A version of this story first appeared in the CNN Business newsletter “Before the Bell”. Not a subscriber? You can register Right here. You can listen to the audio version of the newsletter by clicking on the same link.
NY
CNN
—
The possibility of a market rally in 2023 ended last week amid unfavorable inflation and economic data that spooked investors and increased the likelihood that the Federal Reserve would continue its economically painful rate hike campaign longer than Wall Street had hoped.
On Friday, all major indices recorded their biggest weekly losses in 2023. The S&P 500 fell 2.7%. The Dow Jones Industrial Average fell 3% and the Nasdaq Technology Index fell 3.3%.
What’s happening: Inflation seems to be going sideways after months of steady decline. Price index for personal consumption expenditures for January – The Fed’s preferred rate of inflation turned out to be hotter than expected on Friday.
According to the Commerce Department’s Bureau of Economic Analysis, prices rose a whopping 5.4% in January compared to last year. In December, prices rose by 5.3% year on year.
In January alone, prices rose 0.6% month-on-month, higher than the monthly increase from the 0.2% increase in December.
This inflation crab ride will almost certainly force Fed officials to rethink their policies.
A Submitted document Friday at the Booth School of Business Monetary Policy Forum in New York argued that disinflation is likely to be slower and more painful than markets expect.
“Significant disinflation caused by monetary tightening is associated with a recession,” the document says. “Perfect disinflation would be unprecedented.” (In this case, “flawless” refers to the possibility of a rapid fall in inflation to the Fed’s 2% target without any serious economic damage.)
Several Fed presidents, governors and leading economists attended the Booth School forum. to discuss paper and monetary policy on Friday. Most speakers expressed deep concern about the persistence of inflation and the general reaction of the market.
Inflation won’t stop: Cleveland Fed President Loretta Mester said that while price increases have slowed from a recent high, headline inflation remains too high and could be more resilient than her colleagues currently expect.
“I expect further rate hikes to reach a fairly restrictive level and then remain at that level for some, possibly a long time,” Boston Fed President Susan Collins repeated at the conference.
Collins called inflation “rebellious,” a million-dollar phrase that means non-cooperation or defiance of authority.
Fed chief Philip Jefferson took a more bewildered stance on Friday, noting that inflation continues to baffle economists. “The inflationary forces currently affecting the US economy are a complex mixture of temporary and longer-term elements that defy simple and parsimonious explanation,” he said. Thrifty is another million dollar word for frugal.
Economists stressed that more challenges lie ahead. “It’s important that markets understand that ‘not boarding’ is not an option,” said Peter Hooper, vice president of research at Deutsche Bank, author of the report.
While the latest data suggests that the US economy remains strong, “we expect some bad news by the middle of this year, and the sooner markets get this message, the better it will be for the Fed.” He said.
The last word: Former Governor of the Bank of England Lord Mervyn King summed up what many were thinking on Friday: “Given the difficulty of the current monetary situation, he said: ‘I would not like to advise any central banks on what we should do.’
Researchers at the Federal Reserve Bank of New York have issued a dire warning: if President Joe Biden’s plan to write off student loans is not implemented, the US could face another credit crunch.
Some background: The Covid-19 crisis has prompted a sudden shift in student loan policy and a new openness to forgiveness. In March 2020, Congress passed the CARES Act, which automatically suspended mandatory payments on all federally held student loans.
Since then, this abstinence has been extended eight times and should end as early as August, 40 months after it began.
The Biden administration has announced an unprecedented debt relief proposal that will make life easier for more than 40 million borrowers. An New York Fed analysis found that approximately $441 billion in federal student loans were eligible for forgiveness under the proposal, canceling about 30% of all outstanding federal student loan debt.
This offer of forgiveness is now on hold following an injunction from the 8th US Circuit Court of Appeals. The US Supreme Court will hear the case on Tuesday, with a decision expected by June 2023.
What’s online: If the Biden administration’s forgiveness plan survives litigation, it would be the largest mass consumer debt repayment in modern history, according to the Federal Reserve Bank of New York. About 40% of those with federal student loan debt will have a zero balance; even more will have a much smaller monthly payment.
But “if payments resume without debt relief, we expect student loan defaults and delinquencies to increase and potentially exceed pre-pandemic levels,” the Fed researchers warned.
“We have seen a sharp increase in new credit card and auto loan arrears for borrowers with eligible student loans over the past few quarters, with growth at a faster pace than those without student loans and those without qualifying loans. “, they wrote.
These missed payments suggest that some federal student loan borrowers are having trouble meeting their monthly debt obligations. “We expect these delinquency patterns to worsen if federal student loan repayments resume without relief,” the report said.
The data “could be indicative of trouble ahead, a sign of economic distress that could seem particularly worrisome when the burden of student loan repayments resumes.”
Future concerns: If student loan borrowers expect debt forgiveness in the future, they could borrow even more, causing an even sharper increase in debt balances, the researchers said. “In the absence of direct policies to address this growing problem, taxpayers may seek help again in the future,” they concluded.