🔥 Too-hot demand

Plus: "Two-sided" risk | Friday, September 30, 2022

Open in app View in browser   Presented By Equitybee   Axios Macro By Neil Irwin and Courtenay Brown · Sep 30, 2022 We end the week with a slightly hotter-than-expected print of the Fed's favorite inflation gauge. More below. Plus, we dig into how the Fed is thinking about global spillovers after a wild stretch in markets. Situational awareness: Double-digit inflation has arrived in Europe, where eurozone consumer prices jumped 10% over the year ended in August. That was the highest in the common currency's 25-year history. Inflation in Germany spiked to the highest since 1951. Today's newsletter, edited by Javier E. David and copy edited by Katie Lewis, is 584 words, a 2-minute read.     1 big thing: The demand is too dang high Illustration: Sarah Grillo/Axios   In normal times, consumers earning more money and upping spending on a variety of things would be welcome news. But these are not normal times. There continues to be relatively strong demand in the economy — exactly what the Fed is trying to constrain to tame inflation. Driving the news: Consumption spending rose 0.4% in August, and prices for core personal consumption expenditures (which excludes energy and food) rose by 0.6% — too hot for comfort. That measure was up 4.9% over the last year, compared with 4.7% in July. Over the last three months, core PCE, the Fed's preferred inflation measure, rose at a 5% annual rate — far above the 2% the central bank aims for. The report also pointed to a strong consumer. Personal income rose 0.4% in August, slightly outpacing the overall 0.3% increase in overall prices. Consumers are still opening their wallets at a robust pace, even though it's slowed from earlier in the summer. In August, spending was fueled by services, including transportation. Why it matters: Taken together, the high readings of inflation and consumer spending are a sign of an economy where, despite all the recession chatter, demand remains too high. What to watch: There are signs households continue to lean on their savings to support spending. Consumers saved 3.5% percent of their income last month, well below the elevated levels seen earlier in the pandemic. What they're saying: "Consumer spending growth was quite resilient in the first half of the year despite the many headwinds facing the U.S. consumer, but as inflationary pressures have intensified and spilled into more goods and services, growth is slowing under the strain placed on household budgets," Morning Consult economist Scott Brave said this morning. Yes, but: This data is inherently backward-looking. The great challenge facing policymakers is that if they set policy based on the rearview mirror, they are all but certain to end up restraining demand more than is needed to bring inflation into line.     A message from Equitybee Get access to high-demand, pre-IPO startups     With Equitybee, accredited investors get access to hundreds of high-growth, VC-backed startups and invest at past company valuations by funding employee stock options. In exchange, they get a percentage of the future share value. Choose a startup and start investing.     2. Brainard: Interest rate risks may become more two-sided Photo: Al Drago/Bloomberg via Getty Images   The Fed faces dual risks of raising interest rates too much or too little, its No. 2 official said in a speech today, delivered against the backdrop of tumult in world financial markets. Driving the news: Global interest rates have soared and stock markets plunged, with investors reacting to concerted monetary tightening by the Fed and other central banks. In her new speech, Fed vice chair Lael Brainard emphasized that the Fed will proceed both "deliberately and in a data-dependent manner" in its policy. "We are committed to avoiding pulling back prematurely," Brainard said, according to a prepared text of her speech. But, she added, "we also recognize that risks may become more two-sided at some point." Moreover, she said, "uncertainty is currently high, and there are a range of estimates" about how high interest rates will need to move. She acknowledged the risk of spillovers from the global economy. Between the lines: The speech does not suggest that the Fed is reevaluating its rate-hiking plans amid roiled markets. But it is an acknowledgment of the risks of pushing rates too high, triggering a global recession that would rebound and damage the U.S. economy further. What they're saying: San Francisco Fed president Mary Daly told reporters Thursday evening that she is looking at whether financial conditions have tightened more than should be expected, given the Fed's interest rate increases. "If that's the case, then slowing the pace of increases but still heading for the right terminal rate would be appropriate," she said. Go deeper.     A message from Equitybee Unlock access to high-growth startups     Equitybee gives accredited investors unprecedented access to high-growth, VC-backed startups. What's in it for you: Invest in startups at past valuations by funding employee stock options. Then, you receive a portion of the future share. Get started in minutes.   Are you a fan of this email format? It's called Smart Brevity®. 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