Rate-Hike Patience May Leave Fed in a Bind If Inflation Softens
Federal Reserve officials say they’re willing to tolerate an overshoot of their inflation goal. If the opposite happens, the plan is less clear. Core inflation, excluding energy and food prices, is currently just shy of the central bank’s 2 percent target. Most economists and policy makers see that lasting, though there’s no guarantee: Inflation expectations have been stuck on the low side, and a cooler housing market is among several factors that could weigh on future price pressures. If price gains would slow down even as U.S. economic growth more broadly held up, it could put the central bank in a tough spot. Officials have already placed interest-rate hikes on hold amid muted price pressures and looming global risks. They could extend that pause, pledging to keep rates low until faster price gains materialize. But economists said actually lowering rates on an inflation miss seems unlikely, because it could signal undue pessimism. “The hurdle for a policy inflection point is fairly high,” said Lou Crandall, chief economist at Wrightson ICAP in New York. “If you ease, you trigger the, ‘what does the Fed know that we don’t?’ trade.” The stakes are significant. The Fed hasn’t hit 2 percent inflation on a sustained basis since formally adopting it in 2012. Officials had been hopeful that this would be the year in which they finally clinched their objective. Policy makers expected to hit 2 percent core inflation by the fourth quarter, according to their last set of economic forecasts, published in December. They also saw unemployment falling to 3.5 percent. Together with above-trend output growth, that laid the groundwork for the committee to project two rate increases this year. Officials will release a fresh set of projections following their two-day meeting that concludes Wednesday, and downgrades look likely. Economists surveyed by Bloomberg expect just once hike this year, in September, at which point the tightening cycle will have peaked.
U.K. Labor Market Defies Slowdown as Employment Surges
The U.K. labor market remained in robust health in the three months through January, despite a Brexit-induced slowdown in the overall economy. Employment hit a record high after the biggest jump in more than three years and underlying pay growth maintained its fastest pace in more than a decade as companies struggled to fill vacancies, Office for National Statistics figures published Tuesday show. The jobs market has been the bright spot of the economy since the 2016 Brexit referendum, defying the uncertainty weighing on growth over Britain’s departure from the European Union. The number of people in work between November and January rose by 222,000, the biggest increase since late 2015 and almost double market expectations. It took the employment rate to a record-high 76.1 percent. Unemployment fell to 3.9 percent, its lowest level since 1975, and inactivity reached an all-time low. Wage growth excluding bonuses rose an annual 3.4 percent, a pace last higher in 2008. It means pay is continuing to grow comfortably ahead of inflation, which averaged just 2.1 percent in the period. Total earnings growth slowed slightly to 3.4 percent as a strong October dropped out of the calculation. One explanation for the resilience of the labor market is that firms are hiring workers rather than spending on capital equipment because employment decisions are easier to reverse in a downturn. However, with economic growth having slowed to just 0.2 percent, economists say it is only a matter a time before the labor market succumbs. Surveys may already be pointing the way. The latest PMI reports, for example, show employment is now falling across both the manufacturing and services sectors against a backdrop of Brexit and the weakest global growth since the financial crisis. The Bank of England is expected keep borrowing costs on hold this week and refrain from hiking rates until there is greater clarity over future ties with the EU.
China Considers Excluding Boeing 737 Max From Trade Deal
China is looking at excluding Boeing Co.’s troubled 737 Max jet from a list of American exports it would buy as part of a trade deal with the U.S., people familiar with the matter said. Boeing jets were featured on a draft list of American products China would buy to reduce its trade surplus with the U.S., the people said, asking not to be identified discussing private deliberations. Now, safety concerns are pushing China to examine whether to cut the 737 Max from the list altogether or replace it with other Boeing models after the crash of a plane operated by Ethiopian Airlines led to the aircraft being grounded worldwide, they said. A reduction in aircraft purchases could make it harder for China to fulfill an offer it’s said to have made to pare its $300-billion-plus annual goods trade surplus with the U.S. over six years, and potentially delay any overall agreement between the two countries. Worth billions of dollars and a key U.S. export, planes would likely be a key component of any commitment by China to buy more American goods, along with soybeans, meat and natural gas. China’s Ministry of Commerce, which is in charge of the nation’s trade talks with the U.S., didn’t immediately respond to a request for comment. A Boeing representative declined to comment. Boeing shares were little changed in early U.S. trading from a close of $372.28 Monday in New York. For Boeing, China’s exclusion of Max purchases in a trade deal would mark another setback for a company that’s reeling from a crisis of confidence over its top-selling plane, which accounts for almost a third of its operating profit. Chinese airlines made up about 20 percent of 737 Max deliveries worldwide through January, according to Boeing’s website. China Southern Airlines Co. has 16 of the aircraft, with another 34 on order.
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