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The Federal Reserve’s patient approach to raising interest rates could be tested by the next two months. The U.S. central bank is expected to announce the end of its bond-buying program in October, and will hold its first policy meeting of the year in December. Both of these meetings could prompt the Fed to raise its key rate. The Fed has held its short-term rate—the Federal Funds rate—at nearly zero since December 2008 to stimulate the economy.
The Federal Reserve policymakers are expected to keep interest rates unchanged at their June meeting. After four hikes in the past two years, the Fed officials are widely expected to pause for a little bit and wait for more wage growth and inflation to materialize. (It may be a while before they get their wish: Republican-led tax cuts are expected to push inflation lower, and the Fed’s preferred inflation gauge is still running below its target rate.)
Here’s what you need to know:
The Fed has kept interest rates near zero since March 2020. Stephanie Reynolds for The New York Times…
The Federal Reserve is expected to maintain its monetary crisis mode after its latest meeting on Wednesday, even as the economy improves.
The question is how long it will take for the economic recovery to progress sufficiently to prompt a central bank to change course.
The Fed has kept interest rates at zero since March 2020 and buys about $120 billion worth of bonds each month. These policies make many types of loans cheap and encourage investors to take more risk and invest more actively, pumping money into the economic system and accelerating growth.
The Fed is in no hurry to withdraw this support, even as vaccines against the coronavirus become widely available, the labor market recovers, and retail spending increases as a result of government stimulus programs.
Instead, central bankers, including Fed Chairman Jerome Powell point out that the economy is still far from a full recovery. Millions are unemployed and the coronavirus has not been fully controlled either in the United States or worldwide, threatening an uneven economic recovery and risking the spread of new variants.
The Federal Open Market Committee, which sets monetary policy, said it wanted to see significant progress toward its goals of full employment and stable inflation before winding down its monthly bond purchases. The hurdle to a rate hike is even higher: A return to peak employment and inflation above 2%, which is expected to be slightly higher for some time.
At their March meeting, central bankers made clear that interest rates would likely remain at zero until 2023 if the economy performs as they expect. However, investors’ attention will be focused on hints of further action when Powell holds a post-meeting press conference around 2:30 p.m., after the committee’s statement is released at 2 p.m.
It is expected that by the June meeting, more than half of Americans will be partially vaccinated, and the number could be several million higher than it is now, allowing the F.O.M.C. to discuss some tangible improvements, Michael Feroli, chief U.S. economist at J.P. Morgan, wrote in a research note. At this stage, however, we do not expect the Committee’s message to be substantially different from that of six weeks ago
Nonetheless, the Fed’s commitment to remaining patient – an approach that focuses on actual outcomes and not just expected results – is being severely tested for the first time. With unemployment and inflation expected to fall in the coming months, monetary policymakers are likely to increasingly call for easing support to prevent conditions from spiraling out of control.
Powell and his colleagues, however, downplay the overheating fears and inflation warnings of the 1970s and 1980s, arguing that the world has changed in recent decades.
We had 3.5 percent unemployment, the lowest rate in 50 years, for most of the last two years before the pandemic, Powell said in a recent interview with 60 Minutes. And inflation hasn’t really responded to that. This is not the economy we had 30 years ago
Chairman of the Federal Reserve Jerome Powell….
When Federal Reserve Chairman Jerome H. Powell addresses reporters at an online conference Wednesday afternoon, he will likely face questions about a hot topic: inflation.
Prices are expected to rise in the coming months, both because inflation indices are hovering around the very low 2020s and because of short-term supply chain bottlenecks to get supply back on track. What the Fed and the investment community do not know is the size and duration of this jump.
Most forecasters, as well as the Fed itself, think the rate hikes will be temporary. But some economists warn that they could be big enough to become a problem when businesses resume operations, consumers start spending their savings and the government injects stimulus money into the economy.
If growth is sufficiently strong and sustained, the Fed could find itself in the difficult position of having to decide whether to allow prices to rise or raise interest rates before the labor market fully recovers.
Inflation is also a concern for equity investors: If the Fed raises interest rates to cool the economy, that could make bond investments more attractive and corporate loans more expensive, which is bad news for stocks.
The Fed wants inflation to average 2% per year over time, and it defines this goal using the Commerce Department’s core personal consumption index. But officials look at different indicators to assess conditions. Here is an overview of how some of the key inflation indicators are evolving and how Bloomberg economists surveyed believe they will evolve in the coming months:
- P.C.E., the Fed’s favorite figure: 1.6 percent in February, 2.3 percent expected in March and 2.2 percent for the full year.
- The benchmark coefficient, which excludes volatile food and energy prices: 1.4% in February, expected to be 1.8% in March and 1.9% for the year as a whole.
- The Consumer Price Index a key indicator of the Ministry of Labor, rose 2.6% in March and a 2.6% increase was expected for the full year.
- Producer price index, a measure of wholesale prices: 4.2 percent in March, the highest level since 2011.
- University of Michigan inflation forecast for next year: 3.7% this month, down from 3% at the start of the year.
- The University of Michigan’s forecast for consumer price inflation over five years: 2.7 percent this month, little changed since the beginning of the year.
- The expected inflation rate for the next five years, which the market has estimated at 2.25% in recent days, is about the same as in 2018.
Fed officials regularly note that inflation has been too low rather than too high in recent years and they do not expect this to change any time soon. To raise interest rates, he said, you have to be sure that inflation will rise steadily – for example, if it is accompanied by higher wage growth.
Part of the reason the Fed is comfortable that prices will accelerate is that consumer and business expectations remain relatively low, despite some recent increases. If people don’t expect prices to rise, this will likely limit the ability of companies to charge more.
The Google logo on a building in Zurich, Switzerland. Alphabet, Google’s parent company reported strong revenue growth in the latest quarter.Credit…Arnd Wiegmann/Reuters
Treasury bond yields rose Wednesday ahead of the Federal Reserve’s latest policy meeting.
Economists expect the Federal Reserve to keep interest rates near zero and continue buying bonds, but central bank regulators will be looking for clues about how long that support will last as the U.S. economy improves. The rise in Treasury yields may reflect an expectation that the Federal Reserve is getting closer to signaling that it will change its policy, including raising the federal funds rate, even if it does so in the near future.
Jerome H. Powell, the Fed chairman, will address reporters Wednesday afternoon. Fed officials said they would signal any changes in advance and that they expected the current rise in inflation to be temporary, reducing the need for a monetary policy response.
The yield on 10-year Treasuries rose two basis points to 1.65% on Wednesday, after rising six basis points the day before. The yield on 10-year UK government bonds rose six basis points to 0.83%, while the yield on German bonds rose four basis points to minus 0.21%.
We think the risks around this meeting are strongly biased towards higher interest rates, ING analysts said on bond yields. This is especially true if the Fed abandons its cautious tone of late or simply decides to hedge its interest rates by saying it would react accordingly if the economy overheated.
- US stock futures indicated that the S&P 500 index would open slightly higher.
- Shares of Deutsche Bank rose nearly 9% after the German bank reported its best quarterly profit in seven years. The bank also avoided losses from the collapse of Archego’s Capital Management, which dealt a blow to some of its European peers.
- Shares of Alphabet, Google’s parent company, rose more than 5 percent in premarket trading after the tech company reported that revenue in its latest quarter rose sharply from a year earlier, driven by strong demand for online advertising.
- Shares of Pinterest fell more than 10% in premarket trading after the company said user growth will likely slow if restrictions on Pinterest are lifted.
- On Wednesday, Boeing, Apple, Facebook and Ford will announce their results.
linked to credit Hiroko Masuike/The New York Times
- Alphabet, the parent company of Google, announced Tuesday that it had revenue of $55.31 billion in the first three months of the year, 34 percent more than a year earlier, while net income for the first quarter more than doubled to $17.93 billion. This is the third consecutive quarter of record profits for the company. Advertising revenue was up 32% in the quarter, driven by strong demand for Search Engine marketing. Alphabet also received $6 billion from YouTube ads, up 49%.
- Microsoft announced Tuesday that its quarterly revenue grew at one of the fastest rates in years and its market value approached the $2 trillion mark. Revenue reached $41.7 billion in the fiscal third quarter, up 19% year-over-year and the largest quarterly increase since 2018. Profits rose 44% to $15.5 billion. Gaming revenue was up 50%, driven by spending on the new xbox game console, launched late last year, and Xbox content and services.
- Coffee giant Starbucks said its sales in the US have fully recovered in the first three months of this year. In the second quarter, U.S. retail sales rose 9% from a year earlier, while global sales rose 11% to $6.7 billion. Starbucks reported a profit of $659 million for the quarter.
According to the latest projections, California will have a budget surplus of about $15 billion for the next fiscal year, which runs from July to June. The state is so bloated that it now runs its own stimulus program, hands out $600 or $1,200 checks to low-income families and spends about $2 billion to help small businesses
Less than a year ago, the state had a $54 billion deficit, reports Matt Phillips for the New York Times This is how the fate of the state has changed:
- Nearly half of California’s income taxes come from the wealthiest 1% of the state’s citizens. Since the bulk of this group’s income comes from stocks and share-based compensation, their fate is tied to the performance of the stock market Since its low point in March 2020, the S&P 500 Index has risen nearly 90%, generating nearly $17 trillion in paper gains.
- According to Dealogic, 457 companies went public last year, raising a record $167.8 billion. Nearly a quarter of those funds went to the 100 California companies that took the plunge, more than in any other state.
- The governor’s office expects capital gains tax revenue to exceed $18 billion in the coming fiscal year, a major contributor to the state’s surplus. In Silicon Valley where entrepreneurs get bonuses in shares they sell, or in stock options, California is doing very well, said David Hitchcock, chief California analyst at bond rating agency S&P Global.
- California’s fiscal recovery was helped by better-than-expected federal spending that kept people afloat and prevented a total collapse of the economy. When California’s governor addresses his final budget next month, as required by law, analysts expect him to announce an additional $26 billion in federal funding for California, following President Biden’s $1.9 trillion rescue package approved last month.
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