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3 Facts That Help Explain a Confusing Economic Moment

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3 Facts That Help Explain a Confusing Economic Moment

The path to a “soft landing” doesn’t seem as smooth as it did four months ago. But the expectations of a year ago have been surpassed.April 13, 2024The economic news of the past two weeks has been enough to leave even seasoned observers feeling whipsawed. The unemployment rate fell. Inflation rose. The stock market plunged, then rebounded, then dropped again.Take a step back, however, and the picture comes into sharper focus.Compared with the outlook in December, when the economy seemed to be on a glide path to a surprisingly smooth “soft landing,” the recent news has been disappointing. Inflation has proved more stubborn than hoped. Interest rates are likely to stay at their current level, the highest in decades, at least into the summer, if not into next year.Shift the comparison point back just a bit, however, to the beginning of last year, and the story changes. Back then, forecasters were widely predicting a recession, convinced that the Federal Reserve’s efforts to control inflation would inevitably result in job losses, bankruptcies and foreclosures. And yet inflation, even accounting for its recent hiccups, has cooled significantly, while the rest of the economy has so far escaped significant damage.“It seems churlish to complain about where we are right now,” said Wendy Edelberg, director of the Hamilton Project, an economic policy arm of the Brookings Institution. “This has been a really remarkably painless slowdown given what we all worried about.”The monthly gyrations in consumer prices, job growth and other indicators matter intensely to investors, for whom every hundredth of a percentage point in Treasury yields can affect billions of dollars in trades.But for pretty much everyone else, what matters is the somewhat longer run. And from that perspective, the economic outlook has shifted in some subtle but important ways.

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Change in prices from a year earlier in select categories
Notes: “Groceries” chart shows price index for food at home. “Furniture” includes bedding.Source: Bureau of Labor StatisticsBy The New York Times

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The unemployment rate
Source: Bureau of Labor StatisticsBy The New York Times

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The federal funds target rate
Note: The rate since December 2008 is the upper limit of the federal funds target range.Source: The Federal ReserveBy The New York TimesWe are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

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    Soft Landing or No Landing? Fed’s Economic Picture Gets Complicated.

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    Stubborn inflation and strong growth could keep the Federal Reserve wary about interest rate cuts, eager to avoid adding vim to the economy.America seemed headed for an economic fairy-tale ending in late 2023. The painfully rapid inflation that had kicked off in 2021 appeared to be cooling in earnest, and economic growth had begun to gradually moderate after a series of Federal Reserve interest rate increases.But 2024 has brought a spate of surprises: The economy is expanding rapidly, job gains are unexpectedly strong and progress on inflation shows signs of stalling. That could add up to a very different conclusion.Instead of the “soft landing” that many economists thought was underway — a situation in which inflation slows as growth gently calms without a painful recession — analysts are increasingly wary that America’s economy is not landing at all. Rather than settling down, the economy appears to be booming as prices continue to climb more quickly than usual.A “no landing” outcome might feel pretty good to the typical American household. Inflation is nowhere near as high as it was at its peak in 2022, wages are climbing and jobs are plentiful. But it would cause problems for the Federal Reserve, which has been determined to wrestle price increases back to their 2 percent target, a slow and steady pace that the Fed thinks is consistent with price stability. Policymakers raised interest rates sharply in 2022 and 2023, pushing them to a two-decade high in an attempt to weigh on growth and inflation.If inflation gets stuck at an elevated level for months on end, it could prod Fed officials to hold rates high for longer in an effort to cool the economy and ensure that prices come fully under control.“Persistent buoyancy in inflation numbers” probably “does give Fed officials pause that maybe the economy is running too hot right now for rate cuts,” said Kathy Bostjancic, chief economist at Nationwide. “Right now, we’re not even seeing a ‘soft landing’ — we’re seeing a ‘no landing.’”We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

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    Is the Boom-and-Bust Business Cycle Dead?

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    There is a growing view that the U.S. business cycle has changed (for better) in a more diversified economy. To some, that sounds like tempting fate.For much of modern history, even the richest nations have been subject to big perennial upswings and crashes in commercial activity almost as fixed as the four seasons.Periods of economic growth get overstretched by increased risk-taking. Hiring and investment crest and fall into a contraction as consumer confidence wanes and spending craters. Sales fall, bankruptcies and unemployment rise. Then, in the depths of a recession, debts are settled, panic abates, green shoots appear, and banks begin lending more easily again — fueling a recovery that enables a new upswing.But a brigade of academic economists and prominent voices on Wall Street are asking if the unruly business cycle they learned in school, and witnessed in practice, has fundamentally morphed into a tamer beast.Rick Rieder, who manages about $3 trillion in assets at the investment firm BlackRock, is one of them.“There is a lot of ink spilled on what type of landing we will see for the U.S. economy,” he wrote in a note to clients last summer — employing the common metaphor for whether the U.S. economy will crash or achieve a “soft landing” of lower inflation, slower growth and mild unemployment.“But one point to keep in mind,” Mr. Rieder continued, “is that satellites don’t land and maybe that is a better analogy for a modern advanced economy” like the United States. In other words, dips in momentum will now happen within a steadier orbit.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

  • 150 Shares99 Views

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    Higher for Longer After All? Investors See Fed Rates Falling More Slowly.

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    Investors went into 2024 expecting the Federal Reserve to cut rates sharply. Stubborn inflation and quick growth call that into question.Investors were betting big on Federal Reserve rate cuts at the start of 2024, wagering that central bankers would lower interest rates to around 4 percent by the end of the year. But after months of stubborn inflation and strong economic growth, the outlook is starting to look much less dramatic.Market pricing now suggests that rates will end the year in the neighborhood of 4.75 percent. That would mean Fed officials had cut rates two or three times from their current 5.3 percent.Policymakers are trying to strike a delicate balance as they contemplate how to respond to the economic moment. Central bankers do not want to risk tanking the job market and causing a recession by keeping interest rates too high for too long. But they also want to avoid cutting borrowing costs too early or too much, which could prod the economy to re-accelerate and inflation to take even firmer root. So far, officials have maintained their forecast for 2024 rate cuts while making it clear that they are in no hurry to lower them.Here’s what policymakers are looking at as they think about what to do with interest rates, how the incoming data might reshape the path ahead, and what that will mean for markets and the economy.What ‘higher for longer’ means.When people say they expect rates to be “higher for longer,” they often mean one or both of two things. Sometimes, the phrase refers to the near term: The Fed might take longer to start cutting borrowing costs and proceed with those reductions more slowly this year. Other times, it means that interest rates will remain notably higher in the years to come than was normal in the decade leading up to the 2020 pandemic.When it comes to 2024, top Fed officials have been very clear that they are primarily focused on what is happening with inflation as they debate when to lower interest rates. If policymakers believe that price increases are going to return to their 2 percent goal, they could feel comfortable cutting even in a strong economy.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

  • 138 Shares153 Views

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    U.S. Employers Added 303,000 Jobs in 39th Straight Month of Growth

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    The March data increased confidence among economists and investors that robust hiring and rising wages can continue to coexist while inflation eases.Another month, another burst of better-than-expected job gains.Employers added 303,000 jobs in March on a seasonally adjusted basis, the Labor Department reported on Friday, and the unemployment rate fell to 3.8 percent, from 3.9 percent in February. Expectations of a recession among experts, once widespread, are now increasingly rare.It was the 39th straight month of job growth. And employment levels are now more than three million greater than forecast by the nonpartisan Congressional Budget Office just before the pandemic shock.The resilient data generally increased confidence among economists and market investors that the U.S. economy has reached a healthy equilibrium in which a steady roll of commercial activity, growing employment and rising wages can coexist, despite the high interest rate levels of the last two years.From late 2021 to early 2023, inflation was outstripping wage gains, but that also now appears to have firmly shifted, even as wage increases decelerate from their roaring rates of growth in 2022. Average hourly earnings for workers rose 0.3 percent in March from the previous month and were up 4.1 percent from March 2023.Wage growth continues to slowYear-over-year percentage change in earnings vs. inflation More

  • 138 Shares97 Views

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    Fed Chair Says Central Bank Need Not ‘Hurry’ to Cut Rates

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    Jerome Powell said that strong economic growth gives Federal Reserve officials room to be patient, and he emphasized the institution’s political independence.Jerome H. Powell, the chair of the Federal Reserve, said on Friday that resilient economic growth is giving the central bank the flexibility to be patient before cutting interest rates.Fed officials raised interest rates sharply from early 2022 to mid-2023, and they have left them at about 5.3 percent since last July. That relatively high level essentially taps the brakes on the economy, in part by making it expensive to borrow to buy a house or start a business. The goal is to keep rates high enough, for long enough, to wrestle inflation back under control.But price increases have cooled notably in recent months — inflation ran at 2.5 percent in February, a report on Friday showed, far below its 7.1 percent peak in 2022 for that gauge and just slightly above the Fed’s 2 percent goal. Given that slowdown, officials have been considering when and how much they can cut interest rates this year.While investors were initially hopeful that rate cuts would come early in the year and be substantial, Fed officials have recently struck a cautious tone, maintaining that they want greater confidence that inflation was under control. Mr. Powell reiterated that message on Friday.“We can, and we will be, careful about this decision — because we can be,” Mr. Powell said, speaking in a question-and-answer session with the “Marketplace” host Kai Ryssdal in San Francisco. “The economy is strong: We see very strong growth.”Friday’s Personal Consumption Expenditures report showed that consumers are still spending at a rapid clip. Recent hiring data has also remained solid. In all, the economy seems to be holding up even with the Fed’s high interest rates.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

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    A Key Inflation Gauge Hovers Above Fed’s Target

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    The Fed’s preferred inflation gauge was relatively stable on an annual basis, the latest reminder that bringing inflation down is a bumpy process.The latest reading of the Federal Reserve’s favorite inflation gauge hovered above the level that officials aim for, evidence that price increases are proving stubborn even after declining notably in 2023.The Personal Consumption Expenditures inflation measure, which the Fed officially targets as it tries to achieve 2 percent annual inflation, climbed by 2.5 percent in February compared to a year earlier, according to a report released by the Commerce Department on Friday. Economists in a Bloomberg survey had expected an increase of that size, following a rise of 2.4 percent in January.The closely watched measure that strips out volatile food and fuel prices for a clearer reading of underlying inflation climbed 2.8 percent, in line with what economists had expected for that “core” index and slightly cooler than the previous month.Those inflation readings are much milder than the highs reached in 2022, when overall inflation peaked at 7.1 percent and core at nearly 5.6 percent. But the latest numbers mark a speed bump after months of deceleration, one that is likely to keep Fed officials wary as they contemplate their next steps on monetary policy.Central bankers quickly raised interest rates to about 5.3 percent between early 2022 and the middle of last year, and have held them steady at that relatively high level for months in an effort to cool the economy and rein in inflation. Officials are now considering when they can cut rates, but they want to be sure that inflation is on a clear path back to 2 percent before adjusting policy.Fed officials are weighing two big risks as they consider their next steps. Leaving rates too high for too long could squeeze the economy severely, causing more damage than is necessary. But lowering them too early or by too much could bolster economic activity and make it harder to fully stamp inflation out. If rapid price increases become an embedded feature of the economy, officials worry that it could prove even more difficult to quash them down the road.As policymakers think about how much more cooling in inflation they need to see before cutting interest rates, they are watching both progress on prices and the momentum in the economy as a whole.Consumers have been spending strongly, and while there are some signs of cracks under the surface, that continued in February. Friday’s report, which also includes data about consumer spending, showed that consumption climbed 0.8 percent from the previous month, notably stronger than economists’ expectations. Spending was strong even after adjusting for inflation.The labor market has also remained solid, though job openings have come down after reaching very high levels in 2021 and 2022. Fed officials have suggested that they might view a marked slowdown in hiring — or a jump in unemployment — as a reason to cut rates earlier.For now, investors expect central bankers to cut interest rates in June after holding them steady at their next meeting, in May. More

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    What Comes Next for the Housing Market?

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    The Federal Reserve still expects to cut rates this year, and a change in selling practices could shake up home shopping. Here’s the outlook.Federal Reserve officials are planning to cut interest rates this year, real estate agents are likely to slash their commissions after a major settlement and President Biden has begun to look for ways his administration can alleviate high housing costs.A lot of change is happening in the housing market, in short. While sales have slowed markedly amid higher interest rates, both home prices and rents remain sharply higher than before the pandemic. The question now is whether the recent developments will cool costs down.Economists who study the housing market said they expected cost increases to be relatively moderate over the next year. But they don’t expect prices to actually come down in most markets, especially for home purchases. Demographic trends are still fueling solid demand, and cheaper mortgages could lure buyers into a market that still has too few homes for sale, even if lower rates could help draw in more supply around the edges.“It has become almost impossible for me to imagine home prices actually going down,” said Glenn Kelman, the chief executive of Redfin. “The constraints on inventory are so profound.”Here’s what is changing and what it could mean for buyers, sellers and renters.Interest rates are expected to fall.Mortgages have been pricey lately in part because the Fed has lifted interest rates to a more-than-two-decade high. The central bank doesn’t set mortgage rates, but its policy moves trickle out to make borrowing more expensive across the economy. Rates on 30-year mortgages have been hovering just below 7 percent, up from below 3 percent as recently at 2021.Those rates could come down when the Fed lowers borrowing costs, particularly if investors come to expect that it will cut rates more notably than what they currently anticipate.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

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    Japan’s Labor Market Has a Lesson for the Fed: Women Can Surprise You

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    Japan’s improved labor force participation for women is a reminder not to assume that job market limits are clear and finite.Japan’s economy has rocketed into the headlines this year as inflation returns for the first time in decades, workers win wage gains and the Bank of Japan raises interest rates for the first time in 17 years.But there’s another, longer-running trend happening in the Japanese economy that could prove interesting for American policymakers: Female employment has been steadily rising.Working-age Japanese women have been joining the labor market for years, a trend that has continued strongly in recent months as a tight labor market prods companies to work to attract new employees.The jump in female participation has happened partly by design. Since about 2013, the Japanese government has tried to make both public policies and corporate culture more friendly to women in the work force. The goal was to attract a new source of talent at a time when the world’s fourth-largest economy faces an aging and shrinking labor market.“Where Japan did well over the recent decade is putting the care infrastructure in place for working parents,” Nobuko Kobayashi, a partner at EY-Parthenon in Japan, wrote in an email.Still, even some who were around when the “womenomics” policies were designed have been caught off guard by just how many Japanese women are now choosing to work thanks to the policy changes and to shifting social norms.Japanese Women Are Working in Greater NumbersThe share of women who are active in the job market has picked up sharply in Japan.

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    Female labor force participation rate, ages 25-54
    Source: O.E.C.D.By The New York TimesWe are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More