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Cash-Rich Consumers Could Mean Higher Interest Rates for Longer

Buoyed by pandemic-fueled savings, consumers and businesses are proving less sensitive to tighter credit—complicating the Fed’s job

By NICK TIMIRAOS
Mon, Oct 31, 2022 8:24amGrey Clock 4 min

Washington’s response to the pandemic left household and business finances in unusually strong shape, with higher savings buffers and lower interest expenses. It could also make the Federal Reserve’s job of taming high inflation more difficult.

The U.S. central bank is trying to slow down economic growth to prevent inflation from becoming entrenched. To that end, it has increased rates aggressively this year and is likely to raise them another 0.75 percentage point at a two-day policy meeting that concludes Wednesday. That would bring the benchmark federal-funds rate to a range of 3.75% to 4%.

Some officials have argued for slowing the pace of rate rises after this week’s meeting. But the debate over the speed of increases could obscure a more important one around how high rates ultimately rise. In economic projections released at the Fed’s last meeting in mid-September, most officials anticipated their policy rate would reach at least 4.6% by early next year.

But some economists think it will have to go higher than 4.6%, citing in particular reduced sensitivity of spending to higher interest rates.

“The big question will be, given the resilience the economy has had to interest-rate increases so far, whether that will actually be sufficient,” said former Boston Fed President Eric Rosengren. “The risks are they’re going to have to do a bit more than they’re suggesting.”

The Fed combats inflation by slowing the economy through tighter financial conditions—such as higher borrowing costs and lower stock prices—which curb spending, further reducing employment, income and spending. This normally has its greatest effect on sectors of the economy most sensitive to the cost and availability of credit.

In 2020, however, the government’s wartime-like response to the pandemic—generous fiscal stimulus that showered cash on households and reduced borrowing costs—interrupted the usual recessionary dynamics of rising joblessness that amplifies declines in income and spending. It means private-sector balance sheets are in a historically strong position.

Household, non financial corporate and small-business sectors ran a surplus of total income over total spending equal to 1.1% of gross domestic product in the quarter of April to June, according to economists at Goldman Sachs Group Inc. Using a three-year average, the measure is healthier than on the eve of any U.S. recession since the 1950s.

U.S. households still have around $1.7 trillion in savings they accumulated through mid-2021 above and beyond what they would have saved if income and spending had grown in line with the pre pandemic economy, according to estimates by Fed economists. Around $350 billion in excess savings as of June were held by the lower half of the income distribution, or around $5,500 per household on average.

Businesses were also able to lock in lower borrowing costs as interest rates plumbed new lows in 2020 and 2021. Just 3% of junk bonds, or those issued by companies without investment-grade ratings, mature over the next year, and only 8% come due before 2025, according to Goldman Sachs.

State and local governments are also flush with cash, leaving them in a far better position than after the recession of 2007 to 2009.

While the housing market—among the most interest-rate sensitive parts of the economy—is entering a deep downturn, the rest of the economy is so far holding together. Consumer credit-card balances are rising. Earnings reports from companies including United Airlines Holdings Inc., Bank of America Corp., Nestlé SA, Coca-Cola Co. and Netflix Inc. also point to strong consumer demand and pricing increases.

“This is not the earnings season the [Fed] wanted to see,” said Samuel Rines, managing director at Corbu LLC, a market intelligence firm in Houston. “For now, the consumer is too strong for comfort.”

The Commerce Department reported Friday that consumer spending adjusted for inflation rose 0.3% in September from August, a pickup from prior months.

The upshot is that cooling the U.S. economy might require even higher interest rates. The household savings buffer “suggests to me we may have to keep at this for a while,” said Federal Reserve Bank of Kansas City President Esther George in a webinar earlier this month.

Ms. George is among a handful of Fed officials who have argued in favour of slowing down the pace of interest-rate increases. But she also said the central bank’s ultimate rate destination might be higher than anticipated and that the Fed might have to stay at that higher rate longer.

The tight labour market also figures into this calculus. It not only leads to higher wages that might bump up prices, but also could continue to power consumer spending even as households run down savings.

Worker pay and benefits continued to rise at a rapid clip in the third quarter, according to a Labor Department measure released Friday that is closely monitored by the Fed. The employment-cost index, a measure of what employers pay for wages and benefits, showed that wages and benefits for private-sector workers excluding incentive-paid occupations rose 5.6% from a year earlier.

Jason Furman, a Harvard economist who served as a top adviser to former President Obama, thinks it will be harder for the Fed to slow down the economy. He said he sees the fed-funds rate ultimately reaching 5.25% next year, with a significant risk for topping out at an even higher level.

Steven Blitz, chief U.S. economist at research firm TS Lombard, thinks the central bank’s policy rate will rise to 5.5%. “A recession is coming in 2023, but there is more work for the Fed to do to create one,” he said.

The silver lining might be that stronger private-sector balance sheets cushion the extent of any slump in the U.S. The danger is that higher interest rates or a stronger dollar make trouble in corners of a global financial system that had come to expect low interest rates to persist.



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Italy, Land of Uncollected Garbage, Combines Running With Trash Pickup

At the World Plogging Championship, contestants have lugged in tires, TVs and at least one Neapolitan coffee maker

By ERIC SYLVERS
Wed, Oct 4, 2023 4 min

GENOA, Italy—Renato Zanelli crossed the finish line with a rusty iron hanging from his neck while pulling 140 pounds of trash on an improvised sled fashioned from a slab of plastic waste.

Zanelli, a retired IT specialist, flashed a tired smile, but he suspected his garbage haul wouldn’t be enough to defend his title as world champion of plogging—a sport that combines running with trash collecting.

A rival had just finished the race with a chair around his neck and dragging three tires, a television and four sacks of trash. Another crossed the line with muscles bulging, towing a large refrigerator. But the strongest challenger was Manuel Jesus Ortega Garcia, a Spanish plumber who arrived at the finish pulling a fridge, a dishwasher, a propane gas tank, a fire extinguisher and a host of other odds and ends.

“The competition is intense this year,” said Zanelli. Now 71, he used his fitness and knack for finding trash to compete against athletes half his age. “I’m here to help the environment, but I also want to win.”

Italy, a land of beauty, is also a land of uncollected trash. The country struggles with chronic littering, inefficient garbage collection in many cities, and illegal dumping in the countryside of everything from washing machines to construction waste. Rome has become an emblem of Italy’s inability to fix its trash problem.

So it was fitting that at the recent World Plogging Championship more than 70 athletes from 16 countries tested their talents in this northern Italian city. During the six hours of the race, contestants collect points by racking up miles and vertical distance, and by carrying as much trash across the finish line as they can. Trash gets scored based on its weight and environmental impact. Batteries and electronic equipment earn the most points.

A mobile app ensures runners stay within the race’s permitted area, approximately 12 square miles. Athletes have to pass through checkpoints in the rugged, hilly park. They are issued gloves and four plastic bags to fill with garbage, and are also allowed to carry up to three bulky finds, such as tires or TVs.

Genoa, a gritty industrial port city in the country’s mountainous northwest, has a trash problem that gets worse the further one gets away from its relatively clean historic core. The park that hosted the plogging championship has long been plagued by garbage big and small.

“It’s ironic to have the World Plogging Championship in a country that’s not always as clean as it could be. But maybe it will help bring awareness and things will improve,” said Francesco Carcioffo, chief executive of Acea Pinerolese Industriale, an energy and recycling company that’s been involved in sponsoring and organizing the race since its first edition in 2021. All three world championships so far have been held in Italy.

Events that combine running and trash-collecting go back to at least 2010. The sport gained traction about seven years ago when a Swede, Erik Ahlström, coined the name plogging, a mashup of plocka upp, Swedish for “pick up,” and jogging.

“If you don’t have a catchy name you might as well not exist,” said Roberto Cavallo, an Italian environmental consultant and longtime plogger, who is on the world championship organizing committee together with Ahlström.

Saturday’s event brought together a mix of wiry trail runners and environmental activists, some of whom looked less like elite athletes.

“We like plogging because it makes us feel a little less guilty about the way things are going with the environment,” said Elena Canuto, 29, as she warmed up before the start. She came in first in the women’s ranking two years ago. “This year I’m taking it a bit easier because I’m three months pregnant.”

Around two-thirds of the contestants were Italians. The rest came from other European countries, as well as Japan, Argentina, Uruguay, Mexico, Algeria, Ghana and Senegal.

“I hope to win so people in Senegal get enthusiastic about plogging,” said Issa Ba, a 30-year-old Senegalese-born factory worker who has lived in Italy for eight years.

“Three, two, one, go,” Cavallo shouted over a loudspeaker, and the athletes sprinted off in different directions. Some stopped 20 yards from the starting line to collect their first trash. Others took off to be the first to exploit richer pickings on wooded hilltops, where batteries and home appliances lay waiting.

As the hours went by, the athletes crisscrossed trails and roads, their bags became heavier. They tagged their bulky items and left them at roadsides for later collection. Contestants gathered at refreshment points, discussing what they had found as they fueled up on cookies and juice. Some contestants had brought their own reusable cups.

With 30 minutes left in the race, athletes were gathering so much trash that the organisers decided to tweak the rules: in addition to their four plastic bags, contestants could carry six bulky objects over the finish line rather than three.

“I know it’s like changing the rules halfway through a game of Monopoly, but I know I can rely on your comprehension,” Cavallo announced over the PA as the athletes braced for their final push to the finish line.

The rule change meant some contestants could almost double the weight of their trash, but others smelled a rat.

“That’s fantastic that people found so much stuff, but it’s not really fair to change the rules at the last minute,” said Paul Waye, a Dutch plogging evangelist who had passed up on some bulky trash because of the three-item rule.

Senegal will have to wait at least a year to have a plogging champion. Two hours after the end of Saturday’s race, Ba still hadn’t arrived at the finish line.

“My phone ran out of battery and I got lost,” Ba said later at the awards ceremony. “I’ll be back next year, but with a better phone.”

The race went better for Canuto. She used an abandoned shopping cart to wheel in her loot. It included a baby stroller, which the mother-to-be took as a good omen. Her total haul weighed a relatively modest 100 pounds, but was heavy on electronic equipment, which was enough for her to score her second triumph.

“I don’t know if I’ll be back next year to defend my title. The baby will be six or seven months old,” she said.

In the men’s ranking, Ortega, the Spanish plumber, brought in 310 pounds of waste, racked up more than 16 miles and climbed 7,300 feet to run away with the title.

Zanelli, the defending champion, didn’t make it onto the podium. He said he would take solace from the nearly new Neapolitan coffee maker he found during the first championship two years ago. “I’ll always have my victory and the coffee maker, which I polished and now display in my home,” he said.

Contestants collected more than 6,600 pounds of trash. The haul included fridges, bikes, dozens of tires, baby seats, mattresses, lead pipes, stoves, chairs, TVs, 1980s-era boomboxes with cassettes still inside, motorcycle helmets, electric fans, traffic cones, air rifles, a toilet and a soccer goal.

“This park hasn’t been this clean since the 15 century,” said Genoa’s ambassador for sport, Roberto Giordano.

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