The Rate Question Before the Fed

The Rate Question Before the Fed By James Christie

Good day. The Federal Reserve faces a question with profound implications for whether it attains a so-called soft landing that brings inflation under control without triggering a recession: How long should the central bank keep interest rates at their current level? The matter looms over Fed officials as they head for the Kansas City Fed's annual retreat in Jackson Hole, Wyo., this week. The Fed's benchmark rate stands at a 22-year high, a level intended to force inflation lower. But the level has many economists anxious given its pressure on borrowing costs. Meanwhile, there is also concern that inflation's recent decline may stall and consumer and business spending could accelerate in coming months, forcing the Fed to raise rates higher still.

Now on to today's news and analysis.

Top News How Hard Should the Fed Squeeze to Reach 2% Inflation?

Much of the work lowering inflation is done: Overall, it's fallen to 3.2% from 9.1%. Underlying or "core" inflation, which strips out volatile food and energy prices, looks headed toward 3.5% early next year.

This good news presents Federal Reserve Chair Jerome Powell and his colleagues with their next big question: How long should they hold interest rates near their current level before cutting them? The answer depends on how quickly they want to get inflation all the way to their 2% target .

Jackson Hole Is Powell's Big Moment. What to Expect.

A year ago, Federal Reserve Chairman Jerome Powell sent financial markets reeling when he vowed, in a brief but dramatic speech in Jackson Hole, Wyo., that the U.S. central bank would tame inflation, notwithstanding the economic pain.

Twelve months later, inflation has been slashed by two-thirds while the economy continues to expand and the unemployment rate holds steady near a record low. The Fed, it seems, is well on its way to getting price growth back to its 2% annual target through a mix of higher interest rates and balance-sheet reduction, while avoiding the "unfortunate costs" about which Powell warned.

But as central bank officials and top academic economists gather again on Aug. 24-26 in the Grand Tetons for the Fed's annual end-of-summer confab, the celebration is muted, given that the path forward is both hazy and fraught with significant risk.

Read more at Barron's

U.S. Economy Car Prices Might Be Unsustainable for Buyers

For the average American, paying off a new car at current prices demands 42 weeks of income , according to Cox Automotive data, up from around 33 before the pandemic, and used-car bargains have been hard to come by as well.

A Bright Spot in Commercial Real Estate: Retail Shops

Retailers are on track to open 1,000 net new stores in the U.S. this year as retail availability hits record lows, in fresh signs of the sector's resilience despite turmoil in commercial real estate.

Key Developments Around the World Booming Trade With China Helps Boost Russia's War Effort

China is playing an increasingly important role in propping up Russia's economy and helping boost its war effort, with Beijing providing a range of goods , including some with potential military applications.

U.A.E. Cashes In on Russia's Economic Woes

A year and a half into the Ukraine conflict, few countries have capitalized on the economic opportunities quite like the United Arab Emirates, giving the Russian war effort a lift while boosting the Persian Gulf state.

Brics Nations at Odds Over Adding to Their Number

China and Russia are pushing to expand membership in the Brics bloc of emerging economies to counterbalance Western influence, while others in the group are reluctant to admit new entrants , such as Iran and Cuba.

Financial Regulation Roundup New U.S. Buyback Tax Hits Companies With $3.5 Billion Burden

A new 1% tax on stock buybacks is starting to increase companies' anticipated tax burdens , to the tune of over $3.5 billion in the first half of the year among the largest U.S. public companies.

Don't Like Paying Taxes? Would Free Merch Change Your Mind?

Japan has a system that enables taxpayers to redirect some of their local taxes to towns or cities where they don't live and receive a gift or other token of gratitude , such as some live koi or a large bundle of toilet paper, in exchange.

Forward Guidance Tuesday (all times ET)

8:30 a.m.: Philadelphia Fed non-manufacturing survey

10 a.m.: U.S. existing home sales for July; Richmond Fed manufacturing survey

2:30 p.m.: Chicago Fed's Goolsbee speaks at 'Fed Listens: Joining the Labor Force After Covid-A Discussion on Youth Employment'

Wednesday

4 a.m.: Eurozone flash PMI for August

10 a.m.: EU FCCI flash consumer confidence indicator; U.S. new home sales for July

Research Canada Wage Growth Needs to Cool to Bring Inflation Down

Wage growth may be the last leg for Canadian inflation, with a need for it to slow rapidly from its current pace to bring inflation down, Scotiabank director of forecasting Patrick Perrier and economist Laura Gu write in a note. Canadian labor markets have shown strong momentum since early 2021, with a prolonged period of employment growth outpacing labor supply even with the Bank of Canada raising interest rates. Perrier and Gu write that the baseline forecast is for the Canadian economy to return to excess supply in the final quarter of this year, and wage growth should slow as market tightness dissipates. But if wage growth doesn't slow and the pace is maintained, it could bring additional pressure on inflation and force the hand of the central bank.

-Robb M. Stewart

Commentary Europe's Gas-Guzzling Days Are Fading

Weaker growth is one reason gas use hasn't recovered and another may be lower wholesale prices haven't been passed on to end users, while other factors will be more permanent , notably new technologies, Carol Ryan writes.

Basis Points Higher financing costs top the list of credit concerns for small business owners in the U.S., according to a recent survey by the National Federation of Independent Business. The survey found 58% of small business owners who borrowed or tried to borrow said high interest rates were their largest complaint in accessing financing. (Dow Jones Newswires) The average house price in the U.K. fell 1.9%, or 7,012 pounds ($8,938) in the month to Aug. 12-the biggest fall in asking prices in a month since 2018-according to new data from Rightmove. The average price of property coming to the market fell on month to GBP364,895, outpacing the usual summer slowdown of a drop of 0.9% for the month, the online property portal said. On an annual basis, house prices fell 0.1%, swinging from growth of 0.5% in July. (DJN) New-home buyers in Canada saw a dip in house prices last month, a further sign the market was steadying following the rebound this year. Statistics Canada's new-house price index edged down 0.1% in July from the month before, after notching growth the previous two months, and prices were 0.9% lower than a year earlier. (DJN) Australian consumer confidence stumbled last week in a possible reaction to a weakening of the Australian dollar which has come under pressure amid rising concerns about the outlook for China's economy. (DJN) Feedback Loop

This newsletter is compiled by James Christie in San Francisco and Perry Cleveland-Peck in Barcelona.

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James Christie , Nell Henderson , Nick Timiraos , Tom Fairless , Megumi Fujikawa , Perry Cleveland-Peck [mailto:[e-mail]], Nihad Ahmed , Michael Maloney , Paul Kiernan

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

08-22-23 0732ET