.Pete Marovich for The New York Times“How big of a problem deficits are depends — and it depends very critically on interest rates,” said Jason Furman, an economist at Harvard and former economic official under the Obama administration. “That’s changed a lot,” so “your view on the deficit should change as well.”Mr. Furman had previously estimated that the growing cost of interest on federal debt would remain sustainable for some time, after factoring in inflation and economic growth. But now that rates have climbed so much, the calculus has shifted, he said.Since 2000, the United States has run an annual budget deficit, meaning it spends more than it receives in taxes and other revenue. It has made up the gap by borrowing money.Tax cuts, spending increases and emergency economic assistance approved by both Democratic and Republican presidents has helped fuel the rising deficits in recent years. So has the aging of America’s population, which has driven up the costs of Social Security and Medicare without corresponding increases in federal tax rates. The deficit as a share of the economy rose this year under President Biden even though the economy was growing, just as it did in the prepandemic years under President Donald J. Trump.Now, borrowing costs are poised to add to the gap.Higher interest rates are a leading cause, along with surprisingly weak tax collections, of what the Congressional Budget Office projects will be a doubling of the federal budget deficit over the last year. The deficit, when properly measured, grew from $1 trillion in the 2022 fiscal year to an estimated $2 trillion in the 2023 fiscal year, which ended last month.If borrowing costs climb further — or simply remain where they are for an extended period — the government will accumulate debt at a much faster rate than officials expected even a few months ago. A budget update released by Biden administration economists in July predicted annual average interest rates on 10-year Treasury bonds would not exceed 3.7 percent at any time over the next decade. Those rates are now hovering around 4.7 percent.That recent surge in longer-term bond yields ties back to a number of factors.While the Federal Reserve has been raising short-term interest rates for roughly 18 months, rates on longer-term bonds had remained fairly stable over the first half of this year. But investors have been slowly coming around to the possibility that the Fed will leave interest rates higher for longer — partly because growth has remained solid even in the face of elevated borrowing costs.At the same time, there have been fewer buyers for government bonds. The Fed has been shrinking its balance sheet of bonds as it reverses a pandemic-era stimulus policy, which means that it is no longer buying Treasuries — taking away a source of demand. And key foreign governments have also pulled back from bond purchases.“We’ve whittled down to a smaller universe of buyers,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI.Some analysts have suggested that the pickup in bond yields could also tie back to concerns about debt sustainability. To pay higher interest costs, the government may need to issue even more debt, compounding the problem — and focusing attention on America’s mammoth debt pile, said Ajay Rajadhyaksha, global chairman of research at Barclays.“The problem is not just that number,” he said, referencing the increasing deficit. “The problem is that this economy is as good as it gets.”The economy has remained strong even though the Federal Reserve has raised borrowing costs. That has many expecting the Fed to leave rates higher for longer.Jim Wilson/The New York TimesThat, several economists have said, is the core of the issue: America is borrowing a lot even at a time when the unemployment rate is very low and growth is strong, so the economy does not need a lot of government help.“Right now we have an incredible amount of issuance at the same time as the Fed is messaging higher for longer,” said Robert Tipp, chief investment strategist at PGIM Fixed Income, noting that typically higher issuance comes in periods of turmoil when central bank policy is more accommodative. “This is like a wartime budget deficit but without any help from the central bank. That is why this is so different.”White House officials say it is too early to know whether rising bond yields should spur Mr. Biden to add new deficit-reduction proposals to the $2.5 trillion in plans he included in this year’s budget. Those proposals consist largely of tax increases on corporations and high earners.“We might be having a different discussion about this a month from now,” said Jared Bernstein, the chair of the White House Council of Economic Advisers. “And when you’re writing budgets, you don’t go back and change your path lightly.”The Treasury Department has sold close to $16 trillion of debt for the year through September, up roughly 25 percent from the same period last year, according to data from the Securities Industry and Financial Markets Association. Much of that issuance replaced existing debt that was coming due, leaving a net debt issuance of around $1.7 trillion, more than at any other point over the past decade except for the pandemic-induced bond binge in 2020. The Treasury’s own advisory committee forecasts the size of government debt sales to rise another 23 percent in 2024.Maya MacGuineas, the president of the bipartisan Committee for a Responsible Federal Budget and a longtime proponent of reducing deficits, said it was hard to tell what had caused rates to climb recently. Still, she said, the move serves as a “reminder.”“From a fiscal perspective, the story is very simple: If you borrow too much, you become increasingly vulnerable to higher interest rates,” she said.Santul Nerkar More