Why today’s inflation report is so important

Nicole Goodkind, CNN

The policy of the Federal Reserve System is based on trust. The central bank’s ability to maintain stable prices depends on the public’s confidence that it can provide them. But after more than a year of raising interest rates and trying to cool the economy, prices are still rising at a pace well above the Fed’s 2% target, and the public is growing weary.

Market movements are increasingly out of touch with the Fed’s messages. The latest data showed that inflation is still high and the economy is booming. On Thursday, JPMorgan Chase CEO Jamie Dimon publicly expressed doubts about the central bank’s ability to control inflation.

That’s why Fed officials will be desperate for any sign that their anti-inflationary policy is working when January’s personal consumption spending report is released on Friday. However, reading is expected to show price acceleration.

What’s happening: When people believe that the Fed will keep inflation low and stable, they are more likely to stick to long-term price expectations that are in line with central bank targets. This, in turn, can help the central bank meet its inflation targets.

But if the public expects inflation to be higher in the future, it may demand higher wages, and companies may increase the prices of goods and services. This, in turn, could create a self-fulfilling prophecy in which inflationary expectations are injected into the economy, making it difficult for the Fed to achieve its policy goals.

Dimon partly undermined that trust on Thursday. “I have full respect for [Fed Chair Jerome] Powell, but the fact is that we have lost control of inflation a little, ”the head of the largest US bank said in an interview with CNBC.

Dimon added that he expects interest rates could “maybe” stay high longer and that it could take “some time” for the Fed to return to its 2% inflation target.

Analysts at Blackrock wrote in a note on Thursday that “we think we will live with inflation. We see a decline in inflation as spending patterns normalize and energy prices fall, but we see inflation remaining above policy targets in the coming years.”

“Equity bulls and even Chairman Powell have been bragging about fixed inflation expectations and how consumers and investors think it is heading in the right direction,” said Lisa Shalette, chief investment officer at Morgan Stanley Wealth Management. The latest data, however, raises questions about whether inflation is slowing down, and now the Fed will need to “tread lightly.”

Fed officials are well aware of this issue. At their last policy meeting, “a number” of participants warned that an insufficiently restrictive policy stance could lead to prolonged inflationary pressures, with people beginning to expect inflation to remain high.

What to watch: PCE inflation is the Fed preferred measure. If this data is higher than expected, it could increase the likelihood of a larger rate hike of half a percentage point in March.

Analysts expect the core PCE for January, which excludes volatile food and energy data, to rise 0.4% from December and 4.3% year on year. The January value of this value will be a tick higher than the December value, although the annual data will be lower.

Wells Fargo layoffs, the fall of Domino, and the problems of Carlos Watson: what Wall Street is watching today

▸ The downturn in the real estate market has hit big banks as Wells Fargo fired more than 500 mortgage bankers this week, according to a Bloomberg report. Layoffs were announced on Tuesday, including several bankers whose loans topped $100 million last year, the report said.

Wells Fargo confirmed to CNN that the company had layoffs in the home finance business “in response to a significant decline in mortgage lending in the broader market environment.”

A spokesman for the company said that “we have communicated openly and honestly with affected employees and provided them with opportunities for layoffs, career assistance and other services.”

Job losses in home loans have jumped in recent months as the Federal Reserve raised interest rates and cooled the housing market. Last month, JPMorgan laid off hundreds of employees in its mortgage division. Morgan Stanley and Goldman Sachs also cut jobs.

▸ Domino’s shares fell nearly 12% on Thursday after the pizza maker admitted it was having delivery problems.

“In 2022, we experienced significant pressure on our U.S. shipping business,” CEO Russell Weiner wrote in a statement on Thursday’s fourth-quarter results. Delivery in stores open for at least a year fell 6.6% year-over-year, Chief Financial Officer Sandeep Reddy said in a call with analysts.

Inflation is high, executives explained, and shoppers simply don’t think the shipping fees charged by local stores are worth paying.

“As we saw during the last recession, shipping is moving with the economy, especially for lower disposable income customers who make up a significant portion of our business,” Weiner said.

Papa John’s (PZZA), which also reported results on Thursday, also reported weak fourth-quarter sales. Its shares closed about 6.1% lower.

▸ Carlos Watson, founder and chief executive of hard-pressed Ozy Media, was arrested this week and charged with fraud, according to federal court filing.

Watson was charged in a federal indictment with “participating in a scheme to defraud OZY investors, potential investors, potential acquirers, creditors, and potential creditors.”

The allegations stated that Watson committed fraud “through material misrepresentation and omissions” regarding Ozy Media, including the company’s finances, investors, business partners, contracts, and potential acquisitions.

401(k)s ok(k) yes

Despite higher prices, endless talk of a possible recession and falling markets, 401(k) participants managed to maintain a relatively stable savings rate in the fourth quarter of last year, helping to stabilize their savings and increase their overall average balance, writes my colleague Zhanna Sakhadi.

That’s according to new data from Fidelity Investments, one of the largest providers of workplace retirement plans, which in total represent $2.8 trillion worth of assets on their platform.

“Fortunately, the data shows that retirees understand the importance of long-term savings despite market changes. We are encouraged that people are ignoring the current volatility and continue to make smart choices about their future,” said Kevin Barry, president of Workplace Investing at Fidelity.

By this, Barry means that the average 401(k) savings rate (including both employee and employer contributions) remained roughly stable at 13.7% compared to 13.8% in the third quarter and 13.9% in the second. quarter.

In addition to workplace retirement plans, Fidelity reported a 10.2% annual increase in IRAs on its platform, noting that 61% of IRA contributions made in the fourth quarter of last year went to Roth IRAs.

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