Here’s what keeps Jerome Powell up at night and interest rates high

New York

Federal Reserve Chairman Jerome Powell sent markets reeling on Tuesday when he spoke about the economy with his former boss, Carlyle Group co-founder David Rubinstein, at the Economic Club of Washington.

Stocks struggled for direction as investors tried to gauge Powell’s economic outlook, attitude toward inflation and future interest rate hikes. Wall Street cheered when the Fed chair said inflation had begun, then soured when she said the path to 2% inflation was “solid” with more rate hikes ahead. And will be “long”.

Markets reached new highs, before quickly settling to session lows and then recovering to close the day in the green.

“Powell doesn’t want to play games with the financial markets,” EY said Parthenon’s Chief Economist, Gregory Daco, after the talk. But at the same time, he said Powell wanted to point out that the Fed’s “primary case was not to come down on inflation as quickly and as brutally as some market participants expected.”

Here’s why Powell thinks bringing prices down will be more difficult than investors expect.

Structural changes in the labor market: The U.S. economy added a surprising 517,000 jobs in January, defying economists’ expectations. The unemployment rate fell to 3.4 percent from 3.5 percent, a level not seen since May 1969.

Powell said in response to a question about the report on Tuesday that the current imbalance in the labor market is a reflection of the pandemic’s lingering impact on the U.S. economy and labor supply. He said the labor market is exceptionally strong. Demand outstrips supply by 5 million people, and the labor force participation rate has fallen. “It feels more structural than cyclical.”

“If we continue to get, for example, reports of a strong labor market or reports of higher inflation, it may well be that we will have to do more and raise rates further,” he said. ”

Inflation of basic services: Powell noted that he sees inflation in the goods sector and expects inflation to fall in housing soon. But prices for services remain stubborn. Service sector inflation, which is more sensitive to a strong labor market, is 7.5 percent higher than last year by the end of 2022, and has not slowed, he said.

“That sector is not showing any decline yet,” Powell said. “There was an expectation that [higher prices] Will go away quickly and painlessly and I don’t think there are any guarantees.

Geopolitical Uncertainty: Powell also cited concerns that the reopening of China’s economy after the sudden end to zero-covid-19 restrictions, as well as uncertainty about Russia’s war on Ukraine, could affect the path of inflation in these ways. which are unclear.

The labor market is strong, but tech layoffs keep coming. About 50,000 tech jobs were cut in January, and the trend continued through February.

Video conferencing service Zoom is one of the latest to announce layoffs. The company said Tuesday it is cutting 1,300 jobs, or 15 percent of its workforce.

Zoom CEO Eric Yuan said in a blog post on Tuesday that Zoom rapidly increased employment due to increased demand during the pandemic. The company tripled in size within 24 months and now has to adapt to changing demand for its services, he said.

“The uncertainty of the global economy, and its impact on our customers, means that we need to take a difficult – but important – step to reposition ourselves so that we can weather the economic environment, our customers. deliver and achieve Zoom’s long-term vision,” he wrote.

Yuan added that he plans to cut his salary by 98 percent and forgo a 2023 bonus. Zoom shares closed nearly 10 percent higher on Tuesday.

The announcement comes a day after Dell laid off more than 6,500 employees.

Amazon ( AMZN ), Microsoft ( MSFT ), Google and other tech giants have also recently announced plans to lay off thousands of workers as companies struggle to cope with shifting demand from the pandemic and the growing recession. Adapts to market concerns.

Neil Kashkari, President of the Federal Reserve Bank of Minneapolis told That he is starting to think that the US economy can survive a recession. and achieve a so-called soft landing.

“It’s hard to weather a recession when the job market is still so strong,” she told Poppy Harlow on Tuesday’s This Morning.

Still, “we have more work to do,” Kashkari told Harlow, adding that the labor market is “very hot” and that’s one of the main reasons why it’s “hard to get inflation back.”

While many investors are beginning to think the Fed may pause at around 5%, after only two similar small hikes, Kashkari said he believes the Fed may have to raise rates further. can Kashkari has been voted onto the Federal Open Market Committee, the Fed’s interest rate-setting group, this year.

This is a good time to be in the oil business.. BP’s annual profit more than doubled last year to a record high of nearly $28 billion.

The British energy company said in a statement that profit on the basis of replacement costs will increase to $27.7 billion in 2022, from $12.8 billion last year. The metric is an important indicator of oil companies’ profitability.

BP ( BP ) also unveiled another $2.75 billion in share buybacks and increased its dividend for the fourth quarter by nearly 10% to 6.61 cents per share.

BP shares rose 6 percent in Tuesday’s trading following the news. Its shares have gained 24% in the past 12 months.

The earnings are the latest in a string of record-setting results for the world’s biggest energy companies, which have enjoyed bumper profits thanks to skyrocketing oil and gas prices.

Last week, another energy giant, Shell, forecast a record profit of nearly $40 billion for 2022, double the previous year as oil and gas prices surged after Russia’s invasion of Ukraine.

On Wednesday it was TotalEnergie’s ( TTFNF ) turn. The French company posted an annual profit of $36.2 billion for 2022, double the previous year’s earnings.

Disney has found itself in the middle of a culture war that could result in the transfer of governance of Disney World to a board appointed by Florida Gov. Ron DeSantis. And that may be the least of Disney’s worries, writes my colleague Chris Isador.

The company is facing turmoil in the media industry, declining cable subscriptions, a box office recovery, massive streaming losses, activist shareholders, possible restructuring and layoffs and escalating labor disputes with employees. That’s a lot for CEO Bob Iger.

Iger, who retired as CEO in 2020 only to be brought back in November, has remained mostly quiet about his plans for the company since his return. It ends Wednesday at 4:30 p.m. ET when he is set to open an earnings call with Wall Street investors.

Click here to read more about what to look for in a closely followed call.

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