The U.S. added more than double forecasts for jobs in July. Fed policymakers have had to assert strong action to control inflation The Bank of England is under attack as inflation rises.
The US is likely to enter a recession sometime in the next 12 months, if it is not already there. That was the conclusion drawn by Bill Dudley, the former president of the Federal Reserve Bank of New York, in remarks last week before July.
That report showed an increase of 528,000 jobs, more than double the 250,000 expected, and a decline of 3.5% from 3.6% the previous month. This seemed to dispel the idea that the US economy is in a recession.
However, the Treasury yield curve widened in Friday trading. The yield on bills soared to 3.24% on Friday, while the yield on bills rose more slowly to 2.84%. An inversion of the yield curve indicates a recession in the next two years.
It widened further on Monday as the two-year yield lost just 3 basis points, while the 10-year yield was down 7 bps.
So Dudley was not wrong to look for a recession in the next 12 months. Investors reverted to their good news is bad news position, and immediately began anticipating further sharp interest rate hikes by Fed policymakers to reduce inflation and curb earnings gains. employment
Fed policymakers appeared to reinforce that pessimism. They quickly intervened with claims that the central bank would stay the course and continue to raise rates strongly until they turned decisively to the downside.
San Francisco Fed President Mary Daly told CBS’ Face the Nation on Sunday that the Fed is “far from done.” He forecast a September rate hike of at least 50bps. Daly does not have a vote on the Federal Open Market Committee this year, but he does participate in the debate.
Michelle Bowman, a member of the board of governors who gets to vote at every FOMC meeting, was more hawkish. Noting that he had joined the consensus in July by voting for a hike of 75 basis points, he said in a speech on Saturday:
“My view is that increases of a similar size should be on the table until we see inflation come down in a consistent, meaningful and lasting way.”
This point, he made clear, has not yet been reached.
Some bulls in the market made much of the fact on Monday that a New York Fed survey showed consumers contracting in July. But the decline wasn’t really that big. The July survey showed expectations of 6.2% over the next 12 months, up from 6.8% in June, and 3.2% over the next three years, up from 3.6% the previous month.
The Fed pays a lot of attention to expectations, but they are hardly an accurate forecaster. Former Treasury Secretary Larry Summers said he is more concerned about inflation after the jobs report. He told CNN:
“I think our main problem, which is that we have an unsustainably overheated economy that’s causing high inflation, that’s cutting into people’s paychecks, that unfortunately hasn’t been addressed by the news this report”.
In Friday’s report, he noted that wage gains were at an annual rate of 6%, while inflation was 9%, so wage earners are losing ground.
The Bank of England, for its part, created a storm with its midpoint last week, although it launched a fight against inflation in December and has raised rates steadily for six consecutive meetings, yet than by a quarter of a point or less until last week. .
After the UK recorded 9.4% in June, the central bank now expects inflation to hit 13.3% in October and recession to set in this year and last for five quarters. This pessimism has predictably caused political outrage.
It doesn’t help that the UK is in the middle of a political crisis. After forcing Boris Johnson to announce his resignation as party leader and prime minister, the Conservative Party is trying to select a new leader and impose a new head of government on a long-suffering public without the benefit of an election generals
The leading candidate to replace Johnson, Foreign Secretary Liz Truss, has not hesitated in this situation to take a swipe at the Bank of England and suggest that its independence should be curbed. The governor of the Bank of England, Andrew Bailey, has become a comfortable punching bag.