Fork in Road for Fed Inflation Forecasting; CEOs' Views on Economy, Inflation, Labor Market

Fork in Road for Fed Inflation Forecasting; CEOs' Views on Economy, Inflation, Labor Market By James Christie

Good day. With inflation in the U.S. easing as supply chains get back to normal, Federal Reserve officials are turning their attention toward the labor market and its 3.5% unemployment rate, a half-century low, as a source of price pressures. Nick Timiraos of The Wall Street Journal writes that how the Fed now forecasts inflation will be driven by a debate weighing pandemic-rooted pressures versus traditional factors. His analysis, below, comes as the Fed is likely to raise interest rates on Wednesday by a quarter percentage point to a range between 4.5% and 4.75%, slowing its interest-rate increases for the second consecutive meeting. Fed officials' deliberations this week over how much more to raise interest rates will hinge on how much they expect the economy to slow this year, he writes. Meanwhile, the Journal has rounded up comments by some of the world's corporate leaders on what they are thinking about the economy, inflation and the labor market. Microsoft Corp. Chief Executive Satya Nadella said that, "Just as we saw customers accelerate their digital spend during the pandemic, we are now seeing them optimize that spend. Also, organizations are exercising caution given the macroeconomic uncertainty."

Now on to today's news and analysis.

Top News Fed Debates Whether Wages or Low Unemployment Will Drive Inflation

Stubbornly high inflation is finally easing as supply chain disruptions fade and interest rates at 15-year highs put the brakes on demand. Now, Federal Reserve officials have voiced unease that prices could reaccelerate because labor markets are so tight.

At issue is what's the right way to forecast inflation : a bottoms-up analysis of recent readings on prices and wages that puts more weight on pandemic-driven idiosyncrasies-or a traditional top-down analysis of how far the economy is operating above or below its normal capacity.

How Fast Rate Hikes Slow the Economy Could Shape 2023 Fed Policy

Key to Federal Reserve officials' discussions at their two-day policy meeting will be estimating how much their previous rate increases will cool growth and inflation over time, or what Nobel Laureate Milton Friedman called the "long and variable" lags of monetary policy . "There will be a lot of thinking about 'Are the effects we're getting about on the track that we expected? Are they coming sooner, or are they coming bigger?'" said William English, a former senior Fed economist who is a professor at the Yale School of Management.

What CEOs Are Saying About the Economy

"My guess is if there is a-if the recession is a serious one, and I think it probably will be , but I hope it isn't-that would lead to meaningful decreases in almost all of our input costs," Tesla Inc. Chief Executive Elon Musk said.

The Decline of the Nice-to-Have Economy U.S. Economy Jobless Rate Is at Half-Century Low. In These States, It's Even Lower.

The national unemployment rate fell to a seasonally adjusted 3.5% in December, matching the lowest reading in a half century, while Utah had the lowest rate at 2.2% . Other states' rates were much higher, led by Nevada at 5.2%.

Consumer Spending Fell 0.2% in December as Inflation Cooled

Spending by households fell 0.2% in December from the prior month, while the personal-consumption expenditures price index-the Fed's preferred inflation gauge- rose 5% last month from a year earlier.

Banks Brace for More Consumers to Fall Behind on Their Loans

Banks with big credit-card businesses continued to profit in the fourth quarter. But many tightened their lending standards and set aside more money to cover potential loan losses, signs that they don't expect the good times to last .

McCarthy to Meet With Biden, Expected to Discuss Debt Ceiling

Speaker Kevin McCarthy, who unveiled the timing of the previously announced meeting in an interview Sunday, said lawmakers should implement a plan to cut spending and not simply raise the existing $31.4 trillion borrowing limit.

Pro Take: The Fed's 'Wage-Price Spiral' Concerns Are Far From Over

By Christian Jauregui

Federal Reserve officials caught some relief when the December jobs report indicated cooling wage growth and recent months' gains were revised lower. But it may be too soon for policy makers to say they have averted a so-called wage-price spiral.

Continued strength elsewhere in the jobs report paints a convoluted picture of the labor market, and the prospect of a wage-price spiral-where worker earnings and consumer prices chase each other higher-remains a focal point of Fed Chairman Jerome Powell and other members of the central bank's policy-setting committee. Read More .

Key Developments Around the World Janet Yellen Warns South Africa About Breaching Russia Sanctions

Treasury Secretary Janet Yellen warned South African officials about violating U.S. sanctions, as the White House tries to balance its response to Russia's invasion of Ukraine with a broader effort to deepen ties with African governments .

Upstart Indian Shipper Helps Get Russian Oil to Market

A small office in a suburb of Mumbai helps explain how Russian crude continues to flow . The address is home to Indian shipping company Gatik Ship Management, which didn't manage a single ship until 2022.

Japan, Netherlands to Limit Exports of Chip-Making Gear to China

Japan and the Netherlands have agreed to restrict exports of advanced chip-manufacturing equipment to China, joining White House efforts to slow China's military development by cutting access to advanced technologies.

Forward Guidance Tuesday (all times ET)

8:30 a.m.: U.S. employment cost index for fourth quarter; Canada GDP for November

9 a.m.: S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index for November

9:45 a.m.: Chicago Business Barometer - ISM Chicago Business Survey for January

10 a.m.: The Conference Board Consumer Confidence Index for U.S. for January

Wednesday

4 a.m.: Eurozone Manufacturing PMI for January

4:30 a.m.: S&P Global / CIPS UK Manufacturing PMI for January

5 a .m.: Euro area inflation flash estimate for January

8:15 a.m.: ADP National Employment Report for U.S. for January

10 a.m.: ISM Report on Business Manufacturing PMI for January

2 p.m.: Federal Reserve interest rate decision

2:30 p.m.: Fed's Powell post-FOMC press conference

Commentary Jerome Powell Plays by the Rules

The Fed has been vague about how much tightening will be required to achieve its price stability goals, saying only that it will tighten until interest rates are "sufficiently restrictive," without providing much guidance about what that means, Jeffrey Lacker and Charles Plosser write for WSJ Opinion . Fortunately, there is a well-established body of research in monetary economics that provides concrete guidance on what it will take to restore price stability. This work is grounded in historical experience and a range of compelling economic models. Systematic monetary policy rules, such as those proposed by John Taylor, embody patterns of policy response that have been successful at reducing inflation in the past. When talking about the likely future path of interest rates, Fed officials should cite the quantitative implications of these rules and remind markets that they are explicitly data-dependent. Helping people understand the policy rules and how they inform the Fed's thinking would be far more constructive than asking the public to decode ambiguous phrases such as "sufficiently restrictive."

Mr. Lacker is a former president of the Richmond Fed. Mr. Plosser is a former president of the Philadelphia Fed and a visiting fellow at the Hoover Institution. Both are members of the Shadow Open Market Committee.

Research Eurozone Economy Could Be in Store for Rate Pain

The eurozone is likely to avoid a recession this winter, and while this is good news in the short term, it brings with it problems, Pimco portfolio manager and government bond analyst Nicola Mai writes in a note. If the eurozone economy's recent resilience continues, the prospect of the European Central Bank raising interest rates for longer would become very real, and rates probably would increase more than is currently priced into the market, he writes. "Admittedly, we still expect the economy to weaken as some of the support from order books fades and tighter monetary policy feeds through to the economy," Mr. Mai writes. Markets are pricing in the ECB's peak deposit rate slightly below 3.30% in June versus the current 2%, according to Refinitiv data.

-Xavier Fontdegloria

China Reopening Could Boost Latin America Growth

The reopening of China's economy following the end of the country's zero-Covid policy could have a moderate effect on Latin American economies, Goldman Sachs economists Alberto Ramos and Renan Muta write in a research note. The effect on Latin American growth comes more through commodity prices than from increased demand, the economists write. The investment bank isn't yet changing its GDP forecasts for Latin America, which are above consensus, but the change in China's policy adds upside risk to some of the region's economies. If Chinese and global economic forecasts are revised upward, Goldman Sachs would likely review its Latin America forecasts, the economists write.

-Jeffrey T. Lewis

(MORE TO FOLLOW) Dow Jones Newswires

01-30-23 0716ET