Evelyn Reynolds

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    Inflation rose 4.9% in April from a year ago, less than expectations

    The consumer price index rose 0.4% last month, pushed higher by rising shelter, used vehicle and gas prices. The increase was in line with Wall Street expectations.
    On an annual basis, the inflation rate was 4.9%, slightly less than the estimate and providing some hope that the trend is lower.
    For workers, real average hourly earnings, adjusted for inflation, rose 0.1% for the month but were still down 0.5% from a year ago.

    A widely followed measure of inflation rose in April, though the pace of the increase provided some hope that the cost of living will head lower later this year.
    The consumer price index, which measures the cost of a broad swath of goods and services, increased 0.4% for the month, in line with the Dow Jones estimate, according to a Labor Department report Wednesday.

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    However, that equated to an annual increase of 4.9%, slightly less than the 5% estimate.
    Excluding volatile food and energy categories, core CPI rose 0.4% monthly and 5.5% from a year ago, both in line with expectations.

    Increases in shelter, gasoline and used vehicles pushed the index higher, and were offset somewhat by declines in prices for fuel oil, new vehicles and food at home.
    Markets reacted positively to the news, with futures turning positive as Treasury yields were lower.
    “Today’s reports suggests that the Fed’s campaign to quell inflation is working, albeit more slowly than they would like,” said Quincy Krosby, chief global strategist at LPL Financial. “But for financial markets … today’s inflation print is a net positive.”

    Inflation has been persistent despite the Federal Reserve’s efforts to bring down prices. Starting in March 2022, the central bank has enacted 10 consecutive interest rate increases totaling 5 percentage points, taking benchmark borrowing rates to their highest level in nearly 16 years.
    The CPI reading has cooled considerably since peaking out around 9% in June 2022. However, inflation still has held well above the Fed’s 2% annual target.
    The report provides both good and bad news on the inflation front as Fed officials weigh their next move on rates.
    Shelter costs, which make up about one-third of the CPI weighting, increased another 0.4% on the month and are now up 8.1% from a year ago. The monthly gain represented a step down from previous months’ increases but was still indicative that a key inflation driver is rising.
    At the same time, the 4.4% jump in prices for used cars and trucks reverses recent declines. Food prices, though, were flat while the energy index rose 0.6%, boosted by a 3% gain in gasoline.
    Of the six grocery store indexes the Bureau of Labor Statistics uses to compute food prices, four showed declines. Milk, for instance, fell 2%, the biggest monthly drop since February 2015. Egg prices, one of the biggest gainers in the food index over the past year, fell 1.5%, taking the annual gain down to 21.4%.
    For workers, real average hourly earnings, adjusted for inflation, rose 0.1% for the month but were still down 0.5% from a year ago, the BLS said in a separate report.
    Following the reports, traders lowered odds that the Fed would raise interest rates at the June meeting to 20%, according to the CME Group’s FedWatch tracker of pricing in the fed funds futures market.
    The CPI reading comes just days after the BLS reported that nonfarm payrolls increased by 253,000 in April, above expectations and indicative that the labor market is still hot despite Fed efforts to cool demand.
    In approving its latest rate hike last week, the Fed removed an indication that future hikes are warranted and instead shifted to language saying that decisions will be based on incoming data.
    The Labor Department on Thursday will release the April producer price index, a gauge of wholesale prices on final demand goods and services. That report is expected to show a 0.3% headline increase and a 0.2% core gain. More

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    Fed’s John Williams says rates could be increased if inflation doesn’t come down

    New York Fed President John Williams cautioned that “it will take time for the FOMC’s actions to restore balance to the economy and return inflation to our 2% target.”
    The current problems in the banking industry and their impact will factor into Williams’ policy outlook, he said.
    “We haven’t said we’re done raising rates,” he told the Economic Club of New York.

    John Williams, Chief Executive Officer of the Federal Reserve Bank of New York, speaks at an event in New York, November 6, 2019.
    Carlo Allegri | Reuters

    NEW YORK — New York Federal Reserve President John Williams on Tuesday cautioned that interest rate increases will take a while to work their way through the economy before inflation returns to an acceptable level.
    The central bank official gave no forecast for where he sees policy headed but said he doesn’t expect inflation to return to the Fed’s 2% goal until the next two years. Should inflation not come down, he said the Fed always has the option to raise rates.

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    He added that unemployment is likely to rise to a 4%-4.5% range, from its current 54-year low of 3.4%.
    “Because of the lag between policy actions and their effects, it will take time for the [Federal Open Market Committee’s] actions to restore balance to the economy and return inflation to our 2% target,” Williams said in prepared remarks at the Economic Club of New York.
    Williams spoke six days after the FOMC voted to raise its benchmark rate another quarter percentage point to a target range of 5%-5.25%. In its post-meeting statement, the committee hinted it could pause rate hikes, though it said officials will be taking a variety of factors into account when determining how to proceed.
    The committee removed a key phrase from the statement that had indicated additional rate hikes would be appropriate. Williams, an FOMC voter, said that decision is now a matter of what the incoming data says.
    “First of all, we haven’t said we’re done raising rates,” Williams told CNBC’s Sara Eisen during a Q&A session after his speech. “We’re going to make sure we’re going to achieve our goals and we’re going to assess what’s happening in our economy and make the decision based on that data.”

    “I do not see in my baseline forecast, any reason to cut interest rates this year,” he said, adding that additional rate hikes would be possible if the data doesn’t cooperate.
    The current problems in the banking industry and their impact will factor into Williams’ policy outlook, he said.
    “I will be particularly focused on assessing the evolution of credit conditions and their effects on the outlook for growth, employment and inflation,” Williams said.
    Some positive signs Williams cited include moderation in longer-term inflation expectations and a cooling in demand for labor that has heated the jobs market and put upward pressure on wages, which nonetheless have failed to keep up with cost-of-living increases.
    He also said clogged labor chains, which have been a major inflation contributor, have “improved considerably” over time. More

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    The Debt Limit Workarounds: The Coin, the Constitution, Premium Bonds

    As Congress hurtles toward a debt limit showdown, ways to work around it are garnering attention.Move over, trillion-dollar coin, there is a new debt limit workaround in town — and this one sounds more sophisticated, which some of its proponents have suggested could make it more likely to work.For years, debt limit skeptics have argued that the United States can get around the cap on how much it can borrow by minting a large-denomination coin, depositing it in the government’s account at the Federal Reserve. Officials could then use the resulting money to pay the country’s bills. The maneuver would exploit a quirk in U.S. law, which gives the Treasury secretary wide discretion when it comes to minting platinum coins.But there have always been challenges with the idea: Treasury has expressed little appetite. It is unclear whether the Fed would take the coin. It just sounds unconventional to the point of absurdity. And now, some are arguing for a fancier-sounding alternative: premium bonds.The government typically funds itself by issuing debt in the form of financial securities called bonds and bills. They are worth a set amount after a fixed period of time — for example, $1,000 in 10 years — and they pay “coupons” twice a year in between. Typically, those coupon rates are set near market interest rates.But in the premium bond idea, the government would renew old, expiring bonds at higher coupon rates. Doing so would not technically add to the nation’s debt — if the government previously had a 10-year bond worth $1,000 outstanding, it would still have a 10-year bond worth $1,000 outstanding. But investors would pay more to hold a bond that pays $7 a year than one that pays $3.50, so promising a higher interest rate would allow Treasury to raise more money.Would those higher interest rates, which would cost the government more money, pose a problem? Not technically. The debt limit applies to the face value of outstanding federal government debt ($1,000 in our example), not future promises to pay interest.And the idea could also come in a slightly different flavor. The government could issue bonds that pay regular coupons, but which never pay back principal, or perpetual bonds. People would buy them for the long-term cash stream, and they would not add to the principal of debt outstanding.The premium bond idea has gained support from some big names. The economic commentator Matthew Yglesias brought it up in January, the Bloomberg columnist Matt Levine has written about it, and The New York Times columnist and Nobel-winning economist Paul Krugman made a case for it this week.But even some proponents of premium bonds acknowledge that it could face legal challenges or damage the United States’ reputation in the eyes of investors. Plus, their design and issuance would have to happen fast.“Normally, Treasury makes changes slowly, with lots of consulting of bond market participants and advance announcement of auctions,” said Joseph E. Gagnon, an economist at the Peterson Institute for International Economics, adding that the government might have to offer a discount.But, he added, it “sure beats defaulting” and he “would argue it is better than not paying workers or retirees.”While the premium bond idea might come in different packaging, it has a lot of similarities with the coin idea. Either plan would exploit a loophole to add to government coffers without actually lifting the debt limit. Because both are seen as gimmicky, it could be hard for either to become reality.Of all the options the government could use to unilaterally get around the debt ceiling, “they are the least likely in our opinion,” said Chris Krueger, a policy analyst at TD Cowen.But a workaround that hinges on the 14th Amendment could garner broader support, Mr. Krueger said. That would leverage a clause in the Constitution that says that the validity of public debt should not be questioned.Some legal scholars contend that language overrides the statutory borrowing limit, which currently caps federal debt at $31.4 trillion. The idea is that the government’s responsibility to pay what it owes would trump the debt limit rules — so the debt limit could be ignored.It would not be a perfect solution: The move would draw an immediate court challenge and could sow uncertainty in the bond market, even its proponents acknowledge. Still, some White House officials have looked into the option. More

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    ‘There Are No Good Options’: The U.S. Is Running Out of Money

    Treasury is running out of cash, leaving little time to resolve a debt ceiling standoff that could result in default.President Biden and Speaker Kevin McCarthy will meet on Tuesday afternoon to discuss budget priorities and raising the debt limit at a precarious moment: The United States is quickly running out of cash to pay its bills.Lawmakers have less than a month to pass legislation to increase or suspend the debt ceiling, which caps the amount of money the government can borrow. The United States reached its statutory $31.4 trillion debt limit on Jan. 19, and the Treasury Department estimates that the accounting maneuvers it has been employing to prop up its cash reserves could be exhausted as soon as June 1.If the debt ceiling is not raised before the government runs out of cash — what is known as the X-date — it could be unable to pay all its bills on time, including military salaries, payments to bondholders and Social Security checks. Barring a solution, millions of Americans could stop receiving government benefits, stock markets could plunge, and a constitutional crisis could ensue.The Bipartisan Policy Center, a think tank that tracks the nation’s cash reserves, warned on Tuesday that the X-date was likely to be between early June and early August. It said that economic risks would start to surge before the money ran out and that meeting the nation’s financial obligations would soon become increasingly difficult.“The coming weeks are critical for assessing the strength of government cash flows,” said Shai Akabas, the director of economic policy at the Bipartisan Policy Center. “If a solution is not reached before June, policymakers may be playing daily Russian roulette with the full faith and credit of the United States, risking financial disaster for their constituents and the country.”A default could come sooner than expected because tax revenues have been trickling into the government’s coffers this spring. The sluggish pace is due in part to a decision by the Internal Revenue Service to give taxpayers in states that were affected by severe weather more time to file their 2022 taxes.The brinkmanship has renewed questions about how the federal government might try to prioritize certain payments if it does run out of cash, whether Mr. Biden could ignore the debt limit entirely and order the Treasury Department to continue borrowing, and if far-fetched ideas such as minting a $1 trillion coin could in fact be viable.Treasury Secretary Janet L. Yellen said on Monday that if the debt limit was not raised, then Mr. Biden would have to decide how to proceed.“I would say that if Congress doesn’t raise the debt ceiling, the president will have to make some decisions about what to do with the resources that we do have,” Ms. Yellen said on CNBC. “And there are a variety of different options, but there are no good options.”She added that failing to raise or suspend the debt limit would be an “economic catastrophe” and assailed Republicans for holding the economy hostage.“It’s a gun to the head of the American people and the American economy,” Ms. Yellen said.Mr. Biden and Mr. McCarthy will be joined by Senator Chuck Schumer of New York, the majority leader, and Senator Mitch McConnell of Kentucky, the minority leader. Ms. Yellen is traveling to Japan on Tuesday for a gathering of finance ministers of the Group of 7 nations and will not be participating in the meeting at the White House.The Biden administration and lawmakers are under growing pressure from business groups to find a way to avoid a default.“A default would deliver a severe blow to the economy, leading to widespread job losses, decimated retirement savings and higher borrowing costs for families, businesses and the government,” said Joshua Bolten, the chief executive of the Business Roundtable. “Failing to raise the debt limit would also threaten the U.S. dollar’s central role in the global financial system to the benefit of China.”He added: “Securing a bipartisan path forward to raise the debt ceiling could not be more urgent.” More

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    Biden and McCarthy to Discuss Debt Limit as a Possible Default Looms

    The president will host the House speaker and other congressional leaders at the White House on Tuesday to discuss their impasse over the debt ceiling and spending cuts.WASHINGTON — President Biden will meet with Speaker Kevin McCarthy at the White House on Tuesday in a critical face-to-face confrontation that will frame their showdown over the federal debt and spending in the weeks before the nation is set to default on its obligations for the first time in history.With the American and perhaps the global economy hanging in the balance, the meeting will be the first sit-down session between the Democratic president and Republican speaker since February. But even the terms of the discussion are in dispute: Mr. McCarthy insists the president negotiate a debt ceiling deal with him, while Mr. Biden insists the meeting will just be an opportunity to tell the speaker that there will be no negotiations over the limit.The meeting in the Oval Office will feature Mr. Biden, Mr. McCarthy and three other congressional leaders: Representative Hakeem Jeffries of New York, the Democratic leader in the House, and Senators Chuck Schumer of New York and Mitch McConnell of Kentucky, the Democratic and Republican leaders in the Senate. But Mr. Biden and Mr. McCarthy are the key players, locked in a political game of chicken to see who will blink first on raising the debt ceiling.With the federal government expected to default on its debt as soon as June 1 without an agreement, Mr. McCarthy and his Republican caucus have refused to raise the debt ceiling without commitments to major spending cuts. Mr. Biden has said he would discuss ways to reduce the deficit but has refused to link any spending decisions to the debt ceiling increase, arguing that Congress should simply raise the ceiling as it has for generations to pay for spending already approved.Karine Jean-Pierre, the White House press secretary, repeatedly referred to Mr. Biden’s meeting with Mr. McCarthy on Tuesday as a “conversation” rather than negotiations.Pete Marovich for The New York Times“We should not have House Republicans manufacturing a crisis on something that has been done 78 times since 1960,” Karine Jean-Pierre, the White House press secretary, said on Monday. “This is their constitutional duty. Congress must act. That’s what the president is going to make very clear with the leaders tomorrow.”The meeting that Mr. Biden has called, she added, will not involve any haggling over the debt ceiling. “I wouldn’t call it ‘debt ceiling negotiations,’” she said in reply to a reporter who used that phrase. “I would call it a conversation.” In fact, she was so intent on calling it a “conversation” that she used the word to describe the meeting 15 times during her briefing.Neither side expects any breakthrough at the session, scheduled for 4 p.m., but instead the leaders plan to use it to emphasize their positions in the dispute, in effect setting the parameters for the debate that will play out over the next few weeks. In recent years, such standoffs have not been resolved until the final hours and days before a deadline — or the deadline is extended.Mr. Biden has indicated that he is willing to have a separate discussion with Mr. McCarthy and the Republicans over spending that is not directly linked to the debt ceiling legislation. White House officials said the president plans to push Republicans to consider the tax increases and prescription drug savings he laid out in his most recent budget, which would reduce deficits by an estimated $3 trillion over 10 years, as part of a larger package to reduce debt accumulation over time.He is likely to challenge Republicans in Tuesday’s meeting to be more specific in the spending they would cut. He has hammered them for more than a week over the potential consequences — like reduced funding for veterans’ health services — that could result from the discretionary spending caps they included in a debt ceiling bill that passed the House late last month.Republicans have bristled at the president’s attacks on their legislation, calling them misleading. But they noted that unlike the Democrats, they at least have passed a measure to raise the debt ceiling, albeit conditioned on spending cuts. They argued that Mr. Biden and his Democratic allies have to come to the table with a counterproposal. Otherwise, they maintain, it would be the Democrats, not the Republicans, who failed to raise the debt ceiling, leading to a possible default.“They have to now step up and act like responsible leaders,” Representative Jodey C. Arrington, a Republican from Texas and the chairman of the House Budget Committee, said on CNBC on Monday. “We’ve done that, and we have set that example, and we have placed in their hands a list of proposals that we have gotten consensus on. It’s their time to respond, and the American people expect them to.” More

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    Worries linger about financial stability following bank rescue, Fed report shows

    The Federal Reserve issued its periodic report on the nation’s financial and economic health, a survey showing the biggest fears about current conditions.
    Respondents cited “persistent inflation and tighter monetary policy, banking-sector stress, commercial and residential real estate and geopolitical tensions.”
    Several sectors were identified as having elevated potential for trouble. They include money market funds, stablecoins and hedge funds, particularly larger firms.

    The Federal Reserve in Washington, D.C.
    Wysiati | E+ | Getty Images

    Banking system pressures, real estate stress and persistent inflation top worries about financial stability, though the system overall remains stable, the Federal Reserve said in a report Monday.
    The central bank issued its periodic report on the nation’s financial and economic health, a survey of market experts, economists, academics and others that showed the biggest fears about current conditions.

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    “Frequently cited topics in this survey included persistent inflation and tighter monetary policy, banking-sector stress, commercial and residential real estate and geopolitical tensions,” the report stated.
    The Fed last published its Financial Stability Report in November 2022 before the implosion about two months ago of several prominent midsize banks, including Silicon Valley Bank, an important funding source for technology companies.
    In response to the crisis, the Fed implemented several emergency funding measures it said have helped stabilize the system.
    “Overall, the banking sector remained resilient, with substantial loss-absorbing capacity,” the report stated. “Policy interventions by the Federal Reserve and other agencies helped mitigate these strains and limit the potential for further stress.”
    Several sectors were identified as having elevated potential for trouble.

    These sectors include money market funds, stablecoins and hedge funds, particularly larger firms. However, the report also notes leverage is generally low across household and business debt, including commercial real estate, a potential trouble spot for the economy.
    The report was released on the same day the Fed’s survey of senior loan officers at banks said they see tighter lending standards and lower demand ahead.
    Among the lending officers’ concerns were deposit outflows, a weakening economy and bank liquidity. Commercial and industrial loans were cited as particular point of stress, as was commercial real estate.
    However, the stability report noted bank capital ratios are around what would be considered normal while leverage was mostly lower. The bank did highlight leverage at nonbank financial institutions such as hedge funds.
    “Actions taken by the official sector reassured depositors, and the broad banking system remained sound and resilient. For the banking system as a whole, aggregate bank capital levels were ample,” the report said.
    The Fed added it is prepared to take whatever measures are necessary to keep the system stable. More

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    Financial Stability Experts at the Fed Turn a Wary Eye on Commercial Real Estate

    A financial stability report from the Federal Reserve flagged concerns tied to rising interest rates, including in commercial real estate.Federal Reserve financial stability experts are on the lookout for weaknesses after a year of rising interest rates — and as they survey the potential risks confronting the system, they are increasingly watching office loans and other commercial real estate borrowing.Fed officials have lifted borrowing costs rapidly over the past year — to just above 5 percent from near-zero in early 2022 — to cool rapid inflation by slowing the economy. So far, the fallout from that abrupt change has been most obvious in the banking sector. A series of high-profile banks have collapsed or faced turmoil in recent weeks partly because they were poorly prepared for heftier borrowing costs.But Fed staff members and market experts whom they survey cited commercial real estate as another area worth watching in the central bank’s twice-annual Financial Stability Report, which was released Monday.The jump in interest rates over the past year “increases the risk” that commercial borrowers will not be able to refinance their loans when the loans reach the end of their term, Fed staff wrote in the report, noting that commercial real estate values remain “elevated.”“The magnitude of a correction in property values could be sizable and therefore could lead to credit losses by holders of C.R.E. debt,” the report said — noting that many of those holders are banks, and particularly smaller banks.“The Federal Reserve has increased monitoring of the performance of C.R.E. loans and expanded examination procedures for banks with significant C.R.E. concentration risk,” the report said.The Fed’s comments on commercial real estate amounted to muted watchfulness rather than a full-throated warning — but they come at a time when many investors and economists are closely monitoring the sector. The outlook for office buildings in downtown areas, where workers have not fully returned after a shift to remote work that began during the coronavirus pandemic, has emerged as a particular concern on Wall Street.The report included a survey of 25 professionals at broker-dealers, investment funds, research and advisory organizations, and universities, and those respondents ranked commercial real estate as their fourth-biggest financial stability concern — behind risks from interest rate increases, banking sector stress, and U.S.-China tensions, but ahead of Russia’s war in Ukraine and an impending fight in Congress about raising the debt limit.“Many contacts saw real estate as a possible trigger for systemic risk, particularly in the commercial sector, where respondents highlighted concerns over higher interest rates, valuations and shifts in end-user demand,” the report said.The Fed’s stability report also focused on risks to the economy that might come from the recent banking sector turmoil, which many officials are worried might prompt banks to pull back when it comes to lending. A Fed survey of bank loan officers released on Monday showed that demand for many types of loans has fallen in recent months, and it is becoming gradually harder to borrow.Worries could “lead banks and other financial institutions to further contract the supply of credit to the economy,” the Fed report said. “A sharp contraction in the availability of credit would drive up the cost of funding for businesses and households, potentially resulting in a slowdown in economic activity.”And if banks pull back in a dramatic way, it could have knock-on effects, the Fed report warned.“With a decline in profits of nonfinancial businesses, financial stress and defaults at some firms could increase,” the report said, especially because companies are very indebted — which puts them on dicier footing if business goes badly. More

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    Fed report shows banks worried about conditions ahead, with focus on slowing economy and deposit outflows

    Tumult in mid-sized institutions caused banks to tighten lending standards both to households and businesses, potentially posing a threat to U.S. economic growth, according to a Federal Reserve report Monday.
    The Fed’s quarterly Senior Loan Officer Opinion survey said requirements got tougher for commercial and industrial loans as well as for many household-debt instruments such as mortgages, home equity lines of credit and credit cards.

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    The loan officers further said they expect troubles to persist over the next year, owing largely to diminished expectations for economic growth as well as fears over deposit outflows and reduced risk tolerance.
    Asked their expectations for the next year, respondents gave a fairly gloomy outlook of what’s ahead.
    “Banks reported expecting to tighten standards across all loan categories,” the report said. “Banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers’ collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position, and deposit outflows as reasons for expecting to tighten lending standards over the rest of 2023.”
    At the same time, the survey showed that demand weakened across most categories.
    In particular, the report showed “tighter standards and weaker demand” for commercial and industrial loans, an important bellwether for economic growth. Those conditions were seen across all business sizes.

    Also, the report showed the same conditions across commercial real estate categories.
    “There has been an ongoing tightening of lending conditions. And that is part of part of the process by which monetary policy works,” Treasury Secretary Janet Yellen told CNBC’s Sarah Eisen in response to a question about the report in a Monday “Closing Bell” interview. “The Fed is aware that tightening of credit conditions is something that will tend to slow the economy somewhat. And I believe they are taking this into account in deciding on appropriate policy.”
    The survey was being closely watched on Wall Street to gauge the fallout from troubles in the banking industry that accelerated in early March.
    That’s when regulators shuttered Silicon Valley Bank and Signature Bank following a run on deposits spurred by a loss of confidence that the institutions would have the liquidity to meet their obligations.
    Since then, JPMorgan has taken over First Republic Bank following similar troubles at that firm, and UBS bought rival Credit Suisse after the latter needed rescuing.
    Even with the banking troubles, the central bank last week decided to raise interest rates for the 10th time since March 2022. Policymakers already had seen the SLOOS report before their meeting concluded Wednesday, and Fed Chair Jerome Powell said conditions are about as expected considering what has happened in the sector.
    “The SLOOS is broadly consistent when you see it with how we and others have been thinking about the situation and what we’re seeing from other sources,” Powell told reporters. “Banking data will show that lending has continued to grow, but the pace has been slowing really since the second half of last year.”
    At the March meeting, the Fed’s own economists warned that a shallow recession was likely later in the year because of the tightening standards resulting from the banking problems. More