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Business

Fed’s Waller says market has overreacted to consumer inflation data: ‘We’ve got a long, long way to go’

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Federal Reserve Gov. Christopher Waller said Sunday that financial markets seem to have overreacted to the softer-than-expected October consumer price inflation data last week.

“It was just one data point,” Waller said, in a conversation in Sydney, Australia, sponsored by UBS.

“The market seems to have gotten way out in front over this one CPI report. Everybody should just take a deep breath, calm down. We’ve got a ways to go ” Waller said.

Investors cheered the soft CPI print, released Thursday, driving stocks up to their best week since June. The S&P 500 index
SPX,
+0.92%
closed 5.9% higher for the week.

The data showed that the yearly rate of consumer inflation fell to 7.7% from 8.2%, marking the lowest level since January. Inflation had peaked at a nearly 41-year high of 9.1% in June.

Waller said it was good there was some evidence that inflation was coming down, but noted that there were other times over the past year where it looked like inflation was turning lower.

“We’re going to see a continued run of this kind of behavior and inflation slowly starting to come down, before we really start thinking about taking our foot off the brakes here,” Waller said.

“We’ve got a long, long way to go to get inflation down. Rates are going keep going up and they are going to stay high for awhile until we see this inflation get down closer to our target,” he added.

The Fed is focused on how high rates need to get to bring inflation down, and that will depend solely on inflation, he said.

Waller said “the worst thing” the Fed could do was stop raising rates only to have inflation explode.

The 7.7% inflation rate seen in October “is enormous,” he added.

The Fed signaled at its last meeting earlier this month that it might slow down the pace of its rate hikes in coming meetings.

The central bank has boosted rates by almost 400 basis points since March, including four straight 0.75-percentage-point hikes that had been almost unheard of prior to this year.

“We’re looking at moving in paces of potentially 50 [basis points] at the next meeting or the next meeting after that,” Waller said.

The Fed will hold its next meeting on Dec. 13-14, and then again on Jan. 31-Feb. 1.

At the same time, Powell said the Fed was likely to raise rates above the 4.5%-4.75% terminal rate that they had previously expected.

“The signal was ‘quit paying attention to the pace and start paying attention to where the endpoint is going to be,’” Waller said.

In the wake of the CPI report, investors who trade fed funds futures contracts see the Fed’s terminal rate at 5%-5.25% next spring and then quickly falling back to 4.25%-4.5% by November. That’s well below the levels prior to the CPI data.

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Business

Fed’s Mester says there’s been no progress on inflation, so interest rates need to move higher

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With little or no progress made on bringing inflation down, the Federal Reserve needs to continue raising interest rates, Cleveland Fed President Loretta Mester said Tuesday.

“At some point, you know, as inflation comes down, them my risk calculation will shift as well and we will want to either slow the rate increases, hold for some time and assess the cumulative impact on what we’ve done,” Mester told reporters after a speech to the Economic Club of New York.

“But at this point, my concerns lie more on – we haven’t seen progress on inflation , we have seen some moderation- but to my mind it means we still have to go a little bit further,” Mester said.

In her speech, the Cleveland Fed president said the central bank needed to be wary of wishful thinking about inflation that would lead the central bank to pause or reverse course prematurely.

“Given current economic conditions and the outlook, in my view, at the point the larger risks come from tightening too little and allowing very high inflation to persist and become embedded in the economy,” Mester said.

She said she thinks inflation will be more persistent than some of her colleagues.

As a result, her preferred path for the Fed’s benchmark rate is slightly higher than the median forecast of the Fed’s “dot-plot,” which points to rates getting to a range of 4.5%-4.75% by next year.

Mester, who is a voting member of the Fed’s interest-rate committee this year, repeated she doesn’t expect any cuts in the Fed’s benchmark rate next year. She stressed that this forecast is based  on her current reading of the economy and she will adjust her views based on the economic and financial information for the outlook and the risks around the outlook.

Opinion: Fed is missing signals from leading inflation indicators

Mester said she doesn’t rely solely on government data on inflation because some of it was backward looking. She said supplements her research with talks with business contacts about their price-setting plans and uses some economic models.

The Fed is also helped by some real-time data, she added.

“I don’t see the signs I’d like to see on the inflation,” she added,

Mester said she didn’t see any “big, pending risks” in terms of financial stability concerns.

“There is no evidence that there is disorderly market functioning going on at present,” she said.

U.S. stocks were mixed on Tuesday afternoon with the Dow Jones Industrial Average
DJIA,
+0.12%
up a bit but the S&P 500 in negative territory. The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.936%
inched up to 3.9%

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Business

Was Fed’s Powell dovish or not? 4 key takeaways from Wednesday’s press conference

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Investors reacted as if Fed Chairman Jerome Powell’s press conference Wednesday was dovish, but many economists think it was on the hawkish side of the street.

Here are some of the key takeaways from Powell’s hour-long discussion with reporters about the state of the economy and central bank policy:

Read: Fed jacks up rates to combat highest inflation in 41 years

You say ‘dovish’ and I say ‘hawkish’

After Powell spoke, stock prices
DJIA,
+1.37%

SPX,
+2.62%
rose sharply and bond yields
TMUBMUSD02Y,
2.984%
declined more at the short end than the long end, clear signs the market thought Powell was dovish.

But Robert Perli, head of global policy at Piper Sandler, disagreed with this conclusion.

“The press conference was hawkish,” he said.

“All Powell could do at the press conference today was talk about how inflation was too high, how the Fed is determined to bring it down, and implicitly how he would be willing to tolerate a recession if that’s what’s needed to get the job done,” Perli said.

The market latched on to Powell’s statement that slowing down from the pace of 0.75-percentage-point rate hikes will likely be appropriate “at some point.” Perli said this is “obvious” as the Fed can’t continue on that pace forever.

The market also liked when Powell said the Fed was moving to a new “meeting-to-meeting” phase, perhaps believing that a peak in interest rates is near.

Perli said that’s a misreading and Powell doesn’t want to give guidance because there is so much uncertainty.

Scott Anderson, chief economist at Bank of the West, said the lack of forward guidance from the Fed could increase interest-rate and stock-market volatility around important U.S. data releases, especially on inflation “as investors try to determine what it might mean for the pace of additional rate hikes and the terminal peak for rates in the current tightening cycle.”

Powell ‘bobs and weaves’ on recession

Powell managed to “bob and weave” around the questions of recession, said Josh Shapiro, chief U.S. economist at MFR.

Powell said the Fed wasn’t trying to create a recession and did not expect one, and also that we are not currently in one. He refused to categorically state how it would affect the Fed’s policy path if one materialized, Shapiro said.

The Fed chairman said there was still a path to bring inflation down while sustaining a strong labor market.

“We continue to think that there is a path [to a soft landing]. We know the path has clearly narrowed…and may narrow further,” he said.

Powell said the Fed is determined to bring inflation down, and this likely means a period of “below-trend economic growth and some softening in the labor market conditions. “

What about September?

Powell kept the door open for another “unusually large” 0.75-percentage-point hike in September, but said it would depend on the data.

Carl Tannenbaum, chief economist at Northern Trust, noted that Powell suggested that the year-end fed funds rate would be in the range of 3.25%-3.5%. That is another 100 basis points higher, which the Fed might prefer to accomplish with a 50-basis-point increase followed by two 25-basis-point hikes, rather than going from 75 basis points in September, to 25, then to zero. Powell “sounded marginally less hawkish to me,” he said.

Balance-sheet plans

Powell said the Fed’s program to shrink its balance sheet is working and markets “should be able to absorb this.” He said the plan was on track and could take two to two-and-a-half years.

Some economists have starting to forecast the Fed will end the “quantitative tightening” program next year.

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Business

A ‘firestorm’ of hawkish Fed speculation erupts following strong U.S. inflation reading

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How hawkish will the Federal Reserve be this year?

At the moment, Wall Street economists seem to be telling their clients “more hawkish than we thought five minutes ago.”

The strong U.S. consumer inflation data reported Thursday has set off what looks like a chain reaction of upward revisions to projected interest rates rises and where the Fed is headed with monetary policy.

Fed watchers are talking seriously about an “emergency” interest rate hike before the Fed’s next formal meeting on March 16.

The consumer price index rose 0.6% in January, with broad based gains. The year-over-year rate rose to 7.5%, the highest level in 40 years.

Read: Consumer price inflation increases sharply in January

In the wake of the data, Goldman Sachs said it now sees seven consecutive 25 basis point rate hikes at each of the remaining Fed policy meeting this year. The investment bank’s earlier prediction was five hikes.

Economists at Citi said that their base case is a now for a 50 basis point hike in March followed by quarter point hikes in May, June, September and December.

Marc Cabana, head of U.S. rates strategy at BofA Securities, told Bloomberg Radio that it is very likely the Fed is going to raise rates by 50 basis points in March and “who knows, maybe even 50 in May.”

The talk about an inter-meeting rate hike before March 16 erupted late Thursday after St. Louis Fed President James Bullard said was open to having that discussion.

Market analyst Mohamed Ed-Erian said the frenzy of speculation is a sign the Fed has lost control of the policy narrative. He said he didn’t want to see the Fed take aggressive moves because the market will price in aggressive moves again and again.

“This is what typically happens in a developing country when a central bank loses control of the policy narrative,” he said.

March Chandler, forex analyst for Bannockburn Global Forex, said it will be difficult for Fed officials to get ahead of the curve of expectations.

It is a strange time for the Fed. The central bank has been slowly “tapering” or reducing the amount of securities is is buying under its quantitative easing program started in the depth of the pandemic. The buying of Treasurys and mortgage backed securities is scheduled to end in mid-March.

Some Fed watchers think the Fed may decide to end these purchases “cold turkey,” with the announcement coming Friday.

Under the Fed’s QE program, the Fed is scheduled to release its schedule for the last month of asset purchases.

“If the Fed releases that calendar at 3 p.m, it is pretty strong forward guidance they’re not going to do an intermeeting hike,” Cabana said.

Cabana said he didn’t expect a rate hike before the March 16 meeting. He suggested that investors who want to bet on an intermeeting hike would be better positioned to play for a 75 basis point hike in March.

However, Robert Perli, head of global policy at Piper Sandler, said the firestorm among Fed watchers felt like “much ado about little.”

“We are first to recognize that inflation is too high for comfort. But what we learned yesterday from both the CPI report and FOMC members doesn’t seem enough to change the policy outlook nearly as much as the market did,” Perli said, in a note to clients.

Three Fed officials were not as hawkish as Bullard in their comments the wake of the CPI report.

Richmond Fed President Tom Barkin told the Stanford Institute for Economic Policy Research on Thursday evening that he would have to be convinced of a need for a 50 basis point rate hike, Reuters said.

In an interview with Market News International, San Francisco Fed President Mary Daly downplayed the chances of a half-a-percentage point hike in March.

And Atlanta Fed President Raphael Bostic told CNBC after the CPI data that he was sticking with his call for four rate hikes this year, including a 25 basis point hike in March.

Tim Duy, chief U.S. economist at SGH Macro Advisors, called these dovish Fed comments “nonsensical.”

“It is just getting to the point where the distance between the Fed’s current position and reality is too wide to ignore any longer,” Duy said, in a note to clients.

U.S. stocks
DJIA,
-0.17%

SPX,
-0.45%
were mixed late morning Friday after a wild week on Wall Street. The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.024%
stayed above 2%, the highest level since 2019.

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Business

Asian markets fall as Fed signals ‘downshift’ in economy

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Shares fell in Asia on Thursday after further losses on Wall Street following a Federal Reserve report showing U.S. economic activity slowed this summer.

The report pointed to resurgent coronavirus cases and mounting supply chain problems and labor shortages — woes affecting many economies. Benchmarks fell in Tokyo, Hong Kong, Shanghai and Sydney.

Japan extended its emergency measures to combat COVID-19 outbreaks until the end of September, as numbers of new cases have been declining only slowly, straining the healthcare system.

Chinese markets have been chilled by further moves by the government to strengthen controls over online businesses that thrived during the pandemic.

In another development, ratings agencies say Evergrande Group, one of China’s biggest real estate developers, looks increasingly likely to default on its debts following news reports it will delay interest payments on bank loans. The company is selling assets to raise cash and faces complaints it is late in paying contractors and in delivering projects to customers.

Ratings agencies Moody’s and Fitch cut their ratings on Evergrande debt this week to a level that indicates they believe the company is likely to default on bond payments due to lack of cash. Chinese authorities are trying to reduce high debt levels in the economy and have urged Evergrande to resolve its more than $300 billion in debt, but financial analysts to suggest they might allow a default while trying to reduce its impact on the financial system.

Tokyo’s Nikkei 225
NIK,
-0.57%
fell 0.5%. In Hong Kong, the Hang Seng
HSI,
-1.95%
lost 1.2%, while the Shanghai Composite index
SHCOMP,
+0.21%
edged 0.1% lower. In Sydney, the S&P/ASX 200
XJO,
-1.90%
declined 1.2%, and the Kospi
180721,
-1.41%
in Seoul slid 0.9%. Shares fell in Taiwan
Y9999,
+0.20%
but rose in Singapore
STI,
+0.18%,
Malaysia
FBMKLCI,
-0.83%
and Indonesia
JAKIDX,
-0.24%.

The yield on the 10-year Treasury note fell to 1.33% after rising sharply on Tuesday to 1.37%.

The Federal Reserve’s latest survey of the nation’s business conditions, dubbed the “Beige Book,” said U.S. economic activity “downshifted” in July and August.

The Fed said the slowdown was largely attributable to a pullback in dining out, travel and tourism in most parts of the country, reflecting concerns about the spread of the highly contagious delta variant.

The S&P 500
SPX,
-0.13%
fell 5.96 points to 4,514.07, which is 0.5% below the all-time high the index set last Thursday. The Dow Jones Industrial Average
DJIA,
-0.20%
fell 0.2%, to 35,031.07, and the Nasdaq composite
COMP,
-0.57%
slid 0.6% to 2,249.73. The tech-heavy index’s decline ended a four-day winning streak.

Investors could be in for a choppy market through September as they monitor the Federal Reserve and Washington, which has to deal with budget reconciliation, infrastructure spending and the debt ceiling.

On the bright side, U.S. employers posted record job openings for the second consecutive month in July, according to the Labor Department. The disconnect between the growing number of job openings and the weak recovery for employment levels suggests the jobs issue could be crimping the broader economic recovery.

In other trading, benchmark U.S. crude oil
CLV21,
+0.20%
rose 5 cents to $68.35 per barrel in electronic trading on the New York Mercantile Exchange. It gained 95 cents on Wednesday, to $69.30 per barrel.

Brent crude
BRNX21,
+0.33%,
the international benchmark for pricing, picked up 9 cents to $72.69 per barrel.

The U.S. dollar
USDJPY,
-0.17%
slipped to 110.16 Japanese yen from 110.25 yen.

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Business

Asian markets decline ahead of Fed comments

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TOKYO — Asian shares were lower Wednesday as world markets cautiously awaited the U.S. central bank’s latest comments on the economic outlook.

Japan’s benchmark Nikkei 225
NIK,
-0.02%
gave up early gains and slid 0.2% while South Korea’s Kospi
180721,
-0.64%
retreated 1%. Australia’s S&P/ASX 200
XJO,
-0.47%
dipped 0.7%. Hong Kong’s Hang Seng
HSI,
+0.03%
declined 0.2%, while the Shanghai Composite
SHCOMP,
-0.03%
fell 0.4%. Benchmark indexes in Singapore
STI,
+0.22%,
Taiwan
Y9999,
-0.60%
and Indonesia
JAKIDX,
-0.50%
slipped as well.

Investors are awaiting the Federal Reserve’s latest economic and interest rate projections, expected later in the day. Economists expect Fed Chair Jerome Powell will try to convince jittery financial markets that the central bank can continue providing support without igniting higher inflation.

Those worries have recently pushed bond yields higher, sapping buying demand for shares.

The Fed meeting “carries the potential to either allay or heighten some of the market’s recent concern with regard to the soaring bond yields,” said Jingyi Pan, senior market strategist at IG in Singapore.

Wall Street capped a choppy day of trading with indexes closing mostly lower. Losses by banks, industrial stocks and companies that rely on consumer spending, including cruise line operators, outweighed gains by Big Tech and communication services stocks.

The S&P 500
SPX,
-0.16%
dropped 0.2% to 3,962.71. The Dow Jones Industrial Average
DJIA,
-0.39%
lost 0.4% to 32,825.95. The Nasdaq
COMP,
+0.09%
bucked the trend, benefiting from the rally in technology stocks and rising 0.1%, to 13,471.57.

Investors weighed new economic data Tuesday that showed Americans cut back on spending last month, partly due to bad weather in wide parts of the country that kept shoppers away from stores, and partly due to December and January stimulus payments running out.

“We’re still in the midst of getting back to a more normal environment,” said Jason Pride, chief investment officer of private wealth at Glenmede. “Given the lumpiness of government stimulus payments, we’re going to see numbers jumping around.”

In energy trading, U.S. benchmark crude
CLJ21,
+0.63%
fell 9 cents to $64.71 a barrel in electronic trading on the New York Mercantile Exchange. It lost 59 cents to $64.80 on Tuesday. Brent crude
BRNK21,
+0.54%,
the international standard, lost 15 cents to $68.24 a barrel.

In currency trading, the U.S. dollar
USDJPY,
+0.14%
rose to 109.12 Japanese yen from 108.99 yen.

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Business

Asian markets retreat as caution sets in

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TOKYO — Asian shares mostly fell Thursday as caution set in over company earnings reports, recent choppy trading in technology stocks and prospects for more economic stimulus for a world battling a pandemic.

Japan’s Nikkei 225
NIK,
-1.03%
slipped 0.5% in early trading, while South Korea’s Kospi
180721,
-1.90%
dropped 1.6%. Australia’s S&P/ASX 200
XJO,
-0.87%
slipped 0.6%. Hong Kong’s Hang Seng
HSI,
-1.35%
lost 1.2%, while the Shanghai Composite
SHCOMP,
-1.38%
was down 1%. Stocks rose in Indonesia
JAKIDX,
+0.63%
and Malaysia
FBMKLCI,
-0.25%
but fell in Singapore
STI,
-1.29%
and Taiwan
Y9999,
-0.43%.

Also on market players’ minds is the global vaccine rollout, which is becoming more organized in the U.S., but yet to play out in much of Asia, except for China, where the pandemic started.

“As the rally waned for the U.S. market, Asia markets can be seen left to their own devices into the Thursday session, and it appears that investors may be locking in some of the recent gains,” said Jingyi Pan, a senior market strategist for IG in Singapore.

Wall Street ended with modest gains, with the S&P 500
SPX,
+0.10%
inched up 3.86 points, or 0.1%, to 3,830.17, after swinging between a gain of 0.6% and a loss of 0.3%. The tiny gain extended the benchmark index’s winning streak to a third day.

The Dow Jones Industrial Average
DJIA,
+0.12%
gained 36.12 points, or 0.1%, to 30,723.60. The tech-heavy Nasdaq
COMP,
-0.02%
slipped 2.23 points, or less than 0.1%, to 13,610.54. The index had briefly been above its all-time high set last week.

Energy, communications and financial stocks helped lift the market. Those gains were primarily kept in check by declines in companies that rely on consumer spending and technology stocks.

GameStop and other recently high-flying stocks notched modest gains Wednesday. GameStop
GME,
+2.68%
rose 2.7% and AMC
AMC,
+14.71%
climbed 14.7%. The stocks have been caught up in a speculative frenzy by traders in online forums who seek to inflict damage on Wall Street hedge funds that have bet the stocks would fall. GameStop plunged 60% on Tuesday, and AMC Entertainment lost 41.2%.

“There’s a tug of war that’s been brewing for a week or so now, that markets are ripe for a correction and whether the events of last week are a precipitating event,” said Jamie Cox, managing partner at Harris Financial Group.

Stocks have been mostly rallying this week, an encouraging start to February after a late fade in January as volatility spiked amid worries about the timing and scope of another round of stimulus spending by the Biden administration, unease over the effectiveness of the government’s coronavirus vaccine distribution and turbulent swings in GameStop and other stocks hyped on social media.

That volatility has subsided this week, with Wall Street focusing mainly on corporate earnings reports while it keeps an eye on Washington for signs of progress on a new aid package.

Democrats and Republicans remain far apart on support for President Joe Biden’s $1.9 trillion stimulus package, but investors are betting that the administration will opt for a reconciliation process to get the legislation through Congress.

In energy trading, benchmark U.S. crude
CLH21,
+0.63%
gained 15 cents to %55.84 a barrel. Brent crude
BRNJ21,
+0.51%,
the international standard, added 6 cents to $58.52 a barrel.

In currency trading, the U.S. dollar
USDJPY,
+0.13%
inched down to 105.02 Japanese yen from 105.06 yen.

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