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    Fragile Global Economy Faces New Crisis in Israel-Gaza War

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    A war in the Middle East could complicate efforts to contain inflation at a time when world output is “limping along.”The International Monetary Fund said on Tuesday that the pace of the global economic recovery is slowing, a warning that came as a new war in the Middle East threatened to upend a world economy already reeling from several years of overlapping crises.The eruption of fighting between Israel and Hamas over the weekend, which could sow disruption across the region, reflects how challenging it has become to shield economies from increasingly frequent and unpredictable global shocks. The conflict has cast a cloud over a gathering of top economic policymakers in Morocco for the annual meetings of the I.M.F. and the World Bank.Officials who planned to grapple with the lingering economic effects of the pandemic and Russia’s war in Ukraine now face a new crisis.“Economies are at a delicate state,” Ajay Banga, the World Bank president, said in an interview on the sidelines of the annual meetings. “Having war is really not helpful for central banks who are finally trying to find their way to a soft landing,” he said. Mr. Banga was referring to efforts by policymakers in the West to try and cool rapid inflation without triggering a recession.Mr. Banga said that so far, the impact of the Middle East attacks on the world’s economy is more limited than the war in Ukraine. That conflict initially sent oil and food prices soaring, roiling global markets given Russia’s role as a top energy producer and Ukraine’s status as a major exporter of grain and fertilizer.“But if this were to spread in any way then it becomes dangerous,” Mr. Banga added, saying such a development would result in “a crisis of unimaginable proportion.”Oil markets are already jittery. Lucrezia Reichlin, a professor at the London Business School and a former director general of research at the European Central Bank, said, “the main question is what’s going to happen to energy prices.”Ms. Reichlin is concerned that another spike in oil prices would pressure the Federal Reserve and other central banks to further push up interest rates, which she said have risen too far too fast.As far as energy prices, Ms. Reichlin said, “we have two fronts, Russia and now the Middle East.”Smoke rising from bombings of Gaza City and its northern borders by Israeli planes.Samar Abu Elouf for The New York Times Pierre-Olivier Gourinchas, the I.M.F.’s chief economist, said it’s too early to assess whether the recent jump in oil prices would be sustained. If they were, he said, research shows that a 10 percent increase in oil prices would weigh down the global economy, reducing output by 0.15 percent and increasing inflation by 0.4 percent next year. In its latest World Economic Outlook, the I.M.F. underscored the fragility of the recovery. It maintained its global growth outlook for this year at 3 percent and slightly lowered its forecast for 2024 to 2.9 percent. Although the I.M.F. upgraded its projection for output in the United States for this year, it downgraded the euro area and China while warning that distress in that nation’s real estate sector is worsening.“We see a global economy that is limping along, and it’s not quite sprinting yet,” Mr. Gourinchas said. In the medium term, “the picture is darker,” he added, citing a series of risks including the likelihood of more large natural disasters caused by climate change.Europe’s economy, in particular, is caught in the middle of growing global tensions. Since Russia invaded Ukraine in February 2022, European governments have frantically scrambled to free themselves from an over-dependence on Russian natural gas.They have largely succeeded by turning, in part, to suppliers in the Middle East.Over the weekend, the European Union swiftly expressed solidarity with Israel and condemned the surprise attack from Hamas, which controls Gaza.Some oil suppliers may take a different view. Algeria, for example, which has increased its exports of natural gas to Italy, criticized Israel for responding with airstrikes on Gaza.Even before the weekend’s events, the energy transition had taken a toll on European economies. In the 20 countries that use the euro, the Fund predicts that growth will slow to just 0.7 percent this year from 3.3 percent in 2022. Germany, Europe’s largest economy, is expected to contract by 0.5 percent.High interest rates, persistent inflation and the aftershocks of spiraling energy prices are also expected to slow growth in Britain to 0.5 percent this year from 4.1 percent in 2022.Sub-Saharan Africa is also caught in the slowdown. Growth is projected to shrink this year by 3.3 percent, although next year’s outlook is brighter, when growth is forecast to be 4 percent.Staggering debt looms over many of these nations. The average debt now amounts to 60 percent of the region’s total output — double what it was a decade ago. Higher interest rates have contributed to soaring repayment costs.This next-generation of sovereign debt crises is playing out in a world that is coming to terms with a reappraisal of global supply chains in addition to growing geopolitical rivalries. Added to the complexities are estimates that within the next decade, trillions of dollars in new financing will be needed to mitigate devastating climate change in developing countries.One of the biggest questions facing policymakers is what impact China’s sluggish economy will have on the rest of the world. The I.M.F. has lowered its growth outlook for China twice this year and said on Tuesday that consumer confidence there is “subdued” and that industrial production is weakening. It warned that countries that are part of the Asian industrial supply chain could be exposed to this loss of momentum.In an interview on her flight to the meetings, Treasury Secretary Janet L. Yellen said that she believes China has the tools to address a “complex set of economic challenges” and that she does not expect its slowdown to weigh on the U.S. economy.“I think they face significant challenges that they have to address,” Ms. Yellen said. “I haven’t seen and don’t expect a spillover onto us.” More

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    Jobs Gains Heat Up Even as the Federal Reserve Looks for Cooling

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    Federal Reserve officials are likely to keep a close eye on the job market’s strength in light of September jobs data, which showed that employers hired at an unexpectedly rapid clip.Employers added 336,000 jobs last month, sharply more than the 170,000 economists had predicted. Fed officials have been keeping careful track of the labor market’s strength as they try to assess both how much more they need to raise interest rates to bring inflation under control and how long borrowing costs should stay high.That pace of hiring suggested that the labor market continues to chug along even in the face of the Fed’s 19-month campaign to cool the economy by raising borrowing costs. Central bankers have lifted rates to a range of 5.25 to 5.5 percent, and suggested at their September meeting that they could make one more rate move in 2023 before holding borrowing costs at a high level throughout 2024.The question now is whether policymakers will see the job market resilience as a welcome development — or a concerning one. The Fed’s next meeting is Oct. 31 to Nov. 1, so policymakers will not receive another employment report before they need to make their next rate decision.Fed officials had embraced a recent slowdown in hiring — and that trend now seems far less certain. But the September jobs report did contain some evidence that the economy is simmering down. The data showed that pay grew at only a modest pace in September, for instance.Given that, the strong job gains alone might not be enough to force the Fed to make another rate increase this year. Officials are likely to continue to watch other incoming data — including an inflation report set for release on Oct. 12 — as they contemplate whether borrowing costs need to rise further.Employment data “continues to say it’s a strong labor market, but it is getting a little bit less tight than we saw before,” Loretta J. Mester, the president of the Federal Reserve Bank of Cleveland, said during a CNN International interview on Friday afternoon. Given that wage growth continued to cool, she said the fresh report “doesn’t really change my view that we have a strong labor market and yet — and good — we also see inflation progress.”Economists noted that a few key developments could slow growth this autumn, which could also keep the Fed from reacting too sharply to the fresh hiring figures. Longer term interest rates in financial markets have climbed sharply in recent weeks, for example, and that will make it more expensive for consumers to finance a car or house purchase and for businesses to expand.“In isolation, economic data would probably justify the Fed hiking at the November meeting — what gives me pause for thought is the fact that long-term yields have increased significantly,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “They will have to weigh how much the recent rise in yields and tightening in financial conditions has done the job for them.”Ms. Mester had previously said that she was in favor of a rate move at the Fed’s upcoming meeting if economic data held up, but added a caveat to that expectation on Friday, in light of the market moves.She said she would make the rate decision “once I get in the room in November — at our next meeting — about whether that’s still true, because there’s other things happening in financial markets.”The jobs report initially made Wall Street wary that the Fed might raise interest rates further, something that would weigh on corporate profits and stock valuations. The S&P 500 slipped just after the report. But stocks rebounded throughout the day — suggesting that investors became less worried as they digested the data, and determined that it suggested economic resilience but not necessarily overheating.Some of that comfort could have come from the news on wages. Average hourly earnings were up 4.2 percent from a year earlier, the mildest increase since June 2021.Unemployment was also in line with what the Fed has been expecting. Officials have continued to predict that unemployment would probably rise slightly as the economy slowed, to about 4.1 percent, which would still be low by historical standards. The rate stood at 3.8 percent as of September, up slightly from 3.4 percent earlier this year.And although September hiring was strong, speed bumps lay ahead for the economy. The recent increase in mortgage rates and other borrowing costs is likely to squeeze growth just as the economy faces other challenges — including the resumption of student loan payments, strikes at car manufacturers and in other industries and dwindling consumer savings piles.“The auto union workers strike will weigh on job growth in October while easing consumer spending and more cautious business activity will lead to slower labor demand,” Gregory Daco, the chief economist at EY-Parthenon, wrote in a note following the report.If officials decide to leave interest rates unchanged at the upcoming meeting, they will have one final opportunity to adjust them this year when they meet on Dec. 12-13.Joe Rennison More

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    Why the Jobs Report Might be Pivotal for a Jittery Stock Market

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    Stocks are sliding, government bond yields are soaring, and investors are reacting strongly to incremental economic information, parsing it for even the slightest hints about the path ahead. .Such sensitivity among investors has left markets jittery — veering between fears that the economy is running too hot and worries about a downturn so sharp that the country tumbles into recession.The squeamishness is most apparent in the $25 trillion market for U.S. Treasuries, where yields on government bonds have risen to highs not seen since 2007. Though the jump in bond yields in part reflects bets on a strong economy, the moves have fanned out into the stock market, too. For stock investors, higher yields are generally a negative — and the S&P 500 index is on track for its fifth consecutive weekly decline.After the government reported on Friday that employers added 336,000 jobs in September, sharply higher than economists had expected, stock futures, which allow investors to bet on the market before the official start of trading, dropped and government bond yields rose near a 16-year high.It’s all about interest rates.There are many different interest rates that matter. There is the rate that the Federal Reserve sets, which is a target for overnight borrowing costs. There are consumer and corporate borrowing rates, like those on credit cards or mortgages. And then there are government debt yields, which partly track the Fed’s policy rate but stretch out over much longer periods and factor in other information such as inflation and economic growth.Arguably the most important of these rates is the yield on the 10-year Treasury bond, a measure of what it would cost the U.S. government to borrow money from investors for 10 years, but also a crucial input to virtually every other long-term interest rate in the world, making it a cornerstone of the global financial system.It also influences how companies are valued and, therefore, it holds sway over the stock market. Higher treasury yields indicate higher costs for consumers and businesses, which typically weigh on the market.This week, the yield on the 10-year Treasury bond rose above 4.80 percent, its highest level since 2007, from 4.57 percent at the end of last week. After coming off that high point in the days before the jobs data was released, the yield quickly snapped back above 4.8 percent after the report on Friday. S&P 500 futures pointed to another decline, adding to a 1.6 percent loss for the week. The S&P 500 is down about 7 percent in the more than two months that the yield has been rising.Rates have been rising for a while. What’s so scary now?The Fed has been raising interest rates for roughly 18 months, but the yield on 10-year Treasuries had remained fairly steady for the first half of 2023, oscillating in a range of 3.5 to 4 percent.Over that period, the S&P 500 rallied nearly 20 percent, buoyed by better-than-expected corporate profits, slowing inflation, a resilient economy and greater consensus about the end of the Fed’s rate-raising cycle.But persistently strong economic data has led to higher expectations for growth, while concerns that inflation could remain stubbornly too high have raised expectations that the Fed may have to keep rates elevated for longer than previously thought to finish the job of taming prices. As a result, in early August, the yield on the 10-year bond began a swift ascent.That move has upended some of the market’s long-held assumptions. After a period of relative stability, investors are re-evaluating what higher rates could mean for consumers and companies, catalyzing a sell-off in the stock market. The S&P 500 slumped nearly 5 percent in September, its worst month of the year so far.Add in a sharply appreciating dollar — also tied to rising interest rates — and wild swings in the cost of oil, and the outlook for the economy has become more uncertain.“All these things thrown into a blender — the uncertainty and the speed of how things are moving — is what has kept the market uneasy,” said George Goncalves, head of U.S. macro strategy at MUFG Securities.Is congressional turmoil a factor?The recent brush with a government shutdown and the removal of Kevin McCarthy as House speaker on Tuesday did not rattle markets on their own, but it did highlight the government’s instability, a few months after narrowly averting a potentially devastating debt default.Rising interest rates have compounded concerns about the government’s finances, with the prospect of high rates focusing attention on the rising costs of servicing the United States’ mammoth debt pile and persistent budget deficits.At the moment, unemployment is low and the economy is performing better than many expected. Should growth slow, the fiscal challenge facing Washington will intensify, said Ajay Rajadhyaksha, global chairman of research at Barclays.And assuming no cuts in spending and that rates remain elevated, Mr. Goncalves said, higher deficits could beget higher yields, which in turn could push deficits higher. More

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    Rates Are Jumping on Wall Street. What Will It Do to Housing and the Economy?

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    A run-up in longer-term interest rates could help the Federal Reserve get the economic cool-down it wants — but it also risks a bumpy landing.Heather Mahmood-Corley, a real estate agent, was seeing decent demand for houses in the Phoenix area just a few weeks ago, with interested shoppers and multiple offers. But as mortgage rates pick up again, she is already watching would-be home buyers retrench.“You’ve got a lot of people on edge,” said Ms. Mahmood-Corley, a Redfin agent who has been selling houses for more than eight years, including more than five in the area.It’s an early sign of the economic fallout from a sharp rise in interest rates that has taken place in markets since the middle of the summer, when many home buyers and Wall Street traders thought that borrowing costs, which had risen rapidly, might be at or near their peak.Rates on longer-term government Treasury bonds have been climbing sharply, partly because investors are coming around to the belief that the Federal Reserve may keep its policy rate higher for longer. That adjustment is playing out in sophisticated financial markets, but the fallout could also spread throughout the economy.Higher interest rates make it more expensive to finance a car purchase, expand a business or borrow for a home. They have already prompted pain in the heavily indebted technology industry, and have sent jitters through commercial real estate markets.The increasing pressure is partly a sign that Fed policy is working: Officials have been lifting borrowing costs since March 2022 precisely because they want to slow the economy and curb inflation by discouraging borrowing and spending. Their policy adjustments sometimes take a while to push up borrowing costs for consumers and businesses — but are now clearly passing through.New homes for sale in Mesa, Ariz. Mortgage rates are flirting with 8 percent, up from less than 3 percent in 2021.Caitlin O’Hara for The New York TimesYet there is a threat that as rates ratchet higher across key parts of financial markets, they could accidentally wallop the economy instead of cooling it gently. So far, growth has been resilient to much higher borrowing costs: Consumers have continued to spend, the housing market has slowed without tanking, and businesses have kept investing. The risk is that rates will reach a tipping point where either a big chunk of that activity grinds to a halt or something breaks in financial markets.“At this point, the amount of increase in Treasury yields and the tightening itself is not enough to derail the economic expansion,” said Daleep Singh, chief global economist at PGIM Fixed Income. But he noted that higher bond yields — especially if they last — always bring a risk of financial instability.“You never know exactly what the threshold is at which you trigger these financial stability episodes,” he said.While the Fed has been raising the short-term interest rate it controls for some time, longer-dated interest rates — the sort that underpin borrowing costs paid by consumers and companies — have been slower to react. But at the start of August, the yield on the 10-year Treasury bond began a relentless march higher to levels last seen in 2007.The recent move is most likely the culmination of a number of factors: Growth has been surprisingly resilient, which has led investors to mark up their expectations for how long the Fed will keep rates high. Some strategists say the move reflects growing concerns about the sustainability of the national debt.“It’s everything under the sun, but also no single factor,” said Gennadiy Goldberg, head of interest rate strategy at TD Securities. “But it’s higher for longer that has everyone nervous.”Whatever the causes, the jump is likely to have consequences.Higher rates have already spurred some financial turmoil this year. Silicon Valley Bank and several other regional lenders imploded after they failed to protect their balance sheets against higher borrowing costs, causing customers to pull their money.Policymakers have continued to watch banks for signs of stress, especially tied to the commercial real estate market. Many regional lenders have exposure to offices, hotels and other commercial borrowers, and as rates rise, so do the costs to finance and maintain the properties and, in turn, how much they must earn to turn a profit. Higher rates make such properties less valuable.The yield on the 10-year Treasury bond in August began a relentless march higher to levels last seen in 2007.Hiroko Masuike/The New York Times“It does add to concerns around commercial real estate as the 10-year Treasury yield rises,” said Jill Cetina, an associate managing director at Moody’s Investors Service.Even if the move up in rates does not cause a bank or market blowup, it could cool demand. Higher rates could make it more expensive for everyone — home buyers, businesses, cities — to borrow money for purchases and expansions. Many companies have yet to refinance debt taken out when interest rates were much lower, meaning the impact of these higher interest rates is yet to fully be felt.“That 10-year Treasury, it’s a global borrowing benchmark,” said Greg McBride, chief financial analyst for Bankrate.com. “It’s relevant to U.S. homeowners, to be sure, but it’s also relevant to corporations, municipalities and other governments that look to borrow in the capital markets.”For the Fed, the shift in long-term rates could suggest that its policy setting is closer to — or even potentially at — a level high enough to ensure that the economy will slow further.Officials have raised rates to a range of 5 to 5.25 percent, and have signaled that they could approve one more quarter-point increase this year. But markets see less than a one-in-three chance that they will follow through with that final adjustment.Mary Daly, president of the Federal Reserve Bank of San Francisco, said markets were doing some of the Fed’s work for it: On Thursday, she said the recent move in longer-term rates was equivalent to “about” one additional interest rate increase from the Fed.Yet there are questions about whether the pop in rates will last. Some analysts suggest there could be more room to rise, because investors have yet to fully embrace the Fed’s own forecasts for how long they think rates will remain elevated. Others are less sure.“I think we’re near the end of this tantrum,” Mr. Singh said, noting that the jump in Treasury yields will worsen the growth outlook, causing the Fed itself to shift away from higher rates.“One of the reasons that I think this move has overshot is that it’s self-limiting,” he said.Plenty of people in the real economy are hoping that borrowing costs stabilize soon. That includes in the housing market, where mortgage rates are newly flirting with an 8 percent level, up from less than 3 percent in 2021.In Arizona, Ms. Mahmood-Corley is seeing some buyers push for two-year agreements that make their early mortgage payments more manageable — betting that after that, rates will be lower and they can refinance. Others are lingering on the sidelines, hoping that borrowing costs will ease.“People take forever now to make a decision,” she said. “They’re holding back.”” More

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    Higher Rates Stoke a Growing Chorus of Deficit Concerns

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    A long period of higher interest rates would make the government’s large debt pile costly, a possibility that is fueling a conversation about debt sustainability.The U.S. government’s persistent budget deficit and growing debts were low on Wall Street’s list of worries when interest rates were at rock bottom for years. But borrowing costs have risen so sharply that it is causing many investors and economists to fret that the United States’ big debt pile could prove less sustainable.Federal Reserve officials have raised interest rates to about 5.3 percent since early 2022 in a bid to control inflation. Officials predicted at their meeting last month that interest rates could remain high for years to come, shaking expectations among investors who had bet on rates falling notably as soon as next year.The realization that the Fed could keep borrowing costs high for a long time has combined with a cocktail of other factors to send long-term interest rates soaring in financial markets. The rate on 10-year Treasury bonds has been climbing since July, and reached a nearly two-decade high this week. That matters because the 10-year Treasury is like the market’s backbone: It helps drive many other borrowing costs, from mortgages to corporate debt.The exact cause of the latest run-up in Treasury rates is hard to pinpoint. Many economists say a combination of drivers is probably helping to drive the pop — including strong growth, fewer foreign buyers of America’s debt, and concerns about debt sustainability in and of itself.What’s clear is that if rates remain elevated, the federal government will need to pay investors more interest in order to fund its borrowing. America’s gross national debt stands just above $33 trillion, more than the total annual output of the American economy. The debt is projected to keep growing both in dollar figures and as a share of the economy.While the climbing cost of holding so much debt is stoking conversations among economists and investors about the appropriate size of the government’s annual borrowing, there is no consensus in Washington for deficit reduction in the form of either higher taxes or big spending cuts.Still, the renewed concern is a stark reversal after years in which mainstream economists increasingly thought that the United States might have been too timid when it came to its debt: Years of low interest rates had convinced many that the government could borrow cheap money to pay for relief in times of economic trouble and investments in the future.The deficit as a share of the economy rose this year under President Biden even though the economy was growing.Pete Marovich for The New York Times“How big of a problem deficits are depends — and it depends very critically on interest rates,” said Jason Furman, an economist at Harvard and former economic official under the Obama administration. “That’s changed a lot,” so “your view on the deficit should change as well.”Mr. Furman had previously estimated that the growing cost of interest on federal debt would remain sustainable for some time, after factoring in inflation and economic growth. But now that rates have climbed so much, the calculus has shifted, he said.Since 2000, the United States has run an annual budget deficit, meaning it spends more than it receives in taxes and other revenue. It has made up the gap by borrowing money.Tax cuts, spending increases and emergency economic assistance approved by both Democratic and Republican presidents has helped fuel the rising deficits in recent years. So has the aging of America’s population, which has driven up the costs of Social Security and Medicare without corresponding increases in federal tax rates. The deficit as a share of the economy rose this year under President Biden even though the economy was growing, just as it did in the prepandemic years under President Donald J. Trump.Now, borrowing costs are poised to add to the gap.Higher interest rates are a leading cause, along with surprisingly weak tax collections, of what the Congressional Budget Office projects will be a doubling of the federal budget deficit over the last year. The deficit, when properly measured, grew from $1 trillion in the 2022 fiscal year to an estimated $2 trillion in the 2023 fiscal year, which ended last month.If borrowing costs climb further — or simply remain where they are for an extended period — the government will accumulate debt at a much faster rate than officials expected even a few months ago. A budget update released by Biden administration economists in July predicted annual average interest rates on 10-year Treasury bonds would not exceed 3.7 percent at any time over the next decade. Those rates are now hovering around 4.7 percent.That recent surge in longer-term bond yields ties back to a number of factors.While the Federal Reserve has been raising short-term interest rates for roughly 18 months, rates on longer-term bonds had remained fairly stable over the first half of this year. But investors have been slowly coming around to the possibility that the Fed will leave interest rates higher for longer — partly because growth has remained solid even in the face of elevated borrowing costs.At the same time, there have been fewer buyers for government bonds. The Fed has been shrinking its balance sheet of bonds as it reverses a pandemic-era stimulus policy, which means that it is no longer buying Treasuries — taking away a source of demand. And key foreign governments have also pulled back from bond purchases.“We’ve whittled down to a smaller universe of buyers,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI.Some analysts have suggested that the pickup in bond yields could also tie back to concerns about debt sustainability. To pay higher interest costs, the government may need to issue even more debt, compounding the problem — and focusing attention on America’s mammoth debt pile, said Ajay Rajadhyaksha, global chairman of research at Barclays.“The problem is not just that number,” he said, referencing the increasing deficit. “The problem is that this economy is as good as it gets.”The economy has remained strong even though the Federal Reserve has raised borrowing costs. That has many expecting the Fed to leave rates higher for longer.Jim Wilson/The New York TimesThat, several economists have said, is the core of the issue: America is borrowing a lot even at a time when the unemployment rate is very low and growth is strong, so the economy does not need a lot of government help.“Right now we have an incredible amount of issuance at the same time as the Fed is messaging higher for longer,” said Robert Tipp, chief investment strategist at PGIM Fixed Income, noting that typically higher issuance comes in periods of turmoil when central bank policy is more accommodative. “This is like a wartime budget deficit but without any help from the central bank. That is why this is so different.”White House officials say it is too early to know whether rising bond yields should spur Mr. Biden to add new deficit-reduction proposals to the $2.5 trillion in plans he included in this year’s budget. Those proposals consist largely of tax increases on corporations and high earners.“We might be having a different discussion about this a month from now,” said Jared Bernstein, the chair of the White House Council of Economic Advisers. “And when you’re writing budgets, you don’t go back and change your path lightly.”The Treasury Department has sold close to $16 trillion of debt for the year through September, up roughly 25 percent from the same period last year, according to data from the Securities Industry and Financial Markets Association. Much of that issuance replaced existing debt that was coming due, leaving a net debt issuance of around $1.7 trillion, more than at any other point over the past decade except for the pandemic-induced bond binge in 2020. The Treasury’s own advisory committee forecasts the size of government debt sales to rise another 23 percent in 2024.Maya MacGuineas, the president of the bipartisan Committee for a Responsible Federal Budget and a longtime proponent of reducing deficits, said it was hard to tell what had caused rates to climb recently. Still, she said, the move serves as a “reminder.”“From a fiscal perspective, the story is very simple: If you borrow too much, you become increasingly vulnerable to higher interest rates,” she said.Santul Nerkar More

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    Inflation Measure Favored by the Fed Cooled in August

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    The Personal Consumption Expenditures Index climbed more slowly, after cutting out food and fuel prices for a sense of the underlying trend.Federal Reserve officials received more good news in their battle against rapid inflation on Friday, when a key inflation measure continued to slow, the latest evidence that a return to normal after the pandemic and higher interest rates are combining to wrestle rapid price increases back to a more normal pace.The Personal Consumption Expenditures Index, which the central bank uses to define its 2 percent inflation goal, is still climbing rapidly on an overall basis. It rose 3.5 percent in August from the previous year, pushed up by higher gas prices, up slightly from 3.4 percent previously.But after stripping out food and fuel costs, both of which are volatile, a “core” measure that Fed officials watch closely appeared much more benign. It picked up by 3.9 percent from a year earlier. Compared with the previous month, it climbed by 0.1 percent, a very muted pace.It’s the latest encouraging sign for Fed policymakers, who have been raising interest rates since March 2022 in a campaign to slow the economy and cool price increases. While economic momentum has held up better than expected, a less ebullient housing market and a grinding return to normalcy in the car market have helped key prices — like automobile and rents — to fade. At the same time, supply chain disruptions that led to shortages and starkly pushed up prices starting in 2021 have gradually cleared up, allowing costs for many goods to stop rising or even come down slightly.Given the progress, central bankers are now contemplating whether they need to raise interest rates further. They left them unchanged and in range of 5.25 to 5.5 percent at their meeting this month, while forecasting that they might make one more rate increase this year. At the same time, given how strong the economy remains, officials have signaled that they may need to leave interest rates set to a high level for longer to ensure that inflation returns to normal in a sustainable way.“We’re taking advantage of the fact that we have moved quickly to move a little more carefully now,” Jerome H. Powell, the Fed’s chair, said during a news conference following the Fed’s meeting last week.The question now is whether inflation can fade fully — getting back to something near the Fed’s 2 percent goal and staying there — without a bigger economic slowdown.Multiple data points and anecdotes, from retail sales figures to some company earnings calls, have suggested that American consumers are managing to keep spending despite higher borrowing costs, which have made it more expensive to make big purchases on borrowed money.Friday’s report showed that personal consumption expenditures climbed 0.4 percent in August from a month before, slightly softer than what economists had expected. Spending eked out a small increase after adjusting for inflation.Historically, it has been difficult for the Fed to wrestle inflation lower without causing a big economic slowdown. Companies will generally raise prices if they can, so it requires slower demand to force them to stop. Fed policy is a blunt tool, so it is hard to calibrate it exactly.But increasingly, central bankers have been signaling that they are hopeful they will be able to pull off a rare “soft landing,” cooling price increases without killing growth.“At the end of the day, we will get inflation back to our target, whatever that takes,” Austan Goolsbee, the president of the Federal Reserve Bank of Chicago, said during a speech this week. “But we also can’t lose sight of the fact that the Fed has the chance to achieve something quite rare in the history of central banks: to defeat inflation without tanking the economy.” More

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    Fed Meeting: What to Expect on Interest Rates

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    The Federal Reserve is unlikely to declare victory this week. But investors will watch for any hint that the end to rate increases is coming.Federal Reserve officials are expected to leave interest rates unchanged at their meeting on Wednesday, buying themselves more time to assess whether borrowing costs are high enough to weigh down the economy and wrestle inflation under control.But investors are likely to focus less on what policymakers do on Wednesday — and more on what they say about the future. Wall Street will closely watch whether Fed policymakers still expect to make another interest rate increase before the end of the year or whether they are edging closer to the next phase in their fight against rapid inflation.Central bankers have already raised interest rates to a range of 5.25 to 5.5 percent, the highest level in 22 years. By making it more expensive to borrow to buy a house or expand a business, they are trying to slow demand across the economy, making it harder for companies to charge more without losing customers and slowing price increases.Officials predicted in their last quarterly economic forecast — released in June — that they were likely to make one more rate increase before the end of 2023. They have kept that possibility alive throughout the summer even as inflation has begun to fade meaningfully. But key policymakers have sounded less intent on making another move in recent weeks.The Fed’s chair, Jerome H. Powell, had suggested in June that further adjustment was “likely.” More recently, including during a closely watched speech in August, he said policymakers could nudge rates up “if appropriate.”Jerome H. Powell, chair of the Federal Reserve, said in August that policymakers could nudge rates up “if appropriate.”T.J. Kirkpatrick for The New York TimesFed officials will release economic projections after their gathering this week, which takes place on Tuesday and Wednesday, offering a fresh look at whether most policymakers still think one final rate increase is likely to be necessary. The projections will also show how officials are interpreting a confusing moment in the economy, when consumer spending has been stronger than many economists expected even as inflation has cooled down a bit more quickly.Taken together, the revised forecasts, the Fed’s statement and a news conference with Mr. Powell after the meeting could give the clearest signal yet about how close the central bank thinks it is to the end of rate increases — and what the next phase of trying to fully wrangle inflation might look like.“You’ve had many centrist Fed officials over the last few weeks say: We’re close to where we need to be — we may even be there,” said Michael Feroli, chief U.S. economist at J.P. Morgan.Mr. Feroli thinks that there is a roughly two-thirds chance that policymakers will still forecast another rate move, and a one-third chance that they will predict that the current setting is likely to be the peak interest rate.But even if the Fed signals that interest rates have reached their peak, officials have been clear that they are likely to stay elevated for some time. Policymakers think that simply keeping rates at a high level will continue to weigh on economic growth and gradually cool the economy.Mr. Feroli does not expect officials to start talking too decisively about the next phase — one in which rates come down — quite yet.“They haven’t won the war on inflation, so it’d be a little premature,” Mr. Feroli said.That said, the economic forecasts could offer some hints. Fed officials will release their projections for interest rates in 2024, 2025 and — newly — 2026 after this meeting. In June, their 2024 projections had suggested that officials expected to lower borrowing costs four times next year. The questions is when in the year those cuts would come, and what officials would need to see to feel comfortable lowering rates.Policymakers may offer little clarity on those points on Wednesday, hoping to avoid a big market reaction — one that would make their job of cooling the economy more difficult.If stocks were to shoot up as markets broadly began to anticipate that the Fed-induced financial and economic squeeze was likely to come sooner, it could make it cheaper and easier for companies and households to borrow money. That could speed up the economy when the Fed is trying to slow it down.Already, growth has been surprisingly resilient to the Fed’s high rates. Consumers and companies have continued to spend at a healthy clip despite the many economic risks on the outlook — including the resumption of federal student loan repayments in early October and a possible government shutdown after the end of this month.Consumer spending has been stronger than many economists had expected even as inflation has cooled down a bit more quickly.Karsten Moran for The New York TimesLeftover household savings from the pandemic, a strong labor market with solid wage growth, and various government policies meant to spur infrastructure and green energy investment may be helping to feed that momentum.The resilience could prompt another revision to the Fed’s economic forecasts on Wednesday, economists at Goldman Sachs said: Officials might mark up their estimate of the so-called neutral rate, which signals how high interest rates need to be in order to weigh on the economy. That would suggest that while policy was restraining the economy today, it wasn’t doing so quite as intensely as officials would have expected.The economy’s staying power could also prevent policymakers from sounding too excited about the recent slowdown in inflation.Consumer Price Index increases have cooled notably over the past year — to 3.7 percent in August, down from 9.1 percent at their 2022 peak — as pandemic disruptions fade and prices of goods that were in short supply fall or grow more slowly.The Fed’s preferred inflation indicator, which is released at more of a delay than the Consumer Price Index measure, is expected to have climbed slowly on a monthly basis in August after food and fuel prices are stripped out to give a clearer sense of the inflation trend.The moderation is unquestionably good news — it makes it more likely that the Fed could slow the economy just enough to cool price increases without tanking the economy. But policymakers may worry about fully stamping out inflation in an economy that is still growing robustly, said William English, a former Fed economist who is now a professor in the practice of finance at Yale.If consumers are still willing to spend, companies may find that they can still raise prices to pad or protect profits. Given that, officials may think that a more marked economic slowdown will be needed to bring inflation the whole way down to their 2 percent goal.“The economy stayed stronger for longer than they’d been thinking,” Mr. English said. Given that, Fed officials may maintain that their next move is more likely to be a rate increase than a rate decrease.Mr. English is skeptical that Fed officials think they can cool price increases fully without more of an economic slowdown.“I doubt they are expecting, as their most likely forecast, that they’re going to get an immaculate disinflation,” he said. “I think that is still their base case: The economy really does have to have a period of quite slow growth.” More