1 big thing — Yellen on inflation, GDP, and jobs

2. A reversal in consumer spending patterns

Illustration of a piggy bank with gradually smaller piggy banks falling into it

Rest up this weekend, Macro fans, because next week is a doozy: The Federal Reserve and European Central Bank are meeting, plus a string of important data will lead up to the January jobs report a week from today.

Today, we have a dispatch from Johannesburg, where our colleague Hans Nichols interviewed Treasury Secretary Janet Yellen earlier today. Plus, new data that shows shifting savings and spending patterns.

Today's newsletter, edited by Javier E. David, is 677 words, a 2.5-minute read.

Macro

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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 big question: When to pause?

Illustration of a pause button with an S in the background, creating a dollar bill sign. 

2. 😮‍💨 A busy week for the global economy

It's a jam-packed week for the global economy, with labor market data in the U.S., inflation and growth figures in Europe, plus important monetary policy decisions from both continents. More on what to expect below.

But first, we lay out the huge question facing Federal Reserve policymakers, as Tuesday marks the beginning of 2023's first policy meeting.

Today's newsletter, edited by Javier E. David, is 593 words, a 2.5-minute read.

1 big thing: The one-off surge in worker pay

2. IMF joins the soft-landing party

IMF officials release the World Economic Outlook

The Federal Reserve began its two-day policy meeting this morning; we'll be coming to you tomorrow afternoon with the results of their deliberations.

In the meantime, one more positive inflation indicator  arrived this morning, just before the Fed convened. And in case you missed the news last night, the International Monetary Fund is a now a little less gloomy about the 2023 outlook.

Today's newsletter, edited by Javier E. David, is 584 words, a 2.5-minute read.

1 big thing: Central banks vs. the markets

Fed Chair Jerome Powell, ECB President Christine Lagarde, and Bank of England Governor Andrew Bailey

2. What to watch for in tomorrow's jobs report

Animated illustration of a trend line teetering back and forth as it balances on a briefcase

In the past 24 hours, the world's leading central banks have delivered a fairly consistent message: The inflation outlook may be improving, but our job is not done. Financial markets, however, don't seem to believe it (More below).

Plus, what to watch for in tomorrow's jobs report — and why it will be a little bit more complicated than usual.

Situational awareness: White House National Economic Council director Brian Deese is stepping down, President Biden said in a statement. Meanwhile, the New York Fed named Roberto Perli — a Piper Sandler analyst whom we just quoted yesterday! — as the head of its markets desk, which carries out U.S. monetary policy.

Today's newsletter, edited by Javier E. David, is 676 words, a 2.5-minute read. 

1 big thing: The Fed will be in the thick of the debt limit mess

Fed Chair Jerome Powell and Treasury Secretary Janet Yellen

2. Job openings are on the upswing again

The monster week of economic news continues apace! Neil is heading over to the Federal Reserve shortly to cover the release of a policy statement at 2pm ET, and chair Jerome Powell's news conference at 2:30.

Today, we look at the many ways the Fed will (uncomfortably) be in the middle if things go bad this summer in a debt ceiling standoff. Plus, new jobs data that point to surprising strength in the number of job openings.

Situational awareness: The Institute for Supply Management reported its manufacturing index fell for the fifth straight month to 47.4 (down from 48.4),  below analyst expectations. Numbers below 50 indicate contraction.

Today's newsletter, edited by Javier E. David, is 679 words, a 2.5-minute read.

National

Data: Bureau of Labor Statistics; Chart: Axios Visuals

A major undercurrent of last year's entire economic policy debate has been this question: Is compensation for American workers spiraling upward because of a tight job market destined to fuel inflation?

Why it matters: If wage inflation continues to fade — admittedly, a big if — the Fed will be able to declare victory on inflation without  engineering a steep economic contraction.

It looks increasingly like the surge in worker compensation, in late 2021 and early 2022, was a one-time bump rather than the beginning of an upward wage spiral.

Driving the news: The Employment Cost Index, the gold standard of measures of worker compensation (more on why below), rose 1% in the final three months of 2022, below the 1.2% analysts had expected.

Growth in total compensation had its recent peak in the first quarter of 2022, at 1.4%, then rose more slowly in each subsequent quarter.

Put differently, compensation rose at a 5.8% annual rate in the first three months of 2022, and a 4% annual rate in the final three months of the year.

The intrigue: What's remarkable about the downshift is that it occurred even as the job market remained extremely tight — by some measures even tightening further over the course of 2022.

The unemployment rate averaged 3.6% in Q4, below the 3.8% of Q1. The Phillips Curve, a linchpin of economic policy, would predict the opposite: that a lower unemployment rate would coincide with faster compensation growth.

The breakdown of those relationships in the last year supports the idea that the 2021-22 job market is experiencing unusual disruptions  emanating from the pandemic, rather than behaving in the way conventional economic models would predict.

Between the lines: The deceleration in wage growth has been seen in other measures of compensation, including average hourly earnings in the monthly jobs report and the Atlanta Fed's wage growth tracker.

But the Fed will take extra comfort from seeing the same thing happen in ECI numbers, which captures the value of both wages and benefits, and adjusts for shifts in occupations and industries.

What they're saying: "The debate about wage growth is over: it is coming down," wrote Nick Bunker, head of economic research at the Indeed Hiring Lab.

"The question is now when and how this descent ends," he said. "The prospect of the labor market further fueling inflation is now diminishing, something the Federal Reserve should and will consider."

New compensation data shows inflation pressure fading

It looks increasingly like last year's surge in worker compensation was a one-time bump.

Wages

Economy & Business

When he takes questions from reporters this afternoon, the Fed chair will presumably talk at length about the outlook for inflation, employment, and Fed policy.

But a different set of issues loom over the central bank that we suspect Powell would rather not talk about — potentially tough decisions that involve a debt ceiling standoff.

Why it matters: The debate itself is a fiscal issue between Congress and the executive branch. But if it turns into a crisis with a U.S. default or other extreme outcomes on the table, it would inevitably ensnare the Fed.

State of play: The Fed acts as the "fiscal agent" for the U.S. government, essentially serving the same role for the Treasury that a bank (like JPMorgan) might for a large corporation.

The New York Fed operates Treasury debt auctions, so it would be in the middle if demand falters for U.S. government bonds, or if the government attempts to avoid breaching the debt limit through novel strategies to manipulate the face value of debt.

The Fed also maintains the government's operating accounts; any attempt to prioritize payments — for example, making good on interest payments but delaying paying military contractors — would be a profound operational challenge.

For now, the Biden administration is disinclined to exploit a legal loophole by minting large denomination platinum coins. But if it did, the Fed would have to decide whether to accept the deposit, and could face litigation regardless of its decision.

Then, there are the risks to financial markets and the economy if there is a technical default on bonds, which economists across partisan lines see as potentially catastrophic.

The Fed would immediately face questions as to whether it should suspend quantitative tightening that is withdrawing liquidity from the Treasury market, or even start buying bonds again.

What they're saying: "While the Fed will be careful not to inject itself directly into what is ultimately a fiscal issue, we can also be sure that it won’t take the possible effect of a default on financial markets and the economy lightly," Piper Sandler's Roberto Perli and Benson Dunham wrote in a research note.

"A default, even if brief, could have profound consequences, and most likely the Fed is exploring possible ways to mitigate the problem," they wrote.

The intrigue: There are unusually close ties between the individuals involved. Treasury Secretary Janet Yellen is a former Fed chair. Current Fed vice chair Lael Brainard may be heading to the White House imminently.

And Powell was a Treasury undersecretary in the 1990s overseeing debt issuance. He came to public prominence with commentary on the debt ceiling standoff back in 2011.

The bottom line: The Fed doesn't like getting caught up in the middle of political disputes. But with the way things are going, it won't have much choice.

The Fed will be in the thick of the debt limit mess

The Fed could have a plethora of issues on their hands, including a debt limit standoff.

Fed chair Jerome Powell sitting next to Treasury Secretary Janet Yellen.

Fed chair Jerome Powell and Treasury Secretary Janet Yellen. Photo: Anna Moneymaker/Getty Images

Federal Reserve

When he takes questions from reporters this afternoon, the Fed chair will presumably talk at length about the outlook for inflation, employment, and Fed policy.<ul><li>But a different set of issues loom over the central bank that we suspect Powell would rather not talk about — potentially tough decisions that involve a <a class="gtmContentClick" data-vars-link-text="debt ceiling standoff" data-vars-click-url="https://www.axios.com/2023/01/19/debt-ceiling-fight-biden-congress-republicans" data-vars-content-id="2203a8a9-f594-4a77-89f1-ef6eca9aceb1" data-vars-headline="The Fed will be in the thick of the debt limit mess" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2023/01/19/debt-ceiling-fight-biden-congress-republicans" target="_self">debt ceiling standoff</a>.</li></ul>

The Federal Reserve slowed down its campaign of interest rate increases Wednesday, raising its target interest rate a quarter percentage point after months of more aggressive steps and signaled that more increases are ahead.

Why it matters: The Fed raised interest rates at a breakneck pace last year as inflation soared. Now they have further slowed the pace of hikes, but Fed chair Jerome Powell emphasized that the central bank's job is not done and warned that the economy is only in the early stages of easing inflation.

"Inflation has eased somewhat but remains elevated," the central bank's policy statement said, an acknowledgement that the inflation data has improved since its last meeting in mid-December.

The policy-setting Federal Open Market Committee concluded a two-day policy meeting by raising its target range for the federal funds rate to between 4.5% and 4.75%.

Where it stands: Inflation has come down alongside a labor market that has remained solid — and, by some measures, strengthened. 

But, speaking to reporters during a press conference, Powell was cautious about whether that would continue. 

"It is a good thing that the disinflation that we have seen so far has not come at the expense of a weaker labor market," Powell said. "But I would also say that that that disinflationary process that you now see underway is really at an early stage."

Powell acknowledged that a key area of the economy the Fed is watching — core services, excluding housing — has not seen disinflation yet.

Between the lines: The committee kept language in its statement that it "anticipates that ongoing increases in the target range will be appropriate" to return inflation to 2%. 

The plural "increases" implies that there will be at least two more rate hikes this year.

That throws cold water on a view held by many analysts and traders that there might be only one more rate hike, in March, with the Fed pausing its tightening campaign after that point.

If the Fed follows through on enacting "ongoing increases" in its policy rate, it would be on track to bring its target interest rate above 5%, consistent with Fed officials' own projections but not with current market pricing.

"The job is not fully done," Powell said at the news conference.

The intrigue: Alongside the issues of inflation and employment, there is also another potential issue brewing that will inevitably involve the Fed: The possibility that Congress does not raise the debt ceiling. 

But at the news conference, Powell would not offer any detail about any actions the Fed would take should that scenario play out.

"There's only one way forward here. And that is for Congress to raise the debt ceiling so that the United States government can pay all of its obligations, when due and any deviations from that path would be highly risky," Powell said.

"No one should assume that the Fed can protect the economy from the consequences of failing to act in a timely manner."

Catch up quick: The Fed raised rates seven times in 2022, including four times in super-sized 0.75 percentage point increments in an effort to bring down inflation. That created the most rapid tightening of monetary policy in decades and sent ripples across global financial markets.

Now, though, the end looks to be in sight. As of December, Fed officials expected to raise rates only another 0.75 percentage point across all of 2023, and with Wednesday's move they're one-third of the way there.

In another tweak to its latest statement, the committee referred to how it will determine the "extent" of future rate hikes, instead of the "pace" of them. That implies the pace is now a settled matter, with quarter-point rate moves at a time.

Markets price in a likelihood of rate cuts in the second half of 2023, a notion Fed officials themselves have pushed back on.

The decision, which included first-time policy votes from Dallas Fed President Lorie Logan and newly-installed Chicago Fed President Austan Goolsbee, was unanimous.

Editor's note: This story has been updated with additional reporting.

Fed raises rates by a quarter point, notes lower inflation

The central bank still sees "ongoing increases" to rates.

The Federal Reserve headquarters building in Washington.  Photo: Stefani Reynolds/AFP 

The <a class="gtmContentClick" data-vars-link-text="Federal Reserve" data-vars-click-url="https://www.axios.com/2023/01/11/the-fed-isnt-the-only-inflation-fighter" data-vars-content-id="5303e8ce-485b-4290-9aef-7eed280481d0" data-vars-headline="Fed raises rates by a quarter point, notes lower inflation" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2023/01/11/the-fed-isnt-the-only-inflation-fighter" target="_self">Federal Reserve</a> slowed down its campaign of interest rate increases Wednesday, raising its target interest rate a quarter percentage point after months of more aggressive steps and signaled that more increases are ahead.Why it matters: The Fed raised interest rates at a breakneck pace last year as inflation soared. Now they have further slowed the pace of hikes, but Fed chair Jerome Powell emphasized that the central bank&#x27;s job is not done and warned that the economy is only in the early stages of easing inflation.

They're all trying. From Washington to London to Frankfurt, major central banks are saying — in every way they can — that they have more work to do to push interest rates high enough to vanquish inflation.

But global financial markets just aren't buying it.

Why it matters: Markets are betting that inflation will dissipate rapidly, and that rate cuts will arrive sooner than the central bankers themselves think. That conviction has driven a buoyant start to the year for stocks and bonds.

The big question for 2023 and beyond is, who is right? Either central banks will end up reversing themselves and cutting rates soon, or markets will back down if policymakers follow through on their stated plans.

Driving the news: In his news conference yesterday, Fed Chair Jerome Powell seemed almost resigned to the reality that financial markets are betting on inflation coming down faster and more painlessly than he and his colleagues expect.

"There is a difference in perspective by some market measures on how fast inflation will come down," Powell said. "I'm not going to try to persuade people to have a different forecast, but our forecast is that it will take some time and some patience, and that we’ll need to keep rates higher for longer. But we’ll see."

"It would be very premature to declare victory, or to think that we’ve really got this," he said.

Meanwhile, across the Atlantic today, the Bank of England and the European Central Bank both hiked rates another half percentage point — sounding awfully similar to Powell.

"It is too soon to declare victory just yet," said BoE governor Andrew Bailey. "Inflationary pressures are still there… we need to be absolutely sure that we really are turning the corner on inflation."

Yes, but: Global markets are increasingly confident that this corner has already been turned, interpreting central bankers' acknowledgement that inflation is coming down as confirmation of the thesis that the period of monetary tightening will soon end.

The yield on 10-year U.K. government bonds was down a whopping 0.24 percentage points today in early trading. Its U.S. Treasury counterpart yielded 3.37%, down from 3.88% at the start of the year.

The S&P 500 is up about 9% so far in 2023.

The bottom line: They can't both be right. And this will be a much less painful year if the implicit market forecast is vindicated by events.

Central banks vs. the markets

Markets are betting that inflation will dissipate rapidly, and that rate cuts will arrive sooner than the central bankers  think.

Fed Chair Jerome Powell, ECB President Christine Lagarde, and Bank of England Governor Andrew Bailey. Photos: Yui Mok/Pool/AFP, Kevin Dietsch, Andreas Rentz/Getty Images

Interest rates

They&#x27;re all trying. From Washington to <a class="gtmContentClick" data-vars-link-text="London to Frankfurt" data-vars-click-url="https://www.axios.com/2023/02/02/global-central-banks-interest-rates" data-vars-content-id="ca7de581-f4ab-4bbd-8888-981729bf328f" data-vars-headline="Central banks vs. the markets" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2023/02/02/global-central-banks-interest-rates" target="_self">London to Frankfurt</a>, major central banks are saying — in every way they can — that they have more work to do to push interest rates high enough to vanquish inflation.<ul><li>But global financial markets <a class="gtmContentClick" data-vars-link-text="just aren&#x27;t buying it" data-vars-click-url="https://finance.yahoo.com/news/stock-market-news-live-updates-february-2-2023-123801997.html" data-vars-content-id="ca7de581-f4ab-4bbd-8888-981729bf328f" data-vars-headline="Central banks vs. the markets" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://finance.yahoo.com/news/stock-market-news-live-updates-february-2-2023-123801997.html" target="_blank">just aren&#x27;t buying it</a>.</li></ul>Why it matters: Markets are betting that inflation will dissipate rapidly, and that rate cuts will arrive sooner than the central bankers themselves think. That conviction has driven a buoyant start to the year for stocks and bonds.<ul><li>The big question for 2023 and beyond is, who is right? Either central banks will end up reversing themselves and cutting rates soon, or markets will back down if policymakers follow through on their stated plans.</li></ul>Driving the news: In his <a class="gtmContentClick" data-vars-link-text="news conference yesterday" data-vars-click-url="https://www.axios.com/2023/02/01/fed-raises-rates-inflation" data-vars-content-id="ca7de581-f4ab-4bbd-8888-981729bf328f" data-vars-headline="Central banks vs. the markets" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2023/02/01/fed-raises-rates-inflation" target="_self">news conference yesterday</a>, Fed Chair Jerome Powell seemed almost resigned to the reality that financial markets are betting on inflation coming down faster and more painlessly than he and his colleagues expect.<ul><li>&quot;There is a difference in perspective by some market measures on how fast inflation will come down,&quot; Powell said. &quot;I&#x27;m not going to try to persuade people to have a different forecast, but our forecast is that it will take some time and some patience, and that we’ll need to keep rates higher for longer. But we’ll see.&quot;</li><li>&quot;It would be very premature to declare victory, or to think that we’ve really got this,&quot; he said.</li></ul>Meanwhile, across the Atlantic today, the Bank of England and the European Central Bank both hiked rates another half percentage point — sounding awfully similar to Powell.<ul><li>&quot;It is too soon to declare victory just yet,&quot; <a class="gtmContentClick" data-vars-link-text="said BoE governor Andrew Bailey" data-vars-click-url="https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2023/february/opening-remarks-february-2023.pdf" data-vars-content-id="ca7de581-f4ab-4bbd-8888-981729bf328f" data-vars-headline="Central banks vs. the markets" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2023/february/opening-remarks-february-2023.pdf" target="_blank">said BoE governor Andrew Bailey</a>. &quot;Inflationary pressures are still there… we need to be absolutely sure that we really are turning the corner on inflation.&quot;</li></ul>Yes, but: Global markets are increasingly confident that this corner has already been turned, interpreting central bankers&#x27; acknowledgement that inflation is coming down as confirmation of the thesis that the period of monetary tightening will soon end.<ul><li>The yield on 10-year U.K. government bonds was down a whopping 0.24 percentage points today in early trading. Its U.S. Treasury counterpart yielded 3.37%, down from 3.88% at the start of the year.</li><li>The S&amp;P 500 is up about 9% so far in 2023.</li></ul>The bottom line: They can&#x27;t both be right. And this will be a much less painful year if the implicit market forecast is vindicated by events.

Data: Department of Labor; Chart: Axios Visuals

The number of Americans filing unemployment claims remains extraordinarily low and signals the opposite of a recessionary jobs market.

Driving the news: The Labor Department said this morning that only 186,000 people filed new claims for jobless benefits last week, the lowest since April of last year.

Continuing claims, however, ticked up by 20,000 to 1.675 million, which could be a sign that some people are taking longer to find new jobs. 

Between the lines: Ultra-low claims numbers don't seem to jibe with grim headlines about tech layoffs. But in recent days, labor market anecdata has showed a somewhat brighter picture.

Sure, some high-profile companies have announced layoffs lately, including Microsoft (10,000 jobs), Alphabet (12,000), and Goldman Sachs (3,200).

But this week also brought news that Walmart, the largest private employer in the U.S., raised its minimum wage for hourly employees by two dollars to $14, and said it will increase average hourly pay for store employees to $17.50.

And this morning, Chipotle said it will hire 15,000 workers for its burrito restaurants in the coming months.

The bottom line: If you just focus on the most prominent companies, you're missing the overall story of strength in the labor market.

New unemployment claims number shows job market resilience

The number of Americans filing unemployment claims remains low.

Jobs

Image of four people's legs walking atop a pink bar graph with binary numerals

The number of Americans filing unemployment claims remains extraordinarily low and <a class="gtmContentClick" data-vars-link-text="signals the opposite" data-vars-click-url="https://www.axios.com/2023/01/20/a-tale-of-two-job-markets" data-vars-item="in_content_link" href="https://www.axios.com/2023/01/20/a-tale-of-two-job-markets" target="_self">signals the opposite</a> of a recessionary jobs market.Driving the news: The Labor Department <a class="gtmContentClick" data-vars-link-text="said this morning" data-vars-click-url="https://www.dol.gov/ui/data.pdf" data-vars-item="in_content_link" href="https://www.dol.gov/ui/data.pdf" target="_blank">said this morning</a> that only 186,000 people filed new claims for jobless benefits last week, the lowest since April of last year.

Neil Irwin

Stories

Central banks vs. the markets

Fed raises rates by a quarter point, notes lower inflation

The Fed will be in the thick of the debt limit mess

New compensation data shows inflation pressure fading

New unemployment claims number shows job market resilience

Newsletter editions

🥊 Markets face-off

🏛 The debt limit and the Fed

👊 One-time bump

🐾 Pause patrol

🏛 Yellen on the economy