Month-In-Review: December 2022

After raising rates 375bps in the first 11 months of the year, the Fed rounded out 2022 monetary policy with an additional 50bp hike in December, taking the upper bound of the federal funds rate to 4.50%.?Going forward, with ongoing strength in the labor market coupled with still too high inflation, more than double the Committee's preferred 2% level, policy makers may need to raise rates significantly above earlier indications. Even with an upwardly revised terminal rate of 5.1% as of the December Summary of Economic Projections (SEP), some FOMC members have suggested that may not be a sufficiently restrictive level of rates.??

Market Activity and Commodities

·??????Equities – Stocks ended lower in December and suffered their worst year since 2008, snapping a three-year winning streak. Beginning at 4,079.71, the S&P 500 declined 5.9% in December, closing at 3,839.50. The Dow, meanwhile, declined 4.2%, dropping 34,589.77 to 33,147.25. Additionally, the Nasdaq decreased 8.7% in December, closing at 10,466.48. For the year, the S&P 500 tumbled 19.4%, the Dow declined 8.8%, and the Nasdaq sank 33.1%.

·??????Treasuries – Treasury yields ended December and the year higher. The 10-year Treasury yield rose 27bps from 3.61% to 3.88% in December. The 2-year Treasury yield, meanwhile, ended November up 12bps at 4.31%. For the year, however, the 2-year and 10-year rose 369ps and 237bps, respectively. The spread between the 2-year and 10-year yields first inverted in early July and remained inverted throughout the remainder of the year.

·??????Oil & Gas????????????

o??(Dec 5) – A price cap of $60 a barrel on Russian crude went into affect as Western nations attempt to block key revenue for the country still engaged in conflict with neighboring Ukraine. Broadly speaking,?the deal seems left neither side pleased (often the sign of a balanced outcome from negotiations). According to Russian officials, Russia will redirect its oil supply to "market-oriented partners" even if that means it will have to cut production. Regardless of what level is set, “such interference could further destabilize the market.” Meanwhile, according to reports, Ukraine's President Volodymyr Zelenskyy dismissed the agreement as “quite comfortable for the budget of a terrorist state." Keep in mind, Russia is the world’s third largest oil producer and second largest oil exporter so the impact of the price cap will have global ramifications. While Russia may be able to reroute more shipments in order to skirt the sanctions and keep prices at current levels (or even add additional downward pressure), on the flip side, a meaningful decline in Russian output could lead to upward pressure on global energy prices, particularly if Chinese demand picks up amid a recent lessening of Covid protocols and restrictions.

o??(Dec 23) – According to Deputy Prime Minister Alexander Novak, Russia may reduce output by as much as 700,000 barrels a day early in 2023 in response to the recent price cap. While some have called the potential reduction “insignificant,” it adds upside risks to prices.?

National Growth and Outlook

• NFIB Small Business Optimism (Dec 13) – The NFIB Small Business Optimism Index unexpectedly rose from 91.3 to a reading of 91.9 in November, a two-month high. According to Bloomberg, the index was expected to decline to 90.5 in November.

·??????Leading Index (Dec 22) – The Leading Index declined 1.0% in November, more than the 0.5% decline expected and following a 0.9% decrease in October.

• GDP (Dec 22) – GDP was unexpectedly revised up from a 2.9% increase to a 3.2% gain on an annualized basis in the final third-quarter report. The 3.2% rise follows two consecutive quarters of decline. According to Bloomberg, GDP was expected to be unrevised at a 2.9% gain in the final Q3 report. In the details, personal consumption was revised higher from a 1.7% gain to a stronger 2.3% increase in the final read of Q3 GDP, up from a 2.0% increase in Q2. Goods consumption, on the other hand, was revised down from a 0.2% decrease to a larger 0.4% decline, reflecting a downward revision to durables from -0.3% to -0.8%. Nondurables consumption was unrevised at -0.1% in the final Q3 report.?Services consumption, meanwhile, was revised up a percentage point to a 3.7% gain in the?final round Q3 GDP report. While still positive, this is markedly below the 4.6% rise in Q2. Gross private investment, a gauge of business spending, was revised down from a 9.1% decline to a larger 9.6% drop in the final round Q3 report. Fixed investment, meanwhile, was revised higher from a 4.1% decline to a lesser 3.5% decrease in the third reading of Q3, following a 5.0% decline in Q2. Nonresidential investment, including office buildings and factories, was revised up from a 5.1% gain to a 6.2% increase, due to an upward revision to structures investment from a 6.9% drop to a lesser 3.6% decline, and intellectual property investment from a 5.8% increase to a 6.8% gain in the final read of Q3. Equipment investment, however, was revised lower a tenth of a percentage point to a 10.6% gain. Additionally, residential investment was revised down from a 26.8% drop to a larger 27.1% decline in the final round Q3 report, the largest drop since Q2 2020. On the trade side, exports were revised down from a 15.3% rise to a smaller 14.6% gain, while imports were unrevised at a 7.3% drop in the final round Q3 report. Finally, government consumption was revised higher from a 3.0% gain to a larger 3.7% increase in the third read of Q3. Federal spending was revised up from a 3.4% gain to a larger 3.7% rise, nondefense spending was revised up from a 2.1% rise to a 2.5% gain, and national defense spending was revised higher from a 4.4% gain to a larger 4.7% increase in the final Q3 report. State and local spending, meanwhile, was revised up from a 2.8% increase to a 3.7% gain.

Employment

• Jobless Claims
• (Dec 1) – Initial jobless claims dropped 16k from 241k to 225k in the week ending November 26, a two-week low. Jobless claims were expected to decline to 235k, according to Bloomberg. Continuing claims, however, or the total number of Americans claiming ongoing unemployment benefits, rose from 1.551M to 1.608M in the week ending November 19, the highest since February.
• (Dec 8) – Initial jobless claims rose 4k from 226k to 230k in the week ending December 3, as expected according to Bloomberg and a two-week high. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, rose from 1.609M to 1.671M in the week ending November 26, the highest since February.
• (Dec 15) – Initial jobless claims declined by 20k from 231k to 211k in the week ending December 10, the lowest since September. According to Bloomberg, claims were expected to rise to 232k. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, rose from 1.670M to 1.671M in the week ending December 3, the highest since February.
• (Dec 22) – Initial jobless claims rose by 2k from 214k to 216k in the week ending December 17, a two-week high. According to Bloomberg, claims were expected to rise to 222k. Continuing claims, on the other hand, or the total number of Americans claiming ongoing unemployment benefits, fell from 1.678M to 1.672M in the week ending December 17.
• (Dec 29) – Initial jobless claims rose by 9k from 216k to 225k in the week ending December 24, as expected according to Bloomberg and a three-week high. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, rose from 1.669M to 1.710M in the week ending December 10.
• Nonfarm Payrolls (Dec 2) – Nonfarm payrolls rose by 263k in November, surpassing the 200k gain expected, according to Bloomberg. October payrolls, meanwhile, were revised higher from a 261k gain to a 284k increase. However, with additional revisions to previous months, the overall change in nonfarm payrolls (November data + net revisions) was 240k. In the details, private payrolls rose by 221k in November, following a 248k gain in October. Goods-producing payrolls, meanwhile, rose 37k due to a 20k gain in construction payrolls and a 14k rise in manufacturing payrolls. Private service producing payrolls rose by 184k in November, following a 201k gain in October. Leisure and hospitality led the gain in service payrolls in November, rising 88k following a 60k rise the month prior. Education and health payrolls rose 82k, information payrolls gained 19k, and financial payrolls rose 14k. Also, business services payrolls gained 6k, despite a 17k drop in temporary help payrolls. On the other hand, trade and transport payrolls dropped 49k, due to a 30k decline in retail trade payrolls, the third consecutive month of decline. Additionally, government payrolls rose by 42k in November, following a 36k increase in October.
• Participation Rate (Dec 2) – The civilian labor force declined by 186k following a 22k decline in October. As a result, the labor force participation rate unexpectedly fell from 62.2% to 62.1% in November, a four-month low. According to Bloomberg, the participation rate was expected to rise to 62.3%.
• Unemployment Rate (Dec 2) – Household employment fell by 138k in November following a 328k drop the month prior. With a 186k decline in the labor force, the unemployment rate remained steady at 3.7% in November for the second consecutive month, as expected according to Bloomberg.
• Average Hourly Earnings (Dec 2) – Average hourly earnings jumped 0.6% in November, double the rise expected and following a 0.5% increase in October. Year-over-year, wages rose 5.1% in November, up from the 4.9% gain in October.
• Average Weekly Hours (Dec 2) – The average workweek ticked down from 34.5 hours to 34.4 hours in November, the lowest since April 2020.

Consumer Activity and Confidence

• Vehicle Sales (Dec 1) – Total vehicle sales dropped from 14.90m to 14.14m unit pace in November, more than the expected decline to 14.50m and two-month low. Over the past 12 months, vehicle sales rose 7.9%, down from a 14.4% gain the month prior.
• Consumer Credit (Dec 7) – Consumer credit rose by $27.08b in October, slightly less than the $28.0b gain expected, albeit a two-month high.
• Retail Sales (Dec 15) – Retail sales dropped 0.6% in November, more than the 0.2% decline expected, according to Bloomberg, and the largest monthly decline since December of last year. Year-over-year, retail sales rose 6.5% in November, down from the 8.3% gain in October. Car sales fell 2.3% in November following a 1.6% gain the month prior, while gasoline stations sales declined 0.1% following a 4.8% rise the month prior. Excluding autos, retail sales fell 0.2% in November, but climbed 7.7% over the past 12 months. Excluding autos and gasoline, retail sales declined 0.2% but increased 6.7% year-over-year. In the details, eating and drinking sales climbed 0.9% in November, following a 1.6% increase in October, food and beverage sales rose 0.8%, health and personal care sales rose 0.7%, and miscellaneous sales increased 0.5% in November. On the weaker side, clothing sales declined 0.2%, sporting goods sales fell 0.6%, and non-store retailer sales dropped 0.9% in November. Also, building materials sales fell 2.5%, and furniture sales slipped 2.6% in November. Additionally, general merchandise sales decreased 0.1% in November, due to a 2.9% drop in department store sales, the second consecutive month of decline.
• University of Michigan Consumer Sentiment (Dec 9) – The University of Michigan Consumer Sentiment Index rose from 56.8 to 59.1 in the December report, surpassing the expected rise to 57.0, according to the median estimate on Bloomberg and a two-month high. In the details of the report, a gauge of current conditions rose from 58.8 to 60.2, and a gauge of future expectations increased from 55.6 to 58.4 in the December print, an eight-month high.
• Consumer Spending and Income (Dec 1) – Consumer spending rose 0.8% in October, as expected and following a 0.6% rise in September. Personal income, meanwhile, rose 0.7% in October, surpassing the 0.4% gain expected and following a 0.4% rise in September. Year-over-year, consumer spending increased 7.9% and personal income rose 4.9%. Adjusting for inflation, real consumer spending rose 0.5%, the largest monthly gain since January, while real income increased 0.4% in October, up from a flat reading in September. Over the past 12 months, real spending rose 1.8%, the weakest annual gain since February 2021, while real income fell 1.0%, the tenth consecutive month of decline.
• (Dec 23) – Consumer spending rose 0.1% in November, a tenth of a percentage point less than expected and following a 0.9% rise in October. Personal income, meanwhile, rose 0.4% in November, surpassing the 0.3% gain expected and following a 0.7% rise in October. Year-over-year, consumer spending increased 7.7% and personal income rose 4.7%. Adjusting for inflation, real consumer spending was flat (0.0%) in November, while real income increased 0.3% in November following a similar gain in October. Over the past 12 months, real spending rose 2.0%, a two-month high, while real income fell 0.8%, the eleventh consecutive month of decline.
• Consumer Confidence (Dec 21) – Consumer confidence, according to the Conference Board, rose from 101.4 to a reading of 108.3 in December, the highest reading since January of this year. In the details of the report, a gauge of current conditions rose from 138.3 to 147.2, a three-month high, and a gauge of future expectations increased from 76.7 to 82.4 in December, the highest since January of this year. ?

Inflation

• PCE (Dec 1) – The PCE rose 0.3% in October, a tenth of a percentage point less than expected. Year-over-year, headline inflation increased 6.0%, down from a 6.3% rise in September albeit still near a four-decade high. Excluding food and energy, the core PCE rose 0.2% in October, also a tenth of a percentage point less than expected. Year-over-year, core inflation increased 5.0%, down from the 5.2% annual increase last month.
• (Dec 23) – The PCE rose 0.1% in November, as expected. Year-over-year, headline inflation increased 5.5% following a 6.1% rise in October, and further below the 7.0% peak reached in June. Excluding food and energy, the core PCE rose 0.2% in November, also as expected. Year-over-year, core inflation increased 4.7%, down from the 5.0% annual increase last month.
• PPI (Dec 9) – The PPI rose 0.3% in November, more than the 0.2% rise expected and following a 0.3% gain in October. Year-over-year, producer prices rose 7.4% in November, surpassing the 7.2% gain expected, albeit down from the 8.1% increase in October. Food prices rose 3.3% following a 0.8% gain the month prior, while energy prices declined 3.3% in November, the largest monthly drop since August. Excluding food and energy costs, the core PPI rose 0.4%, double the 0.2% rise expected and following a 0.1% increase in October. Year-over-year, the core PPI increased 6.2% in November, down from the 6.8% gain in October. Additionally, services costs rose 0.4%, due to a 0.7% rise in trade costs. Transportation and warehousing costs, however, declined 0.9% in November.
• CPI (Dec 13) – The CPI rose 0.1% in November, less than the 0.3% gain expected and following a 0.4% increase in October. Year-over-year, consumer prices rose 7.1%, down from the 7.7% pace reported the month prior and the fifth consecutive month of cooling price pressures, albeit still near a four-decade high. Food prices rose 0.5%, while energy prices dropped 1.6% in November, following a 1.8% rise in October. Excluding food and energy costs, the core CPI rose 0.2%, less than the 0.3% gain expected and following a 0.3% increase in October. Year-over-year, the core CPI increased 6.0%, down from the 6.3% gain the month prior. In the details, housing prices increased 0.4%, thanks to a 0.7% rise in the OER, other goods and services costs also gained 0.7%, and recreation prices rose 0.5% in November. Also, education and communication prices increased 0.7%, and apparel prices rose 0.2%. On the other hand, commodities prices declined 0.3%, and transportation prices fell 1.1%, due to a 2.9% drop in used cars and truck prices, the fifth consecutive month of decline. Medical care prices fell 0.5%, and airline fares dropped 3.0% in November, following a 1.1% decrease in October.

Manufacturing and Production Activity

• ISM Manufacturing (Dec 1) – The ISM Manufacturing Index dropped from 50.2 to 49.0 in November, slightly more than the expected decline to 49.7, and first reading in contractionary territory (below 50) since May 2020. In the details of the report, supplier deliveries rose from 46.8 to 47.2, and exports increased 1.9 points to 48.4. On the other hand, imports declined from 50.8 to 46.6, the lowest reading since May 2020, prices paid fell 3.6 points to 43.0, and production slipped 0.8 points to 51.5 in November. Also, new orders dropped two points to 47.2, and employment fell from 50.0 to 48.4, a four-month low.
• ISM Services (Dec 5) – The ISM Services Index unexpectedly rose from 54.4 to 56.5 in November, a two-month high. According to the median estimate on Bloomberg, the index was expected to decline to 53.5 in November. In the details of the report, employment rose from 49.1 to 51.1 in November, a two-month high. On the other hand, prices paid fell from 70.7 to 70.0, supplier deliveries declined from 56.2 to 53.8, backlog of orders slipped from 52.2 to 51.8, and new orders dropped 0.5 points to 56.0 in November, a five-month low.
• Empire Manufacturing (Dec 15) – The Empire Manufacturing Index dropped from 4.5 to -11.2 in December, more than the 1.0 decline expected and a four-month low. In the details of the report, the number of employees rose from 12.2 to 14.0 in December, a five-month high, and the six-month business outlook index increased from -6.1 to +6.3, a three-month high. On the other hand, prices paid remained steady at 50.5, while delivery time declined by one point to 1.9, and new orders slipped from -3.3 to -3.6 in December, a four-month low.
• Industrial Production (Dec 15) – Industrial production declined 0.2% in November, following a 0.1% decline the month prior. According to Bloomberg, production was expected to be flat.
• Capacity Utilization (Dec 15) – Capacity utilization fell from 79.9% to 79.7% in November, slightly more than the expected decline to 79.8%.
• Philly Fed Business Outlook Survey (Dec 15) – The Philly Fed Index rose from -19.4 to -13.8 in December, less than the increase to -10.0 expected, and the fourth consecutive month of decline. In the details of the report, prices paid declined from 35.3 to 26.4, new orders dropped from a reading of -16.2 to -25.8, and employment plunged from 7.1 to -1.8 in December, the lowest reading since June 2020. Also, delivery time fell from -8.8 to -11.9, and prices received slipped from 34.6 to 26.4 in the final month of this year. The six-month outlook index, meanwhile, gained from -7.1 to +3.8 in December, the highest reading since April.
• Kansas City Fed Manufacturing (Dec 22) – The Kansas City Fed Index ticked down three points to a reading of -9 in October, the lowest reading since May 2020. In the details of the report, the volume of new orders decreased five points to -17, production declined from -10 to -13, employment dropped from a reading of 3 to a reading of 0, and prices paid dropped from 22 to 13. On the other hand, order backlogs remained at a reading of -25 in October, while shipments increased from -5 to -1 in October, a five-month high.
• Durable Goods (Dec 23) – Durable goods orders dropped 2.1% in November, more than the 1.0% decline expected and the largest monthly decline since April 2020. Year-over-year, headline orders rose 6.3% in November, down from the 10.5% annual increase the month prior. Transportation orders plunged 6.3%, following a 1.9% gain the month prior, due to a 36.4% drop in civilian aircraft orders, and a 0.1% decrease in vehicle and parts orders. Excluding transportation, durable goods orders rose 0.2% in November and increased 2.8% over the past 12 months. In other details, electrical equipment orders increased 0.2%, machinery orders climbed 0.3%, and computers and electronics orders rose 0.6%. Also, fabricated metals orders gained 0.1% in November. On the other hand, primary metals orders dropped 0.4%, the third consecutive month of decline.
• Capital Goods (Dec 23) – Capital goods orders fell 5.5% in November. Nondefense capital goods orders, meanwhile, declined 7.6%, following a 1.0% gain in October. Capital goods orders excluding aircraft and defense – a proxy for business investment – climbed 0.2% in November, following a 0.3% rise in October. Year-over-year, business investment increased 5.1%.
• Dallas Fed Index (Dec 27) – The Dallas Fed Manufacturing Activity Index declined from -14.4 to 18.8 in December, a two-month low, and the eighth consecutive month of decline. According to Bloomberg, the index was expected to rise slightly to -13.5. In the details of the report, production rose from 0.8 to 9.7, capacity utilization increased from -3.4 to +8.5, and new orders gained from -20.9 to -9.2, averaging -9.8 over the past six months. Additionally, shipments climbed from -7.5 to +1.9, and employment jumped from 5.9 to 14.0, a two-month high. Also, the six-month general business outlook index ticked up from -17.5 to -8.3 in December, the highest reading since May.
• Richmond Fed Manufacturing (Dec 28) – The Richmond Fed Index unexpectedly rose from -9 to a reading of +1 in December, an eight-month high. According to Bloomberg, the index was expected to decline to a reading of -10. In the details of the report, new order volume rose ten points to -4, and order backlogs inched up two points from -25 to -23. Additionally, shipments rose from -8 to +5, and employment climbed from -1 to +3 in December.
• Chicago PMI (Dec 30) – The Chicago PMI rose from 37.2 to 44.9 in December, a two-month high. According to Bloomberg, the index was expected to rise to 40.0 at the end of the year. In the details of the report, supplier deliveries and order backlogs rose, signaling expansion, while new orders, employment and production fell, signaling contraction.

Housing Market Activity

• Construction Spending (Dec 1) – Construction spending fell 0.3% in October, slightly more than the 0.3% decline expected, according to Bloomberg, and following a 0.1% gain in September. Over the past 12 months, construction spending rose 9.2% in October, down from the 10.2% increase in September.
• NAHB Housing Market Index (Dec 19) – The NAHB Housing Market Index unexpectedly declined two points to a reading of 31 in December, the lowest reading since April 2020. According to Bloomberg, the index was expected to rise to a reading of 34 in the final month of the year.
• Building Permits (Dec 20) – Building permits dropped 11.2% in November, pulling the annual pace down from 1.512M to 1.342M, the lowest since May 2020. Building permits were expected to decline 2.1%, according to Bloomberg. Single family permits fell 7.1%, and multi-family permits plunged 16.4%.?Year-over-year, building permits declined 22.4% in November following an 11.0% drop in October, and marking the fourth consecutive month of decline.
• Housing Starts (Dec 20) – Housing starts fell 0.5% in November, pulling the annual pace down from 1.434M to 1.427M, a four-month low. Starts were expected to fall 1.8%, according to the median forecast on Bloomberg. Single family starts fell 4.1%, while multi-family starts rose 4.9%. Year-over-year, housing starts fell 16.4% in November, the seventh consecutive month of decline.?On a regional basis, starts fell in two of the four regions of the country in November. Starts declined 18.6% in the Northeast and 6.5% in the Midwest. However, starts rose 0.1% in the South and 8.3% in the West.
• Existing Home Sales (Dec 21) – Existing home sales existing home sales dropped 7.7% in November from 4.43m to a 4.09m unit pace, the lowest since May 2020. According to the median estimate on Bloomberg, existing home sales were expected to decline 5.2% in November. In the details of the report, single-family sales fell 7.6% and multi-family sales plunged 8.3%. Year-over-year, existing home sales declined 35.4% in November, the sixteenth consecutive month of decline. Despite a decline in sales, the months’ supply of existing homes rose remained steady at 3.3 months, averaging 3.2 months over the past three months. From a price standpoint, the median cost of a previously owned home rose 3.5% in November from a year earlier to $371k, a nine-month low.
• New Home Sales (Dec 23) – New home sales unexpectedly rose 5.8% from 605k to 640k, a three-month high. New home sales were expected to drop 5.1% in November, according to the median estimate on Bloomberg. Year-over-year, sales fell 15.3%, the ninth consecutive month decline. Due to a rise in sales, the months’ supply of new homes declined from 9.3 months to 8.6 months. From a price standpoint, the median cost of a newly constructed home declined 2.8% from the month prior to $471k. Year-over-year, new home prices increased 9.5%.
• S&P/CS 20 City Index (Dec 27) – The S&P Case-Shiller 20 City Home Price Index dropped 0.52% in October, less than the 1.10% decline expected and the fourth consecutive month of decline. Over the past 12 months, the 20-city index rose 8.64%, the smallest gain in two years and down from the 10.41% increase the month prior. On a national level, home prices fell 0.26% in October, but improved 9.24% over the past 12 months, albeit the smallest gain since October 2020 and down from the 10.72% rise in September.
• Pending Home Sales (Dec 28) – Pending home sales fell 4.0% in November, more than the 1.0% decline expected. Over the past 12 months, pending home sales dropped 38.6%, marking a full year of annual declines.

Trade and Currency

• U.S. Dollar (Dec 30) – The U.S. dollar posted its best year since 2015 as the Federal Reserve embarked on a number of rate hikes in order to bring down inflation, which surged to a four-decade high. The U.S. dollar index rose 7.9% against a basket of currencies, closing the year at 103.52.
• Trade (Dec 6) – The U.S. trade deficit widened for the second consecutive month from -$74.1b to $78.2b in October, the widest since June. According to the median estimate on Bloomberg, the deficit was expected to widen to $80.0b. In the details of the report, the value of goods and services imports rose 0.6% from $332.6 to $334.8b, while exports declined 0.7% from $258.5b to $256.6b in October.?
• Import & Export Prices (Dec 14) – Import prices declined 0.6% in November, slightly more than the 0.5% decline expected. Over the past 12 months, import prices rose 2.7%, down from the 4.1% increase in October. Export prices, meanwhile, declined 0.3% in November, less than the 0.5% drop expected. Year-over-year, export prices rose 6.3%, down from the 7.4% annual gain in September.

Monetary Policy, Reports, and Commentary

• Atlanta Fed GDPNow Forecast (Dec 23) – Following a stronger-than-expected final Q3 GDP report, along with a slightly cooler-than-expected November PCE report, the Atlanta Fed’s GDPNow forecast for Q4 GDP rose from 2.7% to 3.7%.
• Fed Speak/News (Dec 5) – University of Chicago Economics Professor Austan D. Goolsbee will succeed Chicago Fed President Charles Evans who will retire in January. Before taking his position in academia, Goolsbee was chairman of the Council of Economic Advisers and a member of the Cabinet under the Obama administration. Evans has been a more vocal (moderate) dove with his most recent comments indicating support for a reduced size of hikes while acknowledging the likely need for a slightly higher peak level in rates. Speaking at an event at Loyola University of Chicago on December 2, Evans said, “We probably are going to have a slightly high peak rate of the funds rate, even as we likely will step down the pace of increases.” Goolsbee, meanwhile, is largely being characterized as a more centrist or middle of the road economist. Thus, with the loss of Evans, the scale will tilt ever so slightly hawk of center.
• (Dec 16) – New York Fed President John Williams suggested that?while inflation has improved somewhat, a tight labor market and other factors are likely to keep inflation “elevated,” warranting elevated rates for some time. Speaking on Bloomberg Television, Williams said, “We’re going to have to do what’s necessary…It could be higher than what we’ve written down.” Acknowledging the forecasts of some Fed watchers?that rates may need to go to 6% or even 7%, Williams was optimistic rates may not need to rise to that “extreme” given some favorable developments, including an easing of supply-chain dislocations and dysfunctions, and softer goods and imports prices.?

·??????December 13-14 FOMC Meeting

o??As expected, the Fed opted to raise rates?50bps after four supersized hikes of 75bps, taking the upper bound of the federal funds target rate to 4.50%. In the statement, the Fed continues to characterize growth as?“modest,”?noting inflation remains elevated and job gains remain robust. In other words, the Committee continues to describe a tight labor market even as topline activity begins to slow. Going forward, the Fed will continue to take lags and the evolution of the data into account, but the Committee broadly sees?“ongoing rate hikes as appropriate.” In the Summary of Economic Projections (SEP), the Fed materially increased its outlook for policy heading into 2023. In September, the majority of Fed officials anticipated the federal funds rate to rise to 4.6%. As of the December SEP, the median estimate was pushed higher to 5.1% with seven of the 19 Fed officials suggesting the rate could be even higher. Notably two?“outliers”?anticipate policy reaching 5.6% in 2023. On the inflation front, the Fed revised higher its expectations for price pressures from 5.4% to 5.6% in 2022 and from 2.8% to 3.1% in 2023, with prices slowly retreating back to the Fed’s 2% target in 2025. Growth, meanwhile, was revised up in 2022 with the Committee anticipating 0.5% GDP versus 0.2% forecast in September, but indicated a likely slower pace of activity in 2023, revising lower its forecast from 1.2% to 0.5%. The vote was unanimous. While the latest policy move appears more dovish in nature, ratcheting down the size of rate hikes, the statement and the dot plot tell a decisively more hawkish storyline for policy going forward.??

Domestic News and Activity?

• Politics and the Biden Administration
• (Dec 21) – Ukrainian President Volodymyr Zelenskyy visited the White House and addressed Congress, urging Washington officials to provide the needed?funds and weapons to keep Russian forces at bay. Independent of the commentary, President Biden unveiled almost $2 billion in Ukrainian aid on top of the already $66 billion (as reported by Reuters) in funds sent overseas since February when Russia first crossed into the neighboring territory.?
• (Dec 23) – Travel was complicated and interrupted for millions ahead of the Christmas holiday. According to reports, more than 12,000 flights around the U.S. were canceled or delayed as a winter advisory swept across Texas, the Midwest and Eastern part of the U.S.

International News and Activity?

·??????Canada

o??(Dec 7) – On the heels of already 350bps in policy firming, the Bank of Canada (BOC) opted to raise rates for a seventh time in ten months by 50bps, taking the overnight lending rate to 4.25%.?The BOC was among the first central banks to raise rates in the aftermath of the pandemic, raising the overnight lending rate 25bps on March 3, 13 days ahead of the Fed’s first rate hike on March 16.

• European Union
• (Dec 7) – European Central Bank (ECB) chief economist Philip Lane reiterated the need for further rate hikes as inflation remains elevated. Speaking in an interview with the?Milano Finaza?newspaper, Lane said while he expects European inflation is peaking, he expects “that more rate increases will be necessary.” He added, however, that a lot has been done already with policy makers driving higher the main refinancing rate by already 200bps to 2.00% as of October.
• (Dec 15) – The European Central Bank raised rates 50bps, bringing the deposit rate to 2.0% and marking the fourth increase since the start of the year. The ECB also announced a reduction in its 5T euro stock of bonds. According to the statement, "From the beginning of March 2023 onwards, the asset purchase programme (APP) portfolio will decline at a measured and predictable pace…The decline will amount to 15 billion euros per month on average until the end of the second quarter of 2023." According to ECB President Christine Lagarde, more work needs to be done to quell inflation. Speaking at the news conference, Lagarde said, “Anybody who thinks that this is a pivot for the ECB is wrong…We should expect to raise interest rates at a 50 basis-point pace for a period of time.”
• The U.K.

o??(Dec 15) – The Bank of England (BOE) raised its policy rate 50bps to 3.50%, marking the ninth increase since December 2021. According to the statement, policy officials are increasingly concerned about forcing the economy into recession while at the same time remain focused on tackling inflation.?

·??????Japan

o??(Dec 20) – In a somewhat unexpected policy move, the Bank of Japan (BOJ) announced it will allow 10-year yields to rise as much as 50bps off its 0% target, up from the previous 25bps cap. The market had widely expected the BOJ to hold policy steady, although even with the latest policy adjustment, BOJ Governor Haruhiko Kuroda emphasized this was not a rate hike. Other policies, including its benchmark interest rate, were left unaltered. The BOJ also announced it will increase bond purchases from 7.3 trillion yen to 9 trillion yen ($67.5 billion) per month. According to Kuroda, despite doubling the cap on the 10-year yield, “Today's step is aimed at improving market functions, thereby helping enhance the effect of our monetary easing. It's therefore not an interest rate hike.”

-Lindsey Piegza, Ph.D., Chief Economist