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AXIOS MACRO Axios Macro-Economic News for Sep 01, 2022 Original article: Peter Burgess COMMENTARY Peter Burgess | ||
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Axios Macro
By Neil Irwin and Courtenay Brown ... Today's newsletter, edited by Javier E. David, is 656 words, a 2½-minute read.
Sep 01, 2022 ... 11:59 AM 💼 Tomorrow at 8:30am ET, we'll get the August payrolls report. As usual, we'll have a full analysis of the numbers shortly after the release, arriving in your inbox with an early send of the newsletter. But first, we'll take a look at the runoff of the Fed's massive bond stockpile that escalates today, along with what some other new indicators are saying about the labor market. 🥊 Fed's 'one-two' punch ... 1 big thing: Fed steps up the 'great wind down' Data: St. Louis Federal Reserve Bank; Chart: Axios Visuals The Federal Reserve's tightening campaign enters a new phase today that — paired with rapid interest rate hikes — will be hard for financial markets to predict. Why it matters: At the onset of the pandemic, the Fed injected stimulus into the economy at an unparalleled scale. Now it will step up the withdrawal of that support, part of a two-pronged approach aimed at crushing inflation. With quantitative tightening (QT) entering full speed as of today, the question now is if it will cause things to break in the financial system. Catch up quick: As the pandemic hit, trillions of dollars' worth of Fed stimulus (quantitative easing, or QE) helped ease financial and economic conditions, and swelled its balance sheet by $5 trillion in just two years. But as the Fed sought to tighten policy to ward off rising inflation, it began a drawdown of its balance sheet by letting bond holdings roll off earlier this year. Starting this month, QT enters a more aggressive phase. The central bank plans to cut its massive bond holdings by up to $95 billion per month, twice as fast as it had been reducing its stockpile since June. The result is over $1 trillion each year being sucked out of the financial system as it continues to swiftly raise interest rates — a one-two punch of monetary tightening. The big picture: Fed rates, the central bank's primary policy tool, get a lot of the attention. But in the background, the balance sheet operates on autopilot. 'I don't think that they know as well what the macroeconomic effects are of adjusting the balance sheet. They'd rather not be trying to talk about both tools simultaneously,' said Bill English, a professor at the Yale School of Management who served as the head of the Fed's monetary affairs division. Still moving even more quickly to scale down the balance sheet is an option, in an extreme scenario, if the Fed believes financial conditions aren't tightening enough. There's still an open question about whether the Fed will eventually decide to sell its mortgage-backed securities outright, an action that would likely push mortgage rates up even further. The other side: Some analysts suspect that if markets become more turbulent, it could stop QT in its tracks. In 2019, the Fed abruptly ended its inaugural attempt after a big hiccup in the critical funding market that underpins much of the financial system. The Fed intervened with billions of dollars in emergency funding to quell the chaos. 2. What to expect in tomorrow's jobs numbers Data: Department of Labor; Chart: Axios Visuals July was a blockbuster month for job growth. We find out tomorrow morning whether August continued the trend. New data out today points to a labor market that remains extremely strong. Why it matters: We're in an 'up-is-down' world with the labor market, in which the Fed actually wants to see things cool down to lower demand in the economy. So a 'good' jobs report may actually mean higher risk of a recession ahead, as it would lead the Fed to be more aggressive. If August's job and wage growth turn out to be strong, and/or the unemployment rate drops further, another 0.75 percentage point rate increase later this month will be highly likely. Driving the news: Forecasters expect to see another 300,000 jobs added to U.S. payrolls (following a 528,000 July number), the unemployment rate unchanged at 3.5%, and a 0.4% rise in average hourly earnings. It comes as other data points to a robust jobs situation. The number of people filing new claims for jobless benefits fell to its lowest level in two months last week, the Labor Department said. Only 232,000 new claims were filed — far from what you would expect to see in a recession. The Institute for Supply Management's survey of manufacturers was unchanged overall for August, but showed a strong surge in the employment component of the index. It rose to 54.2, from 49.9 (50 represents the line between expansion and contraction). Axios, 3100 Clarendon B‌lvd, Arlington VA 22201
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