Aurelia Butler

US Treasury secretary Janet Yellen has stepped up pressure on the leadership of the World Bank by urging it to “quickly” put in place reforms to free up more money to address climate change among other global challenges.The US is the largest shareholder in the international finance institution that provides funding for developing countries and has pushed for an overhaul along with several other major shareholders including Germany.Speaking in Washington on Thursday, less than a fortnight after a trip to three African countries, Yellen focused on her concerns about the bank. It should “expand its vision to include addressing global challenges” and help lower costs for countries needing funds to do so, as well as to engage in “stronger” mobilisation of private finance, she said.Yellen also noted that including global issues such as climate change or pandemic preparedness should not mean shifting the bank away from its existing goal of reducing poverty. “The world has changed, and we need these vital institutions to change along with it,” she said. “In today’s world, sustained progress on poverty alleviation and economic development is simply not possible without addressing the global challenges that face us all.”The World Bank’s leadership has come under fire for lagging behind in its efforts to help tackle climate change. It was exacerbated when the Donald Trump-appointed president David Malpass refused to say whether he believed in human-caused climate change at a conference last September, despite repeated questioning. He later said he had been misunderstood.Reform of the multilateral development banks has risen on the global policy agenda as wealthy countries are confronted by increasingly urgent questions about who pays for the catastrophic impact of hurricanes, floods and wildfires.Smaller and less-wealthy nations have pressed to build a UN coalition to secure funds that would help them tackle the consequences of global warming without increasing their debt burdens to crippling levels. Mia Mottley, the prime minister of Barbados, has put forward several proposals for action at the World Bank and IMF, including the redistribution of $100bn in special drawing rights and the new issuance of long-term, low-interest debt instruments to help finance clean energy projects.The US has led calls from developed countries for reform of the World Bank and other financing institutions. Last year, Yellen asked the bank to develop an “evolution road map” to show how it would incorporate climate and pandemic preparedness into its operating models. Yellen on Thursday increased the tempo by saying the US expected “to see ideas translated into action” over “the next few months”. She called on it make “straightforward” decisions first and to begin putting in place elements of its road map by the time of the spring meetings held by the financial institutions.

She also urged the bank to begin “quickly” stretching its existing financial resources by putting into practice some of the recommendations made by a report commissioned by G20 last year. The report outlined steps for the World Bank and other multilateral development banks to boost their spending, including adjusting the amount of capital they hold against loans, securitising private sector portfolios and piloting new types of financial instruments. Yellen on Thursday reiterated her previous suggestions that development banks broadly should make greater use of concessional finance, including grants, to fund investments where the benefits are shared globally.This could include finance to decommission coal plants and protect displaced workers during a clean energy transition, she said. More

Bank of England governor Andrew Bailey has called on public sector workers to take into account the central bank’s view that inflation will “fall very rapidly” when asking for pay rises.Under pressure from MPs to comment on the strike action that has hit the health service, schools, transport and the civil service, Bailey told the Treasury select committee on Thursday that it was important to recognise that inflation will fall this year when setting public sector pay. The central bank predicts it will drop from 10.5 per cent to 4 per cent by the end of 2023. “You have to be forward looking, here,” Bailey said. “What I would urge, particularly going forward because we believe inflation is going to fall very rapidly, is that that is taken into account.”The BoE governor stressed that public sector pay was not his responsibility and that he was not advocating a particular settlement for different groups of workers, but that he agreed with ministers that there were economic effects of higher pay settlements.“I don’t think you can say there’s no effect,” Bailey said, adding that the precise relationship between public sector pay and inflation depended on how any pay rises were funded. “The economics of it depends on whether you raise taxes [to fund public pay increases] or borrow, frankly,” he told MPs. Allies of Jeremy Hunt, the chancellor, seized on Bailey’s remarks to justify the Treasury’s tough stance on public sector pay. Talks with unions are deadlocked after ministers refused to reopen pay offers for the current financial year.“It’s tough but the chancellor has to resist inflation-busting public sector pay increases to finish off the mission to halve inflation this year,” said one.The BoE this year agreed a 3.5 per cent overall pay raise with its staff, with an additional one-off top up of 1 per cent. Bailey’s noted that private sector wage rises were higher than those in the public sector and also needed to come down if the BoE was going to hit its 2 per cent inflation target. He also worried that aggressive company pricing policies would keep inflation too high for too long. “We are concerned about persistence [of inflation] and that’s why, frankly, we raised interest rates this time,” he said, referring to the central bank’s decision to raise interest rates by half a percentage point to a 15-year high of 4 per cent earlier this month. Explaining why the bank’s Monetary Policy Committee was still raising interest rates even as inflation was starting to come down, he added: “I am very uncertain particularly about price-setting and wage-setting in this country.”Other members of the MPC agreed that if there were high public sector pay rises, the BoE would have to take them into account and they would make it more likely rates would have to rise further.

Huw Pill, the BoE’s chief economist, said that high natural gas prices meant the UK was poorer than hoped and a “fight for a bigger share of a smaller pie” would fuel inflation. Pill, like Bailey, made clear that he did not advocate public sector workers getting lower pay rises than those in the private sector or those receiving incomes from the government, but there would be consequences if pay increased. “[It] implies monetary policy will be tighter to keep aggregate behaviour in the economy in line with price stability,” he said. These fears of persistent wage and price pressures persuaded the majority on the MPC to put more weight on short term factors affecting wages and prices, rather than their medium term forecast that inflation will drop below 2 per cent. More

It’s a long time since we’ve been so inverted. The explanation might not be what you think.Conventional wisdom says yield curve inversion is a harbinger of recession — time is supposed to have value, so paying more to borrow for shorter periods makes very little sense. And as we type, the US 2-year yield has climbed to its highest level relative to the 10-year since the 1980s. Shorter-dated Treasury yields are nearly 87 basis points above longer-dated notes.Yet executives aren’t convinced the US will go into recession this year, jobs data has been strong and inflation might’ve crested. Each improvement in the US growth outlook in recent weeks appears to have been matched a deepening of the yield curve across all segments. What gives?According to Goldman Sachs, that’s because the bond market is wrong and we’re living in the past.“The most compelling reason for the discrepancy is the presence of a strong prior among investors about R* [the neutral long-run rate of interest that balances the economy] being low and similar to estimates from the last cycle, despite the very different nature of the current cycle,” it told clients.In other words, investors think that the Fed will have to make sharp rate cuts in the future, because rates were low for a long time before now. Many readers will remember old-timer bond traders arguing in 2012 that rates were too low, mostly because rates were higher when they were young. Goldman says that investors are now doing that in reverse. Remember, the yield curve can be best understood as a probability-weighted average of policy expectations. For short-term Treasuries, inversion can be “substantial” whenever the Fed is expected to cut rates in the near term. But the gap will look the same whether the cause of those rate cuts is a recession or a so-called soft landing.Meanwhile, for long-dated bonds, rates should stay higher when the consensus says recession can be avoided; investors will demand more compensation for the risk that steady (or high) inflation will erode their principal over that time period. What’s happening now is that, following the Fed’s short-sharp-shock approach, there’s an odd certainty that long-term yields will return to low levels:

As a result, all the usual duration comparisons have stopped working. The two ends of the Treasury market’s pantomime horse are no longer moving together.Here’s how: strong economic data implies that the Fed will wait longer to cut rates. That expectation causes short-term rates to rise. But long-term yields have been “sticky,” Goldman says, because investors assume that they will revert to their post-GFC mean. Because of this, a deepening inversion seems to “have the opposite implication for recession odds than commonly ascribed,” Goldman says. But that raises the question of whether the “stickiness” in long-term yields is reasonable to begin with. To guess whether it is, Goldman uses a nominal yield curve that’s framed around some complicated fair-value methodology you can read about here. Its adjusted yield curve finds that while the mid-range is approximately fine versus the natural rate and the long end is slightly steeper, the front end remains extremely inverted:

Why tho?First, markets may be assigning higher recession odds down the road than we think likely, which would entail more Fed easing than the consensus economist forecasts. But higher recession odds and anticipation of more easing over the next two years should produce a steeper 2s5s curve, all else being equal, unless, of course, the Fed were to cut the policy rate, and keep the rate low for a very long time. This does not strike us as particularly satisfactory, given that even if a recession were to materialize, we expect it would likely be shallow. Indeed, at least from a historical consistency perspective, it is somewhat abnormal, as evidenced by the clear discrepancy between the model estimate and the observed curve value.A second, more obvious explanation, is that investors are anchoring long run rates to a different level than our model. In our model above, we used (real) potential GDP growth as an anchoring device for the policy rate; investors’ real rate anchor would have been nearly 150-200bp below this level for the model estimate to match the current level of inversion in the 2s5s curve. This would mean an assumed R* of 0-50bp, roughly in line with what was commonly believed to be appropriate pre-Covid. When guessing long-term rates, investors have been suffering both from recency bias and credulity about Fed guidance. That “strongly suggests” the current inversion “comes not from high recession odds or inflation normalisation,” but investors’ reluctance to adapt to the New New Normal, says Goldman:Investors appear to be wedded to the secular stagnation, low R* view of the world from the last cycle. We believe this cycle is different, with an economy that can support a higher long run real rate than currently assumed. [ . . . ] If the low R* view is correct, the Fed’s policy stance would indeed be substantively restrictive, and we will likely have a decidedly worse growth outcome than we currently anticipate. If, on the other hand, our economists’ baseline for a still robust economy comes to pass, it will be hard to argue that the Fed has been severely restrictive, and investors will likely update their long run rate priors, thereby moderating inversion to more ‘typical’ levels.Or, this could be an example of the “this time it’s different” argument that invariably shows up whenever the yield curve inverts, when things are almost never actually different. Anyone’s guess, really. More

BRASILIA (Reuters) – Brazil’s Finance Minister Fernando Haddad agrees with President Luiz Inacio Lula da Silva’s view that interest rates need to drop, but is focussed on the new government’s agenda rather than taking on the central bank, an Economy Ministry source said.Leftist Lula again raised his concerns about Brazil’s benchmark interest rate level, which stands at 13.75%, during a closed political meeting on Wednesday with Haddad, Luciano Bivar, a federal deputy who was present, told Reuters.But Haddad had focused instead on the new Brazilian government’s economic agenda, highlighting a new fiscal framework to be presented in April and tax reforms, Bivar said.”The President showed discomfort over the central bank’s actions, but Haddad preferred to focus on the government’s agenda with Congress, the creation of the fiscal framework and tax reform,” Bivar said.Representatives for Lula and Haddad had no immediate comment on their discussions during the political meeting.Haddad’s stance of keeping out of the debate stirred by Lula’s attacks on the central bank does not mean he disagrees with the leftist president’s views, the Economy Ministry source told Reuters, speaking on condition of anonymity.Lula has repeatedly criticized Brazil’s benchmark interest rate level as a major drag on the country’s economic growth and has indicated that it should aim for higher inflation.Haddad’s economic policy secretary has previously said the issue is not being discussed in the ministry.When they kept Brazil’s benchmark interest at a six-year high last week, central bank policymakers signalled that interest rates could remain unchanged for longer than markets expected due to fiscal risks under Lula.But when the minutes from the rate-setting meeting later mentioned the government’s fiscal plans presented by Haddad as possibly mitigating risks, he went public to say that the bank’s tone was now “more friendly”.A second official at the economy ministry said Lula’s criticisms of the central bank are not a topic of internal discussion, despite concerns that they generate market uncertainty and hinder efforts to lower interest rates.When Haddad met with senators from Lula’s Workers Party (PT) on Tuesday, the interest rate debate was not discussed, two sources who asked not to be named told Reuters. One said that the government’s allies in Congress should push ahead with requests for central bank governor Roberto Campos Neto to appear before Congressional committee hearings. But the sources added that there was no government plan to try to remove Campos Neto. The central bank had no immediate comment. More