Jerome Powell Testifies To Congress Takeaways
Powell has indicated that the central bank expects to reduce interest rates later this year, noting that inflation has eased significantly since reaching 40-year highs in 2022. Even with hotter-than-expected inflation and hiring data in January, the central bank is still on track to cut interest rates this year.
Powell has chosen to overlook a significant aspect of inflation: the surge in asset prices. As tech stocks reach record highs, indicators of U.S. financial conditions have reverted to more supportive levels. observed before the Federal Reserve initiated its rate hikes. According to a Bloomberg measure, U.S. financial conditions have already attained the accommodating state seen prior to the Fed's adjustments. Meanwhile, a Goldman Sachs metric indicates that the cumulative easing across assets over the past four months is one of the biggest since at least 1982.
Powell has dismissed expectations that officials might consider cutting rates at their next meeting. Recent economic data that the Fed uses to gauge the economy supports this. The Labor Department reported that the economy added twice as many jobs as forecasters had anticipated in January and inflation, using the Fed's preferred gauge, posted the largest monthly increase in a year.
In December, most Fed officials thought they could cut rates around three times this year provided that inflation was moving closer to that target by year-end. Currently, investors in interest-rate futures markets currently expect the Fed to cut rates three or four times this year, beginning at their meeting in June. The Fed will be slower to cut if inflation remains sticky and faster to cut if the labor market weakened or there was very persuasive lower inflation.
U.S. Manufacturing
U.S. manufacturing is struggling to regain momentum as it tries to recover from a prolonged but shallow downturn. Lower interest rates, which could potentially help the sector, have been delayed due to continuing inflation in the service sector. This has limited diesel consumption, postponed the anticipated depletion of fuel inventories, and caused refining margins to soften.
The manufacturing downturn has been the most prolonged since the slowdown of 2000-2002 and before that 1981-1983. Both of those downturns were cycle-ending recessions rather than mid-cycle slowdowns, characterized by a far more severe contraction in activity. The worst of the current downturn was over by the second and third quarters of 2023, but manufacturers have since struggled to regain momentum.
PMI Measures
The Services PMI has been above 50% for the 14th consecutive month, indicating sustained growth in the sector. However, the rate of growth in February was slightly slower due to faster supplier deliveries and a contraction in the Employment Index. Despite this slowdown, 14 industries reported growth in February, suggesting a robustness in the services sector. The Services PMI is a significant indicator of the overall economic health of the U.S., as the services industry accounts for more than two-thirds of the economy.
The Manufacturing PMI registered 47.8% in February, indicating a contraction for the 16th consecutive month. This is a decrease of 1.3 percentage points compared to January’s reading of 49.1%. Four out of five sub indexes that directly factor into the Manufacturing PMI are in contraction territory.
The New Orders Index contracted for the 18th time in 20 months, registering 49.2%, a decrease of 3.3 percentage points compared to January’s reading of 52.5%. The Production Index also moved back into contraction territory in February, registering 48.4%, 2 percentage points lower than the January reading of 50.4%.
In the manufacturing sector, employment saw a slight decrease in February 2024, with the index falling to 45.9 from 47.1 in January 2024. This indicates a contraction in employment in the manufacturing sector. Many companies are continuing to reduce head counts using layoffs, attrition, and hiring freezes.
Both the services and manufacturing sectors are experiencing challenges in the current economic climate. While the services sector shows signs of resilience the manufacturing sector continues to contract. Both sectors are grappling with labor shortages and inflation pressures.
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