Aurelia Butler

It is important, Daly said at a symposium held jointly with the Monetary Authority of Singapore, “to navigate through this high inflation environment as carefully as we can, so that we don’t leave longer term damage to our labor market.”The Fed has been aggressively raising interest rates to bring down inflation that is more than three times its 2% target. Last week’s rate rise of 75 basis points was the central bank’s third straight increase of that size, and it signaled it would likely lift the policy rate — now in the 3%-3.25% range – to 4.4% by year-end and to 4.6% next year.Fed Chair Jerome Powell has said he expects that raising rates at that pace will push up unemployment and be painful for some households and businesses, but that ultimately it would be more painful to allow inflation to get entrenched. “Price stability is fundamental,” Daly said on Tuesday. U.S. inflation is about half due to excess demand, and about half due to constrained supply, she said, and the hope is that as the Fed raises rates to slow demand, the supply side will also heal, allowing the two to “meet in the middle.” But supply chains are still tangled and labor supply has not returned as quickly as had been hoped, she said, so the Fed may end up needing to do “a little more” on demand to make sure inflation does come down. More

TOKYO (Reuters) -Bank of Japan (BOJ) board members agreed that the central bank must scrutinise how the yen’s recent sharp moves could affect inflation, minutes of the BOJ’s July policy meeting showed on Wednesday.One member said the downward pressure on the yen may ease as the global economic slowdown begins to weigh on inflation and long-term interest rates across the world, the minutes showed.”If the global economy experiences a shock, there’s a chance the current weak-yen trend could change into a strong-yen trend,” another board member was quoted as saying.At the July 20-21 meeting, the BOJ projected inflation would exceed its 2% target this year in fresh forecasts, but maintained ultra-low interest rates and signalled its resolve to keep monetary super loose.Analysts blame the extremely low rates for accelerating the Japanese currency’s declines.In a surprise move last week, the government intervened in the currency market to stem yen weakness by selling dollars and buying yen for the first time since 1998. More

The IMF has launched a biting attack on the UK’s plan to implement £45bn of debt-funded tax cuts, urging the government to “re-evaluate” the plan and warning that the “untargeted” package threatens to stoke soaring inflation. The multilateral lender said it was “closely monitoring” developments in the UK and was “engaged with the authorities” after Chancellor Kwasi Kwarteng unveiled the tax cuts last week, sparking a collapse in the value of sterling and a surge in the country’s borrowing costs. “Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture,” the IMF said in a statement. “It is important that fiscal policy does not work at cross purposes to monetary policy.” Janet Yellen, US Treasury secretary, said the US was “monitoring developments very closely”. She declined to be drawn on the merits of the plan but noted that the US and the UK had “significant inflation problems and central banks focused on . . . bring[ing] inflation down”. She added the financial turmoil of recent days appeared to be confined to Britain rather than spreading to the global economy and that financial markets that had sold off sharply were “functioning well”. At an event hosted by the Economic Club of Washington DC, Brian Deese, director of the White House’s National Economic Council, said he “wasn’t surprised” by the reaction to the UK’s fiscal plan, saying “it puts the monetary authority in a position of potentially having to move even tighter”.He added: “It is particularly important to maintain a focus on fiscal prudence.”In its first assessment of the UK situation, Moody’s, the credit rating agency, offered critical commentary, saying that large unfunded tax cuts would lead to rising borrowing costs and lower growth.Though it did not change the UK’s credit rating, Moody’s warned that a “large unfunded fiscal stimulus . . . will prompt more aggressive monetary policy tightening, weighing on growth in the medium term”.The IMF’s pointed criticism of Kwarteng’s fiscal plan came as some business leaders in the UK hit out at the tax cuts, while the Bank of England’s chief economist warned it would need to react with a “significant monetary response”. The IMF said it understood the UK government’s desire to help “families and businesses deal with the energy [price] shock” while “boosting growth” with supply-side reforms. But it raised the concerns that the tax cuts, which will disproportionately benefit high earners, “will likely increase inequality”. It called on Kwarteng to use the budget on November 23 to “provide support that is more targeted and re-evaluate the tax measures”. Following the IMF statement, the UK Treasury said the November budget would “set out further details on the government’s fiscal rules, including ensuring that debt falls as a share of GDP in the medium term”. It added the government had acted “at speed to protect households and businesses through this winter and the next”.The opposition Labour party seized on the IMF statement, with shadow chancellor Rachel Reeves saying it “should set alarm bells ringing in” Westminster and calling on the government to “urgently lay out how it will fix the problems it has created”.Eswar Prasad, a former senior IMF official, said: “This is a hard-hitting and pointed criticism that pulls few punches. This is as close as IMF language comes to calling a set of policies irresponsible, ill-advised and ill-timed.”Mark Sobel, a former US Treasury official and ex-IMF representative, said the statement was “unusual in its sharpness” but that he approved of the fund being “a ruthless truth teller”. Adnan Mazarei, former deputy director at the IMF, described the statement as “on the strong side” and said the fund was “concerned, especially about the risks of a spillover”, which he described as “tangible”. He added: “The UK authorities have embarked on an unnecessarily risky path.”

Ray Dalio, the billionaire founder of hedge fund Bridgewater, said the UK was “operating like the government of an emerging country”.Dalio’s remarks came after Larry Summers, former US Treasury secretary, on Monday called the policy “utterly irresponsible” and said the violent market reaction was “a hallmark of situations where credibility has been lost”.The pair joined Raphael Bostic, president of the Atlanta branch of the Federal Reserve, who this week warned that the UK’s plan increased economic uncertainty and raised the odds of a global recession.Last week, Jason Furman, an economic adviser to former US president Barack Obama, wrote on Twitter: “I can’t remember a more uniformly negative reaction to any policy announcement by both economists and financial markets than the UK’s policy.” More

BENGALURU (Reuters) – The Federal Reserve will hike its key interest rate to a much higher peak than predicted two weeks ago and the risks are skewed towards an even higher terminal rate, according to economists polled by Reuters.That change in expectations came after the Fed raised rates by 75 basis points last week for the third straight meeting and foresaw going higher than it had previously thought to tame inflation, which is running over four times above target.Since then, already battered global stocks went much deeper into bear market territory – a decline of 20% or more – on fears of recession and most currencies weakened further against the multi-decade high dollar.But that is unlikely to push the Fed to switch its policy path anytime soon as Fed Chair Jerome Powell and other policymakers have remained blunt about the “pain” to come.Indeed, over 70% of economists, 59 of 83, predicted the central bank would hike its fed funds rate by three-quarters of a percentage point for the fourth straight meeting in November, a Reuters poll taken after the Fed meeting last week showed.The survey predicted that would be followed by 50 basis points in December to end the year at 4.25%-4.50%.If realized, that would be the highest rate since early 2008, before the worst of the global financial crisis, and 75 basis points higher than 3.50%-3.75% predicted just two weeks ago. The forecasts are in line with the Fed’s dot-plot projection and current market pricing.”With inflation this high, history says you need to get at it sooner and you need to follow through. The real policy mistake is not bringing inflation back down to 2%,” said Michael Gapen, chief U.S. economist at BofA Securities.”If a near-term recession and a larger increase in the unemployment rate than they are projecting are needed to bring inflation down, that is not a policy error in their mind.”A poll taken earlier this month put the probability of a U.S. recession over the coming year at 45%, with the chance of one occurring over the next two years at 55%.NEUTRAL LEVELA majority, 45 of 83 economists, predicted the fed funds rate peaking at 4.50%-4.75% or higher in Q1 2023, the same as the dot plot projection and higher than the estimated neutral level of 2.4% that neither stimulates nor restricts economic activity.All but two of 51 economists who replied to an additional question said the risks were skewed towards a higher terminal rate than they currently expected.”The Fed reinforced their commitment to whatever it takes to get inflation under control, even if that means causing some pain in the economy,” said Justin Weidner, U.S. economist at Deutsche Bank (ETR:DBKGn), who expects the rate to peak at 4.75%-5.00%.”The short-run pain of recession would be better than the long-run pain of inflation expectations becoming unanchored.” Also, unlike most major central banks, the Fed has backing from a strong currency and a relatively strong economy compared with its peers. Among economists who had a view through end-2023, only 46% forecast at least one rate cut.With inflation not seen below the central bank’s target anytime soon and the unemployment rate, currently 3.7%, expected to increase at a much slower pace than in previous recessions, a premature cut might hurt the Fed’s credibility.More than 80% of respondents said once the fed funds rate reaches a peak, the central bank was more likely to leave it unchanged for an extended period rather than cut it quickly.Rates were predicted to remain in restrictive territory until at least 2026.”To get it (inflation) down, the economy needs to run below potential, bringing demand into better balance with supply capacity,” said James Knightley, chief international economist at ING.”The only way the Fed can do that is to hike rates and keep policy restrictive until that is achieved.”(For other stories from the Reuters global economic poll:) More