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    U.S. Economy’s Staying Power Poses Big Questions for the Fed

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    The Federal Reserve has been trying to slow growth without tanking it. Now, officials must ask if inflation can cool amid signs of resilience.Employers are hiring rapidly. Home prices are rising nationally after months of decline. Consumer spending climbed more than expected in a recent data release.America’s economy is not experiencing the drastic slowdown that many analysts had expected in light of the Federal Reserve’s 15-month, often aggressive campaign to hit the brakes on growth and bring rapid inflation under control. And that surprising resilience could be either good or bad news.The economy’s staying power could mean that the Fed will be able to wrangle inflation gently, slowing down price increases without tipping America into any sort of recession. But if companies can continue raising their prices without losing customers amid solid demand, it could keep inflation too hot — forcing consumers to pay more for hotels, food and child care and forcing the Fed to do even more to restrain growth.Policymakers may need time to figure out which scenario is more likely, so that they can avoid either overreacting and causing unnecessary economic pain or underreacting and allowing rapid inflation to become permanent.Given that, investors have been betting that Fed officials will skip a rate increase at their meeting on Tuesday and Wednesday before lifting them again in July, proceeding cautiously while emphasizing that pausing does not mean quitting — and that they remain determined to bring prices under control. But even that expectation is increasingly shaky: Markets have spent this week nudging up the probability that the Fed might raise rates at this month’s meeting.In short, the mixed economic signals could make Fed policy discussions fraught in the months ahead. Here’s where things stand.Interest rates are much higher.Interest rates are above 5 percent, their highest level since 2007.

    Source: Federal ReserveBy The New York TimesAfter sharply adjusting policy over the past 15 months, key officials including Jerome H. Powell, the Fed chair, and Philip Jefferson, President Biden’s pick to be the next Fed vice chair, have hinted that central bankers could pause to allow themselves time to judge how the increases are affecting the economy.But that assessment remains a complex one. Even some parts of the economy that typically slow when the Fed raises rates are demonstrating a surprising ability to withstand today’s interest rates.“It’s a very complicated, convoluted picture depending on which data points you are looking at,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank, noting that overall growth figures like gross domestic product have slowed — but other key numbers are holding up.House prices are wiggling.Higher interest rates can take months or even years to have their full effect, but they should theoretically work pretty quickly to begin to slow down the car and housing markets, both of which revolve around big purchases made with borrowed cash.That story has been complicated this time. Car buying has slowed since the Fed started raising rates, but the auto market has been so undersupplied in recent years — thanks in large part to pandemic-tied supply chain problems — that the cool-down has been a bumpy one. Housing has also perplexed some economists.

    Note: Data is seasonally adjusted.Source: S&P CoreLogic Case-Shiller Index, via
    S&P Global IntelligenceBy The New York TimesThe housing market weakened markedly last year as mortgage rates soared. But rates have recently stabilized, and home prices have ticked back up amid low inventory. House prices do not count directly in inflation, but their turnaround is a sign that it’s taking a lot to sustainably cool a hot economy.Job signals are confusing.Fed officials are also watching for signs that their rate increases are trickling through the economy to slow the job market: As it costs more to fund expansions and as consumer demand slows, companies should pull back on hiring. Amid less competition for workers, wage growth should moderate and unemployment should rise.Some signs suggest that the chain reaction has begun. Initial claims for unemployment insurance jumped to the highest level since October 2021 last week, a report on Thursday showed. People are also working fewer hours per week at private employers, which suggests bosses aren’t trying to eke so much out of existing staff.

    Notes: Data is seasonally adjusted and includes hours worked by full- and part-time private sector employees.Source: Bureau of Labor StatisticsBy The New York TimesBut other signals have been more halting. Job openings had come down, but edged back up in April. Wages have been climbing less swiftly for lower-income workers, but gains remain abnormally rapid. The jobless rate climbed to 3.7 percent in May from 3.4 percent, but even that was still well shy of the 4.5 percent that Fed officials expected it to hit by the end of 2023 in their latest economic forecasts. Officials will release fresh projections next week.

    Source: Bureau of Labor StatisticsBy The New York TimesAnd by some measures, the labor market is still chugging. Hiring remains particularly strong.“Everyone talks as if the economy moves in one straight line,” said Nela Richardson, chief economist at ADP. “In actuality, it’s lumpy.”Price increases are stubborn.Still, inflation itself may be the biggest wild card that could shape the Fed’s plans this month and over this summer. Officials forecast in March that annual inflation as measured by the Personal Consumption Expenditures index would retreat to 3.3 percent by the end of the year.That pullback is gradually happening. Inflation stood at 4.4 percent as of April, down from 7 percent last summer but still more than double the Fed’s 2 percent goal.

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    Year-over-year percentage change in the Personal Consumption Expenditures index
    Source: Bureau of Economic AnalysisBy The New York TimesOfficials will receive a related and more up-to-date inflation reading for May — the Consumer Price Index — on the first day of their meeting next week.Economists expect substantial cooling, which could give officials confidence in pausing rates. But if those forecasts are foiled, it could make for an even more heated debate about what comes next. More

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    A $1 Trillion Borrowing Binge Looms After Debt Limit Standoff

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    The government has avoided default, but the effects of the debt-ceiling brinkmanship may still ripple across the economy.The United States narrowly avoided a default when President Biden signed legislation on Saturday that allowed the Treasury Department, which was perilously close to running out of cash, permission to borrow more money to pay the nation’s bills.Now, the Treasury is starting to build up its reserves and the coming borrowing binge could present complications that rattle the economy.The government is expected to borrow around $1 trillion by the end of September, according to estimates by multiple banks. That steady state of borrowing is set to pull cash from banks and other lenders into Treasury securities, draining money from the financial system and amplifying the pressure on already stressed regional lenders.To lure investors to lend such huge amounts to the government, the Treasury faces rising interest costs. Given how many other financial assets are tied to the rate on Treasuries, higher borrowing costs for the government also raise costs for banks, companies and other borrowers, and could create a similar effect to roughly one or two quarter-point rate increases from the Federal Reserve, analysts have warned.“The root cause is still very much the whole debt ceiling standoff,” said Gennadiy Goldberg, an interest rate strategist at TD Securities.Some policymakers have indicated that they may opt to take a break from raising rates when the central bank meets next week, in order to assess how policy has so far impacted the economy. The Treasury’s cash rebuild could undermine that decision, because it would push borrowing costs higher regardless.That could in turn exacerbate worries among investors and depositors that flared up in the spring over how higher interest rates had eroded the value of assets held at small and medium sized banks.The deluge of Treasury debt also amplifies the effects of another Fed priority: the shrinking of its balance sheet. The Fed has curtailed the number of new Treasuries and other debt that it buys, slowly letting old debt roll-off and already leaving private investors with more debt to digest.“The potential hit to the economy once Treasury goes to market selling that much debt could be extraordinary,” said Christopher Campbell, who served as assistant Treasury secretary for financial institutions from 2017 to 2018. “It’s difficult to imagine Treasury going out and selling what could be $1 trillion of bonds and not have that have an impact on borrowing costs.”The cash balance at the Treasury Department’s general account fell below $40 billion last week as lawmakers raced to reach an agreement to increase the nation’s borrowing cap. Mr. Biden on Saturday signed legislation that suspended the $31.4 trillion debt limit until January 2025.For months, Treasury Secretary Janet L. Yellen had been using accounting maneuvers known as extraordinary measures to delay a default. Those included suspending new investments in retirement funds for postal workers and civil servants.Restoring those investments is essentially a simple accounting fix, but refilling the government’s cash coffers is more complicated. The Treasury Department said on Wednesday that it hoped to borrow enough to rebuild its cash account to $425 billion by the end of June. It will need to borrow much more than that to account for planned spending, analysts said.“The supply floodgates are now open,” said Mark Cabana, an interest rate strategist at Bank of America.A Treasury Department spokesman said that when making decisions on issuing debt, the department carefully considered investor demand and market capacity. In April, Treasury officials started surveying key market players about how much they thought the market could absorb after the debt-limit standoff was resolved. The Federal Reserve Bank of New York this month asked large banks for their estimates of what they expected to happen to bank reserves and borrowing from certain Fed facilities in the next months.The spokesman added that the department had managed similar situations before. Notably, after a bout of debt-limit wrangling in 2019, the Treasury Department rebuilt its cash pile over the summer, contributing to factors that drained reserves from the banking system and upended the market’s plumbing, prompting the Fed to intervene to stave off a worse crisis.One of the things the Fed did was establish a program for repurchase agreements, a form of financing with Treasury debt posted as collateral. That backstop could provide a safety net to banks short on cash from lending to the government, though its use was widely seen in the industry as a last resort.A similar but opposite program, which doles out Treasury collateral in exchange for cash, now holds over $2 trillion, mostly from money market funds that have struggled to find attractive, safe investments. This is viewed by some analysts as money on the sidelines that could flow into the Treasury’s account as it offers more attractive interest rates on its debt, reducing the impact of the borrowing spree.But the mechanism by which the government sells its debt, debiting bank reserves held at the Fed in exchange for the new bills and bonds, could still test the resilience of some smaller institutions. As their reserves decline, some banks may find themselves short on cash, while investors and others may not be willing to lend to institutions they see as troubled, given recent worries about some corners of the industry.That could leave some banks reliant on another Fed facility, set up at the height of this year’s banking turmoil, to provide emergency funding to deposit taking institutions at relatively high cost.“You may see one or two or three banks caught unprepared and suffer the consequences, starting a daisy chain of fear that can permeate through the system and create trouble,” Mr. Goldberg of TD Securities said. More

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    World Bank Projects Weak Global Growth Amid Rising Interest Rates

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    A new report projects that economic growth will slow this year and remain weak in 2024.The World Bank said on Tuesday that the global economy remained in a “precarious state” and warned of sluggish growth this year and next as rising interest rates slow consumer spending and business investment, and threaten the stability of the financial system.The bank’s tepid forecasts in its latest Global Economic Prospects report highlight the predicament that global policymakers face as they try to corral stubborn inflation by raising interest rates while grappling with the aftermath of the pandemic and continuing supply chain disruptions stemming from the war in Ukraine.The World Bank projected that global growth would slow to 2.1 percent this year from 3.1 percent in 2022. That is slightly stronger than its forecast of 1.7 percent in January, but in 2024 output is now expected to rise to 2.4 percent, weaker than the bank’s previous prediction of 2.7 percent.“Rays of sunshine in the global economy we saw earlier in the year have been fading, and gray days likely lie ahead,” said Ayhan Kose, deputy chief economist at the World Bank Group.Mr. Kose said that the world economy was experiencing a “sharp, synchronized global slowdown” and that 65 percent of countries would experience slower growth this year than last. A decade of poor fiscal management in low-income countries that relied on borrowed money is compounding the problem. According to the World Bank, 14 of 28 low-income countries are in debt distress or at a high risk of debt distress.Optimism about an economic rebound this year has been dampened by recent stress in the banking sectors in the United States and Europe, which resulted in the biggest bank failures since the 2008 financial crisis. Concerns about the health of the banking industry have prompted many lenders to pull back on providing credit to businesses and individuals, a phenomenon that the World Bank said was likely to further weigh down growth.The bank also warned that rising borrowing costs in rich countries — including the United States, where overnight interest rates have topped 5 percent for the first time in 15 years — posed an additional headwind for the world’s poorest economies.The most vulnerable economies, the report warned, are facing greater risk of financial crises as a result of rising rates. Higher interest rates make it more expensive for developing countries to service their loan payments and, if their currencies depreciate, to import food.In addition to the risks posed by rising interest rates, the pandemic and the conflict in Ukraine have combined to reverse decades of progress in global poverty reduction. The World Bank estimated on Tuesday that in 2024, incomes in the poorest countries would be 6 percent lower than in 2019.“Emerging market and developing economies today are struggling just to cope — deprived of the wherewithal to create jobs and deliver essential services to their most vulnerable citizens,” the report said.The World Bank sees widespread slowdowns in advanced economies, too. In the United States, it projects 1.1 percent growth this year and 0.8 percent in 2024.China is a notable exception to that trend, and the reopening of its economy after years of strict Covid-19 lockdowns is propping up global growth. The bank projects that the Chinese economy will grow 5.6 percent this year and 4.6 percent next year.Inflation is expected to continue to moderate this year, but the World Bank expects that prices will remain above central bank targets in many countries throughout 2024. More

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    U.S. Added 339,000 Jobs in May Despite Economic Clouds

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    Employers added 339,000 workers in May, the Labor Department said, though the report also offered signs of shakiness.American employers added an unanticipated barrage of workers in May, reaffirming the labor market’s vigor.Defying expectations of a slowdown, payrolls grew by 339,000 on a seasonally adjusted basis, the Labor Department said on Friday. The increase, the largest since January, suggested that the job market was still piping hot despite a swirl of economic headwinds.But below the surface, the report also offered evidence of softening. The unemployment rate, while still historically low, jumped to 3.7 percent, the highest level since October. In a sign that the pressure to entice workers with pay increases is lifting, wage growth eased.The dissonance offered a somewhat muddled picture that complicates the calculus for the Federal Reserve, which has been raising interest rates for more than a year to temper the labor market’s momentum and rein in price increases. Fed officials have indicated that the jobs report will be an important factor as they decide whether to raise interest rates again.“We’re still seeing a labor market that’s gradually cooling,” said Sarah House, an economist at Wells Fargo. “But it’s at a glacial place.”President Biden hailed the report, saying in a statement that “today is a good day for the American economy and American workers.” The S&P 500 index rose more than 1.4 percent as the data portrayed an economic engine that was running strong but not overheating.Looming over the report is the debt ceiling deal approved by Congress, though economists largely expect the spending caps and cuts to have only marginal impact on the labor market going forward.The hiring numbers suggest that employers remain eager for workers even in the face of high interest rates and economic uncertainty. Many are still bringing on employees to meet consumer demand, especially for services. The only major sectors to lose jobs were manufacturing and information.A slight reversal for manufacturing in MayChange in jobs in May 2023, by sector More

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    For Turkey, Erdogan Victory Brings More Risky Economic Policy

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    The Turkish lira has hit a new low, and analysts see few improvements ahead as re-elected President Erdogan pursues unconventional economic policies.Since winning re-election, President Recep Tayyip Erdogan of Turkey has publicly doubled down on his idiosyncratic economic policies.“If anyone can do this, I can do it,” he declared in a victory speech last Sunday, referring to his ability to solve the country’s calamitous economic problems.His brash confidence is not widely shared by most analysts and economists.The Turkish lira dropped to a record low against the dollar this week, and foreign investors have been disheartened by the president’s refusal to stray from what is widely considered to be an eccentric economic course.Instead of combating dizzying inflation by raising interest rates and making borrowing more expensive — as most economists recommend — Mr. Erdogan has repeatedly lowered rates. He argues that cheap credit will boost manufacturing and exports.But his strategy is also fueling inflation, now running at an annual rate of 44 percent, and eroding the value of the Turkish lira. Attempts by the government to prop up the faltering currency have drained the dwindling pool of foreign reserves.As the lira’s value drops, the price of imported goods — like medicine, energy, fertilizer and automobile parts — rises, making it more expensive for consumers to afford daily costs. And it raises the size of debt payments for businesses and households that have borrowed money from foreign lenders.The national budget is also coming under increasing strains. The destructive earthquakes in February that ripped up swaths of southern Turkey are estimated to have caused more than a billion dollars in damage, roughly 9 percent of the country’s annual economic output.At the same time, Mr. Erdogan went on a pre-election spending spree to attract voters, increasing salaries for public sector workers and payouts for retirees and offering households a month of free natural gas. The expenditures pushed up growth, but economists fear that such outlays will feed inflation.President Erdogan in Istanbul last month. Foreign investors have been disheartened by his refusal to stray from what is widely considered to be an eccentric economic course.Sergey Ponomarev for The New York TimesAn effort to encourage Turks to keep their savings in lira by guaranteeing their balances against currency depreciations further adds to the government’s potential liabilities.Critics of the president’s economic approach were somewhat heartened by reports that Mr. Erdogan is expected this weekend to appoint Mehmet Simsek, a former finance minister and deputy prime minister, to the cabinet. Mr. Simsek is well thought of in financial circles and has previously supported a tighter monetary policy.“What Turkey really needs now is more exports and more foreign direct investment, and for that you have to send a signal,” said Henri Barkey, an international relations professor at Lehigh University. One signal could be Mr. Simsek’s appointment, he said.Mr. Barkey argues that Mr. Erdogan will have no choice but to make a U-turn on policy by winter, when energy import costs rise and some debt payments are due.Others are more skeptical that Mr. Erdogan will back down from his insistence that high interest rates fuel inflation. Kadri Tastan, a senior fellow at the German Marshall Fund, a public policy think tank based in Brussels, said that regardless of the cabinet’s makeup, he didn’t believe a policy turnaround was imminent.“I’m quite pessimistic about an enormous change, of course,” he said.To deal with the large external deficit and depleted central bank reserves, Mr. Erdogan has been relying on allies like Russia, Qatar and Saudi Arabia to help bolster its reserves by depositing dollars with the central bank or extending payment deadlines and discounts for imported goods like natural gas.In a note to investors this week, Capital Economics wrote that any optimism about a policy shift is likely to be short-lived: “While policymakers like Simsek would probably pursue more restrained fiscal policy than we had envisaged, we doubt Erdogan would give the central bank license to hike policy rates to restore balance to the economy.”Turkey’s more than $900 billion economy makes it the eighth largest in Europe. And Mr. Erdogan’s efforts to position himself as a power broker between Russia and the European allies since the war in Ukraine began has further underscored Turkey’s geopolitical influence.Mr. Erdogan, who has been in power for two decades, built his electoral success on growth-oriented policies that lifted millions of Turks into the middle class. But the pumped-up expansion wasn’t sustainable.As the lira’s value drops, the price of imported goods rises.Sergey Ponomarev for The New York TimesThe borrowing frenzy drove up prices, spurring a cost-of-living crisis. Still, Mr. Erdogan persisted in lowering interest rates and fired central bank chiefs who disagreed with him. The pandemic exacerbated problems by reducing demand for Turkish exports and limiting tourism, a large source of income.Mr. Erdogan is likely to keep up his expansionary policies until the next local elections take place next year. Until then, Hakan Kara, the former chief economist of the Central Bank of Turkey, said the country would probably just “muddle through.”“Turkish authorities will have to make tough decisions after the local elections, as something has to give in eventually,” Mr. Kara said. “Turkey has to either switch back to conventional policies, or further deviate from the free market economy where the central authority manages the economy through micro-control measures.”“In either case,” he added, “the adjustment is likely to be painful.” More

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    Jobs Numbers in Focus as the Fed Hints at a ‘Skip’

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    Federal Reserve officials have signaled that they could hold rates steady at their upcoming meeting in June — pausing after a string of 10 straight rate increases to give themselves time to see how the economy is shaping up. But Friday’s fresh jobs data is likely to inform policymakers as they try to decide whether this is the right moment to take a break.Central bankers lifted interest rates to a range of 5 to 5.25 percent as of last month, up sharply from near-zero at the start of 2022. But they have been signaling for months that it could soon be appropriate to take a break from increasing rates so that they can assess how the economy is absorbing the big policy changes they have already made and the consequences of other developments, such as the fallout from recent bank turmoil.Higher interest rates cool the economy by making it more expensive to borrow to buy a house or finance a car purchase, but they take time to have their full effect. As rates rise, businesses gradually pull back on expansion plans, slowing hiring, which then feeds into weaker wage growth and a slower economy overall.That is why policymakers are watching job market data to figure out how higher interest rates are working. They have been expecting hiring to slow, wage gains to pull back and unemployment to begin to rise — but that has taken time to play out.Some Fed officials favor holding off on a rate increase in June, allowing more time for them to see how higher borrowing costs and heightened uncertainty are combining to restrain the economy. Patrick T. Harker, the president of the Federal Reserve Bank of Philadelphia, said this week that he is “definitely in the camp of thinking about skipping any increase at this meeting.”Others have underlined that while the Fed may be poised to pause its campaign to cool the economy, that does not mean it is done raising interest rates altogether.“A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle,” said Philip Jefferson, a Fed governor who is President Biden’s pick to be vice chair of the institution, during a speech this week.“Indeed, skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming,” Mr. Jefferson added. The Fed vice chair is traditionally an important communicator for the institution, one who broadcasts how core officials are thinking about the policy path forward.But even as the Fed moves toward a possible pause this month, officials will take into account incoming data on the economy. A key inflation number released last week came in firmer than economists had expected, and officials will receive a fresh Consumer Price Index inflation report the day that their June 13-14 meeting begins.Friday’s jobs report could reinforce — or, if it is abnormally strong, call into question — whether a skip makes sense. More

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    Companies Push Prices Higher, Protecting Profits but Adding to Inflation

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    Corporate profits have been bolstered by higher prices even as some of the costs of doing business have fallen in recent months.The prices of oil, transportation, food ingredients and other raw materials have fallen in recent months as the shocks stemming from the pandemic and the war in Ukraine have faded. Yet many big businesses have continued raising prices at a rapid clip.Some of the world’s biggest companies have said they do not plan to change course and will continue increasing prices or keep them at elevated levels for the foreseeable future.That strategy has cushioned corporate profits. And it could keep inflation robust, contributing to the very pressures used to justify surging prices.As a result, some economists warn, policymakers at the Federal Reserve may feel compelled to keep raising interest rates, or at least not lower them, increasing the likelihood and severity of an economic downturn.“Companies are not just maintaining margins, not just passing on cost increases, they have used it as a cover to expand margins,” Albert Edwards, a global strategist at Société Générale, said, referring to profit margins, a measure of how much businesses earn from every dollar of sales.PepsiCo, the snacks and beverage maker, has become a prime example of how large corporations have countered increased costs, and then some.Hugh Johnston, the company’s chief financial officer, said in February that PepsiCo had raised its prices by enough to buffer further cost pressures in 2023. At the end of April, the company reported that it had raised the average price across its products by 16 percent in the first three months of the year. That added to a similar size price increase in the fourth quarter of 2022 and increased its profit margin.“I don’t think our margins are going to deteriorate at all,” Mr. Johnston said in a recent interview with Bloomberg TV. “In fact, what we’ve said for the year is we’ll be at least even with 2022, and may in fact increase margins during the course of the year.”The bags of Doritos, cartons of Tropicana orange juice and bottles of Gatorade drinks sold by PepsiCo are now substantially pricier. Customers have grumbled, but they have largely kept buying. Shareholders have cheered. PepsiCo declined to comment.PepsiCo is not alone in continuing to raise prices. Other companies that sell consumer goods have also done well.The average company in the S&P 500 stock index increased its net profit margin from the end of last year, according to FactSet, a data and research firm, countering the expectations of Wall Street analysts that profit margins would decline slightly. And while margins are below their peak in 2021, analysts are forecasting that they will keep expanding in the second half of the year.For much of the past two years, most companies “had a perfectly good excuse to go ahead and raise prices,” said Samuel Rines, an economist and the managing director of Corbu, a research firm that serves hedge funds and other investors. “Everybody knew that the war in Ukraine was inflationary, that grain prices were going up, blah, blah, blah. And they just took advantage of that.”But those go-to rationales for elevating prices, he added, are now receding.The Producer Price Index, which measures the prices businesses pay for goods and services before they are sold to consumers, reached a high of 11.7 percent last spring. That rate has plunged to 2.3 percent for the 12 months through April.The Consumer Price Index, which tracks the prices of household expenditures on everything from eggs to rent, has also been falling, but at a much slower rate. In April, it dropped to 4.93 percent, from a high of 9.06 percent in June 2022. The price of carbonated drinks rose nearly 12 percent in April, over the previous 12 months.“Inflation is going to stay much higher than it needs to be, because companies are being greedy,” Mr. Edwards of Société Générale said.But analysts who distrust that explanation said there were other reasons consumer prices remained high. Since inflation spiked in the spring of 2021, some economists have made the case that as households emerged from the pandemic, demand for goods and services — whether garage doors or cruise trips — was left unsated because of lockdowns and constrained supply chains, driving prices higher.David Beckworth, a senior research fellow at the right-leaning Mercatus Center at George Mason University and a former economist for the Treasury Department, said he was skeptical that the rapid pace of price increases was “profit-led.”Corporations had some degree of cover for raising prices as consumers were peppered with news about imbalances in the economy. Yet Mr. Beckworth and others contend that those higher prices wouldn’t have been possible if people weren’t willing or able to spend more. In this analysis, stimulus payments from the government, investment gains, pay raises and the refinancing of mortgages at very low interest rates play a larger role in higher prices than corporate profit seeking.“It seems to me that many telling the profit story forget that households have to actually spend money for the story to hold,” Mr. Beckworth said. “And once you look at the huge surge in spending, it becomes inescapable to me where the causality lies.”Mr. Edwards acknowledged that government stimulus measures during the pandemic had an effect. In his eyes, this aid meant that average consumers weren’t “beaten up enough” financially to resist higher prices that might otherwise make them flinch. And, he added, this dynamic has also put the weight of inflation on poorer households “while richer ones won’t feel it as much.”The top 20 percent of households by income typically account for about 40 percent of total consumer spending. Overall spending on recreational experiences and luxuries appears to have peaked, according to credit card data from large banks, but remains robust enough for firms to keep charging more. Major cruise lines, including Royal Caribbean, have continued lifting prices as demand for cruises has increased going into the summer.Many people who are not at the top of the income bracket have had to trade down to cheaper products. As a result, several companies that cater to a broad customer base have fared better than expected, as well.McDonald’s reported that its sales increased by an average of 12.6 percent per store for the three months through March, compared with the same period last year. About 4.2 percent of that growth has come from increased traffic and 8.4 percent from higher menu prices.The company attributed the recent menu price increases to higher expenses for labor, transportation and meat. Several consumer groups have responded by pointing out that recent upticks in the cost of transportation and labor have eased.A representative for the company said in an email that the company’s strong results were not just a result of price increases but also “strong consumer demand for McDonald’s around the world.”Other corporations have found that fewer sales at higher prices have still helped them earn bigger profits: a dynamic that Mr. Rines of Corbu has coined “price over volume.”Colgate-Palmolive, which in addition to commanding a roughly 40 percent share of the global toothpaste market, also sells kitchen soap and other goods, had a standout first quarter. Its operating profit for the year through March rose 6 percent from the same period a year earlier — the result of a 12 percent increase in prices even as volume declined by 2 percent.The recent bonanza for corporate profits, however, may soon start to fizzle.Research from Glenmede Investment Management indicates there are signs that more consumers are cutting back on pricier purchases. The financial services firm estimates that households in the bottom fourth by income will exhaust whatever is collectively left of their pandemic-era savings sometime this summer.Some companies are beginning to find resistance from more price-sensitive customers. Dollar Tree reported rising sales but falling margins, as lower-income customers who tend to shop there searched for deals. Shares in the company plunged on Thursday as it cut back its profit expectations for the rest of the year. Even PepsiCo and McDonald’s have recently taken hits to their share prices as traders fear that they may not be able to keep increasing their profits.For now, though, investors appear to be relieved that corporations did as well as they did in the first quarter, which has helped keep stock prices from falling broadly.Before large companies began reporting how they did in the first three months of the year, the consensus among analysts was that earnings at companies in the S&P 500 would fall roughly 7 percent compared with the same period in 2022. Instead, according to data from FactSet, earnings are expected to have fallen around 2 percent once all the results are in.Savita Subramanian, the head of U.S. equity and quantitative strategy at Bank of America, wrote in a note that the latest quarterly reports “once again showed corporate America’s ability to preserve margins.” Her team raised overall earnings growth expectations for the rest of the year, and 2024. More

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    Fed Officials Were Split Over June Rate Pause, Minutes Show

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    In the Federal Reserve’s last meeting, “several” participants thought rates may have moved high enough to get inflation under control.Federal Reserve officials were unanimous in their decision to raise interest rates earlier this month, but were conflicted over whether additional increases would be necessary to bring inflation under control, according to minutes from the Fed’s last meeting released on Wednesday.The Fed voted to raise interest rates by a quarter-point on May 3, to a range of 5 to 5.25 percent, the 10th straight increase since the central bank started its campaign to rein in inflation last year. Although officials left the door open to further rate increases, the minutes make clear that “several” policymakers were leaning toward a pause.“Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary,” the minutes said.Still, some officials believed “additional policy firming would likely be warranted at future meetings” since progress on bringing inflation back to the central bank’s 2 percent target could continue to be “unacceptably slow.”Policymakers believed that the Fed’s moves over the past year had significantly contributed to tighter financial conditions, and they noted that labor market conditions were starting to ease. But they agreed that the labor market was still too hot, given the strong gains in job growth and an unemployment rate near historically low levels.Officials also agreed that inflation was “unacceptably high.” Although price increases have shown signs of moderating in recent months, declines were slower than officials expected, and officials were concerned that consumer spending could remain strong and keep inflation elevated. Some noted, however, that tighter credit conditions could slow household spending and dampen business investment.Fed officials believed the U.S. banking system was “sound and resilient” after the collapses of Silicon Valley Bank and Signature Bank this year led to turbulence in the banking sector. Although they noted that banks might be pulling back on lending, policymakers said it was too soon to tell how big of an impact credit tightening might have on the overall economy.One source of concern for policymakers was brinkmanship over the nation’s debt limit, which caps how much money the United States can borrow. If the cap is not raised by June 1, the Treasury Department could be unable to pay all of its bills in a timely manner, resulting in a default. Many officials said it was “essential that the debt limit be raised in a timely manner” to avoid the risk of severely damaging the economy and rattling financial markets.The central bank’s next move remains uncertain, with policymakers continuing to leave their options open ahead of their June meeting.“Whether we should hike or skip at the June meeting will depend on how the data come in over the next three weeks,” Christopher Waller, a Federal Reserve governor, said in a speech on Wednesday.The president of the Minneapolis Fed, Neel Kashkari, said in an interview with The Wall Street Journal last week that he could support holding rates steady at the June 13-14 meeting to give policymakers more time to assess how the economy is shaping up.“I’m open to the idea that we can move a little bit more slowly from here,” he said.Officials have reiterated that they will continue to monitor incoming data before reaching a decision. On Friday, the Commerce Department will release a fresh reading of the Personal Consumption Expenditures index, the Fed’s preferred gauge of inflation. Early next month, the federal government will also release new data on job growth in May. More