The Federal Reserve Held Rates Steady but Warned of Further Rate Hikes…The central bankers left the overnight rate in a range of 5% to 5.25% but suggested they will raise rates later this year if conditions warrant.
What it means— The decision was unanimous in that it made no one happy. Some members of the Federal Open Market Committee (FOMC) wanted to raise rates again, while others wanted to take a hiatus to see how much damage their rate hikes to date have caused. By holding steady this week and then all but promising to raise rates at the end of July, Fed Chair Powell put together a consensus of the willing.
More interesting were the economic projections released with the monetary policy statement. The bankers forecast core Personal Consumption Expenditures inflation to be up 3.9% this year, 0.3% higher than the March forecast, and they estimate overnight rates will be 0.5% higher at year-end. That suggests the majority of the members expect two more rate hikes this year, which should take a bite out of auto sales while weighing on consumer credit. The economic projections also show the FOMC members expect unemployment will climb just to 4.1% this year, down from the 4.5% forecast in March. In the world of the Fed, things just aren’t bad enough yet to leave alone.
Inflation Fell From 4.9% to 4.0%, the Lowest Level Since March 2021… Falling gasoline and food prices helped pull inflation lower.
What it means— While headline inflation rose a modest 0.1% last month, core inflation (excluding food and energy) rose 0.4% and remains at 5.3%. That’s not going to make the Fed feel good and, along with stubbornly low unemployment, explains why the Fed governors would go out of their way to suggest more rate hikes in the coming months. Shelter is still a problem, with rents rising nearly 9% over the past year, while used car prices also pushed higher. Real-time measures show rents drifting lower and pricing power swinging back to renters, which should take some pressure off of inflation in the months to come. The question is whether this will happen soon enough to keep the Fed on the sideline or if the central bank will raise rates in spite of easing prices just to make sure inflation is under control. The Fed has backed itself into a corner trying to avoid a deep recession while unwinding inflation. Chair Powell wants to avoid Volker’s mistake in the ‘80s.
Unless something major happens, they will likely raise rates one more time even if it’s not warranted, and then tell the markets they stand ready to act again if need be. Investors took this as good news, driving up the markets on Thursday. Despite persistent warnings of a looming recession, investors are piling into the current rally on the widespread assumption that any downturn will be mild ignoring the Fed and economic forecasts. We will see if they still agree as the summer begins and the Fed and Treasury drain liquidity from the system.
National Federation of Independent Businesses Survey Shows Optimism at 89.4%… That was above the 88.7% consensus forecast but remains well below the long-term average.
What it means— The National Federation of Independent Businesses (NFIB) is an organization of small businesses. The number of firms expecting better business conditions in the next few months fell from -49% to -50% from April to May. They remain concerned about inflation and labor shortages, which are making it hard to meet demand. If small businesses capitulate and raise prices so they can pay higher wages, then they will be exacerbating the exact problem the Fed is trying to avoid – sticky inflation.
Initial Jobless Claims Steady at 262,000, Highest Level Since October 2021… Texas was the latest state to see a sizable jump in jobless claims.
What it means— We’re not sure where they are looking for these numbers. According to friends in Texas, every establishment seems to have a “Help Wanted” sign painted on the door. More important are the continuing claims, which inched up by a modest 20,000, to 1.78 million. This is an exceptionally low number in such a large economy. Until that number crosses two million and shows signs of marching higher, unemployment will probably not budge.
Retail Sales Rose 0.3% in May, Well Ahead of the 0.2% Projected Decline… Retail sales for March and April were revised lower, which offset the gains in May.
What it means— Retail sales were steady, pulled lower by gasoline sales as spending on flights, hotels, and restaurants climbed. Restaurant and bar sales expanded by 0.4% last month and are up 8% over the past year. While all of this points to steady growth, remember that retail sales aren’t adjusted for inflation, but the numbers still give the Fed more reason to raise rates in July than to remain on the sidelines.
Chinese Man Sued After Skipping Out on Restaurant Bill for Himself, his Blind Date, and her 23 Relatives… Mr. Liu met his potential love interest, Ms. Zhang, through a matchmaker. When Liu showed up to the restaurant to meet Zhang, he found her sitting with 23 of her relatives and was told that he was expected to pay for the meal. When the $2,800 bill showed up, Liu took a powder, leaving Zhang to settle up. Later Liu offered to pay 25% of the bill, or $550, but Zhang wanted him to pay half. She sued him, but the court sided with Liu, deciding he was only responsible for around $200, the cost of himself and Zhang, his original date.
Data supplied by HS Dent Research
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