Fed Raises Rate by 0.5 Percentage Point, Signals More Increases Likely | Kanebridge News
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Fed Raises Rate by 0.5 Percentage Point, Signals More Increases Likely

Most officials penciled in plans to raise rates above 5% next year, higher than previously expected

By NICK TIMIRAOS
Fri, Dec 16, 2022 8:39amGrey Clock 5 min

WASHINGTON—The Federal Reserve approved an interest-rate increase of 0.5 percentage point and signalled plans to lift rates through the spring, though likely in smaller increments, to combat high inflation.

The decision Wednesday marked a step down after four consecutive larger increases of 0.75 point and raised the benchmark federal-funds rate to a range between 4.25% and 4.5%, a 15-year high.

Markets retreated slightly after the announcement. The Dow Jones Industrial Average lost 142.29 points, or 0.4%, to 33966.35. The yield on the benchmark 10-year U.S. Treasury note edged up to 3.503% from its Tuesday level of 3.501%. Yields rise as prices fall.

The latest increase capped a year in which the Fed raised rates from near zero at the fastest pace since the early 1980s to fight inflation, which is running near a 40-year high.

Fed policy makers are entering a new phase of policy tightening in which they are trying to determine just how high to raise rates. Fed Chair Jerome Powell said in a news conference it was “broadly right” that slowing rate rises to more traditional quarter-percentage-point increments as soon as the Fed’s next meeting, Jan. 31-Feb. 1, would provide the best way to manage the risk of over-tightening.

“It makes a lot of sense, it seems to me—particularly if you consider how far we’ve come,” Mr. Powell said. But he said twice that the Fed hadn’t made any decisions about upcoming meetings, and that the outcome would depend on the state of the economy and borrowing costs.

Rate increases work with what economists call long and variable lags, which means the central bankers may not know for a year or more if they have tightened too much or not enough.

In new economic projections released after the meeting, most Fed officials penciled in plans to raise the fed-funds rate to a peak level between 5% and 5.5% in 2023 and hold it there until some time in 2024. In September, they anticipated lifting the rate to around 4.6% by the end of next year.

After Wednesday’s press conference, investors in interest-rate futures markets expected the Fed to raise rates to a level just below 5% by March before pausing. Bond markets rallied when Mr. Powell hinted the Fed might raise rates by a smaller step of a quarter-point, or 25 basis points, in February, said Lee Ferridge, a senior economic strategist at State Street Global Markets.

“It’s like the new projections didn’t happen, quite honestly. And I’m surprised the market is shrugging it off so confidently,” said Mr. Ferridge. “The expectation is the economic data will be so poor” by the end of the first quarter “that the Fed will stop hiking.”

Mr. Ferridge said he wasn’t convinced the Fed would dial down the pace of rate rises again in February. “If the data comes in hot, then I think they could still go 50,” he said.

Fed rate increases this year have hit asset prices and are causing a significant slowdown in rate-sensitive sectors of the economy such as housing. But in recent weeks, longer-term bond yields have tumbled as investors anticipate a speedy decline in inflation, possibly due to a recession next year.

The fed-funds rate influences other borrowing costs throughout the economy, including rates on car loans, mortgages and business debt.

Fed officials say they combat inflation primarily by slowing the economy through tighter financial conditions—such as higher borrowing costs, lower stock prices and a stronger dollar—that curb demand. As a result, any easing of financial conditions while the Fed continues to battle inflation could raise the risk of a deeper or longer downturn if it prompts the central bank to keep lifting rates.

Mr. Powell suggested the Fed would raise rates to higher levels for longer if broader financial conditions don’t “reflect the policy restraint that we’re putting in place to bring inflation down.”

The projections released Wednesday showed considerable divergence over what might happen after next year. Around one third of officials expect to hold the fed-funds rate above 4.5% through 2024. Most officials anticipate cutting rates by around 1 percentage point in 2024.

Mr. Powell said no officials had projected rate cuts next year and that they weren’t likely to consider lowering interest rates until policy makers are confident inflation is moving down to the Fed’s 2% goal in a sustained fashion.

Data released since the Fed’s November meeting have provided a mixed picture of the economy. While domestic demand has slowed and the housing market is entering a sharp downturn, the job market has remained strong and declines in gas prices could help sustain consumer spending.

Inflation has also slowed in the past two months. Consumer prices climbed 0.1% in November from the previous month and 7.1% from a year earlier, the Labor Department said Tuesday, both down notably from comparable previous increases.

The Fed pays close attention to so-called core prices, which exclude volatile food and energy categories, as a better predictor of future inflation than overall inflation. Over the past three months, core prices increased at a 4.3% annualised rate, the lowest such reading in more than one year.

Tuesday’s inflation report “provides a compelling case for downshifting to a 25-basis-point increase in February,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.

“There are really good reasons for them to slow down if they can,” said Mr. Luzzetti. “I think they want to avoid pausing only to have to re-hike later, and getting down to 25 basis points allows them the best chance of avoiding that possibility.”

Mr. Powell acknowledged the improvement in the inflation rate but warned it might decline to levels that are still uncomfortably high, citing concerns that prices for labor-intensive services might rise if wage growth doesn’t slow down.

Prices of goods such as used cars are declining, a development the Fed has anticipated for more than a year, and there is evidence that rents and other housing costs are set to cool notably amid a sharp slowdown in the growth of new households.

“We welcome these better inflation reports…but I think we’re realistic about the broader project,” Mr. Powell said. Despite progress on goods and housing inflation, “the big story will really be the rest of it, and there’s not much progress there. And that’s going to take time.”

That pessimism was reflected in many Fed officials’ economic projections. Compared with September, they now anticipate a bigger increase in the unemployment rate next year and barely any economic growth.

Those projections offered “the whiff of a bumpy landing on the economic horizon,” said Daleep Singh, a former senior Fed official who is now chief global economist at PGIM Fixed Income.

Most officials expect making somewhat less progress on inflation next year than they had anticipated in September, which is one reason for projecting somewhat higher interest rates. Because central bankers believe inflation-adjusted or “real” policy rates are what matters for slowing the economy, a slower decline in inflation would require higher interest rates to achieve the same degree of economic restrictiveness.

They project core inflation, which excludes volatile food and energy categories, to fall from 5% on an annual basis in October to 3.5% at the end of next year, according to their preferred gauge, the Commerce Department’s personal-consumption expenditures index. That is up from their projection of 3% in September.

Wage growth hasn’t shown meaningful signs of slowing down, particularly as companies offer higher wages to attract new workers than they pay their current workers. Some Fed officials and private-sector economists are concerned that another calendar year of high inflation could lead employees to seek and receive higher pay early next year, which could help fuel more inflation.

Fed policy makers coalesced this spring around plans to raise rates by a half-percentage point at each meeting until they saw evidence inflation was slowing. Almost as soon as those plans came together, Mr. Powell decided to accelerate the increases amid fears that very high inflation would lead consumers and businesses to expect prices to keep climbing rapidly, causing high inflation to persist. The central bank lifted rates by 0.75 percentage point in June, the largest increase in 28 years.

At the time, Mr. Powell said such big moves would be uncommon. But continued high inflation and doubts in financial markets over the Fed’s commitment to fight it led the central bank to make three more increases of that magnitude.

“What’s impressed me to no end is it hasn’t broken anything. For all the talk of crashing the economy and breaking the financial markets, it hasn’t done that,” said Fed governor Christopher Waller last month, referring to the cumulative rate increases.

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High-Earning Men Are Cutting Back on Their Working Hours

While most U.S. workers are putting in fewer hours, men in the top 10% of earners cut back their time on the job the most, according to a new study

By Courtney Vinopal
Fri, Jan 27, 2023 4 min

American workers have cut the number of hours they spend in their jobs since 2019, but no group has dialled back its time on the clock more than young, high-earning men whose jobs typically demand long hours.

The top-earning 10% of men in the U.S. labor market logged 77 fewer work hours in 2022, on average, than those in the same earnings group in 2019, according to a new study of federal data by the economics department at Washington University in St. Louis. That translates to 1.5 hours less time on the job each workweek, or a 3% reduction in hours. Over the same three-year period, the top-earning 10% of women cut back time at work by 29 hours, which translates to about half an hour less work each week, or a 1% reduction.

High-earning men in the 25-to-39 age range who could be described as “workaholics” were pulling back, often by choice, says Yongseok Shin, a professor of economics, who co-wrote the paper. Since this group already put in longer hours than the typical U.S. worker—and women at the highest income levels—these high earners had longer work days to trim, Dr. Shin says, and still worked more hours than the average.

The drop in working hours among high-earning men and women helps explain why the U.S. job market is even tighter than what would be expected given the current levels of unemployment and labour force participation, Dr. Shin says.

“These are the people who have that bargaining power,” Dr. Shin says of the leverage many workers have had over their employers in a tight job market. “They have the privilege to decide how many hours they want to work without worrying too much about their economic livelihood.”

The paper published by the National Bureau of Economic Research, which isn’t yet peer reviewed, suggests high earners were more likely to benefit from flexible working arrangements, which could be a factor in reduced work hours.

Before the pandemic, Eli Albrecht, a lawyer in the Washington, D.C., area, says he worked between 80 to 90 hours a week. Now, he says he puts in 60 to 70 hours each week. That’s still more than most men in America, who averaged 40.5 hours a week in 2021, according to federal data.

Mr. Albrecht’s schedule changed when he shared Zoom school duties for two of his young children with his wife. He’s maintained the reduced hours because it’s making his relationship more equitable, he says, and gives him family time.

“I used to feel—and a lot of dads used to feel—that just by providing for the family financially, that was sufficient. And it’s just not,” Mr. Albrecht says.

The downshift documented by Dr. Shin and his colleagues occurred as many professionals have been reassessing their ambitions and the value of working long hours. Emboldened by a strong job market, millions of Americans quit their jobs in search of better hours and more flexibility.

Overall, U.S. employees worked 18 fewer hours a year, on average, in 2022 compared with 2019, with employed men putting in 28 fewer hours last year and employed women cutting their time by nine hours, data from the U.S. Census Bureau’s Current Population Survey show. The average male worker put in 2,006 hours last year, while the average female worker logged 1,758 hours.

Separate data from the Census Bureau suggests that men with families, in particular, are working less. Between 2019 and 2021, married men devoted roughly 13 fewer minutes, on average, to work each day, according to the American Time Use Survey, which hasn’t yet published 2022 figures. They spent more time on socialising and relaxing, as well as household activities, according to men surveyed by the Census Bureau. The amount of time unmarried men spent on work changed little during that same period.

As high-earning workers in the U.S. cut back, low-wage workers increased their hours, according to Dr. Shin’s research. The bottom-earning 10% of working men logged 41 hours more in 2022, on average, than in 2019. Women in the lowest earning group boosted their hours worked by 52 last year compared with 2019.

While women work fewer hours than men, the unpaid labor they perform outside of their jobs has been well documented. Many working mothers take what’s termed a “second shift,” devoting more time outside work hours to child care and housework.

Maryann B. Zaki, a mother of three who has worked at several firms, including in big law, recently launched her own practice in Houston, giving her more control over her hours. She says she’s noticed more men in her field opting for reduced schedules, sometimes working 80% of the hours normally expected—which can range from 40 to more than 80 a week—in exchange for a 20% pay cut. For the average lawyer, that would amount to a salary reduction of tens of thousands of dollars each year; such arrangements were initially offered to aid working mothers.

Responding to new expectations of work-life balance may be particularly vexing for industries already facing staffing shortages, such as those in medicine. Dr. Lotte Dyrbye, the chief well-being officer for the University of Colorado School of Medicine, said she often hears from early-career physicians and other medical professionals who want to work fewer hours to avoid burnout.

These medical workers are deciding that to be in it for the long haul requires a day every week or two to decompress, Dr. Dyrbye says. But as staff cut back their hours, it costs medical organisations money and may compromise access to care.

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