How the Fed and Investors Could All Be Wrong on Rates; Shoppers See Lower Inflation on the Horizon

How the Fed and Investors Could All Be Wrong on Rates; U.S. Shoppers See Lower Inflation on the Horizon By Perry Cleveland-Peck

Good day. Federal Reserve policy makers and investors aren't always on the same page, but when it comes to their expectations of where rates will end up over the long haul, they agree: much lower than they are now, writes the WSJ's Justin Lahart in a Heard on the Street column. And they might all be wrong, a mistake that could force the Fed to radically reassess its rate expectations in addition to keeping longer-term interest rates-such as on the 10-year Treasury and mortgages-significantly higher than they were before the pandemic. Meanwhile, the Fed has received some welcome news from surveys of American consumers: They expect inflation to stay high over the near term, but also see it easing to 3% in three years and to 2.7% in five years. And the U.S. central bank will launch its FedNow instant-payments service this month, but a fast payments system offered by big banks is already in place, writes Bob Fernandez in a Pro Take.

Now on to today's news and analysis.

Top News Exploring the R-Star, a Model that Can't be Directly Observed

In projections released after their June rate-setting meeting, the median forecast among Federal Reserve policy makers put the "longer run" level of the central bank's target on overnight rates at 2.5%. A survey of primary dealers-banks and other firms that deal directly with the Fed-and a separate survey of large investors, both conducted by the Federal Reserve Bank of New York in May, showed the same median forecast.

The longer-run rate forecasts equate to an assessment of what the target rate would be if inflation was at the Fed's 2% objective and employment was as high as possible without driving inflation higher. When thinking about this just-right rate, economists typically put it into inflation-adjusted, or real, terms. In this case, subtracting out the Fed's 2% inflation objective, it would be 0.5%. Economists call this real, neutral rate "r-star" .

Good News for the Fed: Shoppers See Lower Inflation on the Horizon

U.S. consumers expect inflation to stay high over coming months but decline in the years ahead to levels closer to those seen before the pandemic, according to recent surveys likely to be welcomed by the Federal Reserve.

Pro Take: Fed to Face Competition as It Enters Instant-Payments Space By Bob Fernandez

Americans like speed: fast food, same-day Amazon door drops and airport express lines. The Federal Reserve operates reliable payment systems for Americans to deposit paychecks and pay bills, but it hasn't offered an instant one-yet.

The U.S. central bank will launch its FedNow instant-payments service later this month after years of development and about a decade of discussion. Its move into super fast payments was a bit slow: A consortium of big banks already has launched a private instant service in the U.S., and a number of countries have such systems in place. And some say the new Fed tool may not help those who need it most. Read more .

U.S. Economy Remote Work Sticks for All Kinds of Jobs

It isn't just white-collar workers logging in from bedrooms instead of boardrooms. Lower-income, less-educated and service-industry workers spent more time working from home, on average, last year than before the pandemic.

Industries Reliant on Thriving Downtowns Suffer From Remote Work

Pain from the anemic return to the office across the U.S. is spilling over into architecture, construction, cleaning, brokerage, furniture and other industries that depend on thriving downtowns.

Key Developments Around the World RBA Stands Pat on Rate to Assess Economic Outlook

The Reserve Bank of Australia left official interest rate on hold Tuesday saying that the decision gives it time to further assess the mixed economic outlook. The official cash rate remained at 4.10%.

China Restricts Exports of Metals Used in High-Performance Chips

China said it is restricting exports of products and materials containing gallium and germanium, metals vital in semiconductors, 5G base stations and solar panels, a move that industry executives see as retaliatory measures .

Singapore's Central Bank Posts Record Annual Net Loss

Singapore's central bank posted a record annual loss due to the currency-translation effects of a stronger Singapore dollar and high interest expenses from mopping up excess liquidity in the banking system.

Chocolate Can't Escape Inflation's Grip as Cocoa Prices Soar

Prices for cocoa, the gustatory key ingredient in the world's favorite sweet snacks, are trading at their highest level in nearly four decades amid strong demand, a global shortfall in production and bad weather forecasts in West Africa.

Diamond Giant De Beers to Let Botswana Keep Half of Production

Botswana will increase its take of the diamonds De Beers mines there from 25% to 50% in 10 years' time, part of a deal that extends the company's relationship with the country while loosening its hold on its output there.

Financial Regulation Roundup Banking Watchdog Takes on 'Too Big to Manage'

The biggest U.S. banks are going to have to demonstrate they haven't gotten so large that they are unwieldy, or face a potential breakup, Acting Comptroller of the Currency Michael Hsu said.

Crypto Giant Binance Struggles in Europe

The Netherlands and Belgium have shut their doors to Binance. Germany hasn't yet given it a license to operate. And French prosecutors recently searched the exchange's office as part of an investigation of money laundering controls.

Bank Deals Are Back on the Table. Getting One Done Could Be Messy.

A trio of bank failures in the U.S. earlier this year put mergers back on the agenda in corporate boardrooms and meetings with regulators, but turning all of that talk into action won't be easy.

Forward Guidance Wednesday (all times ET)

10 a.m.: U.S. factory orders for May

2 p.m.: FOMC minutes of June 13-14 meeting

4 p.m.: New York Fed's Williams speaks at Central Bank Research Association meeting at his bank

Thursday

Time N/A: National Bank of Poland releases policy statement

8:15 a.m.: ADP National Employment Report for U.S. for June

8:30 a.m.: U.S. weekly jobless claims; U.S. trade report for May; Canada trade report for May

8:45 a.m.: Dallas Fed's Logan speaks at Central Bank Research Association meeting at Columbia University

10 a.m.: U.S. job openings and labor turnover survey (JOLTS) for May; ISM Report on Business Services PMI for June

Research U.K. Households' Short-Term Inflation Expectations Rise

The inflation expectations of U.K. households for 5 years to 10 years eased for the fourth consecutive month to 3.3% in June from 3.5% previously, according to the Citigroup and YouGov tracker. However, short-term inflation expectations rose to 5% from 4.7% in May. "These remain well below the very high levels observed in the second half of 2022," Citigroup chief U.K. economist Benjamin Nabarro writes in a note. The latest data show inflation expectations remain high but close to the Bank of England's target level, he adds.

-Miriam Mukuru

Commentary The Richcession Keeps Rolling

The U.S. economy keeps chugging along, adding jobs and growing despite still-high inflation and Fed rate increases, but for many richer Americans , it probably feels like a recession has already begun, Justin Lahart writes.

America's Factory Building Boom

Even as demand for manufactured goods remains in a postpandemic hangover, the investment that manufacturers are making in new capacity is a clear positive for the economy , Justin Lahart writes.

Basis Points American car shoppers have been flocking to dealerships so far this year , shaking off concerns about rising interest rates and inflationary pressures. The auto industry is expected to have notched a 12%-to-14% rise in new vehicle sales for the first half of this year, a pace far ahead of industry forecasts heading into 2023. Germany's trade surplus fell unexpectedly on month in May, as exports declined marginally and imports rose, a sign domestic demand could be improving despite a global economic slowdown, as the country's economy tries to shake off the recession it suffered in the winter. The adjusted trade surplus dipped to 14.4 billion euros ($15.72 billion) in May, compared with a revised EUR16.5 billion in April, data from statistics office Destatis showed Tuesday. (Dow Jones Newswires) South Korea's government has trimmed its forecasts for both economic growth and inflation for this year. The Ministry of Economy and Finance said Tuesday gross domestic product in Asia's fourth-largest economy is likely to grow 1.4% in 2023, slower than the 1.6% forecast in December. (DJN)) Brazil's industrial production increased in May as output of machinery jumped. Production rose a seasonally adjusted 0.3% from April and increased 1.9% from a year earlier, the Brazilian Institute of Geography and Statistics said Tuesday. In April, production fell 0.6% in the month and shrank 2.7% from a year earlier. (DJN) Inflation in Turkey fell in June for an eighth successive month but remains high by historical standards, indicating that the country's central bank still has a complex task ahead to control prices as its new governor charts a more conventional monetary-policy stance. (DJN) Feedback Loop

This newsletter is compiled by Perry Cleveland-Peck in Barcelona and James Christie in San Francisco.

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07-05-23 0715ET