Aurelia Butler

The head of the European Central Bank has warned that recent upheaval in the global economy threatens to result in long-lasting changes, keeping inflationary pressures higher than normal and complicating the role of monetary policymakers.Speaking at the US Federal Reserve’s annual conference in Jackson Hole, Wyoming, on Friday, Christine Lagarde said central bankers had to be “extremely attentive that greater volatility in relative prices does not creep into medium-term inflation through wages repeatedly ‘chasing’ prices”.“If global supply does become less elastic, including in the labour market, and global competition is reduced, we should expect prices to take on a greater role in adjustment,” Lagarde said. “If we also face shocks that are larger and more common — like energy and geopolitical shocks — we could see firms passing on cost increases more consistently.”Her comments come after earlier remarks by Jay Powell, the chair of the US central bank, who warned the Fed had not yet vanquished inflation and may need to implement more rate rises, albeit while treading “carefully”. Central bankers, particularly in advanced economies, are at critical junctures in their respective battles against inflation. Consumer price growth has moderated from its recent peaks in the aftermath of the pandemic, but still remains well above the longstanding 2 per cent level that many target. Coupled with concerns about an impending economic slowdown and tighter financial conditions, views have become more fractured about how to calibrate monetary policy to ensure inflation comes down without causing unnecessary pain for businesses and consumers.The ECB has left the door open to a pause in policy tightening at its next meeting on September 14 after raising its benchmark deposit rate nine consecutive times from minus 0.5 per cent to 3.75 per cent.Recent business surveys indicate the eurozone is heading for a fresh downturn, prompting investors to hedge their bets on the ECB raising rates again next month. But much of this hinges on inflation and whether it continues to fall, particularly after excluding volatile energy and food prices.Lagarde, however, gave little indication of which way she was leaning, only repeating the need to set rates at “sufficiently restrictive levels for as long as necessary” to bring inflation back to target in a timely manner.The German economy has shrunk or stagnated for three consecutive quarters due to a downturn in its vast manufacturing sector while disruption to global trade has hit its traditional strength in exports. This weakness in Europe’s largest economy has raised doubts about the ECB’s ability to keep raising rates. But Lagarde said in a question-and-answer session following her remarks that the German economy was “not broken,” and that “they are fixing it”, citing how the country built liquefied natural gas facilities to replace Russian gas in only six months.She said rate-setters needed clarity, flexibility and humility to cope with uncertainty caused by the multiple shocks to the global economy, including the coronavirus pandemic and Russia’s full-scale invasion of Ukraine.Eurozone inflation has halved from last year’s peak of 10.6 per cent, and economists polled by Reuters forecast it to slow from 5.3 per cent in July to 5 per cent in August when new price data is released next week.

However, a rebound in European tourism this summer could keep services inflation high. This would complicate matters for the ECB, which has said underlying inflation — of which services are a big driver — needs to fall sustainably before it stops raising rates.Asked about slower progress across Europe compared to the US in terms of getting inflation down, Lagarde noted that the ECB’s rate increases last year began later than the Fed’s. She also noted that Europe’s dependence on Russian oil and proximity to the war in Ukraine had created unique challenges for the central bank with regards to taming price pressures.Lagarde added that she was “pretty confident” that by the end of the year the inflation numbers would “look significantly different from what we have at the moment”. More

NEW YORK (Reuters) -Federal Reserve Chair Jerome Powell on Friday did little to dissuade markets from the “higher for longer” mantra for rates that has driven up Treasury yields in recent weeks, leaving some investors looking for more cautious bets in case the economy is unable to escape a downturn next year.Speaking at the Kansas City Fed’s annual gathering in Jackson Hole, Wyoming, Powell left open the possibility of further rate increases and stressed the U.S. economy’s surprising strength, though he acknowledged declines in the pace of inflation over the past year.While more balanced than the Fed chair’s ultra-hawkish address at last year’s symposium at Jackson Hole, the speech nevertheless offered little solace to those hoping the central bank would nod towards eventual rate cuts in 2024.For some investors, the view also reinforced worries over the risk that higher yields will eventually weigh on the economy’s robust growth and bring on a potential downturn, though most believe the U.S. is likely to avoid recession in 2023. “The recession risk is out there for 2024, and as such we want to … make sure we’re in corporate debt that is well situated to sustain a downturn,” said Cindy Beaulieu, managing director and portfolio manager at Conning, which manages $205 billion. “Those types of trades are important right now as opposed to trying to take additional credit risk,” she said. Financial markets on Friday saw little of the volatility that accompanied last year’s Jackson Hole confab, when stocks sank more than 3.4%. Yields on the benchmark 10-year Treasury, which move inversely to bond prices, were basically unchanged on the day at 4.233%, though they remained near 16-year highs hit earlier this month. Two-year yields – which are more closely linked to monetary policy expectations – added about four basis points.Stocks – which have wobbled in August as rising bond yields threatened to dull the allure of equities – ended Friday’s session higher with the S&P 500 up 0.66%. Options markets were pricing in a move of around 0.9% in the index ahead of the meeting.The surge in bond yields over the last few months – driven by bets that the Fed will need to keep rates around current levels for longer than expected to prevent inflation from reigniting – has rippled out into the economy, pushing 30-year mortgage rates to their highest level in over 20 years while credit spreads, a measure of risk, widened slightly this month. Investors said much depended on what the next few weeks of data show. The U.S. will report labor market data for August on Sept. 1, and consumer price data on Sept. 13.“Powell appears to be buying time and waiting for more data to come in so that they can set themselves up to continue the soft landing trajectory,” said Anders Persson, chief investment officer, global fixed income, at Nuveen. REVIVING RECESSION WORRIESSome investors were worried that higher rates could weigh on growth and increase the chances of a recession next year. Such a scenario, in theory, would force the Fed to cut rates, pulling bond yields lower. “The prospect of a soft landing is lower after today,” said Mike Sewell, a portfolio manager at T. Rowe Price, who expects to add to long-term bonds over the fourth quarter as the U.S. economy begins to weaken.“We are waiting for financial conditions to crack,” he said.Fed funds futures traders were pricing for a total of nearly 100 basis points of rate cuts next year, roughly unchanged from bets prior to Powell’s speech, but the first rate cut was pushed out to June from May. To be sure, betting against the U.S. economy has been a risky endeavor this year. Many banks have reversed calls for a 2023 recession in recent months, while bets on economic resilience have helped fuel a 15% rally in the S&P 500 year to date. At the same time, many investors appear convinced that yields are going to remain elevated for the time being.Hedge funds’ bearish bets on two-year U.S. Treasuries futures rose to their highest since at least 1990 in the week ending on Aug. 22, according to Commodity Futures Trading Commission data on Friday, although they trimmed net shorts on 10-year note futures.”The market is very short,” said Josh Emanuel, chief investment officer at investment management firm Wilshire.But while risks remained that long-term bond yields could move higher, he was looking to extend the duration of his portfolio. “We are technically neutral today, but becoming increasingly bullish on long-term Treasuries.” More

Deposits at large U.S. banks fell by $48.8 billion to $17.295 trillion from a week earlier, on a seasonally adjusted basis.Commercial bank lending rose by $26.1B to a seasonally adjusted $12.127T during the week, following a $5.2B drop in the prior week, the Fed data showed.Residential real estate lending fell $14.9B, commercial real estate loans increased by $2.3B from a the week earlier, while consumer loans were up $0.5B from the prior week.  More

JACKSON HOLE, Wyoming (Reuters) -Profound changes in how the global economy operates, from increased protectionism to energy transition, could create greater inflation volatility and more persistent price pressures, European Central Bank President Christine Lagarde said on Friday.Much of the developed world has struggled with a historic surge in prices over the past two years and inflation pressures have proven far more persistent than anyone predicted at the onset. Outlining these new realities, Lagarde said the labour market is going through profound changes, energy transition creates new investment needs while a deepening geopolitical divide will lead to protectionism and supply chain constraints.”The new environment sets the stage for larger relative price shocks than we saw before the pandemic,” Lagarde told the annual economic symposium hosted by the U.S. Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming. “Whether all these various shifts will prove to be permanent is not clear at this stage. But it is already evident that, in many cases, their effects have been more persistent than we initially expected.”Higher investment needs and greater supply constraints are likely to lead to stronger price pressures and not all sectors will be able to absorb these, she warned. An added complication is that workers now enjoy greater bargaining power given tight labour markets and firms have become quicker in adjusting their prices, both adding to price pressures. While these changes could still prove temporary, central bankers need to be open to the possibility that some of them will be longer-lasting, Lagarde added.”We will have to be extremely attentive that greater volatility in relative prices does not creep into medium-term inflation through wages repeatedly “chasing” prices,” Lagarde said. “That could make inflation more persistent if expected wage increases are then incorporated into the pricing decisions of firms, giving rise to what I have called ‘tit-for-tat’ inflation.” More

“In the current environment, this means – for the ECB – setting interest rates at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to our 2% medium-term target,” Lagarde said Friday in a speech at the Jackson Hole symposium. Eurozone inflation dropped to 5.3% annual rate in July, but that was still well ahead of the central bank’s 2% target.The ECB president also stressed the need for central banks to adopt “flexibility” on monetary policy, acknowledging that policy decisions can’t “exclusively rely on models that are estimated with old data,” or focus too much on current data as this is “likely to make monetary policy a reactive force rather than a stabilising one.”Lagarde outlined that ECB’s reaction function was based on three criteria: the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.While this “multi-legged” approach would be needed to calibrate policy effectively, Lagarde says, there is also a need to enhance the process by updating forecasting technologies with “variables that act as the best leading indicators.”The ECB previously raised its key interest rate by 25 basis points to 4.25% in July, taking rates to their highest level since 2000.Some on Wall Street, however, have been betting that the central bank could pause rate hikes in September, and deliver a final hike in October.The comments from Lagarde come just as data Friday showed ongoing signs of stuttering economic growth in the euro area.  Germany, the growth engine in the euro area, released a downbeat German IFO survey Friday, showing sentiment among businesses deteriorated further, stoking fears of another recession in europe’s largest economy.   More

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His speech at the annual economic symposium hosted by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming, covered an expansive range of topics that are key to the outlook for Fed policy. Here are some highlights from his text:ECONOMIC GROWTH”(W)e are attentive to signs that the economy may not be cooling as expected. So far this year, GDP (gross domestic product) growth has come in above expectations and above its longer-run trend, and recent readings on consumer spending have been especially robust. In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up. Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.”U.S. GDP grew at a stronger-than-expected 2.4% annualized rate in the second quarter, and data received so far in the third quarter suggests that pace may have accelerated. The Atlanta Fed’s GDP Now tool is currently tracking growth in the July-through-September period at 5.9%. That is expected to come down as more data comes in but other forecasts, such as the Blue Chip consensus, have also been trending up since the quarter began. The lack of signs of material slowdown has Powell and other Fed officials on alert to take more action if needed. LABOR MARKET”The rebalancing of the labor market has continued over the past year but remains incomplete … We expect this labor market rebalancing to continue. Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response.”Powell has repeatedly said that returning inflation to the Fed’s 2% target would likely require some softening in the job market. While he acknowledged a number of signs that labor market tightness is easing, his remarks suggest policymakers are on alert for indications that progress could stall out or reverse, which could augur for either more rate hikes or an even more extended period of higher rates.NEUTRAL RATE”(R)eal interest rates are now positive and well above mainstream estimates of the neutral policy rate. We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring, and inflation. But we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint.”A key reference point for policymakers is the neutral rate, or the interest rate that neither stimulates nor hinders the economy. Calibrating their policy rate against the estimated neutral rate – which Fed officials as of June estimated at 2.5% – gives officials an idea of just how much pressure they are exerting on the economy.INFLATION”Although inflation has moved down from its peak – a welcome development – it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.””(N)onhousing services accounts for over half of the core PCE index and includes a broad range of services, such as health care, food services, transportation, and accommodations … Given the size of this sector, some further progress here will be essential to restoring price stability. Over time, restrictive monetary policy will help bring aggregate supply and demand back into better balance, reducing inflationary pressures in this key sector.”Powell has placed a heavy emphasis on the inflation rate within the nonhousing services sector for some time, which he noted has only recently shown signs of easing after moving sideways through most of the Fed’s tightening efforts so far. His comment that “further progress here will be essential” emphasizes his dissatisfaction with that limited progress. INFLATION TARGET “Two percent is and will remain our inflation target. We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to that level over time.”Powell’s statement puts to rest for now any speculation that the Fed will change its inflation target, as some have suggested might be appropriate if growth tends to remain above trend for an extended period. More