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The Federal Reserve is poised to raise short-term interest rates for the ninth time since 2015. Chairman Jerome Powell holds a press conference following the decision—we’ll have a special Fed-focused edition of the newsletter this afternoon.
Good morning. Jeff Sparshott here to take you through key developments in the global economy. We’ll also look at crashing oil prices, the rise of workplace overdose deaths, second chances for felons, second thoughts on Brexit and an some bad signs for Australia’s quarter-century economic expansion. Let us know what you think by replying to this email.
SMALL CHANGE, BIG EFFECTS
The Federal Reserve is preparing to raise short-term interest rates by a quarter percentage point Wednesday. It doesn’t sound like much but in a world of low inflation and slow recuperation from the financial crisis, even small changes can have outsize effects, Nick Timiraos and Rachel Louise Ensign write.
The Fed has moved its benchmark short-term rate up to a little over 2% since 2015, remarkably little action when considered against history. But the Dow has fallen more than 10% since the Fed’s last move in September, and the economy shows signs of slowing in part because interest-sensitive sectors including housing and car purchases have lost momentum. Growth abroad has softened. The upshot: Officials are considering slowing down the already slow pace of rate increases in 2019.
ANOTHER WILDCARD
The Fed is also gradually shrinking a $4 trillion bond portfolio. It is trying to be deliberate but the effects are largely unknown, adding to angst at the central bank. The Fed’s holdings have fallen to $4.1 trillion from $4.5 trillion a year ago and are set to reach $3.6 trillion in a year. Economists at Goldman Sachs estimate the runoff is equivalent to another 0.1 percentage point increase in the federal-funds rate next year.
WHAT TO WATCH TODAY
The U.S. current-account deficit for the third quarter, out at 8:30 a.m. ET, is expected to widen to $126.2 billion from $101.46 billion.
U.S. existing-home sales for November, out at 10 a.m. ET, are expected to slip to an annual pace of 5.17 million from 5.22 million a month earlier.
The Federal Reserve releases a policy statement at 2 p.m. ET, and Chairman Jerome Powell holds a press conference at 2:30 p.m. ET. Fed officials appear set to raise their short-term rate to a range between 2.25% and 2.5%. Here’s what to watch.
TOP STORIES
NOT ALL RATES HEED THE FED
The Fed doesn’t control everything. Borrowing costs for U.S. consumers have risen unevenly in recent months as deepening uncertainty about the economy overrides central bank moves. Consumer rates that closely track the federal-funds rate have climbed since the Fed last raised rates on September 26. But longer-term loans have remained steady or even fallen as soft inflation data, volatile financial markets and concerns about the economy weigh on 10-year Treasury yields, Paul Kiernan reports.
DOWN THE WELL
Another wrinkle for the Fed: Oil prices fell to their lowest levels in over a year Tuesday. U.S. oil futures are down nearly 40% since early October. Investors have grown increasingly jittery that slowing global growth will weigh on fuel demand, while major oil exporters have failed to alleviate concerns about an oversupplied market, Stephanie Yang and Amrith Ramkumar report.
Cheaper fuel is good news for consumers and should help keep inflation down. But the U.S. is now a major oil producer and its energy sector would likely curtail investment and hiring if low prices persist.
DRUG CRISIS HITS THE WORKPLACE
U.S. drug-overdose deaths have skyrocketed in recent years, a tragic phenomenon that’s creeping more and more into the workplace. 2017 marked the fifth straight year unintentional workplace overdose deaths have increased by at least 25%.
JAILHOUSE ROCK
Felons have long been some of the last candidates in the hiring pool. Now, with one of the tightest labor markets in decades, some employers say they are more willing to consider applicants with criminal histories. In New York, 8,202 parolees released in 2017 found full-time jobs above minimum wage, an increase of 53% from 2014, Zolan Kanno-Youngs reports.
“There’s such a lack of skilled labor, so that’s opened the door for a lot of people with criminal records,” said Mark Holden, senior vice president of Koch Industries.
ISLAND NEWS
More than two years after Britons voted to leave the European Union, U.K. politicians can’t agree on what kind of Brexit they want. Now more lawmakers are calling for a second referendum that could potentially reverse the results of the first, Max Colchester and Jason Douglas report. However, there isn’t yet enough support in Parliament for a new vote and it isn’t clear what Britons would vote on: to reverse the 2016 decision, to support Prime Minister Theresa May’s Brexit deal or to leave without any negotiated deal at all.
Australia’s economy has gone more than a quarter-century without a recession. But things aren’t looking so good right now. Australian bank shares are near five-year lows and the value of new mortgages has neared all-time lows after more than a year of home-price declines. Some forecasters expect a 20% peak-to-trough drop for home prices in Sydney, the most-populous metropolitan area. Wage growth, meanwhile, hit historic lows earlier this year even though unemployment is limited, Kevin Kingsbury reports.
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]WHAT ELSE WE’RE READING
The Financial Times named George Soros its person of the year. “He is the standard bearer of liberal democracy and open society. These are the ideas which triumphed in the cold war. Today, they are under siege from all sides, from Vladimir Putin’s Russia to Donald Trump’s America,” Roula Khalaf writes.
The Fed’s quantitative easing effectively created a minus 5% policy rate in the U.S. That has implications for the exit from easy-money policies. “Other things equal, when the economic situation normalizes, short-term monetary policy interest rates will have to be set higher than before the financial crisis to achieve a desired monetary policy stance,” according to a Swiss National Bank working paper.
UP NEXT: THURSDAY
The Bank of Japan releases a policy statement.
The Bank of England releases a policy statement at 7 a.m. ET.
U.S. jobless claims, out at 8:30 a.m. ET, are expected to increase to 215,000 from 206,000 a week earlier.
The Philadelphia Fed manufacturing survey for December, out at 8:30 a.m. ET, is expected to rise to 15.0 from 12.9 a month earlier.
The Conference Board’s leading economic index for November, out at 10 a.m. ET, is expected be unchanged from the prior month.
Japan’s consumer-price index for November is out at 6:30 p.m. ET.
from Real Time Economics https://ift.tt/2A9kGym
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