1 big thing: Europe's problems > US problems

Fed Chair Jerome Powell in Sintra, Portugal

2. New inflation factor: political ads

Illustration of a television test pattern made of hundred dollar bills.

New week, old problems: This week's economic headlines will come out of Europe, as top central bankers gather in Portugal. 🇵🇹

Plus: How this fall's campaign ads could affect inflation perceptions. 

Situational awareness: Durable goods orders rose 0.7% in May, the Commerce Department said, a solid reading that suggests there's no pullback in capital spending just yet. Less promising, the Dallas Fed Texas Manufacturing Outlook Survey in June plunged due to falling new orders.

Today's newsletter, edited by Javier E. David, is 684 words, a 2½-minute read.

National

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Stay ahead of the curve on the most important economic developments with reporting and analysis on how business, policy, and markets collide. With Neil Irwin and Courtenay Brown.

Axios Macro

1 big thing: The problem with gas price policies

2. Powell in the hot seat

The Biden administration has a new proposal aimed at gasoline prices, and Fed Chair Jerome Powell is on Capitol Hill. And oh, Canada: Prices are soaring up north, too, with Canadian inflation reaching 7.7% over the year ended in May, up from 6.8% in April. 🇨🇦 📈

Today's newsletter, edited by Javier E. David, is 740 words, a 3-minute read.

1 big thing: How we spent our time

2. Inflation head-fake

The Supreme Court has overturned Roe vs. Wade, the legal decision that protected the right to an abortion. It could have lasting economic consequences, as our colleague Emily Peck covered last month.

Today in Macro, we look at how Americans are spending their time and the survey on inflation that helped prompt a policy pivot — but may have been misleading.

Today's newsletter, edited by Javier E. David, is 643 words, a 2½-minute read.

1 big thing: Democrats warn about Fed's moves 

2. Narratives: Goodbye stagflation, hello recession

Worker shortages continue to bite: American Airlines is dropping service in four cities because it doesn't have enough regional pilots.

🚨 Situational awareness: Fed governor Michelle Bowman called for another 75 basis point interest rate hike in a speech this morning — and subsequent 50 basis point moves "as long as the incoming data support them."

Meanwhile, Jerome Powell is back on the Hill, this time before the House Financial Services Committee. We take a look at new pressure the Fed faces from the left, and explain the latest vibe shift on the outlook signaled by bond and commodity markets.

Today's newsletter, edited by Javier E. David, is 689 words, a 2½-minute read.

1 big thing: Canaries in the economic coal mine

2.  Roger Ferguson helped loosen the Fed's ties

East Coast skies are sunny today, but the signals emerging from regional manufacturing surveys across the U.S. are decidedly cloudy. We'll dig into some of that, along with the time the ultra-formal Federal Reserve started casting aside neckties. 🏦 👔

Situational awareness: The Conference Board's consumer confidence index fell to its lowest level in 16 months, while new data hinted that home prices could be leveling off.

Today's newsletter, edited by Javier E. David, is 696 words, a 2½-minute read.

The nation's biggest banks are healthy enough to withstand a severe economic downturn, the Federal Reserve said on Thursday announcing the results of its annual stress test.

Why it matters: The banks proved they had enough capital to continue lending in a hypothetical scenario that saw unemployment skyrocket and commercial real estate prices and stocks collapse. The results of the yearly checkup open the door for banks to return billions of dollars to investors.

Details: All 34 of the biggest banks tested — including Goldman Sachs, J.P. Morgan and Citigroup — had more than the minimum amount of capital required by regulators after projected losses of over $600 billion under the Fed's made-up economic scenario.

That scenario was more extreme than last year since the economic baseline was healthier: the unemployment rate rises to 10%, commercial real estate prices fall 40% and stock prices drop 55%. 

How the banks do in the test determines how much capital they are required to set aside for a rainy day. Excess cash can be paid out to shareholders via dividends and stock buybacks.

The backdrop: The annual stress test, which the Fed started conducting after the 2008 financial crisis, comes as the nation grapples with heightened economic uncertainty. Inflation is rising at the fastest clip in over 40 years and the Fed has undertaken an aggressive interest rate hiking campaign to try to contain it, prompting fears of a coming recession.

Trade groups representing the big banks applauded the results: "Amidst increased economic headwinds, today’s outcome should serve as a welcome reminder that no matter the challenges ahead, banks are ready and willing to help weather the storm," Richard Hunt, CEO of the Consumer Bankers, said in a statement.

Fed stress test finds big banks can weather extreme economic shock

The banks proved they had enough capital to keep lending during a hypothetical economic meltdown.

Pedestrians pass a Chase bank branch in New York. Photo: Victor J. Blue/Bloomberg via Getty Images

Banks

Stock market

The nation&#x27;s biggest banks are healthy enough to withstand a severe economic downturn, the Federal Reserve <a class="gtmContentClick" data-vars-link-text="said on Thursday" data-vars-click-url="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20220623a.htm" data-vars-content-id="00899a00-9044-4a37-9e85-19b20939815c" data-vars-headline="Fed stress test finds big banks can weather extreme economic shock" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20220623a.htm" target="_blank">said on Thursday</a> announcing the results of its annual stress test.Why it matters: The banks proved they had enough capital to continue lending in a hypothetical scenario that saw unemployment skyrocket and commercial real estate prices and stocks collapse. The results of the yearly checkup open the door for banks to return billions of dollars to investors.

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

The Federal Reserve made an aggressive new move in its campaign to bring down inflation Wednesday, raising its target interest rate by three-quarters of a percentage point, the steepest rate hike since 1994 — and indicated another similar move could be coming next month.

Driving the news: In addition to increasing their target for short-term interest rates to a range of between 1.5% and 1.75% Fed officials projected that their target rate will reach 3.4% late this year, far higher than the 1.9% they envisioned in March.

Speaking to reporters, Fed chair Jerome Powell said the central bank will likely raise interest rates again by a similar magnitude — or perhaps by a half-percentage point — at its next policy meeting in July.

"Inflation has obviously surprised to the upside over the past year, and further surprises could be in store," Powell said.

Why it matters: The Fed has shifted toward a break-the-glass, emergency footing on inflation — but such abrupt rate hikes risk sending the economy into recession and markets plunging further.

For weeks, Fed officials had signaled that they would likely raise rates only      half a percent at this meeting, a plan undone by a flurry of bad inflation data in recent days.

Between last Thursday’s close and Tuesday’s close, the S&P 500 fell 7% and the      average rate on a 30 year-fixed rate mortgage rose nearly three-quarters of a percentage point as markets started to adjust for the possibility of the Fed's aggressive move.

What they're saying: “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the policy committee said in a statement.

The committee “anticipates that ongoing increases” in rates will be appropriate. The members’ forecasts imply that it will raise rates by about another 1.75 percentage points over the remainder of the year.

The decision to raise interest rates by three-quarters of a percentage point was not unanimous. Esther George, president of the Federal Reserve Bank of Kansas City, preferred to raise rates only by half a percentage point.

The big picture: Fed officials also released projections for how they expect the economy to evolve in the coming months, and they now expect both slower growth and higher inflation than they did just three months ago – a more stagflationary mix of conditions. 

They also expect to inflict some pain on the labor market with the unemployment rate expected to rise steadily through 2024 to 4.1%.

What they're saying: "Our objective really is to bring inflation down to 2% while the labor market remains strong. What's becoming more clear is that that many factors that we don't control are going to play a very significant role in in deciding whether that's possible or not," Powell said, referring to commodity prices, Russia's  invasion of Ukraine and supply chain shortages.

The median Fed leader now expects inflation of 5.2% this year, up from 4.3% projected in March.

The median official expected GDP growth of 1.7%, down from a 2.8% forecast in March.

The median Fed official expects unemployment to rise to 3.7%, up from its 3.5% projection in March.

The bottom line: The Fed says it won't hold back in its battle against inflation, and won't stop until there's "compelling evidence" prices are falling — even if it comes with the trade-off of a softer economy.

Editor's note: This post has been updated with additional information from Jerome Powell following the rate hike announcement. 

Fed steps up campaign against inflation with 0.75 point rate hike

The Fed has shifted toward a break-the-glass, emergency footing on inflation.

Rates are rising. Photo: Joshua Roberts/Bloomberg via Getty Images

Federal Reserve

Consumers worldwide feel gloomy about the economy

Inflation is pressuring household budgets, pushing down consumer confidence in a slew of nations.

Economy

Jobs

Americans aren&#x27;t the only ones unhappy with how things are going. Consumer sentiment around the globe hasn&#x27;t been this bad since 2009, when the world was mired in a historic recession. Why it matters: <a class="gtmContentClick" data-vars-link-text="Rising prices" data-vars-click-url="https://www.axios.com/2022/06/13/inflation-rates-around-world-us-china-eu-japan" data-vars-item="in_content_link" href="https://www.axios.com/2022/06/13/inflation-rates-around-world-us-china-eu-japan" target="_self">Rising prices</a> are pressuring household budgets and pushing down consumer confidence in a slew of nations, a sign that households may tighten their belts and spending will dry up.

China is becoming the most formidable rival America has faced, and the risk of confrontation with Russia, North Korea or Iran still looms. Authoritarians are rising, the chaotic Afghanistan exit revealed the limits of U.S. power, and the pandemic, climate change and other critical challenges continue to pose grave threats.

World

Federal Reserve chair Jerome Powell told lawmakers on Wednesday that a U.S. recession is a "possibility" as it plots an aggressive interest rate hike campaign to contain prices that are rising at their fastest clip in over 40 years.

Why it matters: Fears of a recession have grown among some market watchers and economists as the Fed signaled it will be more aggressive in slowing down the economy in an effort to get inflation under control.

What he's saying: To be clear, Powell said he did not see the odds of a recession as elevated at the moment. He acknowledged it was "certainly a possibility" but not something the Fed was trying to "provoke."

"It is not our intended outcome at all," Powell said.

Echoing comments he made last week after announcing the steepest rate hike since 1994, Powell said a soft landing "has been made significantly more challenging by the events of the last few months," referring to Russia's invasion of Ukraine, spiking commodity prices and supply chain challenges.

Between the lines: Senators from both parties are skeptical that the Federal Reserve's policies can quell food and gas inflation. That was a recurring theme as Powell began two days of congressional testimony on monetary policy.

The hearings this week will hint at the type of pressure Powell faces from lawmakers, as their constituents grapple with nosebleed prices and growing recession risks.

Here are two exchanges that illustrate the angst about the Fed's role in the inflation fight:

Sen. Elizabeth Warren (D-Mass.): "Inflation is like an illness, and medicine needs to be tailored to the specific problem. Otherwise, you could make things a lot worse. Right now, the Fed has no control over the main drivers of rising prices."

Sen. Mike Rounds (R-S.D.): "The portion of inflation which Americans are feeling today may not just be the core inflation that some of your tools address."

Between the lines: Democrats quizzed Powell about whether the Fed's moves to quell inflation could tip the economy into a recession.

What to watch: Some Republicans piled on to Powell, calling out the Fed for being too slow to react to inflation pressures.

"Though I'm pleased you have begun taking drastic action necessary to right the U.S. economy, these actions are long overdue, and monetary policy remains too loose," North Carolina Sen. Thom Tillis said.

Fed chair says recession a "possibility" amid inflation battle

"It is not our intended outcome at all," Powell told lawmakers on Wednesday.

Jerome Powell speaks during a Senate Banking, Housing and Urban Affairs Committee hearing on June 22. Photo: Ting Shen/Bloomberg via Getty Images

Recession

Federal Reserve chair Jerome Powell told lawmakers on Wednesday that a U.S. recession is a &quot;possibility&quot; as it plots an aggressive interest rate hike campaign to <a class="gtmContentClick" data-vars-link-text="contain prices that are rising" data-vars-click-url="https://www.axios.com/2022/06/10/inflation-cpi-may-fastest-pace-40-years" data-vars-content-id="70cecbaf-96f9-4f9e-8b04-ae6b0e09b064" data-vars-headline="Fed chair says recession a &quot;possibility&quot; amid inflation battle" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2022/06/10/inflation-cpi-may-fastest-pace-40-years" target="_self">contain prices that are rising</a> at their fastest clip in over 40 years.Why it matters: Fears of a recession have grown <a class="gtmContentClick" data-vars-link-text="among some market watchers and economists" data-vars-click-url="https://www.axios.com/2022/06/17/stock-slump-recession-economy-inflation" data-vars-content-id="70cecbaf-96f9-4f9e-8b04-ae6b0e09b064" data-vars-headline="Fed chair says recession a &quot;possibility&quot; amid inflation battle" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2022/06/17/stock-slump-recession-economy-inflation" target="_self">among some market watchers and economists</a> as the Fed signaled it will be more aggressive in slowing down the economy in an effort to get inflation under control.

President Biden has made the COVID-19 crisis and a post-Trump return to national unity and traditional democratic ideals his top priorities. From vaccinations to stimulus to schools, Biden is seeking bipartisan compromise while showing a willingness to use executive authority and bare Democratic majorities in the U.S. House and Senate to implement his policies. Republican leaders are navigating deep party divisions over if and how to move beyond former President Trump.

Politics & Policy

Axios Closer

Data: Mortgage News Daily; Chart: Axios Visuals

Mortgages, car loans and credit card debt are all about to get more expensive.

The big picture: The era of dirt-cheap borrowing is over: The Federal Reserve is trying to slam the brakes on the economy, and the cost to borrow is going up as it rushes to contain inflation.

Higher borrowing costs may push consumers and businesses to hold back on certain purchases. That will cool off demand, and perhaps put a lid on prices that are rising at the fastest rate in over 40 years.

Catch up quick: The Fed said yesterday it would raise interest rates by three-quarters of a percentage point, the biggest hike since 1994. 

With that announcement, the Fed has hiked rates by 150 basis points since March to a range of 1.50 and 1.75%. New projections show interest rates may hit 3.4% by the end of this year. 

Home loans: The rate for a conventional 30-year fixed-rate mortgage now tops 6%, at least by one estimate. This time last year: 3.1%.

Credit card debt: The average credit card rate hit 16.7% — up from 16% last year, according to BankRate. Credit card rates, tied closely to the Fed's moves, are expected to keep rising — squeezing consumers who carry a balance.  

Auto loans: Rising interest rates and increasing prices had already pushed the average monthly car payment to an all-time high of $656 for new vehicles and $546 for used rides, per Edmunds. 

New-car borrowers agreed to an average interest rate of 5.1% in May, up from 4.5% a year earlier and the highest level since March 2020. 

Automakers and car dealers may be hesitant to let rates go too much higher for fear of chasing away customers, Edmunds executive director of insights Jessica Caldwell said in a written analysis. 

The bottom line: Some savers may see at least some relief, in the form of earning a bit more on money parked in savings, depending on the bank. But because inflation is rising far faster than any of those rates, money in savings is still being eroded.

How Americans will feel the squeeze from higher interest rates

Interest rates

A chart showing U.S. average 30-year fixed mortgage rate

Mortgages, car loans and credit card debt are all about to get more expensive.The big picture: The era of dirt-cheap borrowing is over: <a class="gtmContentClick" data-vars-link-text="The Federal Reserve" data-vars-click-url="https://www.axios.com/2022/06/15/inflation-rate-hike-federal-reserve" data-vars-item="in_content_link" href="https://www.axios.com/2022/06/15/inflation-rate-hike-federal-reserve" target="_self">The Federal Reserve</a> is trying to slam the brakes on the economy, and the cost to borrow is going up as it rushes to contain inflation.

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Stories

Fed stress test finds big banks can weather extreme economic shock

Fed chair says recession a "possibility" amid inflation battle

Consumers worldwide feel gloomy about the economy

How Americans will feel the squeeze from higher interest rates

Fed steps up campaign against inflation with 0.75 point rate hike

Newsletter editions

🚦Manufacturing warning

🇪🇺 Europe's big problems

🕒 Minding our time

❌ More Fed pressure

🤷🏼‍♂️ Gas price incoherence