Evelyn Reynolds

Philadelphia Fed President Patrick Harker said Tuesday that he doesn’t think the U.S. is heading for recession.
His comments come despite fears over an inversion of 10-year and 2-year Treasury yields that has been a harbinger of previous downturns.
Harker said he remains open to the idea of more aggressive rate hikes ahead but favors moving by a quarter-percentage point in May.

Despite on ominous indicator hanging over the economy and higher interest rates on the way, Philadelphia Federal Reserve President Patrick Harker said Tuesday that he doesn’t think the U.S. is heading for recession.
That view, expressed in a CNBC interview, comes in the face of a looming inversion of the 10- and 2-year Treasury yields and market expectations that the Fed is about to embark on a substantial rate-hiking cycle aimed at curbing inflation.

Harker said he thinks the current state of the economy is strong enough to withstand both tighter monetary policy and bond market fears of what that will mean to growth.
“What I’m looking for is a safe landing,” he told CNBC’s Sara Eisen during a “Power Lunch” interview. “It may be bumpy along the way. It was bumpy going up, it’s going to be bumpy coming down. We’ve all been on those planes. We land safely, but it would be a bit of a thrill ride. I don’t want that. So that’s why we’re being cautious and careful about how we implement policy.”
The comments came with the curve about flat between the benchmark 10-year and its 2-year counterpart. The curve has inverted, with the 2-year yield above the 10-year, in most recent U.S. recessions, though it has not been a guarantee.
Harker cautioned against relying too much on one relationship when trying to predict the future.
“The evidence is mixed. If you look at the data, it clearly correlates with recessions. But causation is not very clear,” he said. “So we need to make sure that we’re looking at lots of different data.”

Yield curve inversions are considered an important sign as they reflect investor fear that the Fed will tighten conditions too much so that they restrict further growth. They also tend to inhibit lending from banks who worry that future returns will be lower.
However, U.S. unemployment is back to near where it was pre-pandemic, when the jobless rate hit a 50-year low. Consumers remain flush with cash and property values continue to rise.
But the Fed has been wrestling with inflation levels running at a 40-year high, prompting Harker and his colleagues to embark on a rate-hiking cycle in which markets expect increases at each of the remaining six meetings this year, with possibly as high as half a percentage point.
Harker said he thinks the Fed at its May meeting should increase its benchmark rate by only a quarter-percentage point, or 25 basis points. Markets, though, are expecting a hike of 50 basis points, and Harker said he remains open to the idea depending on the data.
“I wouldn’t take it off the table,” he said of the higher move.
Even with the prospect of much higher rates, he said he thinks the Fed can engineer its way through the current situation, with a focus on bringing down inflation first.
“That’s job one,” he said. “I don’t want to overdo it, though, and try to just stomp the brakes hard and have growth end.”
“I think it will be a bumpy ride, and there may be some problems where we get into a period of below-trend growth for a while,” he added. “But I think we can pull this off.”

WATCH LIVEWATCH IN THE APP More

Economist Mohamed El-Erian warned that the Fed’s efforts to combat inflation could tip the economy into recession.
Investors are watching the relationship between bond yields for clues on how close the U.S. is to contraction. So far, recession risks appear low.
However, El-Erian said consumers are facing “a cost-of-living crisis.”

The Federal Reserve’s efforts to fight inflation threaten to sink the U.S. into contraction, according to economist Mohamed El-Erian.
Following the U.S. central bank’s decision earlier this month to increase interest rates for the first time in more than three years, markets now expect the Fed to get even more aggressive.

Current pricing suggests a half percentage-point hike in May and a cumulative boost of 2.5 percentage points to benchmark rates through the end of the year, from the near-zero level where they started 2022.
Doing that could take a big toll on U.S. growth, said El-Erian, chief economist advisor at Allianz and president of Queens’ College, Cambridge.
“The bond market believes inflation is too high, the Fed is well behind the curve, and the Fed risks … pushing the economy into recession as it tries to catch up,” El-Erian told CNBC’s “Squawk Box” in a Monday morning interview.

Watching the curves

Indeed, some market measures are indicating that recession risks are building.
Some shorter-term government bond yields are running higher then their longer-duration counterparts, historically a warning sign that investors believe economic growth ahead will slow. For instance, the 3-year Treasury note was running ahead of both the 10-year note and 30-year bond in Monday trading.

However, a more reliable indicator has been the relationship between the 10-year and the 3-month note, and that yield curve is well apart. The spread between those yields at the end of last week was still about 1.93 percentage points, a margin that implied only a small chance of recession over the next year.
Still, El-Erian said consumers will be struggling with inflation in the coming months. The Fed will try to contain inflation with rate hikes that could constrict economic growth.
“We are looking at a cost-of-living crisis. That’s what we are looking at for the next two quarters, three quarters, where the consumer is going to be hit hard by inflation, they’re gonna get hit hard by lower consumer sentiment,” he said.
El-Erian noted that U.S. stocks have held up relatively well so far, as there are still few alternatives for investors.

Economic signs ahead

A slew of data points this week will help shed light on how quickly the Fed needs to move.
The Job Openings and Labor Turnover Survey for February, due Tuesday, will give insight on labor market slack. The previous month’s report indicated a gap of about 4.8 million between job openings and unemployed potential workers.
On Thursday, the Commerce Department will release the Fed’s preferred inflation gauge, the core personal consumption expenditures price index. That is expected to show a 12-month gain of 5.5% in February, above the previous month’s 5.2% and well ahead of the Fed’s 2% goal.
Then on Friday, the March nonfarm payrolls report is expected to show a 5.5% 12-month increase in average hourly earnings. Economists fear a wage-price spiral that could exacerbate the current 7.9% inflation pace, which is the highest in 40 years.
Consumers flush with cash from pandemic-related stimulus programs have been able to absorb much of the higher costs. But El-Erian said inflation and higher rates will take a toll.
“The corporate sector has pricing power. It has pricing power because demand is still solid. So we’ll be able to pass through the higher costs,” he said. “Overall, we are gonna go through a difficult period where the cost of living is going to be on everybody’s mind.”

WATCH LIVEWATCH IN THE APP More

Americans are more worried about inflation than at any point since 1985, and that concern is quickly escalating, according to a new poll, a potential problem for Democrats and the White House ahead of the midterm elections in November.A Gallup poll released Tuesday showed that rising prices were the No. 1 economic concern for Americans, with 17 percent calling inflation the “nation’s most important problem.”Inflation stress divided slightly among income groups — 63 percent of adults earning $40,000 or less were very concerned, compared with 58 percent of those earning $100,000 or more — and starkly along political lines. About 79 percent of Republicans were seriously worried about inflation, versus 35 percent of Democrats.“That reflects the ongoing phenomenon we’re seeing in polarization,” said Lydia Saad, director of U.S. social research at Gallup. She noted that people increasingly answered economic questions differently when their party controlled the White House, and often in a way that reflected the administration’s messaging. “Democrats are just going to downplay problems, just like Republicans did when Trump was in office,” she said.President Biden’s administration initially expected rapid inflation to fade. As it has lingered, the White House has switched to arguing that it is part of a global phenomenon and has been exacerbated by Russia’s invasion of Ukraine. That is accurate but probably not the full story, since inflation in the United States is higher than in many other developed economies.Prices in the United States rose 7.9 percent in the 12 months through February, according to the latest reading of the Consumer Price Index released this month. That was the highest level of inflation since early 1982.Ms. Saad said it might be a “silver lining” that the worry index was lower now than at the start of the 1980s, when about half of American adults ranked rising prices as the nation’s top problem. Inflation had been elevated for years back then, peaking at about 14.6 percent in 1980.Even so, rising prices have been undermining confidence in the overall economy, according to the Gallup numbers and other consumer sentiment readings. Survey data from the University of Michigan shows that Republicans have been more pessimistic about the economy than at any point since 1980. Democrats, while more optimistic, were less confident in March than they had been at any point since Mr. Biden’s 2020 election victory. More

Home prices nationally rose 19.2% year over year in January, up from 18.9% in December, according to the S&P CoreLogic Case-Shiller Index.
The 10-city composite annual increase was 17.5%, up from 17.1% in the previous month. The 20-city composite rose 19.1%, up from 18.6% in December.
Phoenix, Tampa, Florida, and Miami saw the biggest annual gains at 32.6%, 30.8% and 28.1%, respectively.

After cooling off ever so slightly toward the end of last year, home price gains reaccelerated in January.
Home prices nationally rose 19.2% year over year in January, up from 18.9% in December, according to the S&P CoreLogic Case-Shiller Index. The 10-city composite annual increase was 17.5%, up from 17.1% in the previous month. The 20-city composite rose 19.1%, up from 18.6% in December.

Phoenix, Tampa, Florida, and Miami saw the biggest annual gains at 32.6%, 30.8% and 28.1%, respectively. Sixteen of the 20 cities reported higher price increases in the year ended in January 2022 versus the year ended in December 2021.
Washington, D.C., Minneapolis and Chicago saw the smallest annual gains, although they were all still up double digits from a year ago.

A “For Sale” sign is seen in front of a home in Miami, Florida.
Joe Raedle | Getty Images

Tight supply and strong demand appear to be outweighing rising mortgage rates, which would usually take some of the heat out of housing.
While the index is a three-month running average, mortgage rates began to climb in January. The average rate on the 30-year fixed ended 2021 at around 3.25% and ended January at 3.68% according to Mortgage News Daily. It is now flirting with 5%.
“The macroeconomic environment is evolving rapidly. Declining COVID cases and a resumption of general economic activity has stoked inflation, and the Federal Reserve has begun to increase interest rates in response. We may soon begin to see the impact of increasing mortgage rates on home prices,” said Craig Lazzara, managing director at S&P Dow Jones Indices.

Higher mortgage rates have already started to affect sales in the first months of the year. Pending home sales, which measure signed contracts on existing homes, have now fallen for four straight months, according to the National Association of Realtors.
“The monthly payment for a median-priced home has jumped 30% in the past year, far outpacing even fast-rising consumer prices, up almost 8% from a year ago,” said George Ratiu, senior economist at Realtor.com, in a release. “While the small number of homes-for-sale will keep upward pressure on prices as we move through the Spring buying season, I expect conditions to undergo noticeable adjustments in the months ahead.”

WATCH LIVEWATCH IN THE APP More

Job openings last month remained near record levels, and the number of workers voluntarily leaving their positions increased, the Labor Department said on Tuesday.The data, released as part of the agency’s monthly report on job openings, layoffs and quitting, serve as indicators of how much demand there is for workers in the U.S. economy and the extent to which employers are still struggling with labor shortages months after the economy began recovering from the pandemic’s worst damage.There were about 11.3 million job openings in February, essentially the same as the month before and down a little from a record in December, though the number of hires overall edged up by 263,000 last month, to about 6.7 million.After falling during the peak of Covid-19 lockdowns in 2020, the rates at which so-called prime-age workers — those aged 25 to 54 — are working or seeking work has rallied back to prepandemic levels. Yet with the economy growing faster than in decades, demand for labor has outpaced the availability of workers — at least at the wages and benefits employers are offering.There are still roughly three million or so people who have not returned to the work force, according to the government data.“Looking at how poorly our labor force has grown so far this year, if companies want to win the war for talent they need to engage the people who may not be actively seeking work right now, or be the first option people see when they do return,” Ron Hetrick, a senior economist at Emsi Burning Glass, a data and research company, wrote in a note.That echoes the sentiment of many unions and labor activists, who have been saying that even though wage growth has picked up, people aren’t feeling valued enough by employers. It’s led to fresh questions about how bosses might get to know the “love language” of their hires and find sometimes unconventional ways to show them that they care. There are also more straightforward requests: Several progressive economists have noted that employers could, for instance, take some jobs generally expected to be low-wage — such as fast food service and cashiers — and entice workers by offering higher pay and better benefits.Large public companies and small businesses alike often say that they have already substantially raised pay from before the pandemic and that with inflation raging at highs unseen since the early 1980s, raw material and other costs have made business more difficult. An expensive surge in commodity markets suggests that price increases for food and energy could worsen, especially if firms raise prices further.Still, despite widespread frustration with inflation and shortages of some products and materials, some surveys suggest businesses are becoming more optimistic about the future. The MetLife and U.S. Chamber of Commerce Small Business Index recently reached a pandemic-era high, with about three in five of the small business owners surveyed saying their business is in good health. More

Romania is buying iodine pills. Ireland enacted special incentives for its farmers to till essential crops. And military spending is rising across the continent.Nicolae Ciuca spent a lifetime on the battlefield before being voted in as prime minister of Romania four months ago. Yet even he did not imagine the need to spend millions of dollars for emergency production of iodine pills to help block radiation poisoning in case of a nuclear blast, or to raise military spending by 25 percent in a single year.“We never thought we’d need to go back to the Cold War and consider potassium iodine again,” Mr. Ciuca, a retired general, said through a translator at Victoria Palace, the government’s headquarters in Bucharest. “We never expected this kind of war in the 21st century.”Across the European Union and Britain, Russia’s invasion of Ukraine is reshaping spending priorities and forcing governments to prepare for threats thought to have been long buried — from a flood of European refugees to the possible use of chemical, biological and even nuclear weapons by a Russian leader who may feel backed into a corner.The result is a sudden reshuffling of budgets as military spending, essentials like agriculture and energy, and humanitarian assistance are shoved to the front of the line, with other pressing needs like education and social services likely to be downgraded.The most significant shift is in military spending. Germany’s turnabout is the most dramatic, with Chancellor Olaf Scholz’s promise to raise spending above 2 percent of the country’s economic output, a level not reached in more than three decades. The pledge included an immediate injection of 100 billion euros — $113 billion — into the country’s notoriously threadbare armed forces. As Mr. Scholz put it in his speech last month: “We need planes that fly, ships that sail and soldiers who are optimally equipped.”The commitment is a watershed moment for a country that has sought to leave behind an aggressive military stance that contributed to two devastating world wars.“We never thought we’d need to go back to the Cold War and consider potassium iodine again,” said Nicolae Ciuca, prime minister of Romania.Cristian Movila for The New York TimesA wartime mind-set has also spread to sectors aside from defense. With prices soaring for oil, animal feed and fertilizer, Ireland introduced a “wartime tillage” program last week to amp up grain production, and created a National Fodder and Food Security Committee to manage threats to the food supply.Farmers will be paid up to €400 for every additional 100-acre block that is planted with a cereal crop like barley, oats or wheat. Planting additional protein crops like peas and beans will earn a €300 subsidy.“The illegal invasion in Ukraine has put our supply chains under enormous pressure,” Charlie McConalogue, the agriculture minister, said in announcing the $13.2 million package. Russia is the world’s largest supplier of wheat and with Ukraine accounts for nearly a quarter of total global exports.Spain has been running down its supplies of corn, sunflower oil and some other produce that also come from Russia and Ukraine. “We’ve got stock available, but we need to make purchases in third countries,” Luis Planas, the agriculture minister, told a parliamentary committee.Mr. Planas has asked the European Commission to ease some rules on Latin American farm imports, like genetically modified corn for animal feed from Argentina, to offset the lack of supply.Extraordinarily high energy prices have also put intense pressure on governments to cut excise taxes or approve subsidies to ease the burden on families that can’t afford to heat every room in their home or fill their car’s gas tank.Ireland reduced gasoline taxes, and approved an energy credit and a lump-sum payment for lower-income households. Germany announced tax breaks and a $330-per-person energy subsidy, which will end up costing the treasury $17.5 billion.Ireland introduced a “wartime tillage” program last week to increase grain production.Niall Carson – PA Images, via Getty ImagesIn Spain, the government agreed last week to defray the cost of gasoline in response to several days of strikes by truckers and fishermen, which left supermarkets without fresh supplies of some of their most basic items.And in Britain, a cut in fuel taxes and support for poorer households will cost $3.2 billion.The outlook is a change from October, when Rishi Sunak, Britain’s chancellor of the Exchequer, announced a budget for what he called an “economy fit for a new age of optimism,” with large increases in education, health and job training.In his latest update to Parliament, Mr. Sunak warned that “we should be prepared for the economy and public finances to worsen potentially significantly,” as the country faces the biggest drop in living standards it has ever seen.The energy tax relief was welcomed by the public, but the reduced revenues put even more pressure on governments that are already managing record high debt levels.“The problem is that some countries have quite a big chunk of legacy debt — in Italy and France, it’s over 100 percent of gross domestic product,” said Lucrezia Reichlin, an economics professor at the London Business School, referring to the huge amounts spent to respond to the pandemic. “That is something which is very much new for the economic governance of the union.” European Union rules, which were temporarily suspended in 2020 because of the coronavirus, limit government debt to 60 percent of a country’s economic output.And the demands on budgets are only increasing. European Union leaders said this month that the bill for new defense and energy spending could run as high as $2.2 trillion.The Russia-Ukraine War and the Global EconomyCard 1 of 6Rising concerns. More

The tax would require that American households worth more than $100 million pay a rate of at least 20 percent on their full income, as well as unrealized gains in the value of liquid assets like stocks.WASHINGTON — The White House will ask Congress on Monday to pass a new minimum tax on billionaires as part of a budget proposal intended to revitalize President Biden’s domestic agenda and reduce the deficit.The tax would require that American households worth more than $100 million pay a rate of at least 20 percent on their full income, as well as unrealized gains in the value of their liquid assets, such as stocks, bonds and cash, which can accumulate value for years but are taxed only when they are sold.Mr. Biden’s proposal to impose a tax on billionaires is the first time he has explicitly called for a wealth tax. While many in his party have advocated taxes that target an individual’s wealth — not just income — Mr. Biden has largely steered clear of such proposals in favor of increasing the top marginal income tax rate, imposing a higher tax on capital gains and estates, and raising taxes on corporations.The “Billionaire Minimum Income Tax” would apply only to the top one-hundredth of 1 percent of American households, and over half of the revenue would come from those worth more than $1 billion. Those already paying more than 20 percent would not owe any additional taxes, although those paying below that level would have to pay the difference between their current tax rate and the new 20 percent rate.The payments of Mr. Biden’s minimum tax would also count toward the tax that billionaires would eventually need to pay on unrealized income from assets that are taxed only when they are sold for a profit.The tax proposal will be part of the Biden administration’s budget request for the next fiscal year, which the White House plans to release on Monday. In a document outlining the minimum tax, the White House called it “a prepayment of tax obligations these households will owe when they later realize their gains.”“This approach means that the very wealthiest Americans pay taxes as they go, just like everyone else,” the document said.As the administration grapples with worries over rising inflation, the White House also released a separate document on Saturday saying that Mr. Biden’s budget proposal would cut federal deficits by a total of more than $1 trillion over the next decade.The idea of imposing a wealth tax has gained traction since Mr. Biden was elected as Democrats have looked for ways to fund their sweeping climate and social policy agenda and ensure that the wealthiest Americans are paying their fair share.Senator Elizabeth Warren, Democrat of Massachusetts, and Senator Ron Wyden, Democrat of Oregon and the chairman of the Finance Committee, released separate proposals last year that would tax the wealthiest, albeit in different ways. Ms. Warren had championed the idea of a wealth tax in her unsuccessful presidential campaign.The decision by the administration to call for a wealth tax also reflects political realities over how to finance Mr. Biden’s economic agenda.Moderate Democrats, including Senator Kyrsten Sinema of Arizona, have balked at raising the corporate tax rate or lifting the top marginal income tax rate to 39.6 percent from 37 percent, leaving the party with few options to raise revenue.Still, Senator Joe Manchin III, Democrat of West Virginia, slammed the idea of taxing billionaires after Mr. Wyden’s proposal to do so was released, although Mr. Manchin has since suggested he could support some type of billionaires’ tax.Legal questions about such a tax also abound, particularly whether a tax on wealth — rather than income — is constitutional. If Congress approves a wealth tax, there has been speculation that wealthy Americans could mount a legal challenge to the effort. More

The average rate on the 30-year fixed mortgage shot significantly higher Friday, rising 24 basis points to 4.95%, according to Mortgage News Daily.
The quicker-than-expected rise in rates has weighed on demand for mortgages and refinancing loans.
With both rates and prices considerably higher, the median mortgage payment is now more than 20% higher than it was a year ago.

The rate for the most common kind of mortgage just surged again.
The average rate on the 30-year fixed mortgage shot significantly higher Friday, rising 24 basis points to 4.95%, according to Mortgage News Daily. It is now 164 basis points higher than it was one year ago.

“That’s the second time this week, and it puts this week on par with the worst week from the 2013 taper tantrum — a record we didn’t see being legitimately challenged a few days ago,” said Matthew Graham, COO of Mortgage News Daily.
On Tuesday, the rate had hit 4.72%, a 26-basis-point jump from March 18. The quicker-than-expected rise in rates has weighed on demand for mortgages and refinancing loans.
The rate surged as the yield on the U.S. 10-year Treasury also took off. Mortgage rates follow that yield loosely, but not entirely. Mortgage rates are also influenced by demand for mortgage-backed bonds. The Federal Reserve is scaling back its holdings of these assets and is also hiking interest rates.
It couldn’t come at a worse time, as the all-important spring housing market gets underway. Potential buyers are already facing extraordinarily tight supply and sky-high prices. With both rates and prices considerably higher, the median mortgage payment is now more than 20% higher than it was a year ago.
Buyers are also facing inflation on everything else in their budgets, which exacerbates the affordability issues. Rents are also surging higher at a record rate, causing more potential buyers to be unable to put aside money for a down payment. In addition, as rates rise, some buyers will no longer qualify for a mortgage. Lenders have been much more strict about how much debt a borrower may take on in relation to income.

Economists are already beginning to revise their sales figures lower for the year. Lawrence Yun, chief economist for the National Association of Realtors, said Tuesday that he expects the rate to hover around 4.5% this year, after previously predicting it would stay at 4%.
NAR’s latest official prediction is for sales to drop 3% in 2022, but Yun now says he expects they will fall 6% to 8%. NAR has not officially updated its forecast.

WATCH LIVEWATCH IN THE APP More