Economy

Stock and bond markets have been rallying in anticipation of Federal Reserve rate cuts. But don’t get swept away just yet, our columnist says.It’s too early to start celebrating. That’s the Federal Reserve’s sober message — though given half a chance, the markets won’t heed it.In a news conference on Wednesday, and in written statements after its latest policymaking meeting, the Fed did what it could to restrain Wall Street’s enthusiasm.“It’s far too early to declare victory and there are certainly risks” still facing the economy, Jerome H. Powell, the Fed chair, said. But stocks shot higher anyway, with the S&P 500 on the verge of a new record.The Fed indicated that it was too early to count on a “soft landing” for the economy — a reduction in inflation without a recession — though that is increasingly the Wall Street consensus. An early decline in the federal funds rate, the benchmark short-term rate that the Fed controls directly, isn’t a sure thing, either, though Mr. Powell said the Fed has begun discussing rate cuts, and the markets are, increasingly, counting on them.The markets have been climbing since July — and have been positively buoyant since late October — on the assumption that truly good times are in the offing. That may turn out to be a correct assumption — one that could be helpful to President Biden and the rest of the Democratic Party in the 2024 elections.But if you were looking for certainty about a joyful 2024, the Fed didn’t provide it in this week’s meeting. Instead, it went out of its way to say that it is positioning itself for maximum flexibility. Prudent investors may want to do the same.Reasons for OptimismOn Wednesday, the Fed said it would leave the federal funds rate where it stands now, at about 5.3 percent. That’s roughly 5 full percentage points higher than it was in early in 2022. Inflation, the glaring economic problem at the start of the year, has dropped sharply thanks, in part, to those steep interest rate increases. The Consumer Price Index rose 3.1 percent in the year through November. That was still substantially above the Fed’s target of 2 percent, but way below the inflation peak of 9.1 percent in June 2022. And because inflation has been dropping, a virtuous cycle has developed, from the Fed’s standpoint. With the federal funds rate substantially above the inflation rate, the real interest rate has been rising since July, without the Fed needing to take direct action.But Mr. Powell says rates need to be “sufficiently restrictive” to ensure that inflation doesn’t surge again. And, he cautioned, “We will need to see further evidence to have confidence that inflation is moving toward our goal.”The wonderful thing about the Fed’s interest rate tightening so far is that it has not set off a sharp increase in unemployment. The latest figures show the unemployment rate was a mere 3.7 percent in November. On a historical basis, that’s an extraordinarily low rate, and one that has been associated with a robust economy, not a weak one. Economic growth accelerated in the three months through September (the third quarter), with gross domestic product climbing at a 4.9 percent annual rate. That doesn’t look at all like the recession that had been widely anticipated a year ago.To the contrary, with indicators of robust economic growth like these, it’s no wonder that longer-term interest rates in the bond market have been dropping in anticipation of Fed rate cuts. The federal funds futures market on Wednesday forecast federal funds cuts beginning in March. By the end of 2024, the futures market expected the federal funds rate to fall to below 4 percent.But on Wednesday, the Fed forecast a slower and more modest decline, bringing the rate to about 4.6 percent.Too Soon to RelaxSeveral other indicators are less positive than the markets have been. The pattern of Treasury rates known as the yield curve has been predicting a recession since Nov. 8, 2022. Short-term rates — specifically, for three-month Treasuries — are higher than those of longer duration — particularly, for 10-year Treasuries. In financial jargon, this is an “inverted yield curve,” and it often forecasts a recession.Another well-tested economic indicator has been flashing recession warnings, too. The Leading Economic Indicators, an index formulated by the Conference Board, an independent business think tank, is “signaling recession in the near term,” Justyna Zabinska-La Monica, a senior manager at the Conference Board, said in a statement.The consensus of economists measured in independent surveys by Bloomberg and Blue Chip Economic Indicators no longer forecasts a recession in the next 12 months — reversing the view that prevailed earlier this year. But more than 30 percent of economists in the Bloomberg survey and fully 47 percent of those in the Blue Chip Economic Indicators disagree, and take the view that a recession in the next year will, in fact, happen.While economic growth, as measured by gross domestic product, has been surging, early data show that it is slowing markedly, as the bite of high interest rates gradually does its damage to consumers, small businesses, the housing market and more.Over the last two years, fiscal stimulus from residual pandemic aid and from deficit spending has countered the restrictive efforts of monetary policy. Consumers have been spending resolutely at stores and restaurants, helping to stave off an economic slowdown.Even so, a parallel measurement of economic growth — gross domestic income — has been running at a much lower rate than G.D.P. over the last year. Gross domestic income has sometimes been more reliable over the short term in measuring slowdowns. Ultimately, the two measures will be reconciled, but in which direction won’t be known for months.The MarketsThe stock and bond markets are more than eager for an end to monetary belt-tightening.Already, the U.S. stock market has fought its way upward this year and is nearly back to its peak of January 2022. And after the worst year in modern times for bonds in 2022, market returns for the year are now positive for the investment-grade bond funds — tracking the benchmark Bloomberg U.S. Aggregate Bond Index — that are part of core investment portfolios.But based on corporate profits and revenues, prices are stretched for U.S. stocks, and bond market yields reflect a consensus view that a soft landing for the economy is a near-certain thing.Those market movements may be fully justified. But they imply a near-perfect, Goldilocks economy: Inflation will keep declining, enabling the Fed to cut interest rates early enough to prevent an economic calamity.But excessive market exuberance itself could upend this outcome. Mr. Powell has spoken frequently of the tightening and loosening of financial conditions in the economy, which are partly determined by the level and direction of the stock and bond markets. Too big a rally, taking place too early, could induce the Fed to delay rate cuts.All of this will have a bearing on the elections of 2024. Prosperity tends to favor incumbents. Recessions tend to favor challengers. It’s too early to make a sure bet.Without certain knowledge, the best most investors can do is to be positioned for all eventualities. That means staying diversified, with broad holdings of stocks and bonds. Hang in, and hope for the best. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Serco has increased its bet on German demand for immigration services with the acquisition of private provider European Homecare for €40mn, as it forecast a rise in revenue and profit this year.The deal is the London-listed contractor’s second in continental Europe in just over 12 months, after it bought Swiss immigration services company ORS in September 2022, which also operates in Germany.Serco’s chief executive Mark Irwin said on Thursday that European Homecare “would complement our ORS operations” and give it a stronger foothold in Europe. The move came as Serco forecast a revenue hit from UK government plans to reduce the number of asylum seekers accommodated in hotels. “There are complex and growing requirements for immigration and asylum seeker support services globally,” Irwin said. “Increasing our presence in Germany will expand the immigration support we already provide to government customers in the UK, Australia and across Europe.”Serco, which manages services for governments worldwide, is expecting acquisitions and strong demand for immigration and defence services to push revenue up 7 per cent to £4.8bn in the current financial year. Underlying operating profits are projected to rise 3 per cent to £245mn. However the contractor is expecting flat revenues in its 2024 financial year, partly due to the government’s decision to end contracts with 50 of the 400 hotels it uses to house prospective asylum seekers by the end of January. Serco said that as a result of that change, and factors including exits from old contracts, revenue would remain the same. Serco, however, expects underlying profits to increase 6 per cent to £260mn in 2024, helped by acquisitions such as European Homecare. Shares rose 4.2 per cent in morning trading on Thursday in London.European Homecare is a private provider of immigration services in Germany with more than 2,000 employees. The company manages more than 100 facilities and provides accommodation and support to more than 36,000 people seeking asylum. The group’s revenue is expected to be about €150mn in the year ending December 31, and Serco is acquiring the business from Korte-Stiftung. Serco said new contracts and the contribution from deals would help offset “lower immigration volumes in the UK and Australia”. Although it said “ongoing demand” for immigration services in Britain would contribute to underlying profit growth in the current financial year, immigration volume growth had eased in the second half.The company added it would be affected by a change in contract mix “as we support the UK government’s efforts to reduce the number of asylum seekers being accommodated in hotels”.Serco said growth in its immigration and defence sectors had “more than offset” the loss of Covid-related work this year. The company ran about a fifth of the Covid-19 testing sites in England and Northern Ireland. It also provided half of the call handlers for the test-and-trace system in England. More

NEW YORK/WASHINGTON (Reuters) -Wall Street’s top regulator on Wednesday adopted new rules aimed at reducing systemic risk in the $26 trillion U.S. Treasury market by forcing more trades through clearing houses, while offering some concessions following industry pushback.The five-member U.S. Securities and Exchange Commission voted 4-1 on Wednesday to finalize the new rules, proposed over a year ago, marking the most significant overhaul in decades of the world’s largest bond market, a global benchmark for assets.The reforms, which require some cash Treasury and repurchase or “repo” agreements to be centrally cleared, are part of a broader government effort to fix structural issues regulators believe are causing market volatility and liquidity problems. They will become effective in phases by June 2026.”Today is the most significant day for U.S. Treasury market structure in decades. The SEC’s final rule will reassemble the way that the Treasury market functions,” said Nathaniel Wuerffel, head of market structure at BNY Mellon (NYSE:BK), a major Treasury market participant. The reforms in part target hedge funds and proprietary trading firms, which have become an ever-larger part of the Treasury market over the past decade but are relatively lightly regulated. Debt-fueled bets by those firms, also known as “basis trades,” have drawn scrutiny from regulators who worry that an abrupt unwind of leveraged positions could strain markets. Moody’s (NYSE:MCO) credit agency in November said those risks could be reduced by forcing trades through a central clearer, which acts as the buyer to every seller, and seller to every buyer, guaranteeing trades in case either party defaults. “Today’s final rules, taken together, will reduce risk across a vital part of our capital markets in normal times and stress times,” SEC Chair Gary Gensler said in prepared remarks.The rule broadens the scope of which transactions must be cleared, requiring clearing houses in the Treasury market to ensure that their members, mostly big broker dealers, clear cash Treasury trades. It will also require that broker dealers clear repurchase (repo) and reverse repo transactions with their clients.That would sweep in more hedge fund-related trades. Most hedge fund activity in repo markets – where banks and other players such as hedge funds borrow short-term loans backed by Treasuries and other securities – is done bilaterally between the broker dealers and its client.The market is central to the basis trade, which takes advantage of the premium of futures contracts over the price of the underlying Treasury bonds. The trades – typically the domain of macro hedge funds with relative value strategies – involve selling a futures contract, buying Treasuries deliverable into that contract with repo funding, and delivering them at contract expiry.Market practice suggests a large share of hedge funds trading in repo markets put up no haircut, indicating that they are fueling activity using enormous amounts of cheap debt.Gensler told reporters the market currently operates on a “risky foundation of trades” handled bilaterally, including “a significant amount of leverage in the prime brokerage relationships between banks, brokerages and hedge funds.”PHASE-INThe Fixed Income Clearing Corporation is the country’s sole clearer of Treasuries. While advocates say clearing makes markets safer, critics say the requirement to post margin or collateral to secure trades adds costs which could reduce liquidity.In a nod to worries expressed by industry groups, SEC officials told reporters ahead of Wednesday’s vote they had softened some of the original proposals. Notably, purchases and sales of Treasuries between broker-dealers and hedge funds or levered accounts will not have to be cleared because clearing repo trades would largely cover the related risks, they said.The Managed Funds Associations (MFA), which represents hedge funds, said it applauded that decision.”Ultimately, how the SEC and the Fixed Income Clearing Corporation implement the final rule … will determine the rule’s impact on market liquidity and efficiency,” MFA’s Chief Counsel Jennifer Han said in a statement. Under the new rule, central clearing houses would also have to keep the collateral for their members separate from that held on behalf of their members’ customers.Overall, just 13% of Treasury cash transactions are centrally cleared, according to estimates in a Treasury Department report based on 2017 data. Market participants had been worried about the implementation timeframe, which was “better than expected,” said Wuerffel. Clearing houses have until March 2025 to comply with provisions on risk management, protection of customer assets and access to clearance and settlement services. Their members will have until December 2025 to begin central clearing of cash market Treasury transactions and June 30, 2026 for repo transactions.Still, many market participants warned there would be a lot of work to do in that time. “There are a number of operational challenges that need to be addressed to ensure a cost-effective, safe and efficient client clearing structure,” said Scott O’Malia, CEO of broker-dealer trade group the International Swaps and Derivatives Associations. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of Martin Sandbu’s Free Lunch newsletter. Sign up here to get the newsletter sent straight to your inbox every Thursday’Tis the season of charity and generosity, and I have a cause to sell you. The FT supports Flic, the Financial Literacy and Inclusion Campaign. I know all Free Lunch readers know the value of financial literacy, and understand the cost and disempowerment that comes with financial exclusion. So do check out our charity auction, which features lunches with our columnists, including yours truly. You read it right: you can bid for a Not-At-All-Free-Lunch with me, supporting a great cause and in the process sparing me the embarrassment of drawing lower bids than my colleagues. So bid early, bid often. If you win, you even get to choose the conversation topics — if that includes the score chart of Bidenomics in the US, read on, for that’s the topic of today’s column.There is an ongoing exercise of pulling one’s hair out among economic and political observers of the US. In brief, the polling on how people assess the economic situation — which should feed into how they feel about their political choices in next year’s presidential election — paints the economic situation as much worse than it actually is. At the start of the month, my colleague John Burn-Murdoch thoroughly documented this paradox. Two big takeaways are, first, that what Americans tell pollsters about the state of the economy is linked to their political affiliation to an absolutely wild degree. (See Burn-Murdoch’s chart below.) Second, the partisan motivated thinking on both sides does not cancel itself out: average US opinion diverges from economic reality in a way that does not happen in other western countries. So there is something to explain here. But it is not something I think I understand, and I am not going to attempt to do here. For what it’s worth, I think Paul Krugman is probably right that there is a “vibecession” going on: people are not as dissatisfied with their personal situation, which they experience directly, as they are about the economy overall, which they learn about from actual and social media. While we scratch our heads about this, however, I think it’s worth being clear about how well the US economy is, in fact, doing. And it’s perhaps no big surprise that the easiest source for information about things going well is the Biden administration itself, whose officials are keen to point out the benefits of Bidenomics. But they are also quite good at collecting and presenting the facts to support it, and these facts are not always as well known as they should be. Start with employment. It is well known that the jobs market has been strong, with unemployment near historic lows and the number of vacancies still high. What I find the most important employment fact, however, is that the prime-age employment-to-population rate is so strong. This is the share of 25- to 54-year-old Americans in work — an important gauge of the labour market over time since it is less affected by population ageing than the overall rate. As the White House Council of Economic Advisers has pointed out in a blog post, the prime-age rate is now higher than before the pandemic, higher than before the global financial crisis, and almost as high as the all-time 81.9 per cent peak before the dotcom bubble in 2000. What the CEA doesn’t say, but which I think is a crucial implication, is that this is a sign the US labour market could expand further. Here is how I think about it: if 82 per cent of prime-age workers could work in early 2000, why can’t 82 per cent of prime-age workers do so in 2023? This was a more powerful point in the past decade, when the rate fell as low as 75 per cent, yet people were worried that low interest rates were overheating the economy. But it’s a big reason why I think it was wrong to see the strong post-pandemic labour market — the first in decades where the balance of power tilted strongly towards workers — as a problem rather than a success. The pressure on real wages, in combination with plentiful jobs that could pay higher wages to which workers switched, was precisely the dynamic needed to bring people in from the sidelines and expand the labour force. If policymakers hadn’t panicked, there is all reason to think we could have matched the 1999 record. As it is, the rate has slipped slightly from 80.9 in August to 80.7 in November.Another big achievement has been a boost to investment of various kinds. We have mentioned before the extraordinary jump in factory construction under the Biden administration. The rate of manufacturing construction has doubled. So has foreign direct investment in factory building and expansion. Next, an analysis from the US Treasury shows that state and local spending on infrastructure, funded by the Bipartisan Infrastructure Law, has grown much faster than what would be expected from earlier recoveries. Moreover, the spending is disproportionately being channelled to infrastructure projects in states with infrastructure in the worst state of disrepair, and with lower incomes. Public transport will get a boost, again with much more spending than normal in states where it usually is neglected.The Treasury has also published a note on the economic growth benefits from the climate policies pursued in the Inflation Reduction Act and the other industrial programmes — for reasons ranging from higher R&D incentives, smaller losses from natural disasters, fewer sick days from less local pollution, to reducing economic volatility from fossil energy dependence. Not all of those arguments are entirely convincing. But on the whole they do serve as a useful reminder that some smart spending creates more benefits than it costs. A health warning: these are the administration’s own boastful displays, so need to be taken with the requisite addition of salt. And announcements are not the same as outcomes. But that shouldn’t distract from the fact that it has things to boast about. As for the argument that climate action can be good for growth, the Biden administration is in good company. In France, the government-commissioned expert study on the economics of climate policy, recently available in English, says the same thing. On the overall macro level, too, there are good things to say. A few weeks ago we highlighted how US growth has outperformed Europe’s after the pandemic.And this growth has, for the first time in a very long while, largely benefited the worst off. On one measure, 40 per cent of the rise in wage inequality over the previous 40 years has been reversed in the post-pandemic recovery — that is to say, through the highest inflation in as many years. In sum: so far, Bidenomics works well on the ground but not, it seems, in people’s minds. That is not because it doesn’t work for them; on the contrary, everything about people’s economic behaviour signals optimism. But when asked to assess the economy, they are negative. This could mean one of two opposite things. It could mean that the age of “it’s the economy, stupid” is over — in which case, Bidenomics copycats elsewhere (like the UK) should beware, as Claire Ainsley writes in an FT op-ed. Or it could mean that current polling of economic sentiment is not a good indicator of how people are going to vote, and the good economic reality — if central banks don’t ruin it — will win the day. I have argued something like that was at work in the Democrats’ surprisingly strong showing in the 2022 midterms. It could happen again.But we don’t know which is right. As we go into next year’s US election season, we are flying unusually blind.Other readablesNumbers newsA good teaser of a question: which country has the fastest growth rate in Europe? In 2023, it is shaping up to be Ukraine. Although it remains devastated by Russia’s war, the signs I reported to you after visiting in April seem to have held true. The IMF’s latest “Article 4” report shows how impressively Ukraine’s economy has stabilised — and then some. The IMF sees the growth rate coming in at 4.5 per cent, and set to continue at 3 to 4 per cent next year. Inflation is coming down fast, from a 19 per cent average over 2023 to 6 per cent at year-end. Real wages are up 6.3 per cent after a 16 per cent fall in 2022. Even private investment has jumped. Of course, the economy is vitally dependent on huge financing flows from abroad. The relatively good 2023 performance shows what European and US decision makers are about to sabotage if they can’t deliver on the promises they have made.Germany’s coalition government has agreed a budget for 2024 after the earlier version was blown out of the water by the constitutional court. Recommended newsletters for youChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up hereUnhedged — Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here More

1. Fed keeps rates steady and signals 2024 rate cutsThe Federal Reserve has kept interest rates steady at a more than two-decade high, but indicated that it would begin to slash borrowing costs next year.The Federal Open Market Committee unanimously voted to hold rates at a range of 5.25% to 5.50% on Wednesday, although the U.S. central bank’s quarterly “dot plot” — an outline of future rate expectations — showed that policymakers were factoring in three quarter-point cuts in 2024, a more dovish outlook than prior estimates.In closely-watched comments following the decision, Fed Chair Jerome Powell also acknowledged that officials are “likely at or near the peak rate for this cycle.”Powell added that the Fed, which has embarked on an unprecedented run of rate hikes in a bid to quell elevated inflation, is now “getting back” to a point where it is aiming to prevent unemployment from spiking as well. The remark suggests that while the Fed may not be completely satisfied with the current pace of price growth, it could be starting to shift its focus on to preventing a more restrictive policy stance from sparking a recession in the broader economy.2. Futures rise after main U.S. averages soarU.S. stock futures edged higher on Thursday, suggesting an extension in steep gains posted in the prior session that were sparked by the Fed’s outlook for rate reductions next year.By 05:01 ET (10:01 GMT), the Dow futures contract had added 43 points or 0.1%, S&P 500 futures gained 8 points or 0.2%, and Nasdaq 100 futures increased by 52 points or 0.3%.The main indices on Wall Street spiked on Wednesday, with the 30-stock Dow Jones Industrial Average in particular touching a record high. The benchmark S&P 500 jumped to its best closing level since 2022, while the tech-heavy Nasdaq Composite gained 1.4%.U.S. Treasury yields also slipped on the Fed’s projections. The rate-sensitive 2-year Treasury yield dropped to its lowest mark since June and the benchmark 10-year yield dipped to its weakest point since August. Yields typically move inversely to prices.”The market looks at the median outcome [of the dot plot], and hey presto it’s gleaned a Fed that is leaning into rate cuts in 2024, at least more than they were,” analysts at ING said in a note. “A far more hawkish Fed had been anticipated.”3. Dollar sinks, gold spikesThe dollar slumped to its lowest mark in four months on Thursday, as traders raised their bets that the Fed will move to slash rates early next year.Markets are now pricing in an almost 74% probability that the central bank will roll out a 25 basis-point cut at its gathering in March, followed by a further quarter percentage-point reduction in May, according to Investing.com’s Fed Rate Monitor Tool.Heightened expectations for declining rates may be unattractive for foreign investment, weighing on the relative value of the dollar. By 05:01 ET, the dollar index, which measures the U.S. currency against a basket of its peers, had dropped by 0.3% to 102.6.”We still suspect that there will be occasions for the dollar to rebound on evidence of further resilience in the [U.S.] outlook. However, that may be a story for January now,” the ING analysts said.The weakening in the greenback helped make gold less expensive for overseas buyers, contributing to a spike in spot prices for the yellow metal above the key $2,000 per troy ounce level.4. Central bank decisions in Europe on deckA host of central banks in Europe are now set to unveil their latest interest rate decisions, with markets curious to see if they follow the Fed’s lead and leave borrowing costs unchanged.The Bank of England and European Central Bank, both of which have been battling to corral high inflation, are widely tipped by economists to hold rates at 5.25% and 4.00%, respectively. Investors will also be keen to see how forcefully policymakers try to temper hopes for rate cuts next year.Earlier on Thursday, the Swiss National Bank became the latest bank to keep rates steady and noted that pressure from price gains has “decreased slightly over the past quarter.”However, Norway increased its main rate by 25 percentage points to 4.5%, citing stubbornly high inflation.5. Crude moves up on inventories draw, dovish FedOil prices rose Thursday on a bigger-than-expected weekly draw in U.S. crude storage and weakness in the dollar that was driven by the dovish Fed stance.By 05:02 ET, the U.S. crude futures traded 1.8% higher at $70.74 a barrel, while the Brent contract climbed 1.9% to $75.69 per barrel.U.S. oil inventories fell by 4.3 million barrels in the week to Dec. 8, according to data from the Energy Information Administration on Wednesday, much more than 650,000 barrels expected. But this draw comes on the heels of several consecutive weeks of strong builds, which could signal waning winter demand. More

It’s too soon to declare victory, but the economic outlook seems sunnier than it did a year ago, and many economists are predicting a surprising win.The Federal Reserve appears to be creeping closer to an outcome that its own staff economists viewed as unlikely just six months ago: lowering inflation back to a normal range without plunging the economy into a recession.Plenty could still go wrong. But inflation has come down notably in recent months — it is running at 3.1 percent on a yearly basis, down from a 9.1 percent peak in 2022. At the same time, growth is solid, consumers are spending, and employers continue to hire.That combination has come as a surprise to economists. Many had predicted that cooling a red-hot job market with far more job openings than available workers would be a painful process. Instead, workers returned from the labor market sidelines to fill open spots, helping along a relatively painless rebalancing. At the same time, healing supply chains have helped to boost inventories and ease shortages. Goods prices have stopped pushing inflation higher, and have even begun to pull it down.The Fed is hoping for “a continuation of what we have seen, which is the labor market coming into better balance without a significant increase in unemployment, inflation coming down without a significant increase in unemployment, and growth moderating without a significant increase in unemployment,” Jerome H. Powell, the Fed chair, said Wednesday.As Fed policymakers look ahead to 2024, they are aiming squarely for a soft landing: Officials are trying to assess how long they need to keep interest rates high to ensure that inflation is fully under control without grinding economic growth to an unnecessarily painful halt. That maneuver is likely to be a delicate one, which is why Mr. Powell has been careful to avoid declaring victory prematurely.But policymakers clearly see it coming into view, based on their economic projections. The Fed chair signaled on Wednesday that rates were unlikely to rise from their 5.25 to 5.5 percent setting unless inflation stages a surprising resurgence, and central bankers predicted three rate cuts by the end of 2024 as inflation continues to cool and joblessness rises only slightly.Consumers continue to spend, and growth in the third quarter was unexpectedly hot.Tony Cenicola/The New York TimesIf they can nail that landing, Mr. Powell and his colleagues will have accomplished an enormous feat in American central banking. Fed officials have historically tipped the economy into a recession when trying to cool inflation from heights like those it reached in 2022. And after several years during which Mr. Powell has faced criticism for failing to anticipate how lasting and serious inflation would become, such a success would be likely to shape his legacy.“The Fed right now looks pretty dang good, in terms of how things are turning out,” said Michael Gapen, head of U.S. Economics at Bank of America.Respondents in a survey of market participants carried out regularly by the research firm MacroPolicy Perspectives are more optimistic about the odds of a soft landing than ever before: 74 percent said that no recession was needed to lower inflation back to the Fed’s target in a Dec. 1-7 survey, up from a low of 41 percent in September 2022.Fed staff members began to anticipate a recession after several banks blew up early this year, but stopped forecasting one in July.People were glum about the prospects for a gentle landing partly because they thought the Fed had been late to react to rapid inflation. Mr. Powell and his colleagues argued throughout 2021 that higher prices were likely to be “transitory,” even as some prominent macroeconomists warned that it might last.The Fed was forced to change course drastically as those warnings proved prescient: Inflation has now been above 2 percent for 33 straight months.Once central bankers started raising interest rates in response, they did so rapidly, pushing them from near-zero at the start of 2022 to their current range of 5.25 to 5.5 percent by July of this year. Many economists worried that slamming the brakes on the economy so abruptly would cause whiplash in the form of a recession.But the transitory call is looking somewhat better now — “transitory” just took a long time to play out.Much of the reason inflation has moderated comes down to the healing of supply chains, easing of shortages in key goods like cars, and a return to something that looks more like prepandemic spending trends in which households are buying a range of goods and services instead of just stay-at-home splurges like couches and exercise equipment.In short, the pandemic problems that the Fed had expected to prove temporary did fade. It just took years rather than months.“As a charter member of team transitory, it took a lot longer than many of us thought,” said Richard Clarida, the former Fed vice chair who served until early 2022. But, he noted, things have adjusted.Fed policies have played a role in cooling demand and keeping consumers from adjusting their expectations for future inflation, so “the Fed does deserves some credit” for that slowdown.While higher interest rates didn’t heal supply chains or convince consumers to stop buying so many sweatpants, they have helped to cool the market for key purchases like housing and cars somewhat. Without those higher borrowing costs, the economy might have grown even more strongly — giving companies the wherewithal to raise prices more drastically.Now, the question is whether inflation will continue to cool even as the economy hums along at a solid clip, or whether it will take a more marked economic slowdown to drive it down the rest of the way. The Fed itself expects growth to slow substantially next year, to 1.4 percent from 2.6 percent this year, based on fresh projections.“Certainly they’ve done very well, and better than I had anticipated,” said William English, a former senior Fed economist who is now a professor at Yale. “The question remains: Will inflation come all the way back to 2 percent without more slack in the labor and goods markets than we’ve seen so far?”To date, the job market has shown little sign of cracking. Hiring and wage growth have slowed, but unemployment stood at a historically low 3.7 percent in November. Consumers continue to spend, and growth in the third quarter was unexpectedly hot.While those are positive developments, they keep alive the possibility that the economy will have a little too much vim for inflation to cool completely, especially in key services categories.“We don’t know how long it will take to go the last mile with inflation,” said Karen Dynan, a former Treasury chief economist who teaches at Harvard. Given that, setting policy next year could prove to be more of an art than a science: If growth is cooling and inflation is coming down, cutting rates will be a fairly obvious choice. But what if growth is strong? What if inflation progress stalls but growth collapses?Mr. Powell acknowledged some of that uncertainty this week.“Inflation keeps coming down, the labor market keeps getting back into balance,” he said. “It’s so far, so good, although we kind of assume that it will get harder from here, but so far, it hasn’t.”Mr. Powell, a lawyer by training who spent a chunk of his career in private equity, is not an economist and has at times expressed caution about using key economic models and guides too religiously. That lack of devotion to the models may come in handy over the next year, Mr. Gapen of Bank of America said.It may leave the Fed chief — and the institution he leads — more flexible as they react to an economy that has been devilishly tricky to predict because, in the wake of the pandemic, past experience is proving to be a poor precedent.“Maybe it was right to have a guy who was skeptical of frameworks manage the ship during the Covid period,” Mr. Gapen said. More

Among thirty-two market participants polled this week, 29 or 91% expected the People’s Bank of China (PBOC) to keep the borrowing cost of one-year medium-term lending facility (MLF) loans unchanged, while the remaining three projected a marginal interest rate cut.The interest rate on the MLF loans currently stands at 2.5%.Additionally, 26 or 81% of all respondents predicted that the central bank would inject fresh funds to exceed the maturing 650 billion yuan ($91.11 billion) worth of the MLF loans on Friday.”We look for an outsized MLF to buffer liquidity demand emanating from bond sales and loans; if there is no outsized MLF, then a reserve requirement ratio (RRR) cut is probably needed,” said Frances Cheung, rates strategist at OCBC Bank.Over recent months, China has started to unleash fresh stimulus to shore up the economy. In a surprise move, Beijing in late October approved 1 trillion yuan of sovereign bond issuance for this year – its first such budget deficit expansion in a fiscal year in 23 years – and passed a bill to allow local governments to frontload part of their 2024 bond quotas.The PBOC injected a net 600 billion yuan of cash via MLF loans into the banking system in November, the biggest monthly increase since December 2016.Expectations of an interest rate reduction has increased slightly as China has been facing heightened deflationary pressure, with consumer prices falling the fastest in three years in November while factory-gate deflation deepened.”The main barrier to PBOC rate reductions since the middle of this year has been the strength of the dollar,” said Julian Evans-Pritchard, head of China economics at Capital Economics.”However, U.S. yields have fallen and the renminbi has strengthened recently. The currency has now returned to levels that the PBOC is more comfortable with, which should open the door to a resumption of rate cuts.”With China’s economy sputtering and the U.S. dollar surging until recently, the yuan has had a volatile year, having weakened 6.14% to the dollar at one point before giving back some of the losses on views that U.S. interest rates have peaked.On Wednesday, the Federal Reserve took a decidedly dovish tilt by flagging rate cuts were on the way next year.The yuan strengthened 2.55% in November, its best month this year, but it is still down about 3.3% year-to-date.China will step up policy adjustments to support an economic recovery in 2024, state media said, following the annual Central Economic Work Conference held from Dec. 11-12, during which top leaders set economic targets for next year.”This signals that the Chinese leadership wants to put more weight on the economy than it did earlier this year,” said Tommy Wu, senior China economist at Commerzbank (ETR:CBKG).”Monetary policy will continue to be about providing sufficient but not excessive liquidity. This means any rate cuts and stimulus measures will likely be modest.”($1 = 7.1341 Chinese yuan) More

MANILA (Reuters) -The Philippine central bank kept its benchmark interest rate steady at 6.50% for a second straight meeting on Thursday as price pressures have started to ease, but said policy would have to stay “sufficiently tight” to bring inflation back to target. All but one of the 24 economists in a Dec. 5-11 Reuters poll correctly predicted the central bank’s decision. One expected a quarter-point hike.”The Monetary Board continues to see the need to keep current policy settings sufficiently tight,” Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona told a press conference, reiterating the central bank’s readiness to adjust policy as needed.Annual inflation rose at its slowest pace in 20 months in November at 4.1% versus the previous month’s 4.9%, bringing the average rate over the 11-month period to 6.2%, which was still well outside the central bank’s 2%-4% target.The central bank lowered its risk-adjusted inflation forecast to 6.0% this year from 6.1%, and to 4.2% next year, from 4.4%, but noted that risks to inflation “still leans significantly toward the upside.”Economists in the same Reuters poll believed the central bank was done hiking rates, with median forecasts showing policy on hold until the end of the second quarter of 2024, with the next move likely to be a cut. “With inflation headed lower and the Fed dovish, more signs point to BSP being done with rate hikes,” ING Economist Nicholas Mapa said on X platform. But when asked if the central bank was nearing or at the end of its tightening cycle, senior assistant governor Illuminada Sicat said: “We need some firm indications that inflation expectations are already anchored firmly within the target range.”The Fed left interest rates unchanged on Wednesday and Chair Jerome Powell said its historic tightening of monetary policy is likely over, with a discussion of cuts in borrowing costs coming “into view”. More