Powell Says Solid Economy Allows Fed to Consider Rate Cuts ‘Carefully’ 

(…) “The economy is not sending any signals that we need to be in a hurry to lower rates,” Powell said at a talk in Dallas on Thursday. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.” (…)

The Fed’s next meeting is Dec. 17-18. Investors in interest-rate futures markets expect the central bank to lower rates by a quarter point at that meeting and then to slow down the pace of cuts after that. Prices in futures markets imply a roughly 60% chance of a cut next month with two additional quarter-point cuts in 2025, according to CME Group. Powell didn’t directly address the prospects for a cut at that meeting. (…)

Powell characterized the labor market as one that is still cooling under the weight of restrictive monetary policy. For now, “it seems like we’re right where we need to be,” Powell added. (…)

Powell said it was difficult to model the effects of any new tariffs, though he allowed that the current situation differed from an episode in 2018-19, when Trump launched a trade war with China.

Back then, inflation was low, and consumers and businesses didn’t have any recent memory of being asked to accept notable price hikes. “We’re in a different situation,” Powell said.

Bloomberg has more:

Powell said the labor market is in “solid condition,” and said by many metrics it’s back to “more normal” levels consistent with the maximum employment mandate.

“Improving supply conditions have supported this strong performance of the economy,” Powell said. “The labor force has expanded rapidly, and productivity has grown faster over the past five years than its pace in the two decades before the pandemic, increasing the productive capacity of the economy and allowing rapid economic growth without overheating.” (…)

In a moderated discussion that followed his speech, Powell added that uncertainty over the neutral level of rates — where policy is neither stimulating nor dampening growth — provides yet another reason to move cautiously. Several Fed officials have said they believe the fed funds rate remains in restrictive territory and favor moving gradually down toward it.

“In this situation, what it calls for is us to be careful,” he said. As the central bank approaches “the plausible range of neutral levels,” he added, “it may be the case that we slow the pace of what we’re doing just to increase the chances that we get this right.” (…)

Between Powell’s August 24 “the cooling in labor market conditions is unmistakable” after the unemployment rate hit 4.3% and the current “solid condition”, we had 6 weeks of declining unemployment claims mirroring the mild seasonality observed since 2022.

That was when the FOMC shifted its focus away from inflation to the labor market…

• Boston Fed President Says December Rate Cut Isn’t a ‘Done Deal’

Another rate cut in December is “certainly on the table, but it’s not a done deal,” said Boston Fed President Susan Collins in an interview Thursday. “There’s more data that we will see between now and December, and we’ll have to continue to weigh what makes sense.” (…)

Then she went on to justify another rate cut:

Collins said she didn’t see any evidence that inflation was picking up due to new sources of strength in the economy, aligning herself with a view Powell expressed last week. Both of them suggested recent inflation stickiness has instead been an echo or “catch-up” effect of large price increases from the past few years, such as car insurance costs rising to reflect past increases in car prices that have since subsided.

“As far as I can tell, I do not see evidence of new price pressures,” said Collins. Firmer inflation in recent months instead reflects “the effects of the longer-term dynamics of past shocks,” she said. (…)

“I don’t see an argument for maintaining restrictive policy when there is not evidence of new price pressures, and the old dynamics are perhaps unevenly and gradually resolving over time,” she said.

Rising US producer prices add to signs of fading disinflation

U.S. producer prices picked up in October, lifted by higher costs for services like portfolio management and airline fares, another sign that progress towards lower inflation was stalling. (…)

The producer price index for final demand rose 0.2% last month after an upwardly revised 0.1% gain in September, the Labor Department’s Bureau of Labor Statistics said. The increase in the PPI was in line with economists’ expectations. The PPI was previously reported to have been unchanged in September.

In the 12 months through October, the PPI increased 2.4% after advancing 1.9% in September.

Services prices rose 0.3% after gaining 0.2% in September. A 3.6% surge in portfolio management fees amid a stock market rally accounted for more than a third of the rise in services costs. Airline fares jumped 3.2% after rising 1.1% in the prior month. Hotel and motel room prices fell 0.5%. (…)

Overall healthcare costs increased 0.5%, the most since January.

There were also gains in the prices of vehicle wholesaling, computer hardware, software and supplies retailing as well as cable and satellite subscriber services.

The government introduced prices for new-model-year passenger cars and light motor trucks with the October PPI report. Passenger car prices rose 0.3% while light motor vehicle prices were unchanged. (…)

Should we worry about the recent acceleration in PPI inflation? Yes:

A $7 Trillion and Growing Cash Pile Defies Wall Street Skeptics US money-fund assets reach $7 trillion for first time

It was supposed to be the year of the great money-market exodus.

Between Federal Reserve interest-rate cuts and the rally in stocks and bonds that would naturally follow, all the elements were there, Wall Street prognosticators said, to prompt investors to yank cash out of money-market funds en masse.

They were wildly off. For while the rate cuts came and stocks soared, companies and households have kept shoving cash into money funds, pushing the total assets held in those accounts above $7 trillion this week for the first time ever. The relentless rush into those funds — which buy Treasury bills and other short-dated instruments — underscores just how attractive benchmark rates above 5% have been for an investor base that had grown accustomed to them being closer to 0% this century.

Even as those rates now slide to 4.5%, money-market funds are still throwing off a steady stream of nearly risk-free revenue that is bolstering the finances of many households and offsetting to some extent the damage that rate hikes have caused in other parts of the economy. And with signs mounting that the Fed may not cut benchmark rates much more, many on Wall Street are now predicting that Americans aren’t going to fall out of love with cash any time soon. (…)

It’s not just that money-market rates are still near their peak, but also the fact that they’re in-line and often still above what most alternatives are paying that’s continuing to attract investors.

Three-month Treasury bills currently yield around 4.52%, about 0.07 percentage point more than the rate on the 10-year Treasury note. The Fed’s overnight reverse repurchase agreement facility, a place money funds often park their cash, currently pays 4.55%. (…)

Institutional investors have accounted for roughly half of the $700 billion of money-fund inflows this year, according to Crane data, which tracks the entire money-market industry. Data from the Investment Company Institute, which is released on a weekly basis and excludes firms’ own internal money funds, puts year-to-date inflows at $702 billion, and total assets at a record $6.67 trillion in the week through Nov. 13. (…)

China Stimulus Boosts Domestic Consumption as Trump Tariffs Loom Retail sales beat forecasts with fastest growth since February

• (…) Retail sales jumped 4.8% on year, beating a projected 3.8% growth and the strongest rate since February
• Industrial output rose 5.3%, versus a 5.4% gain in the previous month and lower than economists’ forecast of a 5.6% increase
• Fixed-asset investment expanded 3.4% in the first 10 months, unchanged from the reading for January-September. Property investment tumbled 10.3% in the period
• The urban jobless rate dropped to 5% from 5.1% in September

(…) Beijing has also sought to spur consumer spending by subsidizing purchases of equipment, appliances and cars in a program announced earlier this year and ramped up in the last few months.

The sales of home appliances rose 39% compared to the same period last year, the fastest growth since 2010 excluding January and February numbers that are combined due to a distortion from Lunar New Year holidays. (…)

The decline in new housing prices softened to the slowest since March while the drop in the cost of used homes narrowed to the smallest in more than a year, NBS figures showed. The slump in property sales also eased. (…)

Also on Bloomberg:

New-home prices in 70 cities, excluding state-subsidized housing, dropped 0.51% from September, the slowest pace since March, National Bureau of Statistics figures showed Friday. Values of used homes fell 0.48%, the least in more than a year.

Price movements compared with a year earlier showed a more mixed picture. New-home prices fell 6.2%, slightly more than September’s 6.1% drop, the statistics bureau said. Existing-home prices dropped 8.9%, compared with 9% in September. (…)

AI CORNER

The Power Play is happening in Japan too:

Hokkaido Electric Sees Power Demand Surge With Data Center Boom

Hokkaido has emerged as an attractive destination for Japanese companies looking to build data centers due to its cold climate, which reduces cooling costs, and potential for renewable energy, particularly offshore wind. That has raised the question of whether the prefecture, which until recently was expecting demand to decline due to its aging population, would have enough generation capacity to cope.

Hokkaido Electric Power Co. will be able to meet the rising demand expected from 2027 through 2030, Susumu Saito, the company’s president, said at a press conference in Tokyo on Friday. However, that relies on restarting its Tomari No. 3 nuclear reactor that was taken offline in the wake of the Fukushima disaster in 2011, he said.

State-backed Rapidus Corp. will start producing chips in Hokkaido in 2027, and the Nikkei newspaper has reported SoftBank Corp. is building a large-scale data center there.

October CPI: Sticky as Expected

The difficulty in fully quelling inflation was on display in October. Consumer prices rose 0.2% for a fourth consecutive month, driving the year-over-year change back up to 2.6%. The firm headline reading came despite another drop in gasoline prices and a more benign increase in food prices last month. After jumping 0.4% in September, grocery prices advanced 0.1%, while food away from home prices rose 0.2%. Food away from home inflation remains elevated relative to its pre-pandemic pace, but has eased considerably over the past year, having advanced 3.8%—the smallest one year change since the spring of 2021.

Excluding food and energy, the core CPI rose 0.3% (0.28% unrounded) in October. This marked the third straight monthly reading of 0.3% and represents a pick-up relative to May–July when monthly core inflation registered 0.1%-0.2% per month.

Core goods prices were flat in October, but this masks some significant movement in the sub-components. Used vehicle prices climbed 2.7%, the largest increase since May 2023 and in line with the leading signals sent by the privately-produced Manheim Index. Used vehicle prices are still down 3.4% year-over-year, but the sharp deflation seen in this sector over the past couple of years seems to be slowing down. New vehicle prices were unchanged in the month, and a big drop in apparel prices (-1.5%) helped offset the jump in used vehicle prices.

Core services prices increased 0.3% (0.35% unrounded), similar to the gains registered in September and August. Primary shelter inflation ticked up amid a 0.3% increase in rents and a 0.4% increase in owners’ equivalent rents. Despite the monthly bump higher, the year-ago pace of primary shelter inflation continues to decline and is slowly approaching its pre-pandemic pace.

Airfares rose 3.2% in October and have increased at a nearly 50% annualized rate over the past three months. These sharp gains have come on the heels of some puzzlingly weak airfare readings earlier in the year and leave the year-ago change in airfares only up 4.1%. Elsewhere, a 0.1% decline in motor vehicle insurance prices helped keep services inflation in check, as did a relatively consensus-looking 0.4% increase in medical care services prices.

Source: U.S. Department of Labor and Wells Fargo Economics

Looking through the monthly noise, inflation has gotten to a better place over the past year. The 2.6% year-over-year increase in consumer prices marks a step down from the 3.2% change this time last year and the 7.7% reading in October 2022. Core CPI also has trudged lower, moderating to a 12-month change of 3.3% compared to 4.0% last October.

Slower growth in nominal wages, a pickup in productivity growth, stable commodity prices and more price-sensitive consumers continue to slowly reduce upward pressure on prices, even as prospective fiscal/trade policy changes have renewed concerns about the path ahead for inflation.

Yet the lack of additional progress in measured inflation over the past few months points to the Fed proceeding with monetary policy easing more slowly in the near term. We continue to expect the FOMC to cut the fed funds rate by another 25 bps in December given the cumulative progress on inflation and the significant cooling in the labor market over the past year.

That said, we believe the time is soon approaching when the FOMC will slow the pace of easing further, perhaps moving to an every-other-meeting pace of rate cuts. The FOMC will receive another month’s worth of inflation and labor market data ahead of its next meeting on December 18, which likely will sway that meeting’s decision and the forward guidance for 2025.

The WSJ’s Nick Timiraos agrees:

The latest report likely wasn’t enough to derail another interest-rate cut from the Federal Reserve in December. But together with solid consumer spending and steady hiring, firmer inflation could kick off a bigger debate at officials’ next meeting over whether to slow the pace of rate cuts early next year. (…)

Investors’ positive response to the report might have been driven in part by relief that President-elect Donald Trump and the Fed won’t immediately be at loggerheads. Trump repeatedly pressed for lower rates during his first term. Economists view some of Trump’s proposed policies, such as higher tariffs, as likely to push inflation higher. (…)

My August 26 post Lucky Fed! I concluded “In all, there is no such thing as an immaculate disinflation. China’s inability to boost its domestic economy deflated imported goods and oil prices which kept inflation expectations anchored. Part of the normalization of the labor market came from surging immigration.”

China has yet to conclusively boost domestic demand and surging immigration may be a thing of the past. But low oil prices continue to bless this Fed, both on actual muted cost pressures and on inflation expectations.

• Global Oil Market Faces a Million-Barrel Glut Next Year, the IEA Says Chinese demand contracts for six straight months to September

Oil consumption in China — the powerhouse of world markets for the past two decades — has contracted for six straight months through September and will grow this year at just 10% of the rate seen in 2023, the IEA said in a monthly report on Thursday. The global glut would be even bigger if OPEC+ decides to press on with plans to revive halted production when it gathers next month, according to the agency.

It’s possible that China’s oil demand has peaked, IEA Head of Oil Industry and Markets Toril Bosoni said in an interview with Bloomberg TV on Thursday.

“It’s not just the economy and the shift, the slowdown in the construction sector,” Bosoni said. “It’s the transition to electric vehicles, high speed rail and gas in trucking that is undermining Chinese oil demand growth.”

Amid this extended weakness in Chinese demand, crude prices have retreated 11% since early October despite ongoing hostilities between Israel and Iran, as traders focus growing output in the Americas, the Paris-based IEA said. The decline foreshadows a “well-supplied market in 2025,” it added. (…)

Global oil consumption will increase by 920,000 barrels a day this year — less than half the rate seen in 2023 — to average 102.8 million per day, it said. Next year, demand will grow by 990,000 barrels a day.

“The sub-1 million barrel-a-day growth pace for both years reflects below-par global economic conditions with the post-pandemic release of pent-up demand now complete,” according to the report. “Rapid deployment of clean energy technologies is also increasingly displacing oil in transport and power generation.” (…)

While demand growth cools, supplies from producers such as the US, Brazil, Canada and Guyana is set to grow this year and next by 1.5 million barrels a day, the agency predicts. As a result, world supplies will exceed demand next year by more than 1 million barrels a day, even if the 23-nation OPEC+ cartel abandons plans to restore output. (…)

OPEC’s secretariat has belatedly recognized the demand slowdown, cutting its forecasts for this year by 18% during four consecutive monthly downgrades. Nonetheless, its projection of 1.8 million barrels a day of growth remains roughly double the rate seen by the IEA, and higher than most other market observers.

Lucky Fed, but lucky us as well. The Fed is easing amid continued strong domestic U.S. demand, risking resilient inflation. But lower oil prices might just save us all.

These charts are from John Authers’ today’s column:

Ed Yardeni:

Today’s CPI report suggests that inflation may be getting stuck north of the Fed’s 2.0% target. The headline and core CPI inflation rates rose 2.6% and 3.3% y/y during October. Goods prices are still deflating. But supercore inflation, rent inflation, and wage growth all rose last month suggesting they are getting sticky at relatively high rates. This along with strong economic growth confirms our view that the Fed has eased too much too soon. Our view is confirmed by rising bond yields, which are challenging the wisdom of the Fed’s rate cutting.

We’re not worried about a second wave of inflation because we believe that productivity is already boosting real GDP, while keeping a lid on unit labor costs inflation. Recent upward revisions in productivity confirm this view. However, we think that the Fed needs to give consumer price inflation more time to get unstuck before even considering whether any more rate cuts are necessary.

Eurozone Industry Falters Again as Trade Troubles Loom Industrial output across the 20 nations sharing the euro fell 2% in September, a sharper decline than expected

Total output decreased 2% across the 20 nations that share the euro, a sharper decline than was expected by economists, European Union data showed Thursday. Sliding 0.4% over the quarter as a whole, output marked a fresh downturn in an industrial sector that has struggled to gain a firm footing as it looks to recover from the energy shock sparked early in 2022 with Russia’s full-scale invasion of Ukraine. Compared with January 2022, just before the invasion, production has fallen 6%.

September’s sharpest fall came in production of capital goods—those used to produce other goods—which are particularly susceptible to high interest rates. (…)

Many of Europe’s industrial export sectors are struggling in the face of weak demand, including chemicals and chip makers, and several car makers and suppliers have begun planning reduced operations and layoffs.

Darker clouds are now looming on the horizon for Europe’s exporters following the election of Donald Trump to the White House in last week’s U.S. presidential vote. Trump, a protectionist, has vowed to redress his country’s trade deficit by slapping blanket tariffs on goods imported from elsewhere, including from Europe. Those tariffs could be especially steep for auto imports, Trump has suggested. (…)

Why such big surprise?

Factory output levels continued to decrease across the euro area in October. Although the rate of contraction cooled since September, it was solid and broadly in line with the average seen over the current 19-month sequence of decline. Production lines were once again squeezed by a lack of incoming new work, including from abroad*. Total new order inflows shrank at the start of the fourth quarter, although the extent of the fall was the softest since June. (S&P Global)