Central Banks Tightening


Overview: Over the past week, U.S. and other global central bankers continued to talk tough about fighting inflation. Economic data around the world clearly indicated that inflation remains a major issue. As a result, mortgage rates increased.

 

At the Jackson Hole economic summit, Federal Reserve Chair Jerome Powell delivered a brief speech emphasizing that the Fed intends to do whatever it takes to bring down inflation. He explained that the consequences of not fighting inflation aggressively enough and allowing it to become “entrenched” would be worse than the effects of tighter monetary policy. He acknowledged that this will slow economic growth and weaken the labor market. Disappointing some investors, he repeated that future decisions will be based on incoming economic data rather than providing more specific guidance. Investors remain split about whether the Fed will raise the federal funds rate by 50 or 75 basis points at the next meeting on September 21.


The Personal Consumption Expenditures (PCE) Price Index is the inflation indicator favored by the Fed, and the latest reading was a bit lower than expected, but still far higher than Fed officials would like to see. In July, core PCE was up 4.6% from a year ago, down from a peak of 5.3% in February. To put in perspective how much inflation has climbed, the annual rate of increase was below the Fed's target level of 2% during the first three months of 2021. Investors are heavily divided about how quickly monetary policy tightening will bring down inflation and how much it will slow the economy.


The Job Openings and Labor Turnover Survey (JOLTS) report measures job openings and labor turnover rates, and the latest data indicated that the labor market remains strong. At the end of July, there were a massive 11.2 million job openings, down a little from the record high in March, but over 4 million more than in January 2020 prior to the pandemic. There were roughly two job openings for every unemployed worker, reflecting a very tight labor market, as companies struggle to hire enough workers with the necessary skills. A very large number of employees also willingly left their jobs in July. This is viewed as a sign of labor market strength as well, since people usually quit only if they expect that they can find better jobs.

 

Core PCE (annual % change)

 

Week Ahead


Sept 1 — Institute for Supply Management (ISM) Manufacturing Index

Sept 2 — Employment Report

Sept 6 Institute for Supply Management (ISM) Services Index