Delving Into the Disconnect Over the U.S. Economy; Mester Says No Need to Rush Fed Rate Cuts By James Christie

Good day. U.S. consumers are spending briskly, the jobless rate has been below 4% for 24 straight months and inflation has tapered lower. So why are Americans so down on the economy? The Wall Street Journal looks into this disconnect and finds that long-term financial security for many Americans feels fragile and vulnerable to wide-ranging social and political threats. Meanwhile, Federal Reserve Bank of Cleveland President Loretta Mester said on Tuesday that there is no need to rush interest-rate cuts. "It would be a mistake to move rates down too soon or too quickly without sufficient evidence that inflation was on a sustainable and timely path back to 2%," she said.

Now on to today's news and analysis.

Top News Why Americans Are So Down on a Strong Economy

Clayton Wiles, a truck driver in North Carolina, earns about 20% more than three years ago. Kristine Funck, a nurse in Ohio, has won steady pay raises, built retirement savings and owns her home. Alfredo Arguello, who opened a restaurant outside Nashville when the pandemic hit, now owns a second one and employs close to 50 people.

But ask any of them about the state of the American economy, and the same gloominess surfaces . "Unstable" is how Arguello describes it. Said Funck: "Even though I'm OK right now, there's a sense it could all go away in a second."

Fed's Mester Warns Against Cutting Rates Too Soon and Too Quickly

Cutting interest rates too soon would risk some of the progress seen on reducing inflation and might cause interest-rate policy to reverse course, Cleveland Fed President Loretta Mester said on Tuesday, MarketWatch reported .

U.S. Economy U.S. Wanted a Homegrown Solar Industry. China Is Building a Lot of It.

For years, the U.S. erected higher and higher barriers to the import of Chinese solar panels, arguing that was the best way to protect domestic suppliers. Now, China's solar giants are building their factories inside the U.S.

Tech Layoffs Just Keep Coming as Sector Resets for AI

The drumbeat of job cuts in the tech industry continued Tuesday when DocuSign became the latest company to announce layoffs, as Silicon Valley signals its intention to keep a grip on costs while pouring cash into artificial intelligence.

CFOs Capitalize on Favorable Conditions to Issue Debt

Big U.S. companies including General Mills, T-Mobile US and International Business Machines issued bonds in January, capitalizing on lower borrowing costs and stronger investor demand after a volatile 2023.

Key Developments Around the World Europe's Green Agenda Collides With Geopolitical, Economic Reality

The European Union is coming under pressure to pare back its sweeping plan to cut greenhouse-gas emissions amid fierce resistance from farmers as well as demands to boost military spending to counter Russia.

BOC Faces Limits on Addressing Housing Affordability, Macklem Says

Housing affordability is a "significant problem" for Canada, and Bank of Canada Gov. Tiff Macklem said the central bank is limited in addressing it because officials have little influence over the shortage in residential units .

Canada Building Permits Drop 14% in December From November TSMC Lifts Chip Investment in Japan Above $20 Billion

Taiwan Semiconductor Manufacturing said Tuesday it would add a second chip factory in southern Japan and raise the total investment there to more than $20 billion, its latest move to minimize geopolitical risks .

Financial Regulation Roundup SEC Increases Oversight for Hedge Funds, High-Speed Traders

Wall Street's top regulator extended its authority into new corners of the financial industry on Tuesday, adopting rules targeting firms that are among the most active buyers and sellers of U.S. government bonds and stocks.

IRS Says Tax Enforcement Pays for Itself-and Then Some

The Internal Revenue Service boosted its estimates of its own value, projecting that Congress's recent expansion of the agency will generate $561 billion in tax revenue , higher than earlier Biden administration forecasts.

Forward Guidance Wednesday (all times ET)

8:30 a.m.: U.S. trade report for December; Canada trade report for December

12 p.m.: Richmond Fed's Barkin speaks to the Economic Club of Washington, D.C.

1:30 p.m.: Bank of Canada summary of deliberations for January interest-rate decision


8:30 a.m.: U.S. weekly jobless claims; Richmond Fed's Barkin appears on Bloomberg TV

10 a.m.: Bank of England's Mann speaks at Official Monetary and Financial Institutions Forum

10:30 a.m.: ECB's Lane in fireside chat at Brookings Institution in Washington

12:05 p.m.: Richmond Fed's Barkin speaks to the Economic Club of New York

Research Rate Cuts in U.S. and Canada May Be Smaller and Come Later

U.S. and Canadian economic resilience may mean interest rates will get cut later and by less than anticipated this year. Scotiabank economists Jean-Francois Perrault and Rene Lalonde now anticipate Federal Reserve and Bank of Canada policymakers will cut in the third quarter rather than the second quarter and by less than previously expected, with the upper end of the policy rate band in the U.S. at 4.5% and the Bank of Canada's policy rate at 4.25% by year-end. And they see a risk that the banks will cut by even less than that. Recent strong growth has led the pair to raise growth forecasts for the U.S. and Canada in 2024, up 1 percentage point from previously to an expected 2.3% for the U.S. and 0.9% for Canada where they had penciled in 0.5%. They note that strong growth comes with an inflationary cost.

-Robb Stewart

Prospect of U.K. Rate Hike Has Diminished, BOE's Breeden Says

Bank of England deputy governor for financial stability, Sarah Breeden, said she is less concerned about persistent inflationary pressures in the U.K. and the possibility that interest rates will need to rise further. Instead she is focused on how long rates will need to remain at their current level, Breeden said in a speech at a UK Women in Economics Annual Networking Event. "My focus, and indeed the focus of many on the MPC [Monetary Policy Committee], has shifted to thinking about how long rates need to remain at their current level," she said. "The downside surprise in services price inflation and wage growth suggested a little less [inflation] persistence than we had assumed in our central forecast back in November, and so my concerns about the risk of even greater persistence emerging have diminished," she said.

-Jessica Fleetham

Commentary UBS Can Be the Next Morgan Stanley, but Much Has to Go Right

To reach the same lofty valuation as U.S. counterpart Morgan Stanley, Swiss bank UBS needs to juggle the integration of Credit Suisse with strong growth in wealth management , Jon Sindreu writes.

A China-U.S. Decoupling? You Ain't Seen Nothing Yet

The U.S. trade deficit with China is on track to fall to its lowest in a decade . This looks, at first glance, like a decoupling of the two economies thanks to the tariffs President Trump slapped on Chinese imports in 2018, Greg Ip writes.

Basis Points Total U.S. household debt, including mortgages, car loans, credit cards and student loans, climbed to $17.5 trillion in the fourth quarter, according to the New York Fed's quarterly report on household debt. As inflation cools, New York Fed researchers note that is a roughly 1% quarterly rate of growth, which is on par with the previous quarter. But researchers are particularly watching credit-card balances and car loans, for which transitions into delinquency keep climbing above prepandemic levels. (MarketWatch) Canada's rapid population growth, powered by visas for temporary workers and students, means forecasts about housing needs are already out of date, CIBC Capital Markets economist Benjamin Tal says. Based on current trends, Canada's population is set to exceed Statistics Canada's high-growth population forecast of 44.15 million well before the end of the decade, Tal says. (Dow Jones Newswires) Housing affordability in Canada won't ease for the next two years, "primarily reflecting a very unaffordable starting point, " Desjardins Securities said, noting efforts to increase residential construction face stiff headwinds in higher borrowing costs and a skilled-labor shortage. Housing affordability is at its most acute in about four decades, according to Bank of Canada indicators. (DJN) Asian manufacturers could be turning a corner, HSBC economists said after a recent slew of upbeat purchasing managers index data. January's readings showed the manufacturing sector expanding in eight out of 12 Asian economies, and slower contractions in Taiwan, Malaysia and Thailand. (DJN) China's foreign-exchange reserves fell as expected at the start of 2024, as capital-outflow pressure increased amid a stronger U.S. dollar. The country's foreign-exchange reserves fell $18.66 billion to $3.219 trillion at the end of January, the People's Bank of China said Wednesday. (DJN) Thailand's central bank kept its policy rate unchanged as inflation has eased in recent months. The Bank of Thailand said Wednesday that its policy committee voted five to two to maintain its one-day repurchase rate at 2.50%. Germany's industrial production declined more than expected in December , posting a seventh-straight month of falling output and reflecting further weakness in the key manufacturing sector of Europe's largest economy. Kenya's central bank on Tuesday raised its key interest rate to 13.0% from 12.5% as it battles to curb inflation. The country's Monetary Policy Committee said inflation has remained sticky in the upper bounds of the target range amid albeit reduced pressures on the exchange rate. (DJN) Uganda's central bank held its benchmark lending rate at 9.5% on Tuesday as Africa's top coffee exporting nation contends with rising inflationary pressure. (DJN) Feedback Loop

This newsletter is compiled by James Christie in San Francisco.

Send us your tips, suggestions and feedback. Write to:

(MORE TO FOLLOW) Dow Jones Newswires

02-07-24 0806ET