Aurelia Butler

WASHINGTON/CHICAGO (Reuters) – The chances of a “soft landing” for the U.S. economy, where inflation declines without major job losses, appear to be growing, Federal Reserve Vice Chair Lael Brainard said on Thursday, and the central bank is now “probing” for the right level of rates to control inflation without tanking employment.”Inflation has been declining over the past several months against a backdrop of moderate growth,” Brainard said at the University of Chicago’s Booth School of Business, noting a “significant weakening in the manufacturing sector,” a moderation in consumer spending, and other data pointing to now “subdued growth” in 2023.The slowdown is, for the most part, welcome. The Fed raised its benchmark overnight interest rate rapidly last year, from near-zero in March to the current 4.25%-4.50% range, to restrain inflation that climbed to 40-year highs. That aggressive policy tightening is beginning to slow demand as intended, Brainard said, but the full impact is yet to come. “We’re now in restrictive territory, and we are probing for the sufficiently restrictive level” to be confident that inflation is headed back down to the Fed’s 2% target, Brainard said. Brainard’s remarks, among the last from a Fed policymaker before the Saturday start of an official quiet period ahead of the central bank’s next rate-setting meeting on Jan. 31-Feb. 1, did not give any explicit guidance on how high she feels interest-rates may ultimately need to go. In December, Fed policymakers as a group signaled the policy rate will need to rise to at least 5.1%; financial markets, meanwhile, are pricing for the Fed to stop just short of 5%.But she did appear to ratify market expectations for the Fed’s upcoming rate hike to be a quarter-of-a-percentage-point, a downshift from December’s half-point rate hike and from the four 75-basis-point rate hikes that preceded. The “logic” that drove the Fed to slow its rate-hike pace in December, in order to have more time to assess the impact of policy, “is very applicable today,” Brainard said.’COMPETING’ RISKSSpeaking earlier Thursday, Boston Fed President Susan Collins was more explicit.”I anticipate the need for further rate increases, likely to just above 5%, and then holding rates at that level for some time,” Collins told a conference organized by the Boston Fed, echoing a near-unanimous sentiment expressed by her rate-setting colleagues in recent weeks.She also said she feels smaller rate hikes are now appropriate as the Fed manages “competing” threats: “the risk that our actions may be insufficient to restore price stability, versus the risk that our actions may cause unnecessary losses in real activity and employment.” Brainard similarly, though less directly, called out the potential risk to the labor market as rates increasingly restrict the economy, a shift from last year when fighting inflation was the Fed’s clear priority. “Now we’re in an environment where we’re balancing risks on both sides,” she said. She also pointed to trends in prices, wages and margins that indicated inflation, which by the Fed’s preferred measure is running at almost three times its 2% target, was slowing and could well continue doing so.The U.S. unemployment rate, meanwhile, is at a low 3.5%.”Recent data suggests slightly better prospects that we could see continued disinflation in the context of moderate growth,” Brainard said. Still, she said, “it is a very uncertain environment and you can’t rule out worse trade-offs.”Even as the Fed parses the progress it has made on inflation, she said it would “stay the course.””Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis,” Brainard said. More

“We are going to act independently and we are going to say that until the end of the mandate,” Campos Neto said at an event hosted by the UCLA Anderson School of Management. Appointed by former far-right President Jair Bolsonaro, Campos Neto is set to serve through December 2024.Also on Thursday, Institutional Relations Minister Alexandre Padilha said Brazil’s government does not intend to make changes to the central bank, seeking to appease markets after leftist President Luiz Inacio Lula da Silva public criticism of the institution.On Wednesday, Lula criticized the formal independence of the central bank, established by law in 2021. He said the independence was “nonsense” and that the current inflation target hinders economic growth. Lula returned to the subject Thursday morning, questioning the current level of the country’s interest rates after the central bank’s 12 consecutive rate hikes to battle inflation.Campos Neto said that, in his view, the president meant that the central bank can be autonomous without this being formalized in law.Speaking about the country’s high real interest rate, discounting inflation, Campos Neto said he believed that inflation would be around 9% if not for tax cuts promoted by the government last year. Policymakers paused in September an aggressive tightening cycle that lifted rates to 13.75% from a 2% record low in March 2021. Inflation hit 5.79% in the 12 months to December. Campos Neto said Brazilians have vivid memories of inflation, and highlighted that a country perceived by investors as riskier must offer more return.After Bolsonaro supporters invaded and defaced the country’s Congress, presidential palace and Supreme Court on Jan. 8, Campos Neto said the central bank strongly condemns the attacks, adding they affect the country’s credibility. More

Investing.com — The world’s most Zen central banker may have the last laugh after all.The unflappable Haruhiko Kuroda seems all but certain to leave his post as Bank of Japan Governor in two months’ time without raising interest rates or otherwise tightening monetary policy, after reverting to steadfastly dovish type at this week’s policy meeting.The BoJ defied widespread expectations that it would relax its control of Japanese long-term interest rates, keeping its official target rate for 10-Year government bond yields at 0% and its tolerance bands at 0.5% either side of that. Uniquely among world central banks at a time when inflation is at a 40-year high, its official short-term rate remained below 0%.The decisions came as a shock to financial markets, who had bet that the BoJ would be forced into tightening policy by a surge in import prices and a collapsing yen. They had seen the widening of its tolerance bands from 25 basis points either side of 0% at December’s meeting as a first crack in the dam, through which an unstoppable torrent of speculative capital would flood, wrecking the BoJ’s strategy.That may yet happen, but after some alarmingly weak U.S. economic data this week that have taken more steam out of the dollar and the U.S. Treasuries market, it seems unlikely to happen before Kuroda gets his coat.After all, one doesn’t need to believe in BoJ tightening to be a yen bull. The same end is achieved by the U.S. central bank turning more dovish. It’s enough that the forward curve for dollar rates flattens and then starts to come down.The main thing is that the rate differential between the two currencies narrows, and that it what is happening: since October, when the USD/JPY hit a 32-year high of nearly 152, the spread between 10-year Japanese and U.S. rates has narrowed by some 80 basis points, driving USD/JPY back down to just over 128, its lowest in eight months.Francesco Pesole, a foreign exchange strategist with ING, said he sees risks of the dollar falling further, however dovish the BoJ remains.This threatens to wreck the BoJ’s hopes that a weak yen would generate enough inflation to exorcise Japan’s deflationary demons once and for all, by forcing companies to raise wages to appease their workforces.The Bank’s new forecasts, released this week, reflect no such belief. From around 3% in the current fiscal year, it expects inflation to sink back below 2% in the year through March 2024, and to stay below that level the year after. Again, almost uniquely among world central banks, those forecasts are below the central bank’s long-term definition of stable prices.As such, it was inevitable that it should reaffirm its commitment to buying bonds to reflate the economy, saying it will “continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner.”The only hope that the BoJ allowed itself to voice was that the risks to its forecasts are to skewed to the upside: China’s reopening this year should support the external sector, both through exports of machinery and imports of tourists, all of which should tend to make Japan Inc. a little less neurotic about raising wages.  The Japanese labor market is and will remain tight, and inflation expectations have risen.However, Japan has seen many false dawns before on this front, and skeptics will be entitled to demand more proof before they buy into any ‘new paradigm’ story. With global inflation appearing to have peaked months ago, the biggest single support to Japan’s reflation efforts is weakening. Kuroda may be the last and the most reluctant member of “Team Transitory” when it comes to central banking, but the odds are rising by the day that by the time Japan summons the nerve to raise interest rates, the need to do so may well have passed.   More

BENGALURU (Reuters) – The U.S. Federal Reserve will end its tightening cycle after a 25-basis-point hike at each of its next two policy meetings and then likely hold interest rates steady for at least the rest of the year, according to most economists in a Reuters poll.Fed officials broadly agree the U.S. central bank should slow the pace of tightening to assess the impact of the rate hikes. The Fed raised its benchmark overnight interest rate by 425 basis points last year, with the bulk of the tightening coming in 75- and 50-basis-point moves.As inflation continues to decline, more than 80% of forecasters in the latest Reuters poll, 68 of 83, predicted the Fed would downshift to a 25-basis-point hike at its Jan. 31-Feb 1 meeting. If realized, that would take the policy rate – the federal funds rate – to the 4.50%-4.75% range.The remaining 15 see a 50-basis-point hike coming in two weeks, but only one of those was from a U.S. primary dealer bank that deals directly with the Fed.The fed funds rate was expected to peak at 4.75%-5.00% in March, according to 61 of 90 economists. That matched interest rate futures pricing, but was 25 basis points lower than the median point for 2023 in the “dot plot” projections issued by Fed policymakers at the end of the Dec. 13-14 meeting.”U.S. inflation shows price pressures are easing, yet in an environment of a strong jobs market, the Federal Reserve will be wary of calling the top in interest rates,” noted James Knightley, chief international economist at ING.The expected terminal rate would be more than double the peak of the last tightening cycle and the highest since mid-2007, just before the global financial crisis. There was no clear consensus on where the Fed’s policy rate would be at the end of 2023, but around two-thirds of respondents had a forecast for 4.75%-5.00% or higher.The interest rate view in the survey was slightly behind the Fed’s recent projections, but the poll medians for growth, inflation and unemployment were largely in line.Inflation was predicted to drop further, but remain above the Fed’s 2% target for years to come, leaving a relatively slim chance of rate cuts anytime soon.In response to an additional question, more than 60% of respondents, 55 of 89, said the Fed was more likely to hold rates steady for at least the rest of the year than cut. That view lined up with the survey’s median projection for the first cut to come in early 2024.However, a significant minority, 34, said rate cuts this year were more likely than not, with 16 citing a plunge in inflation as the biggest reason. Twelve said a deeper economic downturn and four said a sharp rise in unemployment.”The Fed has prioritized inflation over employment, therefore only a sharp decline in core inflation can convince the FOMC (Federal Open Market Committee) to cut rates this year,” said Philip Marey, senior U.S. strategist at Rabobank.”While the peak in inflation is behind us, the underlying trend remains persistent … we do not think inflation will be close to 2% before the end of the year.” GRAPHIC: Reuters Poll- U.S. Federal Reserve outlook (https://fingfx.thomsonreuters.com/gfx/polling/jnpwywrxgpw/Reuters%20Poll-%20U.S.%20Federal%20Reserve%20%20outlook.PNG) In the meantime, the Fed is more likely to help push the economy into a recession than not. The poll showed a nearly 60% probability of a U.S. recession within two years.While that was down from the previous poll, several contributors had not assigned recession probabilities to their forecasts as a slump was now their base case, albeit a short and shallow one as predicted in several previous Reuters surveys. The world’s biggest economy was expected to grow at a mere 0.5% this year before rebounding to 1.3% growth in 2024, still below its long-term average of around 2%.With mass layoffs underway, especially in financial and technology companies, the unemployment rate was expected to rise to average 4.3% next year, from the current 3.5%, and then climb again to 4.8% next year.While still historically low compared to previous recessions, the forecasts were about 1 percentage point higher than a year ago.(For other stories from the Reuters global economic poll:) More

TOKYO (Reuters) – Japan’s core consumer prices in December rose 4.0% from a year earlier, double the central bank’s 2% target and hitting a fresh 41-year high, data showed on Friday, adding to recent growing signs of mounting inflationary pressure.The data will likely keep alive market expectations that the Bank of Japan (BOJ) will soon end its yield control policy and allow interest rates to rise more, analysts say.The increase in the core consumer price index (CPI), which excludes volatile fresh food but includes oil costs, matched a median market forecast and followed a 3.7% annual gain seen in November.The annual rise in core CPI thus exceeded the BOJ’s 2% target for a ninth straight month.”Inflationary pressure is heightening quite a bit, with price hikes broadening beyond those for food and fuel,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.”Companies aren’t that cautious about raising prices any more. We might see inflation stay above the BOJ’s 2% target well into autumn this year,” he said.Core-core CPI, which strips away both fresh food and energy costs, was 3.0% higher in December than a year earlier, accelerating from a 2.8% gain seen in November.The BOJ kept monetary policy ultra-loose on Wednesday but raised its inflation forecasts in fresh quarterly projections, as companies continued to pass on higher raw material costs to households.Many market players expect the central bank to phase out yield curve control, a policy under which it caps long-term interest rates around zero, when dovish governor Haruhiko Kuroda’s second, five-year term ends in April. More