Aurelia Butler

Federal Reserve chair Jay Powell has warned that the US central bank might have to raise interest rates more than expected by investors because it will probably take a “significant period of time” to tame inflation given stronger labour market data.Powell’s comments to the Economic Club of Washington on Tuesday were his first since data last week showed a surprising jump in jobs growth in January, which suggested the Fed might have to go further in its monetary tightening to cool down the economy.But even as Powell stressed that the central bank was prepared to be more aggressive if needed, his intervention was not as hawkish as expected by some economists and market strategists. “The markets were geared up for a hawkish speech, based on the unemployment number on Friday. Markets expected that the whole world had changed, and it doesn’t seem like it has,” said Andy Brenner, head of international fixed income at NatAlliance Securities.Michael Feroli, a senior economist at JPMorgan, added: “While Powell has recently questioned the market’s more benign inflation forecast, he hasn’t protested it too strongly — after all, doing so would be asserting with vigour that the Fed will miss its inflation target.”Powell’s intervention resulted in choppy trading. The S&P 500 and Nasdaq were up 0.8 per cent and 1.1 per cent, respectively, in afternoon trading. In less than a year, the Fed has lifted its main interest rate from near-zero to a target range between 4.5 per cent and 4.75 per cent. Last week, it slowed the pace of its rate increases to 25 basis points from 50 at the end of last year, suggesting its most aggressive efforts to tame inflation were behind it.On Tuesday, answering questions from David Rubenstein, the co-founder of private equity group Carlyle, Powell said the “disinflationary process” still had a “long way to go” and was in its early stages. “It’s probably going to be bumpy,” he said.“The reality is we’re going to react to the data,” Powell said, adding that “it may well be the case” that the Fed would have to raise rates “more than is priced in” by financial markets.The Fed chair later reiterated that message. “I think there has been an expectation that [inflation] will go away quickly and painlessly and I don’t think that’s at all guaranteed. That’s not the base case,” Powell said. “The base case, for me, is that it will take some time. And we will have to do more rate increases and then we’ll have to look around and see whether we’ve done enough.”Edward Al-Hussainy, senior analyst at Columbia Threadneedle, said: “Nothing in Powell’s interview deviated from the message in [the] post-FOMC press conference, about whether the labour market report has meaningfully changed the odds of the terminal [rate] moving higher.”In recent days, other Fed officials have also pointed to the enduring strength of the labour market as a reason for the central bank to keep pressing ahead with tightening.“It’ll probably mean we have to do a little more work,” Raphael Bostic, the president of the Atlanta Fed, told Bloomberg News. “And I would expect that would translate into us raising interest rates more than I have projected right now.”

Two senior European Central Bank policymakers on Tuesday also pushed back against the idea that it could soon stop raising interest rates. Isabel Schnabel, an ECB executive board member, said it “can’t yet give the all clear on inflation” because underlying price pressures — excluding volatile energy and food prices — are “still extraordinarily high”. Schnabel told a Finanzwende webinar that “monetary tightening is having little impact so far” on inflation and the recent deceleration of price growth in the eurozone purely reflected a fall in energy inflation. Her comments appeared designed to counter investor hopes that the ECB could pause after its meeting next month, when it has signalled plans to raise rates by another half percentage point.Germany’s central bank boss Joachim Nagel, who is a member of the ECB rate-setting governing council, told Börsen-Zeitung that “further, significant rate hikes” were still needed because even after it raised its deposit rate to 2.5 per cent last week, this did not yet seem “restrictive” to him. More

Chip suppliers have warned that a European effort to impose a ban on “forever chemicals” will cause widespread disruption to already tight semiconductor supply chains. Five European countries, including Germany and the Netherlands, on Tuesday proposed that the EU phase out tens of thousands of so-called forever chemicals, known as PFAS, used in the production of semiconductors, batteries, aircraft, cars, medical equipment and even frying pans and ski wax.The ban would constitute “the broadest restriction proposal in history”, Frauke Averbeck, who led the proposal for the German Environment Agency, said. “It’s a huge step for us to take.”“If no action is taken we estimate that the societal costs will exceed the costs without a restriction,” said Richard Luit, senior policy adviser at the Dutch National Institute for Public Health and Environment.However, industry executives warned that a broad ban could have severe consequences for many sectors. Chemours, a leading supplier of high-end fluoropolymers, warned that the chemicals were “absolutely critical” for semiconductor manufacturing as well as a wide range of other industries.“If we do not have these, there would be very severe global disruption,” said Denise Dignam, Chemours’ head of advanced performance materials. “I can’t think of how you would run these [semiconductor] manufacturing processes without these materials.” Iwaki, the world’s leading chemical-handling pumpmaker, said that restrictions at a European level could lead to “more disruptions and likely an increase in prices” because of scarcity of supplies and higher costs.In addition to Germany and the Netherlands, the effort to eliminate PFAS from Europe has been backed by Denmark, Sweden and Norway, and comes after three years of discussions with policymakers and industry on a ban. The proposal offers two scenarios: a full ban or a ban with specific exemptions based on the availability of alternatives.If approved, the regulation would not come into force until 2026 at the earliest. Some sectors, such as components for medical equipment, will be permitted a transition period of up to 12 years while others will have to adjust within 18 months. PFAS are extensively used across industry and in consumer products because of their resistance to high temperatures and corrosion. In many cases there are no manufacturing alternatives. Their “forever chemicals” moniker stems from the fact that their carbon-fluorine bonds are among the strongest in organic chemistry, which means that they do not break down easily and accumulate over time in humans and in the environment. Several have been linked with impairments to unborn babies and damage to human internal organs as well as contaminating water and wildlife.Public awareness and campaigning against the chemicals accelerated after the release in 2019 of the film Dark Waters, which detailed a case against the US company Dupont for dumping PFAS in waterways in West Virginia.Solvay, the Belgium-based chemicals group which also produces fluorochemicals, said it would review the scope of the European proposal. It would analyse “the possible implications on our products and businesses”.The group has already announced the phasing out of fluorosurfactants, “the PFAS substances currently under the most intense spotlight,” Solvay said.The proposals published on Tuesday forecast that the use of PFAS will rise by 10 per cent a year for the electronics industry, mainly driven by soaring demand for chips. The report estimates that in 2020 up to 310,000 tonnes of PFAS were introduced to the market. Over 30 years, “the expected mean tonnage in the European Economic Area is 49mn tonnes,” the report stated.

Some of the most critical PFAS are already in short supply as chipmakers expand capacity. The price of one of the most critical PFAS derivatives used in chipmaking — PFA fluoropolymer — has already soared by 70-80 per cent in the past two years, because of shortages caused by high demand, according to semiconductor industry executives. Despite a chip downturn, prices are still expected to jump a further 20 per cent this year, they said. Parts of the semiconductor industry and its supply chain are being considered for a transition period of up to 12 years if a ban is introduced, subject to further information from the industry. Chemours’ Dignam warned that regulators must consider the whole supply chain when considering a ban because chips are crucial to everything from cars to mobile phones.“Trying to regulate a class of chemistry is like trying to regulate [everything from] diesel gas to the olive oil that you put on your salad,” Dignam said. “It is maybe a dangerous precedent to go that broad.” More

Financial markets got off to a rip-roaring start to 2023. Equities, bonds and even bitcoin rallied in January. Emerging markets, shunned during the pandemic, also saw big inflows. The risk-on appetite hinged on expectations for a “soft landing” in the US: speedy disinflation, without a recession. Investors were brought back down to earth on Friday as the US reported strong job numbers, which raises the prospect that inflation could be stickier than expected and the Federal Reserve pushes interest rates higher for longer. Investors are befuddled. Until a clear narrative on how the economy will fare emerges, markets will continue to whipsaw.Markets were initially buoyed by signs of easing price pressures in the US: headline inflation has been dropping from its highs since the summer and the Fed’s rate rises were beginning to cool interest rate-sensitive areas of the economy. Investors did not buy into the Fed’s narrative that monetary policy needed to do more heavy lifting before price growth would come under control. They had priced in a lower terminal rate and cuts later this year — even after the Fed raised rates by 25 basis points last week and warned of more to come. After employment figures showed the US gained 517,000 jobs in January, much higher than anticipated, with unemployment at a 53-year low, markets moved closer to the Fed’s line and sold off. After all, solid jobs growth points to a still red-hot labour market, which will sustain price pressures. But markets are still digesting what it means for the US economic outlook, with a hard, a soft, and even a “no landing” scenario on the table, which have varying implications for investors and their positioning.For some, the “soft landing” narrative remains intact. Sturdy jobs numbers alongside a slowdown in annual earnings growth — which reached a 17-month low of 4.4 per cent — suggest disinflation could be achieved without a notable uptick in unemployment. The employment cost index, which is closely correlated with underlying services inflation — a metric the Fed is monitoring — also softened recently. In this scenario, the Fed need not raise rates much further, and could even cut rates before the close of the year. But there is also discomfort that bumper jobs growth, and resilience in the service sector, could point to a “no landing” in which the economy does not slow and inflation and interest rates reach new heights.Others are more alert to a “hard landing”. Indeed, economic activity is weakening more broadly: forward-looking indicators of the US manufacturing sector suggest it may already be in recession, while recent housing market and retail data show frailty. If wage growth fails to subside, the Fed may need to push the cost of credit even higher, making an accelerated slowdown in the US economy even more likely. But equally, weakness across the economy and faster pass-through of previous rate rises could more rapidly drag down both growth and inflation.Financial markets are finding it hard to price in all these risks. Conflicting views mean asset prices will be particularly sensitive to new data and comments by Fed officials. For investors, the surprising jobs numbers highlight the risks of taking aggressive positions when uncertainty remains high — and of cherry-picking data to fit a narrative. Making sense of the US economy after recent shocks requires a degree of humility. The Fed, meanwhile, needs to remain steadfast in its aim to get inflation back down to target and ensure its communications are clear, at the same time remaining alive to financial stability risks as markets oscillate and reprice positions. Whether the landing for the US economy is soft or hard, there will be plenty of turbulence on the way there. More

What can we learn from monetarists about what happened to prices after the Covid-19 pandemic struck? What can we learn from the mistakes made in the 1970s? The purpose of posing these questions is to inject humility into current debates, especially among central bankers. Their failure to forecast, or prevent, the big jumps in price levels of recent years is significant. So, why did it happen and what might history suggest about the mistakes still to come?It is possible to argue that there is nothing to learn. Covid-19 was, it might be suggested, a unique event to which policymakers responded in the most sensible possible way. Similarly, the 1970s are ancient history. Our policymakers would not make the mistake of letting inflation shoot up again, so embedding expectations of permanently high inflation. I would like to believe these propositions. But I do not.Start with money. There have been two obstacles to taking the money supply seriously. The more important is that it was discarded as a target and even an indicator by “respectable” macroeconomists long ago. The less important was the hysteria of so many about the quantitative easing introduced after the global financial crisis. This obscured what was so very different this time.As I noted in a column published almost a year ago, the British economist Charles Goodhart argued back in 1975 that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes”. That insight proved relevant to the monetarism of the 1980s. But, I suggested, there is a corollary: if it is no longer used as a target, money might become a useful indicator once more.Recently, Claudio Borio of the Bank for International Settlements has suggested how this might become the case for money, once again. Thus, he argues, whether money matters depends on whether inflation is high, or not. In other words, the presence of “excess money” on balance sheets influences behaviour more when people are sensitive to inflation than when they are not.In an excellent recent post on Money: Inside and Out, Chris Marsh of Exante Data explains how money fell out of the thinking of monetary economists and central bankers. He notes however that a large expansion of the supply of money is likely to affect spending significantly. That is even more likely if the money created by central banks effectively funds fiscal deficits, as happened so strikingly in 2020.A crucial point is that this differed greatly from what happened after 2008. The result of the financial crisis was a dramatic slowdown in the creation of money by bank lending. The money created by the central banks through their asset purchases (QE) offset this endogenous slowdown in monetary growth. This significantly reduced the severity of the post-crisis economic slowdown.In early 2020, the opposite was true: private credit growth and money creation by the central banks were both very strong. Average annual growth of US M2 from end 2008 to end 2019 was just 6 per cent. In the year to February 2021, it grew 27 per cent. It is not surprising then that, with the fiscal boosts as well, US nominal domestic demand rose by more than 20 per cent in the two years to the third quarter of 2022. That generated a strong recovery. But it also supported a jump in the price level: in the two years to December 2022, the core US consumer price index rose 11.5 per cent, far above the 4 per cent implied by the Federal Reserve’s 2 per cent annual target.That was the past. What now? Measures of US broad money are now actually falling. In December 2022, for example, US M2 was 2.5 per cent below its peak in March. Data on broader measures provided by the Center for Financial Stability show the same picture. This suggests that inflation might fall faster than expected. It is even possible that if the aim is only to stabilise inflation rather than make the price level fall back, policy is too tight.Yet there still seems to be a monetary overhang. In addition, the Danish economist, Jesper Rangvid, in his January 2023 blog, provides a sobering comparison with the 1970s. He notes, rightly, the relevance of comparisons with another period when a combination of strong fiscal and monetary expansions interacted with supply shocks to generate high inflation. But in the 1970s, there were two spikes. Energy prices played a role in both. But so, too, did expansionary monetary policy.Rangvid adds that: “As soon as inflation started falling in the early 1970s, the Fed reduced the Fed Funds Rate. This was too early. It implied that the real interest rate fell too fast and too much.” In December 2022, what the Federal Reserve Bank of Atlanta calls “sticky price” inflation was running at over 5 per cent on a one-month annualised, three-month annualised and annual basis. Rangvid concluded that it might take even longer to get inflation back down to 2 per cent than it did in the mid-1970s, perhaps another two years. But there is a danger not only of loosening too soon, but also of loosening too far under what is quite likely to be fierce political pressure, so generating another upsurge.The big point is that the inflation genie is now out of his lamp. I agree with Rangvid that monetary policy should have been tightened sooner. I also agree with Marsh that central banks should not have ignored money, as Mervyn King has also argued. There might be a case for waiting to see what happens before further tightening, at least in the US, especially if one focuses on the monetary data. But inflation might also prove stickier downwards than hoped. Whatever happens, do not repeat what happened in the 1970s: get inflation down and then keep it [email protected] Martin Wolf with myFT and on Twitter More

The writer is an FT contributing editor and global chief economist at Kroll It’s Groundhog Day again for US debt limit silliness. But unlike the Bill Murray film, this is no comedy. The US faces a needless, self-inflicted financial mess that could drag on the global economy. This is lunacy. And investors must focus on it now.Treasury secretary Janet Yellen is in the role of Punxsutawney Phil, the Pennsylvania groundhog whose shadow supposedly determines the length of winter. On January 19, she announced the US had hit its arbitrary debt ceiling, and that accounting legerdemain would allow the country to borrow for only six more months before defaulting. So far financial markets have remained calm because a last-minute deal has always emerged to lift the debt ceiling. But default is now a much greater possibility. A small group of Republican hardliners have decided that the size of the national debt matters more than the full faith and credit of the government. The House of Representatives is so divided they may indeed take the country hostage.The US Treasury market is the deepest, most liquid in the world. US sovereign securities are considered essentially risk-free. Lending around the world is based on spreads to Treasuries, which also influence currency values. A US default would roil global markets.There is a market belief that if the US can no longer borrow, it will at least prioritise payments to bondholders over other obligations. Technically this should be possible, but both Treasury and the Federal Reserve have doubts it can be implemented. There would be a slew of lawsuits and the optics are politically toxic. Imagine President Joe Biden telling Americans that firefighters and soldiers won’t be paid, but rich foreign investors will be. The Biden administration insists this is not on the table, though its position may change as default draws nearer.If it cannot borrow, plans developed by the Treasury in 2011 would have the government delay payments of other obligations until it had enough cash to cover a whole day’s bills. This would be recorded as “arrears” in the government books, something often seen in emerging markets. Even without a default on Treasuries, markets may decide failure to meet any payment obligation constitutes a default of some sort, triggering a global financial meltdown.We know from the past that even brushing up against default is costly. The Government Accountability Office estimated the 2011 debt stand-off raised government borrowing costs by $1.3bn that year. In 2013, Fed economists estimated short-term government paper yields rose 21 basis points in 2011 and 46 basis points in 2013, and yields on other maturities by 4-8 basis points, costing the Treasury around $250mn in each episode.If the debt ceiling were to bind, borrowing costs would rise much more, causing dislocations in markets with thin liquidity and necessitating Fed intervention. That’s another reason markets are relaxed for now. The Fed could temporarily restart quantitative easing and buy Treasuries, as the Bank of England did last September when UK government bond yields spiked. If a default pushed short-term rates up, the Fed could expand its standing repo facility. If demand for undefaulted government securities pushed their yields too low, the Fed could lend Treasuries to the market via reverse repos.The central bank could accept defaulted Treasuries as collateral or buy them, an option chair Jay Powell called “loathsome” on a Fed conference call in 2013. Hoovering up defaulted securities would be met with lawsuits and could push up inflation when it is still too high. The Fed will also be wary of creating moral hazard by bailing out politicians dithering on lifting the debt ceiling.Meanwhile, breaching the debt ceiling would depress government spending, as the Congressional Budget Office estimates that tax revenue meets only 80 per cent of US spending needs beyond interest payments. Without government payments, some households and businesses would be unable to pay their bills, a drag on growth just when the economy is nearing recession.The long-term implications of breaching the debt ceiling are the most pernicious. If investors worry they may not be paid what they are owed when they are owed it, they may demand a yield premium on Treasuries. Default could also prompt some countries to hedge their dollar bets by buying fewer Treasuries and adding other currencies to foreign exchange reserves. Those politicians threatening default must drop their demands immediately. And markets should not delay in sending a message: their folly will lead to disaster. More