The Fed Should ‘Proceed Carefully’ On Rate Cuts, Barr Says

Officials at the Federal Reserve have repeatedly said they want to gain confidence that inflation is on a downward trajectory to its goal of a 2% annual rate before cutting its benchmark interest rate.

Tuesday’s unexpectedly hot report on inflation didn’t increase that confidence, according to Michael Barr, a member of the central bank’s policy committee that decides on when and how much to move the fed funds rate.

“January's report on consumer product index inflation is a reminder that the path back to 2% inflation may be a bumpy one,” Barr said Wednesday at a meeting of the National Association for Business Economists in Washington. “Given the limited historical experience with the growth and inflation dynamics we currently face and no modern experience of emerging from a global pandemic, we have yet another reason to proceed carefully, as we have been doing.”

Financial markets have continually pushed back their bets for when the Fed will cut its key interest rate from its current 23-year high where it’s been held since July to quash inflation. Market participants are now mostly betting the first rate cut will come in June, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.

‘Fragile’ Shoppers More Often Turning to Buy Now, Pay Later Plans

Buy now, pay later (BNPL) repayment plans are growing in popularity, and a report Wednesday shows how often shoppers use the option, and on what kind of purchases. 

New research from the New York Federal Reserve showed that lower-income users are turning to BNPL more frequently, while more affluent shoppers are using it for high-priced purchases. The research comes as more holiday shoppers this year tried BNPL services, which offer short-term repayment plans, often with no interest charges. 

"Financially fragile” shoppers, defined as being unable to come up with an emergency $2,000 payment next month, are turning to the payment method more often than “stable” consumers. The Fed survey showed that about 60% of fragile consumers used the product five or more times in the past year, while much smaller numbers of stable purchasers used the product.

“This implies that financially fragile users are almost three times as likely as financially stable users to use BNPL five or more times and suggests that high-frequency use may grow if the product continues to be adopted by financially fragile households,” wrote New York Fed researchers Felix Aidala, Daniel Mangrum, and Wilbert van der Klaauw wrote on the Liberty Street Economics blog. Overall, it showed that users of BNPL with lower credit scores and greater unmet credit needs made up a disproportionate share of BNPL users.  But while fragile consumers more often utilized BNPL options, higher-income shoppers were more likely to use it for purchases prices between $1,750 and $2,000, the survey showed.

-Terry Lane

Fed's Goolsbee Says Officials Should Put Inflation Data Ahead of Wage Growth Trends

Federal Reserve officials should place more importance on evaluating how prices are changing and less on data regarding workers’ wages, Chicago Federal Reserve President Austan Goolsbee said Wednesday. 

Growing workers’ wages, which in turn can help fuel higher prices, have prompted some officials and economists to question whether it's time to cut interest rates from their current decades-high level. But Goolsbee said focusing on wages to keep interest rates high could be counterproductive, leading to the weakening of the labor market.  

“I’ve been cautioning people about over-interpreting data like wage growth,” Goolsbee said. “You don’t want to remain this historically restrictive for too long. If you do, you’re going to have to start thinking about the employment side of the mandate.”

Regarding inflation, Goolsbee said this week’s Consumer Price Index print, while higher than expected, doesn’t indicate that the inflation is moving off of the path to “gradually” getting back to the target rate of 2%. 

“We can still be on the path even if we have some increases and some ups and downs,” Goolsbee said. 

In a wide-ranging discussion at the Council on Foreign Relations, Goolsbee also said the biggest risks to the U.S. economy come from “external shocks,” where geopolitical events like conflict in the Middle East help to drive up prices of oil and other commodities.

-Terry Lane

A previous version of this post incorrectly identified the day.

Business Applications See Slight Decrease in the Start of 2024

The latest release from the reveals that business applications were down 1.3% month-over-month in January, hitting 450,078.

In total, 2023 saw a record-breaking 5.5 million new business applications filed, the most for any year since the Census Bureau began tracking in 2014. However, the numbers have been on a downward trend since September. The business application metric counts all filings for Employment Identification Numbers (EINs), which essentially functions as a business’ social security number.  While business applications across the country declined in January, new filings increased in the Northeast and Southern states on a month-over-month basis. Retail trade was the industry with the highest number of applications in January, however, was down from the month prior.

-Avery Koop

CBO Director Says Economic Outlook Is Overall Positive

The legislative branch's economic research agency projects that the deficit will grow without intervention, but overall forecasts a bright economic outlook, the director of the organization said Wednesday.

The Congressional Budget Office (CBO) released its annual economic outlook last week, predicting a $1.6 trillion budget deficit next year with the debt held by the public reaching 99% of GDP next year. The agency also forecasted gross domestic product to grow 1.5% during 2024 and inflation to come in at 2.1% as measured by the Federal Reserve's preferred gauge.

CBO Director Phillip Swagel testified before the House Budget Committee Wednesday, telling representatives that the overall projection was a positive one.

"We do expect the economy to slow a bit this year as the Fed's interest rate hikes continue to bite into the economy," Swagel said. "Then we expect some recovery next year but continued growth, continued low employment, continued job creation."

A previous version of this post incorrectly identified the day.

Price Growth Comes for Valentine's Day

Rising cocoa prices are making chocolate more expensive this Valentine's Day. Prices on the holiday staple have surged 10% in the past year—three times the rate of general inflation. The large price jumps are due in part to adverse weather and tree disease in West Africa. The country produces about two-thirds of the world's cocoa and conditions have substantially impacted output. The price of cocoa—chocolate's main ingredient—has more than doubled in the past year and risen more than 40% in the past month, hitting all-time highs.

Read more about how the economics of cocoa supply are affecting Valentine's Day buying here.

-Lyle Niedens

Application Activity Dips on Elevated Mortgage Rates

Mortgage application activity see-sawed this week, decreasing this week after gaining last week, as mortgage rates edged slightly higher and housing inventory continued to be an issue.

Mortgage loan application volume decreased by 2.3% for the week ending Feb. 9,  the Mortgage Bankers Association (MBA) reported in its weekly survey. Interest rates on 30-year fixed-rate mortgages moved up to 6.87%, their highest since December. While mortgage rates have declined from their peak in October, they have hovered near 7% in 2024.  “Purchase applications remained subdued as elevated rates continue to add to affordability challenges along with still-low existing housing inventory,” said Joel Kan, MBA vice president.  Purchase applications decreased by 3% last week, refinance activity declined 2% this week. 

-Terry Lane