Economy

The New York Fed’s Survey of Consumer Expectations put the three-year inflation outlook at 2.3%, the lowest in a data series going back to June 2013.
Household spending is expected to increase by 4.9%, which is 0.2 percentage point lower than in June and the lowest reading since April 2021.

People shop at a grocery store in Brooklyn on July 11, 2024 in New York City.
Spencer Platt | Getty Images

Consumers grew more confident in July that inflation will be less of a problem in the coming years, according to a New York Federal Reserve report Monday that showed the three-year outlook at a new low.
The latest views from the monthly Survey of Consumer Expectations indicate that respondents see inflation staying elevated over the next year but then receding in the next couple of years after that.

In fact, the three-year portion of the survey showed consumers expecting inflation at just 2.3%, down 0.6 percentage point from June and the lowest in the history of the survey, going back to June 2013.
The results come with investors on edge about the state of inflation and whether the Federal Reserve might be able to reduce interest rates as soon as next month. Economists view expectations as a key for inflation as consumers and business owners will adjust their behavior if they think prices and labor costs are likely to continue to rise.
On Wednesday, the Labor Department will release its own monthly inflation reading, the consumer price index, which is expected to show an increase of 0.2% in July and an annual rate of 3%, Dow Jones estimates show. That’s still a full percentage point away from the Fed’s 2% goal but about one-third of where it was two years ago.
Markets have fully priced in the likelihood of at least a quarter percentage point rate cut in September and a strong likelihood that the Fed will lower by a full percentage point by the end of the year.
While the medium-term outlook improved, inflation expectations on the one- and five-year horizons stood unchanged at 3% and 2.8%, respectively.

However, there was some other good inflation news in the survey.
Respondents expect the price of gas to increase by 3.5% over the next year, 0.8 percentage point less than in June, and food to see a rise of 4.7%, which is 0.1 percentage point lower than a month ago.
In addition, household spending is expected to increase by 4.9%, which is 0.2 percentage point lower than in June and the lowest reading since April 2021, right around the time when the current inflation surge began.
Conversely, expectations rose for medical care, college education and rent costs. The outlook for college costs jumped to a 7.2% increase, up 1.9 percentage points, while the rent component — which has been particularly nettlesome for Fed officials who have been looking for housing costs to decline — is seen as rising by 7.1%, or 0.6 percentage point more than June.
Expectations for employment brightened, despite the rising unemployment rate. The perceived probability of losing one’s job in the next year fell to 14.3%, down half a percentage point, while the expectation of leaving one’s job voluntarily, a proxy for worker confidence about opportunities in the labor market, climbed to 20.7%, a 0.2 percentage point increase for the highest reading since February 2023.

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Highlighting consumer spending trends, Moynihan noted a significant slowdown in growth.”In our consumer base of 60 million customers spending every week, what you’re seeing is they’re spending at a rate of growth of this year over last year, for July and August so far, about 3%. That is half the rate it was last year at this time,” Moynihan told CBS News on August 11.He emphasized that while consumers still have money in their accounts, they are “depleting a little bit,” suggesting they’re tapping into savings to maintain their lifestyles, especially during the summer months.Addressing the Federal Reserve’s approach, Moynihan cautioned against maintaining high rates for too long.”We’ve won the war on inflation, it’s come down. It’s not where people want it yet, but we got to be careful that we don’t try to get so perfect that we actually put us in recession,” he said to the CBS host.He advocated for a more accommodating monetary policy, stating, “I think right now, it’s time for them to start to take the- become a little more accommodative, and take off the restrictions and let the thing put cool.”He added: “They’ve told people rates probably aren’t going to go up, but if they don’t start taking them down relatively soon, you could dispirit the American consumer.”When questioned about political influences on the Federal Reserve, especially in light of former President Donald Trump’s recent comments suggesting greater presidential control over the Fed, Moynihan defended the institution’s independence.”I think if you look around the world’s economies and you see where Fed central banks are independent and operate freely, they tend to fare better than the ones that don’t,” he remarked.Moynihan concluded by acknowledging the myriad of advice the Fed receives, including his own. “I think the strong central bank has to take all that advice and process it,” he said, emphasizing the importance of the Fed’s autonomy in navigating economic challenges. More

While the elevated risk of a recession persists, the report indicates that recent economic data have not significantly worsened, suggesting a somewhat stabilized outlook. “While we dropped our recession call in the spring, we have been consistently highlighting that the economy was undergoing a significant slowdown (from over 3% growth in 2023 to around 1½ in 2024 (Q4/Q4)),” the analysts said.This slowdown has raised concerns among market participants, particularly following disappointing employment data. However, despite these concerns, UBS maintains that the probability of a recession, while elevated, has not shown any abrupt changes.UBS tracks 16 leading hard data indicators to gauge economic health. As of June 2024, these indicators suggest a continued sideways movement, with no clear upward or downward momentum. The aggregate hard data factor, which measures the average of these indicators, has remained just below zero, indicating a lack of significant improvement or deterioration. The implied recession probability from this model stands at 80%, slightly lower than earlier in the year but still concerningly high.Interestingly, the current contractionary phase of the hard data cycle has lasted for 28 months, making it the longest such period without triggering a recession. Historically, the pre-Global Financial Crisis (GFC) contraction phase lasted 20 months, with an average of 12 months before a recession was declared by the National Bureau of Economic Research (NBER). This prolonged period of contraction without a recession suggests that while certain interest-sensitive and cyclical sectors remain weak, overall consumer strength has so far mitigated the risk of a downturn.UBS also assesses recession risk by analyzing the slope of the yield curve, a key indicator of market expectations for future economic activity. The yield curve has been inverted since July 2022, a traditional signal of an impending recession. However, the probability of a recession based on the yield curve has decreased to 50% in July 2024, down from 60% in the spring and 90% a year ago. This decline reflects a slight easing in the depth of the yield curve inversion, particularly in the 2 to 7-year maturity range.The yield curve’s prolonged inversion without a subsequent recession is unusual, marking the longest such period on record. This anomaly may indicate that while the signal remains concerning, other factors, such as strong consumer spending and labor market resilience, are helping to stave off a recession.UBS also monitors credit market indicators, including leverage and interest coverage ratios, and data from the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS). The recession probability from these credit market indicators currently stands at 28%, a level that has remained relatively stable since it began rising in the second quarter of 2022. While this probability is lower than those derived from hard data and yield curve models, it still underscores the fragility of the current economic expansion.The U.S. economy’s resilience has largely been supported by strong consumer spending, particularly among upper-income households benefiting from positive wealth effects and ample liquidity. However, UBS warns that as fiscal support diminishes, the economy’s reliance on this consumer strength makes it vulnerable to shocks. The labor market’s gradual slowdown, while in line with UBS’s projections, adds to the fragility of the expansion, emphasizing the need for cautious optimism. More

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The markets are currently banking on aggressive interest rate cuts by the Federal Reserve, but a rise in inflation could quickly unravel these expectations, leading to what Gavekal terms a “nasty shock.”They note that the futures market is currently pricing in a 100% certainty of a rate cut on September 18, with a 50% chance of a more substantial 50 basis point cut.Furthermore, there is an expectation of a full 100 basis point cut by the end of 2024.However, Gavekal cautions that an uptick in inflation could trigger a “violent position adjustment,” forcing investors to rethink the Fed’s trajectory.According to Gavekal, the debate within their team reflects the uncertainty in the broader market. Some analysts believe structural factors will push inflation above the Fed’s 2% target, while others argue that factors like a contraction in money supply and easing supply bottlenecks will curb inflation.”Yes, July’s employment report showed the labor market continues to cool. This implies wage growth will continue to moderate, reinforcing the disinflation narrative. At the margin, it adds to the case for rate cuts. But an uptick in inflation would undermine this case in the short term,” said Gavekal.The Fed’s willingness to cut rates hinges on inflation cooperating. If inflation surprises on the upside, the Fed might delay cuts, causing a rebound in the US dollar, higher bond yields, and pressure on US equities, especially growth stocks.Gavekal suggests that in the event of such an inflation scare, the safest assets might be US dollar cash, T-bills, and inflation-protected treasuries. As Gavekal notes, with so much riding on the upcoming CPI release, it may be prudent for investors to brace for potential volatility on Wednesday. More

WASHINGTON (Reuters) – The Biden administration on Monday unveiled new rules and efforts targeting consumer annoyances ranging from hard-to-cancel subscriptions, cumbersome insurance forms, and not being able to get a live customer service agent on the phone. The “Time is Money” initiative is aimed at cracking down on endless hold times or deliberately complicated procedures that cost consumers, said Neera Tanden, U.S. President Joe Biden’s domestic policy adviser.She said it shouldn’t take 45 minutes to cancel a subscription that it took one click to order, and people shouldn’t be forced to print out complicated forms to file an insurance claim. Often they give up, she said, leaving companies holding onto money that consumers could spend elsewhere.”These seemingly small inconveniences don’t really happen by accident. They have huge financial consequences,” she said.The push is part of an effort by Biden aimed at easing strains on voters’ pocketbooks amid persistent inflation concerns that have eroded support for the Democratic Party. Vice President Kamala Harris, now the Democratic presidential candidate, is making a similar case as she campaigns across the country.Business executives have chafed at what they see as efforts by Democrats to vilify and over-regulate industry. Republican presidential candidate Donald Trump has campaigned on relieving companies of regulatory burdens.The new actions use existing government oversight tools and are not aimed at “shaming corporations writ large,” Tanden said. They do not require congressional approval, an official said, and some will be phased in over coming months. The Federal Trade Commission is accepting comments on a proposed rule that would require companies to make it as easy to cancel a subscription or service as it was to sign up, the official said.The Federal Communications Commission is moving on Monday toward setting similar requirements for cable, broadband and cellphone service.The Labor and Health and Human Services departments will also write to big healthcare companies and insurers, urging them to allow consumers to file forms online.Several U.S. agencies are working on new rules requiring companies to offer customers a single button to reach a real person, instead of navigating a lengthy phone tree “doom loop,” the officials said.The Consumer Financial Protection Bureau is also planning to issue rules cracking down on “time-wasting chatbots” used by banks, the official said. More

The recently established U.S.-China Financial Working Group is set to meet for discussions about financial stability and curbing the flow of fentanyl.A group of senior Biden administration officials is traveling to Shanghai this week for a round of high-level meetings intended to keep the economic relationship between the United States and China on stable footing amid mounting trade tensions between the two countries.The talks will take place on Thursday and Friday and are being convened through the U.S.-China Financial Working Group, which was created last year. Officials are expected to discuss ways to maintain economic and financial stability, capital markets and efforts to curb the flow of fentanyl into the United States.Although communication between the United States and China has improved over the past year, the economic relationship remains fraught because of disagreements over industrial policy and China’s dominance over green energy technology. The Biden administration imposed new tariffs in May on an array of Chinese imports, including electric vehicles, solar cells, semiconductors and advanced batteries. The United States is also restricting American investments in Chinese sectors that policymakers believe could threaten national security.The U.S. delegation, which is scheduled to depart on Monday, is being led by Brent Neiman, the Treasury Department’s assistant secretary for international finance. He will be joined by officials from the Federal Reserve and the Securities and Exchange Commission. They are expected to meet with the People’s Bank of China’s deputy governor, Xuan Changneng, and other senior Chinese officials.“We intend for this F.W.G. meeting to include conversations on financial stability, issues related to cross-border data, lending and payments, private-sector efforts to advance transition finance, and concrete steps we can take to improve communication in the event of financial stress,” Mr. Neiman said ahead of the trip, referring to the abbreviation for the financial working group.Treasury Secretary Janet L. Yellen pressed Chinese officials during her trip to China in April to stop flooding global markets with cheap clean-energy products.Pool photo by Tatan SyuflanaAmerican and Chinese financial regulators have been conducting financial shock exercises this year to coordinate their responses in the event of a crisis, like a cyberattack or climate disaster, that might affect the international banking or insurance systems.The Biden administration has been urging China to take action to prevent chemicals used to produce fentanyl from being exported to other countries and smuggled into the United States. There were signs of progress this month when China announced that it would put new restrictions on three of these chemicals, a move that the United States described as a “valuable step forward.”Other economic issues between the two countries continue to be contentious. Treasury Secretary Janet L. Yellen pressed Chinese officials during her trip to China in April to stop flooding global markets with cheap clean-energy products, warning that its excess industrial capacity would distort global supply chains.But after a meeting of Communist Party leaders last month, there was little indication that China would retreat from its investments in high-tech manufacturing or take major steps toward rebalancing its economy by bolstering domestic consumption.The talks this week are the fifth meeting of the financial working group and will be the second time the officials have convened in China. More