Aurelia Butler

Jay Powell warned last week that the Federal Reserve’s path to getting US inflation down this year was “probably going to be bumpy”.But the Fed chair’s prediction of uneven progress became more tangible this week after the release of new batches of data showing the US economy is not cooling off as rapidly as hoped.The result is that Powell and the rest of the Fed are grappling with a potential new inflection point in the economic outlook that could complicate their task and again wreck their policy plans and expectations.On the one hand, Fed officials are more confident they will avoid a rapid slowdown or even a recession in the short term, which means a “soft” landing is still in sight. More unsettlingly, however, the central bank’s battle against high inflation appears far from over.Having already raised interest rates from near zero to between 4.5 and 4.75 per cent over the past year, it looks increasingly likely the Fed will need to apply even more tightening than expected to cool the US economy.“[The recent figures] just embolden the Fed to do more,” said Kathy Bostjancic, chief economist at the insurer Nationwide. “I think question the markets are wrestling with is: how much more? Will they stop at 5.5 per cent? Will they have to go to six? And whatever terminal rate they get to, they are likely to hold it there for longer.”Economic data in recent weeks has hinted at the work still to be done. On Tuesday, figures showed an unexpectedly modest easing in the rise of consumer price index last month, to 6.4 per cent compared to a year earlier.The following day, data revealed a surprisingly large increase in monthly retail sales in January, suggesting US households were still comfortable spending generously.Both followed a surge in job growth for the month of January that blew past forecasts amid a persistently hot labour market. Price pressures are also proving stickiest in services that are notably labour-intensive, such as car repairs.While the next Federal Open Market Committee is not until late March, and additional jobs and inflation data are expected before that, economists are already anticipating that officials at the central bank will raise their forecast for the path of its main interest rate at the meeting.In their December projection, known as the “dot plot”, Fed officials forecast a so-called terminal rate of between 5 and 5.25 per cent this year, which implied just two quarter-point rate rises in 2023, but it now appears they could go higher.“Pretty soon they will start preparing those March dots and that terminal rate is going to be moving higher,” said Michael Feroli, a senior economist at JPMorgan. He added that the Fed is constantly weighing the risks of “doing too much or too little”, and that “their most recent thoughts” will be concerns about the latter.For Powell, who celebrated the fifth anniversary of his ascent to the helm of the Fed this month, renewed questions about whether the central bank is being sufficiently aggressive on inflation could be disconcerting. After price pressures started surging in late 2021, the Fed was forced to play catch-up, implementing massive 75 and 50 basis-point rate rises throughout last year.By January, the Fed seemed to be back on track: the central bank was ready to dial back the pace of its rate increases to more traditional quarter-point increments, reflecting greater confidence it had price rises under control.

Over the past week, however, Fed officials have had to revert to more hawkish messaging. “It is clear that overall demand remains well in excess of supply and inflation is running far above our 2 per cent target. When it comes to monetary policy, we must restore balance to the economy,” said John Williams, the president of the New York Fed, on Tuesday. “We will we stay the course until our job is done.”David Wessel, a senior fellow in economic studies at the Brookings Institution, said the Fed could no longer be accused of being behind the curve on price pressures, having restored its inflation-fighting credibility with its campaign of sweeping interest rate rises over the past year.Instead, he said, the central bank is now back to more conventional policymaking, where it will be making moves in quarter-point increments depending on the data.“They are back to the standard, which is feeling the stones with their feet as they cross the river,” he said. “They’ve raised rates a lot, and there are lags in monetary policy. You want to be careful that you don’t overdo it.”That caution may be particularly warranted because January data can be especially unreliable — and the jobs, inflation and retail sales figures recorded last month may yet be reversed.“January was very warm and very unsnowy compared to normal and weather effects like that do not persist,” said Ian Shepherdson of Pantheon Macroeconomics. “It does not follow that there is permanent strength.”One bright spot for Powell in the recent patch of economic strength is that market expectations, which were starting to price in a more rapid end to tightening than the central bank, have now changed course and are more in tune with the Fed’s views.“The market was in a sense behind the curve and has caught up to the Fed,” said Don Kohn, the former Fed vice-chair. More

Restructuring experts in the UK have been predicting an uptick in activity for several years — but even the worst effects of the pandemic were mostly averted by the £370bn government business support package. Until now, this funding — combined with stimulus measures after the 2008 financial crisis, which ensured a long period of low interest rates — has helped to keep corporate distress low.However, as the support is wound down, restructuring and insolvency consultancies are gearing up for their busiest year for some time.“We have constantly been thinking the wave will break but there has been a long period of low levels of defaults,” says Peter Marshall, co-head of European restructuring at investment bank Houlihan Lokey. “Last year was active but government support meant that most economies weathered that storm.”In December, though, corporate insolvencies rose sharply in England and Wales to reach 1,964 — a third higher than the same month of 2021, and 76 per cent higher than in December 2019, before the pandemic.

Behind these stark numbers, published by the Insolvency Service, are companies seeking help with restructuring, or advice on how to refinance their operations to avoid being forced into insolvency.“There is definitely a pick-up in activity,” says Sam Whittaker, managing director for the investment bank Lazard’s restructuring business. “We would expect this to continue through 2023, and into 2024 and 2025.”Marshall pinpoints rising inflation, which is pushing up costs for businesses, as the catalyst for greater company defaults. “Companies are struggling to deal with everything that is hitting them,” he says.Inflation is also affecting consumer demand, which again has a knock-on effect, particularly on sectors such as retail and construction, which are simultaneously facing high costs of raw materials, energy and labour.Restructuring experts expect this will continue as rising interest rates, spiralling energy costs and supply chain issues continue to squeeze company finances.Jo Robinson, EY-Parthenon’s turnaround and restructuring strategy leader in the UK and Ireland, sees companies taking early action to address cash flow problems due to pressures on costs. “A lot of boards and management teams haven’t been through anything like this before”, she points out, given the last recession was in 2008.

“We’re starting to see distress coming through a bit more,” agrees Issy Gross, a restructuring and insolvency partner at PwC in the UK. While this is not yet widespread, as most companies still have access to cash and debt, she is concerned about what will happen when interest rate hedges drop away and companies need to refinance at higher levels.According to Whittaker, one reason for the low level of corporate distress is that many businesses managed to refinance any outstanding debts over the past two years while interest rates were very low.This means the new rates environment is more likely to cause issues for companies in the medium term. “The cost of borrowing has gone up and will remain higher,” he observes, adding that this will mostly affect midsized companies that lack the financial firepower of their larger rivals.Mark Addley, a PwC UK partner in the deals team, says lenders are generally quite sympathetic to companies and willing to help where they trust the management and its longer term prospects.He says there is still a huge amount of deployable capital in funds that could be used to support, or buy out, struggling companies and acquire assets such as real estate.While traditional corporate debt has been harder to find — and more expensive since the Bank of England began raising rates — private equity firms still have tens of billions of pounds to spend from their funds.Companies with better prospects will be able to use consultants to help them refinance and restructure their operations, and even engage with the mergers and acquisitions teams to find new investors or buyers for their operations, if necessary.But, where restructuring existing operations is not enough, more companies will fail — which means a wave of activity for insolvency practitioners could be about to start.PwC found there were 474 winding up petitions made last November — about four times as many as November 2021, when there were only 120. In the first 11 months of 2022 there were 2,990 — over three times more than in the same period in 2021. These formal applications from creditors to shut down companies are a leading indicator of future distress and creditor sentiment, PwC says.Gross says the distress is mainly among smaller companies: “It’s difficult to say exactly what caused that. Is it lack of access to capital? Or is it actually that people were just really knackered after the last few years and just don’t want to do this anymore?”PwC has also invested in its team in the cryptocurrency sector, where Addley predicts further distress in future. The firm is working as the provisional liquidator overseeing the bankruptcy process for collapsed crypto business FTX.Others see the tech sector as a new area for activity. Many lossmaking start-ups are struggling to raise new funds as their existing investors see a sharp decline in valuations.David Fleming, a managing director in the restructuring practice at consultancy Kroll, says consumer-facing industries are becoming busiest, with several retailers already working to raise new money or look at options for the future. Some, he says, are struggling to refinance because of outstanding debts and government-backed loans. But the prospect of a recession is also looming, he says. “It could be quite scary.” More

ISLAMABAD (Reuters) – The United States is concerned about debt owed to China by Pakistan and other countries, U.S. State Department Counselor Derek Chollet said on Thursday during a visit to Islamabad as the country dealt with an economic crisis.Pakistan, historically a close ally of Washington, has become increasingly close to China, which has provided billions in loans and is Islamabad’s largest single creditor. Pakistan faces a crippling economic crisis, with decades-high inflation and critically low foreign exchange reserves depleted by continued debt repayment obligations.”We have been very clear about our concerns not just here in Pakistan, but elsewhere all around the world about Chinese debt, or debt owed to China,” Chollet told journalists at the U.S. Embassy in Islamabad after he met with Pakistani officials. China and Chinese commercial banks held about 30% of Pakistan’s total external debt of about $100 billion, according to a report by the International Monetary Fund released in September last year. Much of that debt has come under the China-Pakistan Economic Corridor, part of Beijing’s Belt and Road Initiative. Cholett said Washington was talking to Islamabad about the “perils” of a closer relationship with Beijing, but would not ask Pakistan to choose between the United States and China.Relations between Islamabad and Washington had turned frosty over the war in Afghanistan, but there has been a thaw in recent months, with an increasing number of high-level visits.Officials from China and the United States will be part of a multi-country meeting of a new sovereign debt roundtable on Friday. G7 and multilateral lending institutions have long pushed for broad efforts to deliver debt relief to heavily indebted nations to help them avoid cuts in social services that could spur social unrest.U.S. Treasury Secretary Janet Yellen and other G7 officials see China, now the world’s largest sovereign creditor, as a key stumbling block in debt-relief efforts. Chollet said the U.S. was working with Pakistan to navigate through the current crisis. More

(Reuters) – Congress overhauled disclosure rules for federal judges last April to bolster public confidence that judicial decisions haven’t been tainted by secret financial considerations.But the new law does not undermine longstanding precedent that allows judges to invest in index funds without worrying about the funds’ ownership of shares in public companies, according to a ruling on Wednesday from U.S. District Judge Yvonne Gonzalez Rogers (NYSE:ROG) of Oakland, California.In notably fiery language, Rogers denied a recusal motion by patent holder Cellspin Soft Inc, which argued that the judge had a financial stake in Alphabet (NASDAQ:GOOGL) Inc through her husband’s jobs — formerly as a partner at McKinsey & Company Inc and then as a contract partner for venture capital firm Ajax Strategies — and through her multimillion-dollar investment in two broad-based Vanguard index funds. Alphabet owns Fitbit (NYSE:FIT) Inc, one of the half-dozen defendants Cellspin accused of infringing its patents on the automated distribution of multimedia content.The judge, who granted summary judgment to the defendants last June, after more than five years of litigation, explained at length why, in her view, Cellspin’s “speculation” about her husband’s financial connections to Alphabet and its subsidiary Google LLC was utterly specious. In a nutshell: He left McKinsey before Google acquired Fitbit and is not an equity partner at Ajax, where his sole role is to advise the boards of two portfolio companies in which Google has no stake.“The accusations are frivolous and devoid of any evidentiary merit,” the judge wrote. “Plaintiff’s attack on the integrity of the judiciary … not only demonstrates a measure of desperation but is divorced from the law and the facts.”It’s always fun to read indignant judicial opinions, but in the larger context of judicial ethics, the most important part of Rogers’ opinion is her discussion of the investments that she and her husband have in two Vanguard funds whose underlying stock portfolios are calibrated to reflect stock indexes. One of the Rogerses’ investments is in a fund linked to the Standard & Poor’s 500 Index. The other is in an index fund for internationally traded stocks.The federal statute governing judicial recusals includes a safe harbor provision that says judges need not step aside if they have a financial interest in a party through a “mutual or common investment fund,” as long as the judge does not have a role in managing the fund. In several reported decisions between 2011 and 2015, judges have held that index funds – including the very Vanguard S&P 500 fund in which Rogers and her husband invested – are, in essence, mutual funds and therefore included in the safe harbor.Cellspin’s lawyers at Garteiser Honea argued, however, that by investing in the Vanguard funds, Rogers had chosen to take a financial interest in the shares of the large public companies that dominate the underlying indexes, including Fitbit owner Google and other defendants.“Owning index funds is just another way to hold/own Google and Apple (NASDAQ:AAPL) stocks,” Cellspin argued. “Investing in an index fund … provides a foreseeable investment in Google.”Cellspin said that 2022 precedent from the Federal Circuit in Centripetal Networks, Inc. v. Cisco Systems (NASDAQ:CSCO), Inc. sets a more demanding standard for judges who own stock. (In that case, the appeals court ruled that a West Virginia judge was required to recuse based on his wife’s ownership of about $5,000 in Cisco stock, even though he and his wife moved the shares into a blind trust partway through the litigation.)Cellspin’s lawyers also said that by passing a new judicial disclosure law last year, Congress signaled how seriously it expects judges to think about their financial conflicts.Fitbit’s counsel at Desmarais pointed out the potentially seismic consequences of Cellspin’s index fund theory in their brief opposing Rogers’ recusal. “Cellspin’s flawed interpretation of the law,” Fitbit said, “taken to its logical conclusion, would likely exclude Judge Gonzalez Rogers — along with many, if not most, other federal judges — from presiding in almost every case involving publicly traded corporations.”Rogers was having none of it. The new law, she said, did not change the statutory provision offering a safe harbor for mutual fund investments. Nor, she said, did the Federal Circuit’s Centripetal decision, which involved direct ownership of stock in a litigant before the judge. Rogers said the Vanguard funds in which she has invested “are prototypical examples falling into the safe harbors for mutual or common investment funds.”In an email statement Cellspin counsel Scott Fuller of Garteiser insisted that the recusal motion was “neither baseless nor illogical,” since the recusal standard requires judges to step aside even if there is an appearance of partiality, including bias from a financial conflict.Fuller added that policy concerns about a potential parade of recusals if judges were required to step aside based on index fund holdings cannot dictate the outcome of specific recusal demands. “Judges are free to make whatever investments they see fit to make (including owning specific stocks or funds) but the impact of such investments will necessarily require recusal in some cases in order to maintain and protect the public trust in the court system,” he said.I reached out to defense lawyers for Fitbit, Nike Inc (NYSE:NKE), Under Armour Inc (NYSE:UAA), Fossil Group Inc (NASDAQ:FOSL) and Garmin (NYSE:GRMN) International Inc. All opposed Rogers’ recusal. None got back to me.Read more:Justice best served by leaving intact a conflicted judge’s ruling: 5th CircuitCongress approves tougher financial disclosure rules for U.S. judgesJudge’s stock portfolio didn’t taint class rulings: tuna plaintiffs to 9th Circuit More

TOKYO (Reuters) -Japan’s government picked academic Kazuo Ueda as new central bank chief on expectations he can help keep inflation on target and sustain economic growth and wage hikes, finance minister Shunichi Suzuki said on Friday.”We fully paid attention to the potential impact on financial market in proceeding with consideration,” Suzuki told reporters.”We also took into account the importance of keeping close coordination with top officials of major central banks as well as the ability to send and receives high-quality messages to market players within and outside Japan,” Suzuki said.The cabinet judged that Ueda, who is a well-known economics academic, was the most appropriate candidate to take over incumbent Haruhiko Kuroda, due to his deep insight on monetary affairs in terms of both theory and practice, he added.The government picked BOJ executive Shinichi Uchida and former banking watchdog Ryozo Himino as the two deputy governors for their rich experience and knowledge of monetary policy and financial affairs.”I believe the nominations were made to demonstrate their comprehensive ability as one team,” Suzuki said.Suzuki also told reporters after a cabinet meeting Japan is coordinating with other countries on the agenda for when the Group of Seven financial leaders’ meeting takes place later this month. More

TOKYO (Reuters) -For Prime Minister Fumio Kishida, Japan’s next central bank chief had to symbolise a departure from the unconventional policies of his predecessor Shinzo Abe – but without angering pro-growth lawmakers of Abe’s powerful political faction.The tricky task of steering the Bank of Japan (BOJ) out of years of ultra-low interest rates without upending markets required the skill to read markets and clearly communicate policy intentions, both domestically and internationally.Kazuo Ueda, a 71-year-old university professor who has kept a low profile despite strong credentials as a monetary policy expert, ticked some important boxes.He was branded neither an explicit dove nor hawk. While he was not even on the list of dark horse candidates floated by the media, Ueda was well known in global central bank circles.Having an academic helm the BOJ is unprecedented in Japan, where the job traditionally rotates between a central banker and an official from the Ministry of Finance (MOF).But the idea found traction in Kishida’s administration, particularly as attempts to convince incumbent deputy governor Masayoshi Amamiya, considered the top contender for the job, failed.The account of how Kishida chose the new BOJ leadership is based on interviews and conversations with 15 sources, including former and incumbent central bank and government officials, ruling camp lawmakers, aides of Kishida, private-sector bankers and analysts closely watching Japanese politics and policy.Most of them spoke on condition of anonymity as they were not authorised to speak publicly, or declined to comment on record due to the sensitivity of the matter.The search for a new chief began mid-last year, when Kishida and his aides drafted a list including a range of candidates from the BOJ, MOF, private sector and academia.Other academics in the list included Columbia University professor Takatoshi Ito, a close associate of Kuroda, and University of Tokyo academic Tsutomu Watanabe, known for his research on Japan’s deflation.The BOJ lobbied hard for a career central banker to take the job after Kuroda, a former MOF executive, presided for a rare second, five-year term that ends in April.The bank’s preferred choices were incumbent deputy governor Amamiya, as well as former deputies Hiroshi Nakaso and Hirohide Yamaguchi, given their deep knowledge on monetary policy.Many finance ministry officials favoured Amamiya, who for decades has cultivated good ties with the government.But Amamiya had made clear to associates from the outset he had no intention of taking the job, on the view he would be not be able to dismantle the stimulus he helped Kuroda create, sources say.”If he becomes governor, he would have had to spend five years contradicting what he said in the past decade,” said a former MOF executive who knows Amamiya well. “That’s quite hard.”A commercial bank executive who met him late last year recalled how Amamiya, when asked, flatly denied the chance of becoming governor. “It struck me how he very strongly ruled out the possibility,” the executive said.Amamiya, in fact, talked about how the BOJ needed to be like the U.S. Federal Reserve, where academics with monetary policy expertise take the helm and guide policy with support from staff, say people who had interactions with him.Kishida’s administration also wanted someone who would signal a departure from Kuroda’s monetary experiment that was a key part of his predecessor’s “Abenomics” stimulus policies, and became deeply unpopular with the public for failing to broadly distribute wealth.But choosing a more hawkish policymaker like Nakaso or Yamaguchi would have drawn discontent from reflationist-minded lawmakers from Abe’s powerful faction within the ruling Liberal Democratic Party (LDP).That was too risky for Kishida, whose own faction is a minority and relies on support from more powerful groups within the LDP.The choice of Kuroda’s successor has been closely watched by investors and the wider public as an indication of how soon the BOJ will shift away from extremely low interest rates, a transition that could have huge ramifications for global financial markets.”The prime minister probably wants a fresh face. But he also needs to avoid giving the impression that there will be a big change to ultra-loose policy,” ruling party heavyweight Akira Amari told Reuters days before news of Ueda’s choice broke.When asked in parliament on Wednesday by an opposition lawmaker, Kishida said he could not comment on how he reached the decision, and when he finalised it. He also declined to comment on whether the administration sounded out Amamiya for the job.Kishida, however, said he had “exchanged views” with many people since last year in selecting the new BOJ leadership.The BOJ declined to comment for this story, including on questions about Amamiya’s consideration of the role. Japan’s top government spokesperson Hirokazu Matsuno declined to comment, when asked on Thursday whether the government sounded out Amamiya for the top BOJ job.Matsuno said he hoped the BOJ works closely with the government and guides monetary policy flexibly, when asked whether Ueda’s appointment could lead to a retreat from Abenomics.POLITICAL BALANCING ACTThanks in part to Amamiya’s recommendation, Ueda remained on a short list and eventually became the top choice in a process that was disclosed to only a handful of people.On Feb. 8, Kishida met party heavyweights Toshimitsu Motegi and Taro Aso for dinner at a high-end Japanese restaurant near the premier’s official Tokyo residence.While Kishida did not reveal the name of his preferred choice, the BOJ succession was among topics discussed, said two sources with knowledge of the matter.”The government needed someone who understood monetary policy both in terms of practice and theory, and can interact with an inner circle of top central bankers,” one of the people said. “That turned out to be Mr. Ueda.”The fact Ueda, who holds a PhD from the Massachusetts Institute of Technology and studied under prominent central banker Stanley Fischer, kept a low political profile and avoided being branded as someone in favour or against Abenomics, served him well.While he warned of the rising cost of the BOJ’s yield control policy, Ueda has called for the need to keep monetary policy loose to ensure Japan stably achieves the bank’s 2% inflation target.The view meshed with that of Kishida’s administration, which wants the BOJ to address the side-effects of yield curve control but not rush into tightening monetary policy.”Amamiya was labelled as close to Abenomics. By contrast, Ueda has a fresh image and gives the BOJ a freer hand in shifting away from Abenomics,” said a ruling party heavyweight belonging to Abe’s faction.Political commentator Atsuo Ito sees Kishida’s decision as symbolic of the way his administration gives due consideration to what lawmakers of Abe’s pro-growth faction think.”For Kishida, this choice was about getting the political balance right,” he said.NEW POWER DYNAMICSKishida’s choice was welcomed by many BOJ policymakers, as Ueda was no stranger to the institution and a quiet cheer-leader of its pre-Kuroda conventional policies.During his seven-year stint as a BOJ board member, Ueda worked closely with Amamiya inventing new tools to combat a banking crisis and debilitating deflation.Even after retiring as board member, Ueda kept close ties with the BOJ by serving as an adviser at its think tank and attending various international central bank forums.”He’s something of a legend in Japanese central banking,” said a BOJ official of Ueda. “He stood out as someone special among the many members who served at its board.”Knowing they would have little influence on Kishida’s final pick, BOJ officials had a backup plan in case the new governor was someone from outside the institution.That was to re-appoint BOJ executive director Shinichi Uchida for a rare, second four-year term in April last year to ensure he would slide into the deputy governor post.That would provide the new leadership with the kind of knowledge of the BOJ’s inner bureaucracy for which Amamiya was known.Together with Ryozo Himino, the other nominated deputy and a former banking regulator, the three should have the right combination of theoretical, industry and technocratic expertise to unwind Kuroda-era policy, say sources familiar with the BOJ’s thinking.However, none of the three are seen as having the political savviness of Amamiya, who could read the political mood and work behind the scenes to sound out the administration’s policy views.That could work as a disadvantage if the economy takes a turn for the worse and the BOJ again comes under political heat.Already, Japan faces headwinds from slowing global growth, casting doubt on whether wages will rise enough to keep inflation sustainably around the BOJ’s 2% target and justify phasing out stimulus.”If the BOJ actually moves toward normalising monetary policy, there will surely be some political tension because the reflationist-minded lawmakers will push back,” said Atsuo Ito.”A policy reversal will probably take quite a long time.” More