Aurelia Butler

WASHINGTON (Reuters) – The Federal Reserve should not raise interest rates further or it would risk “needlessly” sapping the strength of the U.S. economy, Atlanta Federal Reserve President Raphael Bostic said on Wednesday in written remarks and a subsequent interview arguing officials need to wait longer for the impact of previous rate increases to be felt on the economy before moving higher.”My baseline is that we should stay at this level for the rest of the year,” and not cut rates until the latter half of 2024, Bostic said in an interview on Yahoo Finance.In a published essay earlier in the day he said “if we simply press on with additional rate hikes, we could needlessly drain too much momentum from the economy.” “I think we are in a place where we should let the hard work the (Federal Open Market) Committee has already done work its way through the economy and see if it continues to bring inflation closer to our goal,” Bostic said.”Letting restrictive policy work for a while is prudent because the policy has been truly restrictive for less than a year, and it takes time for monetary policy changes to meaningfully influence economic activity. We have good reasons to expect our policy tightening will be increasingly effective in coming months.”Bostic’s remarks highlight the emerging debate at the Fed over when and if to raise rates further after deciding last week to leave the overnight federal funds rate unchanged for the first time since March of 2022. Over 10 consecutive meetings the policy rate was increased a full five percentage points, to a range between 5% and 5.25%, before Fed officials decided to skip the June session and take stock of what was happening in the economy.With inflation still more than double the Fed’s 2% target and declining only slowly, policymakers at that meeting said they expected another half point of rate increases this year, with investors betting rate hikes will resume at the central bank’s July 25-26 policy meeting.Bostic is the first official to say explicitly that may be too soon.He noted that the number of goods subject to high inflation seemed to be shrinking, and that it had only been a few months since policy had become truly restrictive – too soon to gauge what Fed tightening to date means for the economy.”Policy has been restrictive for only eight to nine months. Therefore, the real economic effects of tighter monetary policy are only just beginning to take hold,” Bostic said. “What we don’t know is exactly how responsive our brakes are, how quickly policy will bite more deeply and in turn how quickly inflation will fall.” The risk of waiting is that inflation may resurge, but “that is not my baseline.” More

The head of Germany’s central bank has warned inflation is a “very greedy beast” and it would be a “first-order error” to stop raising interest rates even if it keeps falling in the coming months.Joachim Nagel, president of the Bundesbank, on Wednesday said some central banks in the past had given up too early in the fight against inflation and it was his “intention that we should really prevent this” from happening in the eurozone.Nagel’s comments underline how many central bankers are determined to keep raising borrowing costs until they are convinced they have squeezed economic activity enough to bring inflation back down to their 2 per cent target.He was backed up by fellow European Central Bank governing council member Isabel Schnabel, who warned the eurozone’s “incredibly strong” labour market ran the risk of a “wage-price spiral” similar to the one that caused surging inflation after the oil shocks of the 1970s. “We have to monitor this very carefully,” she said.The latest scare for monetary policymakers was Wednesday’s UK inflation data showing the headline rate had not fallen as widely expected, but was stuck at 8.7 per cent in May and the core rate — excluding energy and food — continued to accelerate above 7 per cent.The US Federal Reserve skipped a rate rise for the first time in more than 10 meetings last week, but its chair Jay Powell signalled on Wednesday that more policy tightening was likely as he said the battle against inflation was not over. Eurozone inflation has fallen from a peak of 10.6 per cent in October to 6.1 per cent in May and it is likely to continue falling “in the next weeks and months”, Nagel told an event in Berlin organised by Germany’s council of economic experts.“In that situation it would be a first-order error to give up too early, despite the fact that we see some . . . effects that we do not like,” he added.The ECB last week raised its deposit rate by a quarter point to 3.5 per cent — its highest level for 22 years. It also increased its forecasts for inflation over the next three years and predicted price growth would still be above its target in 2025.“It was pretty easy to do monetary policy up until now,” Nagel said. “Now the art of monetary policy has started. Now it gets a little bit more complicated.”

Investors have responded to last week’s hawkish signals from the ECB by pricing in a stronger chance that it will raise rates by a further quarter point both in July and September.Schnabel told the same event that vacancies in the eurozone had risen to a “historical high” in proportion to the number of unemployed people and “this raises the bargaining power of the workers and of course the wages are increasing faster than we thought”.“If, as we have seen in the first quarter, productivity growth remains negative or at least does not recover as we have seen in the projections, then I think there is a risk that this could turn into such a wage-price spiral,” she said. The ECB assumes companies will absorb higher wages by lowering their profit margins, “but of course that is uncertain”, she added.Labour costs in the eurozone rose at an annual rate of 5 per cent in the first quarter, more than double the historical average. Job vacancies in the bloc accounted for 3 per cent of all jobs in the period, while the unemployment rate fell to a record low of 6.5 per cent in April. More

(Reuters) – Two Federal Reserve officials and a labor economist who aspires to join their ranks told U.S. senators on Wednesday that they will set policy based on data and the central bank’s official mandates, pushing back against some Republicans who suggested they might put personal politics first. When setting policy at the central bank, “I think about the dual mandate first, and I think about the two legs of that dual mandate, and those are maximum employment and stable prices,” Fed Governor Lisa Cook said in the hearing of the Senate Banking Committee that was vetting her for a new term at the Fed. Since joining the Fed last year, Cook said she’s worked with her colleagues to combat high inflation and if she is confirmed for more time at the Fed, Cook said that’s how she will continue to work. Cook attended the hearing with Philip Jefferson, a Fed governor nominated to become vice chair, and Adriana Kugler, the U.S. executive director to the World Bank who has been nominated to fill a governor slot. She was responding to a question from J.D. Vance, a Republican senator for Ohio, who pressed her over her past views about diversity problems and their potential ability to exacerbate economic and financial troubles.Over the last few years, the Fed has faced considerable pressure to diversify the ranks of its leadership from largely white males who have dominated the institution since its founding. The Fed has itself embraced this shift, believing that leaders from different backgrounds promote more effective policy-making. Kugler is prospectively the first-ever Latina to serve on the Fed in its just over a century long history. Cook and Jefferson are black. At the hearing’s start, Tim Scott, a South Carolina Republican and ranking member of the Senate Banking Committee, said two of the three nominees “seem more interested in having government serve their personal ideologies and their political priorities.” He flagged interest into environmental problems and racial inequality as a concern and added he wants Fed nominees “who want to serve the country and not have their positions be leveraged for their ability to weave into our overall philosophy their ideologies.” Kugler also defended the primacy of the Fed’s mandate, and did so in personal terms. “I spent my childhood in Colombia, where in the late 1970s and early 80s inflation was very high, hovering about 25%. This is something that you saw and felt in everyday life,” and it reinforced the importance of keeping price pressures low, she said. The three nominees did not offer any guidance about what they think the Fed should do with monetary policy beyond affirming the importance of bringing inflation back to the 2% target. The Fed has been raising rates aggressively to cool price pressures but skipped a hike at its most recent meeting to take stock of the cumulative impact of its past tightenings. In their testimony, the nominees said they agreed that bank regulations should be tailored to the risk levels and complexity of a given financial firm. They also affirmed the importance of a banking system that has both small and large banks and said financial sector concentration is not desirable and that the Fed should carefully weigh bank merger applications. More

Today’s top storiesFed chair Jay Powell told the US Congress that the June pause in rising interest rates was “prudent” but that the battle against inflation was not yet over.China responded angrily after US president Joe Biden called its leader Xi Jinping a “dictator”, just a day after secretary of state Antony Blinken visited Beijing to restore the two countries’ frayed relationship. The head of the European Investment Bank urged EU governments to get involved in rebuilding Ukraine now, even as hostilities continue. Ukraine’s president Volodymyr Zelenskyy appealed to his allies to start funding “real projects” for the reconstruction at a special summit in London. The FT editorial board said the private sector needed confidence that the postwar country would be investable.For up-to-the-minute news updates, visit our live blogGood evening.A double whammy of bad news on inflation and the public finances has put the dampeners on Tory hopes for pre-election tax cuts and intensified fears of a mortgage “time bomb” facing many UK households.Inflation remained at a higher than expected 8.7 per cent in May, according to new data this morning, the fourth month in a row that prices have topped forecasts, but the “core” measure, excluding volatile items such as food and energy prices, rose again from 6.8 per cent to 7.1 per cent.UK inflation remains much higher than the EU’s 7.1 per cent and the 2.7 per cent in the US. Paul Dales of Capital Economics said the acceleration in the core figure left the UK “looking increasingly like the global outlier and the stagflation nation”. 

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The data heaps pressure on the Bank of England to continue with its interest-rate rising programme tomorrow. Traders expect a rise of at least 0.25 percentage points to 4.75 per cent and predict rates will peak at 6 per cent early next year.Two-year gilt yields hit 5.1 per cent after the data was released, the highest level since the financial crisis of 2008, before easing slightly. (You can read our explainer here if you want more detail on how the bond market is driving up mortgage rates.) Mass home repossessions are unlikely because of higher levels of housing equity and regulatory pressure on lenders, but pressures on households are intense. First-time buyers are struggling to access mortgages at all as rising interest rates have meant a cut in the number of products for borrowers with small deposits by more than 40 per cent over the past year. Renters too are under strain, with new data today showing annual prices rising at the fastest rate for seven years.Separate figures this morning showed UK government debt overtaking GDP for the first time in 62 years as borrowing doubled due to the cost of social security benefits and energy support schemes. The higher than expected net total of £20bn was the second-highest for May since monthly records began in 1993.High inflation and rising mortgage costs have also moved centre stage politically. Opposition leader Sir Keir Starmer said homeowners with loans had been hit by a “Tory mortgage penalty” of £2,900 a year in extra costs. Today’s data also removes much of the headroom for chancellor Jeremy Hunt to deliver big tax cuts and makes prime minister Rishi Sunak’s pledge to halve inflation to about 5.5 per cent by the end of 2023 that much more difficult.The FT editorial board concurs with Hunt that the best way of supporting mortgage holders is for the BoE to get inflation back down. It has a chance to show it is getting a grip at its meeting tomorrow, the FT says, but concludes: “Unfortunately for homeowners, things will have to get worse before they get better.” Compare countries’ performance in detail with our global inflation tracker.Need to know: UK and Europe economyFormer UK chancellor George Osborne rejected accusations that his austerity policies meant health and social care were in a weakened state as the Covid pandemic hit.Brussels urged EU members to toughen measures against China such as screening outbound investments after some had questioned the need for tighter rules.EU states are resisting a request from Brussels for a €66bn budget top-up to cater for rising interest rates, migration-related costs and commitments to Ukraine. Brussels also said there would be no new money available for nature reforms to restore biodiversity. Need to know: Global economyIndia’s president Narendra Modi arrived in the US for a state visit in an attempt to deepen US-India relations, bolstered by rising defence and technology co-operation and the shared goal of countering China.China cut benchmark lending rates for the first time in almost a year in an effort to spur growth. Economist Tao Wang says Beijing needs to introduce structural changes redefining the roles of the state, as well as a stimulus package.Qatar struck a second huge gas supply deal with China in the latest example of Beijing rushing to secure long-term energy agreements.Mafalda Duarte, the new head of the Green Climate Fund, warned the west against inaction on clean energy for the developing world. Chief economics commentator Martin Wolf says these developing economies won’t be able to make the green transition without help for financing.A new Big Read examines whether Iran’s nuclear weapons ambitions can be halted after five years of dangerous brinkmanship with the US. Need to know: businessVolkswagen, BMW and Mercedes were accused of using forced labour in their Chinese supply chains in one of the first official complaints under a new German law.There was more corporate ignominy in the UK, where big retailers such as Marks and Spencer, WHSmith and Argos were named and shamed for failing to pay the minimum wage. A growing list of US companies are either paying more or abandoning borrowing plans because of the slowdown in the $1.4tn market for junk-rated loans.Pasta producers in Europe including Barilla and Panzani are in hot water for continuing mark-ups even as wheat prices decline. Columnist Helen Thomas discusses the lack of scrutiny in the murky world of food trading. The new head of Brazilian state-owned Petrobras said it would be a “fatal error” not to replenish its oil reserves, as it tries to overcome opposition to plans for drilling off the mouth of the Amazon river. TikTok is expanding online retail, with its Chinese parent company ByteDance selling products through the app in an attempt to challenge etailers such as Shein and Amazon. Anti ESG funds, designed as alternatives to investing with an eye to environmental, social and governance issues, are losing sales, raising concerns about their long-term viability. Investor interest in air taxis has waned a little. A big problem is that there’s nowhere to land, the Lex column says. Here’s all you need to know about this (potentially) revolutionary new mode of transport.The World of WorkPolitical leaders are happy to talk up the prospect of green jobs but need to match that with solid ideas for market incentives and training and reskilling workers, writes columnist Sarah O’Connor.Does HR have an image problem? Listen to the Working It podcast.Some good newsOn July 1, New York state’s Right to Repair law will come into effect, requiring manufacturers to make it easier to repair items such as smartphones. The move is likely to have an impact around the world and follows last week’s approval in the European parliament for rules making smartphones feature user-replaceable batteries. More