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    Key Fed inflation rate falls to lowest annual rate in nearly 2 years

    An inflation gauge that the Fed follows closely rose 4.1% from a year ago, the lowest annual increase since September 2021.
    So-called core PCE increased 0.2% on the month, as goods prices fell while services costs rose.
    Consumers continued to spend, with expenditures up 0.5% on the month, while income increased a bit slower than expected.
    The employment cost index, another key Fed gauge, rose 1% during the second quarter, slightly less than expected.

    Inflation showed further signs of cooling in June, according to a gauge released Friday that the Federal Reserve follows closely.
    The personal consumption expenditures price index excluding food and energy increased just 0.2% from the previous month, in line with the Dow Jones estimate, the Commerce Department said.

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    So-called core PCE rose 4.1% from a year ago, compared with the estimate for 4.2%. The annual rate was the lowest since September 2021 and marked a decrease from the 4.6% pace in May.
    Headline PCE inflation including food and energy costs also increased 0.2% on the month and rose 3% on an annual basis. The yearly rate was the lowest since March 2021 and moved down from 3.8% in May.
    Goods prices actually decreased 0.1% for the month while services rose 0.3%. Food prices also fell 0.1%, while energy increased 0.6%.
    Markets reacted positively to the report, with stock market futures pointing higher and Treasury yields headed lower.
    “Today’s economic releases reaffirm the current market narrative that inflation is cooling and economic growth is continuing, which is a favorable environment for risk assets,” said George Mateyo, chief investment officer at Key Private Bank. “The Fed and investors will take comfort in these numbers as they suggest that the inflation threat is dissipating and thus the Fed may now be able to go on vacation and assume an extended pause with respect to future interest rate increases.”

    The data reinforces other recent releases showing that, at least compared with the soaring inflation from a year ago, prices have begun to ease. Readings such as the consumer price index are showing a slower rise in inflation, while consumer expectations also are also coming back in line with longer-term trends.
    Fed officials follow the PCE index closely as it adjusts for changing behavior from consumers and provides a different look at price trends than the more widely cited CPI.
    Along with the inflation data, the Commerce Department said personal income rose 0.3% while spending increased 0.5%. Income came in slightly below expectations, while spending was in line.
    The report comes just two days after the Fed announced a quarter percentage point interest rate increase, its 11th hike since March 2022 and the first since skipping the June meeting. That took the central bank’s key borrowing rate to a target range of 5.25%-5.5%, its highest level in more than 22 years.
    Following the hike, Fed Chairman Jerome Powell stressed that future decisions on rate moves would be based on incoming data rather than a preset course on policy. Central bank officials generally believe that inflation is still too high despite the recent positive trends and want to see multiple months of solid data before changing direction.
    A separate indicator that the Fed follows closely showed that compensation costs increased a seasonally adjusted 1% on an annual basis during the second quarter. That reading for the employment cost index was slightly below the 1.1% estimate. More

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    The Bank of Japan just shocked markets with a policy tweak — here’s why it matters

    “We didn’t expect this kind of tweak this time,” Shigeto Nagai, head of Japan economics at Oxford Economics, told CNBC’s Capital Connection.
    The Bank of Japan has been dovish for years, but its latest move has left markets wondering whether a change is on the horizon.
    Speaking at a press conference following the announcement, BoJ Governor Kazuo Ueda played down the change in policy stance — but that didn’t stop markets from reacting.

    Kazuo Ueda, governor of the Bank of Japan (BOJ).
    Bloomberg | Bloomberg | Getty Images

    The Bank of Japan announced Friday “greater flexibility” in its monetary policy — surprising global financial markets.
    The central bank loosened its yield curve control — or YCC — in an unexpected move with wide-ranging ramifications. It sent the yen whipsawing against the dollar, while Japanese stocks and government bond prices slid.

    Elsewhere, the Stoxx 600 in Europe opened lower and government bond yields in the region jumped. On Thursday, ahead of the Bank of Japan statement, reports that the central bank was going to discuss its yield curve control policy also contributed to a lower close on the S&P 500 and the Nasdaq, according to some strategists.
    “We didn’t expect this kind of tweak this time,” Shigeto Nagai, head of Japan economics at Oxford Economics, told CNBC’s “Capital Connection.”

    Why it matters

    The Bank of Japan has been dovish for years, but its move to introduce flexibility into its until-now strict yield curve control has left economists wondering whether a more substantial change is on the horizon.
    The yield curve control is a long-term policy that sees the central bank target an interest rate, and then buy and sell bonds as necessary to achieve that target. It currently targets a 0% yield on the 10-year government bond with the aim of stimulating the Japanese economy, which has struggled for many years with disinflation.
    In its policy statement, the BOJ said it will continue to allow 10-year Japanese government bond yields to fluctuate within the range of 0.5 percentage point either side of its 0% target — but it will offer to purchase 10-year JGBs at 1% through fixed-rate operations. This effectively expands its tolerance by a further 50 basis points.

    “While maintaining the tolerance band for the 10-year JGB yield target at +/-0.50ppt, the BoJ will allow more fluctuation in yields beyond the band,” economists from Capital Economics said.
    “Their aim is to enhance the sustainability of the current easing framework in a forward-looking manner. Highlighting ‘extremely high uncertainties’ in the inflation outlook, the BoJ argues that strictly capping yields will hamper bond market functioning and increase market volatility when upside risks materialize.”

    Next step tightening?

    From a market perspective, investors — many of whom were not expecting this move — were left wondering whether this is a mere technical adjustment, or the start of a more significant tightening cycle. Central banks tighten monetary policy when inflation is high, as demonstrated by the U.S. Federal Reserve’s and European Central Bank’s rate hikes over the past year.
    “Fighting inflation was not the official reason for the policy tweak, as that would surely imply stronger tightening moves, but the Bank recognised obstinately elevated inflationary pressure by revising up its forecast,” Duncan Wrigley, chief China+ economist at Pantheon Macroeconomics, said in a note.
    The BOJ said core consumer inflation, excluding fresh food, will reach 2.5% in the fiscal year to March, up from a previous estimate of 1.8%. It added that there are upside risks to the forecast, meaning inflation could increase more than expected.
    Speaking at a news conference after the announcement, BOJ Governor Kazuo Ueda played down the move to loosen its yield curve control. When asked if the central bank had shifted from dovish to neutral, he said: “That’s not the case. By making YCC more flexible, we enhanced the sustainability of our policy. So, this was a step to heighten the chance of sustainably achieving our price target,” according to a Reuters translation.
    MUFG said that Friday’s “flexibility” tweak shows the central bank is not yet ready to end this policy measure.
    “Governor Ueda described today’s move as enhancing the sustainability of monetary easing rather than tightening. It sends a signal that the BoJ is not yet ready to tighten monetary policy through raising interest rates,” the bank’s analysts said in a note.
    Capital Economics’ economists highlighted the importance of inflation figures looking ahead. “The longer inflation stays above target, the larger the chances that the Bank of Japan will have to follow up today’s tweak to Yield Curve Control with a genuine tightening of monetary policy,” they wrote.
    But the timing here is crucial, according to Michael Metcalfe of State Street Global Markets.
    “If inflation has indeed returned to Japan, which we believe it has, the BoJ will find itself needing to raise rates just as hopes for interest rate cuts rise elsewhere. This should be a medium-term positive for the JPY [Japanese yen], which remains deeply undervalued,” Metcalfe said in a note.

    The end of YCC?

    The effectiveness of the BOJ’s yield curve control has been questioned, with some experts arguing that it distorts the natural functioning of the markets.
    “Yield curve control is a dangerous policy which needs to be retired as soon as possible,” Kit Juckes, strategist at Societe Generale, said Friday in a note to clients.
    “And by anchoring JGB (Japanese government bond) yields at a time when other major central banks have been raising rates, it has been a major factor in the yen reaching its lowest level, in real terms, since the 1970s. So, the BoJ wants to very carefully dismantle YCC, and the yen will rally as slowly as they do so.”
    Pantheon Macroeconomics’ Wrigley agreed that the central bank is looking to move away from YCC, describing Friday’s move as “opportunistic.”
    “Markets have been relatively calm and the Bank seized the opportunity to catch most investors by surprise, given the consensus for no policy change at today’s meeting,” he wrote.
    “The markets are likely to test the BoJ’s resolve, as it probably will seek to engineer a gradual shift away from its [yield curve control] policy over the next year or so, while leaving the short-term rate target unchanged, as it still believes that Japan needs supportive monetary policy.”  
    — CNBC’s Clement Tan contributed to this report. More

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    Soft Landing Optimism Is Everywhere. That’s Happened Before.

    People are often sure that the economy is going to settle down gently right before it plunges into recession, a reason for caution and humility.In late 1989, an economic commentary newsletter from the Federal Reserve Bank of Cleveland asked the question that was on everyone’s mind after a series of Federal Reserve rate increases: “How Soft a Landing?” Analysts were pretty sure growth was going to cool gently and without a painful downturn — the question was how gently.In late 2000, a column in The New York Times was titled “Making a Soft Landing Even Softer.” And in late 2007, forecasters at the Federal Reserve Bank of Dallas concluded that the United States should manage to make it through the subprime mortgage crisis without a downturn.Within weeks or months of all three declarations, the economy had plunged into recession. Unemployment shot up. Businesses closed. Growth contracted.It is a point of historical caution that is relevant today, when soft-landing optimism is, again, surging.Inflation has begun to cool meaningfully, but unemployment remains historically low at 3.6 percent and hiring has been robust. Consumers continue to spend at a solid pace and are helping to boost overall growth, based on strong gross domestic product data released on Thursday.Given all that momentum, Fed staff economists in Washington, who had been predicting a mild recession late this year, no longer expect one, said Jerome H. Powell, the central bank’s chair, during a news conference on Wednesday. Mr. Powell said that while he was not yet ready to use the term “optimism,” he saw a possible pathway to a relatively painless slowdown.But it can be difficult to tell in real time whether the economy is smoothly decelerating or whether it is creeping toward the edge of a cliff — one reason that officials like Mr. Powell are being careful not to declare victory. On Wednesday, policymakers lifted rates to a range of 5.25 to 5.5 percent, the highest level in 22 years and up sharply from near zero as recently as early 2022. Those rate moves are trickling through the economy, making it more expensive to buy cars and houses on borrowed money and making it pricier for businesses to take out loans.Such lags and uncertainties mean that while data today are unquestionably looking sunnier, risks still cloud the outlook.“The prevailing consensus right before things went downhill in 2007, 2000 and 1990 was for a soft landing,” said Gennadiy Goldberg, a rates strategist at TD Securities. “Markets have trouble seeing exactly where the cracks are.”The term “soft landing” first made its way into the economic lexicon in the early 1970s, when America was fresh from a successful moon landing in 1969. Setting a spaceship gently on the lunar surface had been difficult, and yet it had touched down.By the late 1980s, the term was in widespread use as an expression of hope for the economy. Fed policymakers had raised rates to towering heights to crush double-digit inflation in the early 1980s, costing millions of workers their jobs. America was hoping that a policy tightening from 1988 to 1989 would not have the same effect.The recession that stretched from mid-1990 to early 1991 was much shorter and less painful than the one that had plagued the nation less than a decade earlier — but it was still a downturn. Unemployment began to creep up in July 1990 and peaked at 7.8 percent.The 2000s recession was also relatively mild, but the 2008 downturn was not: It plunged America into the deepest and most painful downturn since the Great Depression. In that instance, higher interest rates had helped to prick a housing bubble — the deflation of which set off a chain reaction of financial explosions that blew through global financial markets. Unemployment jumped to 10 percent and did not fall back to its pre-crisis low for roughly a decade.Higher Rates Often Precede RecessionsUnemployment often jumps after big moves in the Fed’s policy interest rate

    Note: Data is as of June 2023.Sources: Bureau of Labor Statistics; Business Cycle Dating Committee; Federal ReserveBy The New York TimesThe episodes all illustrate a central point. It is hard to predict what might happen with the economy when rates have risen substantially.Interest rates are like a slow-release medicine given to a patient who may or may not have an allergy. They take time to have their full effect, and they can have some really nasty and unpredictable side effects if they end up prompting a wave of bankruptcies or defaults that sets off a financial crisis.In fact, that is why the Fed is keeping its options open when it comes to future policy. Mr. Powell was clear on Wednesday that central bankers did not want to commit to how much, when or even whether they would raise rates again. They want to watch the data and see if they need to do more to cool the economy and ensure that inflation is coming under control, or whether they can afford to hold off on further interest rate increases.“We don’t know what the next shoe to drop is,” said Subadra Rajappa, head of U.S. rates strategy at the French bank Société Générale, explaining that she thought Mr. Powell took a cautious tone while talking about the future of the economy on Wednesday in light of looming risks — credit has been getting harder to come by, and that could still hit the brakes on the economy.“It looks like we’re headed toward a soft landing, but we don’t know the unknowns,” Ms. Rajappa said.That is not to say there isn’t good reason for hope, of course. Growth does look resilient, and there is some historical precedent for comfortable cool-downs.In 1994 and 1995, the Fed managed to slow the economy gently without plunging it into a downturn in what is perhaps its most famous successful soft landing. Ironically, commentators quoted then in The Times weren’t convinced that policymakers were going to pull it off.And the historical record may not be particularly instructive in 2023, said Michael Feroli, the chief U.S. economist at J.P. Morgan. This has not been a typical business cycle, in which the economy grew headily, fell into recession and then clawed its way back.Instead, growth was abruptly halted by coronavirus shutdowns and then rocketed back with the help of widespread government stimulus, leading to shortages, bottlenecks and unusually strong demand in unexpected parts of the economy. All of the weirdness contributed to inflation, and the slow return to normal is now helping it fade.That could make the Fed’s task — slowing inflation without causing a contraction — different this time.“There’s so much that has been unusual about this inflation episode,” Mr. Feroli said. “Just as we don’t want to overlearn the lessons of this episode, I don’t think we should over-apply the lessons of the past.” More

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    Turkey’s central bank says inflation is set to hit 58% — more than double its previous estimate

    Turkey’s central bank expects inflation to hit 58% by the end of 2023, its new governor Hafize Gaye Erkan said in her debut news conference Thursday.
    Erkan said exchange rate developments, changes to economic policy, stronger-than-expected domestic demand, and a new forecasting approach had all contributed to the higher forecast.
    Appointed to the central bank on June 9, analysts suggested Erkan’s arrival — along with a new Turkish finance minister — could signal a pivot in monetary policy

    Turkish Central Bank Governor Hafize Gaye Erkan answers questions during a news conference for the Inflation Report 2023-III in Ankara, Turkey on July 27, 2023.
    Anadolu Agency | Anadolu Agency | Getty Images

    Turkey’s central bank expects inflation to hit 58% by the end of 2023, its new governor Hafize Gaye Erkan said in her debut news conference Thursday, as she committed to “restore anchoring of expectations as well as predictability.”
    The new forecast is more than double the 22.3% outlined in the central bank’s last inflation report three months ago.

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    Erkan said exchange rate developments, changes to economic policy, stronger-than-expected domestic demand, and a new forecasting approach had all contributed to the higher forecast.
    Appointed to the central bank on June 9, analysts suggested Erkan’s arrival — along with a new Turkish finance minister — could signal a pivot in monetary policy following years of low borrowing costs and soaring inflation.
    This expectation was met later in the month, when the central bank almost doubled its key interest rate from 8.5% to 15%, its first hike since March 2021. This was followed by a 250 basis point hike in July, although this was lower than expectated.
    While rising prices have plagued many economies around the world, inflation has hit eye-watering levels in Turkey of up to 85%. Inflation in June came in at 38.2% on an annual basis, and 3.9% month-on-month.
    In her press conference Thursday, Erkan said food inflation is expected to top 60% at the end of the year.

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    The central bank also revised its forecast for the end of 2024 to 33%, and its forecast for the end of the following year to 15%.
    “Through decisions on quantitative tightening, we will ensure a stable development in the Turkish lira liquidity without generating excessiveness in exchange rates and domestic demand,” Erkan said.
    “We will dynamically optimize the monetary tightening process by continuously measuring the effects of our decisions on inflation, markets, monetary and financial conditions.”
    The Turkish lira has marked numerous new record lows over the past 18 months, as traders digested lower rates in the country despite most other major central banks embarking on monetary tightening programs. More

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    European Central Bank raises rates by a quarter percentage point, says inflation set to remain ‘too high for too long’

    “Inflation continues to decline but is still expected to remain too high for too long,” the ECB said Thursday in a statement.
    The central bank did not share any forward guidance about upcoming moves.
    ECB President Christine Lagarde will outline the decision at 14:45 Frankfurt time.

    The European Central Bank announced a new rate decision Thursday.
    Daniel Roland | AFP | Getty Images

    The European Central Bank on Thursday announced a new rate increase of a quarter percentage point, bringing its main rate to 3.75%.
    The latest move completes a full year of consecutive rate hikes in the euro zone, after the ECB embarked on its journey to tackle high inflation last July.

    “Inflation continues to decline but is still expected to remain too high for too long,” the ECB said Thursday in a statement.
    A headline inflation reading showed the rate coming down to 5.5% in June from 6.1% in May — still far above the ECB’s target of 2%. Fresh inflation data out of the euro zone is due out next week.

    What next?

    While market players had expected the 25 basis point hike, a lot of anticipation remains about the ECB’s post-summer approach. Inflation has eased, but questions linger about whether monetary policy is pushing the region into an economic recession.
    The central bank did not share any forward guidance about upcoming moves.
    “The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction,” it said.

    Speaking at a press conference, European Central Bank President Christine Lagarde said, “Our assessment of data will tell us whether and how much ground we have to cover.”
    She added that her team is “open-minded” about upcoming decisions. The central bank might hike or hold rates steady in September, but whatever it does it will not be definitive, she said.
    Lagarde went further when pressed by the press, saying, “We are not going to cut.”
    Carsten Brzeski, global head of macro at ING Germany, said: “What is more interesting, the accompanying policy statement kept the door for further rate hikes wide open and did not strike a more cautious note.”
    Neil Birrell, Chief Investment Officer at Premier Miton Investors, said in a statement, “If rates are yet not at the peak, we are not far away, and the conversation may soon move to how long they will stay at the peak.”
    An ECB survey showed that corporate loans in the euro zone dropped to their lowest level ever between the middle of June and early July.
    Euro zone business activity data released earlier this week pointed to declines in the region’s biggest economies, Germany and France. The figures increased the chances of a recession in the euro area this year, according to analysts at ING Germany.
    The International Monetary Fund said this week that the euro zone is likely to grow by 0.9% this year, but that factors in a recession in Germany, where the GDP is expected to contract by 0.3%.
    The ECB also announced on Thursday that it will set the remuneration of minimum reserves to 0% — which means that banks will not earn any interest from the central bank on their reserves.

    Market reaction

    The euro traded lower against the U.S. dollar off the back of the announcement, dropping by 0.3% to $1.105. The Stoxx 600 jumped 1.2%, while government bond yields dropped.
    The reactions highlight that market players are probably expecting further rate increases in the euro zone. More

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    GDP grew at a 2.4% pace in the second quarter, topping expectations despite recession calls

    Gross domestic product rose at a 2.4% annualized pace in the second quarter, topping the 2% estimate.
    Consumer spending powered the solid quarter, aided by increases in nonresidential fixed investment, government spending and inventory growth.
    A Commerce Department inflation gauge increased 2.6%, down from a 4.1% rise in Q1 and well below the estimate for a gain of 3.2%.

    The U.S. economy showed few signs of recession in the second quarter, as gross domestic product grew at a faster than expected pace during the period, the Commerce Department reported Thursday.
    GDP, the sum of all goods and services activity, increased at a 2.4% annualized rate for the April-through-June period, better than the 2% consensus estimate from Dow Jones. GDP rose at a 2% pace in the first quarter.

    Markets moved higher following the report, with stocks poised for a positive open and Treasury yields on the rise.
    Consumer spending powered the solid quarter, aided by increases in nonresidential fixed investment, government spending and inventory growth.
    Perhaps as important, inflation was held in check through the period. The personal consumption expenditures price index increased 2.6%, down from a 4.1% rise in the first quarter and well below the Dow Jones estimate for a gain of 3.2%.
    Consumer spending, as gauged by the department’s personal consumption expenditures index, increased 1.6% and accounted for 68% of all economic activity during the quarter.
    In the face of persistent calls for a recession, the economy showed surprising resilience despite a series of Federal Reserve interest rate increases that most Wall Street economists and even those at the central bank expect to cause a contraction.

    “It’s great to have another quarter of positive GDP growth in tandem with a consistently slowing inflation rate,” said Steve Rick, chief economist at TruStage. “After yesterday’s resumption of interest rate hikes, it’s encouraging to see the aggressive hike cycle working as inflation continues to decline. Consumers are getting a reprieve from the rising costs of core goods, and the U.S. economy is off to a stronger start to the first half of the year.”
    Growth hasn’t posted a negative reading since the second quarter of 2022, when GDP fell at a 0.6% rate. That was the second straight quarter of negative growth, meeting the technical definition of a recession. However, the National Bureau of Economic Research is the official arbiter of expansion and contractions, and few expect it to call the period a recession.
    Thursday’s report indicated widespread growth.
    Gross private domestic investment increased by 5.7% after tumbling 11.9% in the first quarter. A 10.8% surge in equipment and a 9.7% increase in structures helped power that gain.
    Government spending increased 2.6%, including a 2.5% jump in defense expenditures and 3.6% growth at the state and local levels.
    Separate reports Thursday brought more positive economic news.
    Durable goods orders for items such as vehicles, computers and appliances rose 4.7% in June, much higher than the 1.5% estimate, according to the Commerce Department. Also, weekly jobless claims totaled 221,000, a decline of 7,000 and below the 235,000 estimate.
    Powerful employment gains and a resilient consumer are at the heart of the growing economy.
    Nonfarm payrolls have grown by nearly 1.7 million so far in 2023 and the 3.6% unemployment rate for June is the same as it was a year ago. Consumers, meanwhile, continue to spend, and sentiment gauges have been rising in recent months. For instance, the closely watched University of Michigan sentiment survey hit a nearly two-year high in July.
    Economists have expected the Fed rate hikes to lead to a credit contraction that ultimately takes the air out of the growth spurt over the past year. The Fed has hiked 11 times since March 2022, the most recent coming Wednesday with a quarter-point increase that took the central bank’s key borrowing rate to its highest level in more than 22 years.
    Markets are betting that Wednesday’s hike will be the last of this tightening cycle, though officials such as Chairman Jerome Powell say no decision has been made on the future policy path.
    Housing has been a particular soft spot after surging early in the Covid pandemic. Prices, though, are showing signs of rebounding even as the real estate market is burdened by a lack of supply.
    Following the Wednesday rate hike, the Fed characterized growth as “moderate,” a slight boost from the characterization of “modest” in June.
    Still, signs of trouble persist.
    Markets have been betting on a recession, pushing the 2-year Treasury yield well above that for the 10-year note. That phenomenon, called an inverted yield curve, has a near-perfect record for indicating a recession in the next 12 months.
    Similarly, the inversion of the 3-month and 10-year curve is pointing to a 67% chance of contraction as of the end of June, according to a New York Fed gauge. More

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    GDP Grew at 2.4% Rate in Q2 as US Economy Stayed on Track

    The reading on gross domestic product was bolstered by consumer spending, showing that recession forecasts early in the year were premature, at least.The economic recovery stayed on track in the spring, as American consumers continued spending despite rising interest rates and warnings of a looming recession.Gross domestic product, adjusted for inflation, rose at a 2.4 percent annual rate in the second quarter, the Commerce Department said Thursday. That was up from a 2 percent growth rate in the first three months of the year and far stronger than forecasters expected a few months ago.Consumers led the way, as they have throughout the recovery from the severe but short-lived pandemic recession. Spending rose at a 1.6 percent rate, with much of that coming from spending on services, as consumers shelled out for vacation travel, restaurant meals and Taylor Swift tickets.“The consumer sector is really keeping things afloat,” said Yelena Shulyatyeva, an economist at BNP Paribas.The resilience of the economy has surprised economists, many of whom thought that high inflation — and the Federal Reserve’s efforts to stamp it out through aggressive interest-rate increases — would lead to a recession, or at least a clear slowdown in the first half of the year. For a while, it looked as if they were going to be right: Tech companies were laying off tens of thousands of workers, the housing market was in a deep slump and a series of bank failures set up fears of a financial crisis.Instead, layoffs were mostly contained to a handful of industries, the banking crisis did not spread and even the housing market has begun to stabilize.“The things we were all freaked out about earlier this year all went away,” said Michael Gapen, chief U.S. economist at Bank of America.Inflation has also slowed significantly. That has eased pressure on the Fed to keep raising rates, leading some forecasters to question whether a recession is such a sure thing after all. Jerome H. Powell, the Fed chair, said on Wednesday that the central bank’s staff economists no longer expected a recession to begin this year.Still, many economists say consumers are likely to pull back their spending in the second half of the year, putting a drag on the recovery. Savings built up earlier in the pandemic are dwindling. Credit card balances are rising. And although unemployment remains low, job growth and wage growth have slowed.“All those tailwinds and buffers that were supporting consumption are not as strong anymore,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “It feels to me like this hard landing has been delayed rather than canceled.” More

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    The Fed’s Difficult Choice

    The Federal Reserve has raised interest rates again. When should it stop?After raising interest rates again yesterday, the Federal Reserve now faces a tough decision.Some economists believe that the Fed has raised its benchmark rate — and, by extension, the cost of many loans across the U.S. economy — enough to have solved the severe inflation of the past couple years. Any further increases in that benchmark rate, which is now at its highest level in 22 years, would heighten the risk of a recession, according to these economists. In the parlance of economics, they are known as doves.But other experts — the hawks — point out that annual inflation remains at 3 percent, above the level the Fed prefers. Unless Fed officials add at least one more interest rate increase in coming months, consumers and business may become accustomed to high inflation, making it all the harder to eliminate.For now, Jerome Powell, the Fed chair, and his colleagues are choosing not to take a side. They will watch the economic data and make a decision at their next meeting, on Sept. 20. “We’ve come a long way,” Powell said during a news conference yesterday, after the announcement that the benchmark rate would rise another quarter of a percentage point, to as much as 5.5 percent. “We can afford to be a little patient.”The charts below, by our colleague Ashley Wu, capture the recent trends. Inflation is both way down and still somewhat elevated, while economic growth has slowed but remains above zero.Sources: Bureau of Labor Statistics; Bureau of Economic Analysis | By The New York TimesToday’s newsletter walks through the dove-vs.-hawk debate as a way of helping you understand the current condition of the U.S. economy.The doves’ caseThe doves emphasize both the steep recent decline in inflation and the forces that may cause it to continue falling. Supply chain snarls have eased, and the strong labor market, which helped drive up prices, seems to be cooling. “A happy outcome that not long ago seemed like wishful thinking now looks more likely than not,” the economist Paul Krugman wrote in Times Opinion this month.Economists refer to this happy outcome — reduced inflation without a recession — as a soft landing. The doves worry that a September rate hike could imperil that soft landing. (Already, corporate defaults have risen.)“It’s crystal clear that low inflation and low unemployment are compatible,” Rakeen Mabud, an economist at the Groundwork Collaborative, a progressive think tank, told our colleague Talmon Joseph Smith. “It’s time for the Fed to stop raising rates.”A recession would be particularly damaging to vulnerable Americans, including low-income and disabled people. The tight labor market has drawn more of them into work and helped them earn raises.The hawks’ caseThe hawks see the risks differently. They point to some signs that the official inflation rate of 3 percent is artificially low. Annual core inflation — a measure that omits food and fuel costs, which are both volatile — remains closer to 5 percent.“The Fed should not stop raising rates until there is clear evidence that core inflation is on a path to its 2 percent target,” Michael Strain of the American Enterprise Institute writes. “That evidence does not exist today, and it probably will not exist by the time the Fed meets in September.” (Adding to the hawks’ case is the fact that big consumer companies like Unilever keep raising their prices, J. Edward Moreno of The Times explains.)Fed officials themselves have argued that it’s important to tame inflation quickly to keep Americans from becoming used to rising prices — and demanding larger raises to keep up with prices, which could in turn become another force causing prices to rise.At root, the hawk case revolves around the notion that reversing high inflation is extremely difficult. When in doubt, hawks say, the Fed should err on the side of vigilance, to keep the U.S. from falling into an extended and damaging period of inflation as it did in the 1970s.And where do Fed officials come down? They have the advantage of not needing to pick a side, at least not yet. Between now and September, two more months of data will be available on prices, employment and more. Powell yesterday called a September rate increase “certainly possible,” but added, “I would also say it’s possible that we would choose to hold steady.”As our colleague Jeanna Smialek, who covers the Fed, says, “They have every incentive to give themselves wiggle room.”More on the FedThe Fed’s economists are no longer forecasting a recession this year.Powell noted that the labor force has been growing. “That’s good news for the Fed, because it helps ease the labor shortage without driving up unemployment,” Ben Casselman wrote.Responding to a question from Jeanna, Powell said it was good that consumer demand for the “Barbie” movie was so high — but that persistently high spending could be a reason for a future rate increase.Stock indexes rose after the Fed announced the increase, but fell after Powell delivered his economic outlook.THE LATEST NEWSWar in UkraineA Ukrainian soldier on the front line in eastern Ukraine.Tyler Hicks/The New York TimesUkraine appears to be intensifying its counteroffensive. Reinforcements are pouring into the fight, many trained and equipped by the West.The attack looks to be focused in the southern region of Zaporizhzhia, with the aim of severing Russian-occupied territories in Ukraine.U.S. officials said the assault was timed to take advantage of turmoil in the Russian military.PoliticsA judge halted Hunter Biden’s plea deal on tax charges after the two sides disagreed over how much immunity it granted him.In her first Supreme Court term, Ketanji Brown Jackson secured a book deal worth about $3 million, the latest justice to parlay fame into a big book contract.Mitch McConnell, the 81-year-old Senate Republican leader, abruptly stopped speaking during a Capitol news conference and was escorted away. He spoke in public again later.A former intelligence officer told Congress that the U.S. government had retrieved materials from U.F.O.s. The Pentagon denied his claim.Rudy Giuliani admitted to lying about two Georgia election workers he accused of mishandling ballots in 2020.Representative George Santos used his candidacy and ties to Republican donors to seek moneymaking opportunities.Other Big StoriesGetty ImagesSinead O’Connor, the Irish singer who had a No. 1 hit with “Nothing Compares 2 U,” died at 56. She drew a firestorm when she ripped up a photo of the pope on live TV.The heat wave that has scorched the southern U.S. is bringing 100-degree heat to the Midwest. The East Coast is probably next.Israel’s Supreme Court agreed to hear petitions challenging the new law limiting its power.Soldiers in Niger ousted the president and announced a coup.Gap hired Richard Dickson, the Mattel president who helped revitalize Barbie, as its chief executive.The messaging platform Slack was having an outage this morning.OpinionsCongress should create an agency to curtail Big Tech, Senators Lindsey Graham, a Republican, and Elizabeth Warren, a Democrat, argue.Thousands of Americans drown every year. More public pools would help, Mara Gay writes.Here are columns by Nicholas Kristof on affirmative action and Pamela Paul on the so-called Citi Bike Karen.MORNING READSEternally cool: Fans keep you dry on a hot day. They let you channel Beyoncé. They say, “I love you.” Can an air-conditioner do that?The yips: A star pitcher lost her ability to throw to first base. Now, she helps young athletes with the same problem.Spillover: Could the next pandemic start at the county fair?Lives Lived: Bo Goldman was one of Hollywood’s most admired screenwriters, winning Oscars for “One Flew Over the Cuckoo’s Nest” and “Melvin and Howard.” He died at 90.WOMEN’S WORLD CUPThe Dutch midfielder Jill Roord, left, and Lindsey Horan of the U.S. team.Grant Down/Agence France-Presse — Getty ImagesA second-half goal from the co-captain Lindsey Horan gave the U.S. a 1-1 tie against the Netherlands, in an evenly matched game.Spain’s star midfielder Alexia Putellas returned to the starting lineup for the first time in more than a year after a knee injury.OTHER SPORTS NEWSOff the market: The Angels are reportedly withdrawing the superstar Shohei Ohtani from trade talks.Honeymoon phase: Aaron Rodgers agreed to a reworked contract with the Jets, which saves the team money and likely ensures he plays multiple seasons in New York.ARTS AND IDEAS Alfonso Duran for The New York TimesA growing dialect: What is Miami English? The linguist Phillip Carter calls it “probably the most important bilingual situation in the Americas today,” but it’s not Spanglish, in which a sentence bounces between English and Spanish. Instead, Miamians — even those who are not bilingual — have adopted literal translations of Spanish phrases in their English speech. Some examples: “get down from the car” (from “bajarse del carro”) instead of “get out of the car,” and “make the line” (from “hacer la fila”) instead of “join the line.”More on cultureKevin Spacey was found not guilty in Britain of sexual assault.The Japanese pop star Shinjiro Atae came out as gay, a rare announcement in a country where same-sex marriage isn’t legal.THE MORNING RECOMMENDS …Armando Rafael for The New York TimesBrighten up grilled chicken with Tajín, the Mexican seasoning made with red chiles and lime.Preserve vintage clothes in wearable condition.Calculate your life expectancy to guide health care choices.Consider a body pillow.Reduce exposure to forever chemicals in tap water.GAMESHere is today’s Spelling Bee. Yesterday’s pangram was thrilling.And here are today’s Mini Crossword, Wordle and Sudoku.Thanks for spending part of your morning with The Times. See you tomorrow.P.S. David is on “The Daily” to talk about how the wealthy get an advantage in college admissions.Sign up here to get this newsletter in your inbox. Reach our team at themorning@nytimes.com. More