Aurelia Butler

WASHINGTON (Reuters) -Democratic U.S. Senator Elizabeth Warren said on Sunday that she was very worried that the Federal Reserve was going to tip the nation’s economy into recession and that interest rate hikes would put people out of work.”Do you know what’s worse than high prices and a strong economy? It’s high prices and millions of people out of work. I am very worried that the Fed is going to tip this economy into recession,” Warren told CNN on Sunday.The U.S. central bank’s chief, Jerome Powell, warned on Friday that Americans were headed for a painful period of slow economic growth and possibly rising joblessness as the Federal Reserve raises interest rates to fight high inflation.Powell said in a speech on Friday the Fed will raise rates as high as needed, and would keep them there “for some time” to bring down inflation that is running at more than three times the Fed’s 2% goal.”While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” Powell had said in his speech.”What he calls ‘some pain’ means putting people out of work, shutting down small business because the cost of money goes up because the interest rates go up,” said Warren, whose views on the economy are often influential among progressive Democrats.Warren said inflation was high partly due to supply chain problems, the COVID-19 pandemic and the war between Russia and Ukraine. “There is nothing in raising the interest rates, nothing in Jerome Powell’s tool bag, that deals directly with those and he has admitted as much in congressional hearings,” Warren said. More

Tory leadership frontrunner Liz Truss on Sunday faced renewed pressure to outline her plans to tackle the cost of living crisis, as MPs called for increased support for households and small businesses grappling with rising energy bills.The foreign secretary, who has advocated for £30bn in tax reductions, is exploring VAT cuts of up to 5 percentage points and increasing the personal allowance, the level at which people start paying income tax on their earnings.Truss has previously ruled out giving “handouts” to ease income pressures, describing it as “taking money from people in taxes and then giving it back to them in benefits”. Her allies on Sunday indicated that a support package would be unlikely to include additional one-off payments. However, officials close to the foreign secretary have stressed that all options will be considered and that a final decision on financial support will be made after a new party leader is announced on September 5. Rishi Sunak’s allies have dubbed the latest proposed VAT cut, first reported in The Sunday Telegraph and The Sunday Times, as “flawed” and “regressive”. One official from the former chancellor’s team said: “VAT is not paid on basic items such as food therefore does nothing to help families pay their supermarket bills.” “Cutting VAT will benefit higher-income households more, leaving very little to no benefit for lower-income households who will need the most help this winter,” they added.

Former chancellor and Tory leadership candidate Rishi Sunak at a Q&A during a hustings in Birmingham © Reuters

Meanwhile, Conservative MPs have voiced growing concern over the impact of energy price rises on households and business, following the regulator Ofgem’s announcement on Friday that the energy price cap would increase by 80 per cent in October, taking bills up to £3,549 for the average user.“I’m hearing from constituents who are reaching out for the first time worried about how they will get through this winter,” one senior Tory MP told the Financial Times. “Some of the existing help packages don’t even touch the sides.” Another Conservative backbench MP thought that Truss was right not to give details of her plans until elected but said they were concerned about the ability of households to manage energy prices over the winter. “The worry is ‘how long will this go on for?’” they said.Other Tory MPs raised the alarm over the future of small companies. “I’m hearing that companies are seeing 300 per cent increases in bills. Businesses will close as some of these numbers are not viable,” one senior Tory backbencher argued. “We need to be giving small and medium-size businesses more financial support for energy bills,” another added. “If they have to pass on costs to customers that will only drive inflation further.” 

Over the weekend, outgoing prime minister Boris Johnson blamed the cost of living crisis on Moscow, saying that Russia’s president Vladimir Putin wanted the UK to “buckle” in the face of “eye-watering” energy price rises, referring to the gas crisis sparked by the war in Ukraine. Johnson added that the nation had “enough resilience to get through” the coming months, adding that his successor would introduce a “huge package” of financial support.This week Johnson will reiterate the importance of committing to longer-term net zero pledges alongside implementing short-term methods to ease pressures on the cost of living, the Daily Telegraph reported. The cost of living crisis is just one of several pressing issues facing the next prime minister, with concerns over continued NHS waiting list backlogs and ambulance delays.Matthew Taylor, NHS Confederation chief executive, on Sunday argued that an “honest conversation” was needed about the capacity of the health service heading into the winter. Are you facing difficulties managing your finances as the cost of living rises? Our consumer editor Claer Barrett and finance educator Tiffany ‘The Budgetnista’ Aliche discussed tips on the best ways to save and budget as prices across the globe increase in our latest IG Live. Watch it here. More

Pivot? What pivot?Fed chief Jerome Powell stepped up the fight against inflation in his Jackson Hole speech on Friday, making it clear that there will be no “pivot” to a looser policy stance any time soon.Instead, U.S. households and businesses will have to endure some “pain” as the central bank raises interest rates as high as necessary to get inflation back under control.You can add investors to that list, especially equity investors.Asian markets will likely open deeply in the red on Monday following Wall Street’s slide on Friday. The S&P 500 fell 3.4%, its fifth biggest fall in almost two years, and the Nasdaq tumbled almost 4%. The Dow shed over 1000 points.Powell was blunt – inflation must be tamed, no matter the collateral damage. This means interest rates are headed higher, unemployment will rise, and growth will slow. “We must keep at it until the job is done.” Powell and co are not alone. ECB board member Isabel Schnabel told her Jackson Hole audience that central banks must continue raising rates even if economies go into recession, because de-anchoring inflation expectations is “even worse”. Policymakers in Asia are in a different spot, especially those in China and Japan. But some, like Bank of Korea governor Rhee Chang-yong, admit that their path will large part be determined by the Fed.The corporate calendar in Asia on Monday is light. If investors’ attention is drawn away from the macro, it may turn towards geopolitics – the U.S. Navy confirmed a Reuters report that two warships sailed through international waters in the Taiwan Strait on Sunday, a move likely to rile China’s military.Key developments that should provide more direction to markets on Monday: Australian retail sales (July)German inflation (August) More

Norway’s plan to curb electricity exports as Europe grapples with a severe energy crisis is a dangerous and selfish act that risks empowering Russia’s president Vladimir Putin, according to the Nordic country’s neighbours.The power grid operators of Denmark, Finland and Sweden have taken the unusual step of warning Norway that its proposal to stop exporting electricity amid concerns in Oslo over its hydro production undermined the European market.“It would be the first country in Europe to do it in electricity. It would be a very dangerous step and nationalistic. It’s very selfish behaviour,” Jukka Ruusunen, chief executive of Finland’s network operator Fingrid, told the Financial Times.“If we don’t work together it will help Russia. The best way to help Russia is to leave the team,” he added.The criticism underlines how Europe’s energy crisis has raised tensions among traditional allies, as power prices surge following Russia’s full-scale invasion of Ukraine in February.As western Europe’s largest petroleum producer, Norway will make record sums from the sale of oil, gas and electricity this year.But amid growing worries about how Europe will cope this winter both with high prices and the availability of energy, Norway’s proposal to curb electricity exports to boost its own security of supply has sparked anger.“There is a danger in any national measure in any situation like this — they are contagious. People might say if Norway can do it, so can we. Therefore I think it’s the wrong approach,” said Johannes Bruun, director for the electricity market at Energinet, Denmark’s grid operator. Denmark was not planning any retaliatory measures, he added.Andreas Bjelland Eriksen, state secretary in Norway’s petroleum and energy ministry, confirmed that the centre-left government in Oslo was looking at a mechanism that would curb production, and therefore exports, when the reservoirs that power its hydroelectric facilities “fall to very low levels”. Any mechanism would be in line with the “obligations” it has to Europe and would help the “stability of the entire integrated power system”, he added.However its neighbours disagree. Ruusunen noted that Norway was earning “so much money” in the wake of the Russian invasion. A cut in electricity exports would also help “populist, nationalist voices to split the market. In the end, everybody would lose,” he said.Norway is keen to present itself as a reliable supplier of petroleum after displacing Russia as the biggest source of gas to Europe. “If they do this, it will hurt the whole brand of Norway. The reliability and trust are one of the basic ingredients,” Ruusunen said.Trygve Slagsvold Vedum, Norway’s finance minister, sought to calm fears in Helsinki and Stockholm by pointing out that they received electricity from the north of Norway, where reservoir levels are high and prices low — unlike in the south of the country, which supplies Denmark, Germany, the UK and the Netherlands.But Ruusunen gave that argument short shrift, saying there was only a “very weak” and “very small” electricity supply line in the north.Norway’s government is under pressure to do more to alleviate rising power prices at home, particularly for struggling businesses in the south of the country.The country already provides the most generous power subsidies in Europe, paying 90 per cent of consumers’ bills over a certain level. More

Central bankers face a more challenging economic landscape than they have experienced in decades and will find it harder to root out high inflation, top multilateral officials and monetary policymakers have warned.The world’s leading economic authorities this weekend sounded the alarm about the forces working against the Federal Reserve, European Central Bank and other central banks as they combat the worst inflation in decades. Speaking at the annual gathering of central bankers in Jackson Hole, Wyoming, many said that the global economy was entering a new and tougher era.“At least over the next five years, monetary policymaking is going to be much more challenging than it was in the two decades before the pandemic struck,” Gita Gopinath, the IMF’s deputy managing director, told the Financial Times.“We are in an environment where supply shocks are going to be more volatile than we’ve been used to, and that’s going to generate more costly trade-offs for monetary policy,” she said.The pace of price growth has rocketed as supply-chain disruptions from Covid-19 lockdowns collided with high consumer demand fuelled by unprecedented fiscal and monetary support since the start of the pandemic. Russia’s full-scale invasion of Ukraine delivered a series of commodity shocks that created yet more supply constraints and price increases.These dynamics have forced central banks to aggressively tighten monetary policy to ensure inflation does not become more deeply embedded in the global economy. But given their limited capacity to address supply-related issues, many fear they will be forced to deliver much more economic pain than in the past in order to restore price stability.David Malpass, president of the World Bank, warned that central banks’ tools, especially in advanced economies, are ill-suited to address the supply-related inflationary pressures that are driving a significant portion of the recent inflation surge.“The rate hikes are having to compete with lots of friction within the economy, so I think that’s the biggest challenge that they face,” he said. “You’re hiking rates in the hope of reducing inflation, but it is being counteracted by so much friction within the supply chain and production cycle.”Key figures at both the Fed and the ECB made “unconditional” pledges to restore price stability. Jay Powell, Fed chair, on Friday warned that as a result a “sustained period” of slow growth and a weakening of the labour market were likely.The IMF’s Gita Gopinath said attendees had shown ‘humility’ over the huge uncertainty facing the global economy © David Paul Morris/BloombergGopinath cautioned that the ECB faced particularly acute trade-offs; there was “a real risk” that a stagflationary environment of languishing growth and high inflation will emerge in Europe, given the intensity of the energy crisis caused by the Ukraine war, she said.Malpass said that developing economies are also particularly vulnerable as global financial conditions tighten.“Part of it is higher interest rates and they have a lot of debt outstanding, so that increases both their debt service costs but makes it harder for them to get new debt,” he said. “The added challenge is the advanced economies drawing heavily on global capital and energy resources, creating a lack of working capital for new investments [elsewhere].”The enormity of the economic challenge confronting central bankers was summed up by Changyong Rhee, head of the Bank of Korea, when he said that whether the world would revert to a low-inflation environment was the “billion-dollar question”.Cutting through the buoyant atmosphere among Jackson Hole attendees — who, because of the pandemic, had waited two years to socialise and trade ideas face-to-face — was the overarching concern that the world and the economic relationships that underpin it had fundamentally changed.The sharp shift in economic dynamics left attendees doing some soul-searching. “There’s a lot of humility in the room [about] what we know and what we don’t know,” said Gopinath.The event revealed in stark detail the faultlines caused by the pandemic and Russia’s invasion of Ukraine.“We have the energy crisis, we have the food crisis, we have the supply chain crisis and we have the war, all of which has profound implications for the economic performance of the world, for the nature in which the world is interconnected and most importantly, for the relative prices of many, many things,” said Jacob Frenkel, the former governor of the Bank of Israel who chairs the board of the Group of 30, an independent consortium of ex-policymakers.Complicating matters are doubts about just how much policy tightening is needed in the face of unpredictable gyrations in supply and, in turn, prices.“Currently, we have to make our decisions against the backdrop of high uncertainty,” said Thomas Jordan, chair of the Swiss National Bank. “Interpreting the current data is challenging, and it is difficult to distinguish between temporary and sustained inflationary pressure.”According to the ECB’s Schnabel, the next few years are at risk of being known as the “Great Volatility” — in contrast with the past two decades, which economists called the “Great Moderation” because of the relatively tranquil dynamics.Many officials have come to believe that the structural forces that kept price pressures in check — chiefly globalisation and an abundant labour supply — have reversed.“The global economy seems to be on the cusp of a historic change as many of the aggregate supply tailwinds that have kept a lid on inflation look set to turn into headwinds,” warned Agustín Carstens, general manager at the Bank for International Settlements. “If so, the recent pick-up in inflationary pressures may prove to be more persistent.”Sceptics of this view say they are confident that the world’s leading central banks will be able to ward off entrenched high inflation. “The issue central banks need to focus on isn’t establishing inflation credibility,” said Adam Posen, president of the Peterson Institute for International Economics. “The issue is redoing the strategy and the inflation targets for a world where you’re going to have more frequent and larger negative supply shocks.”The 2 per cent inflation target that central banks in advanced economies have mostly abided by for decades came up repeatedly throughout the conference, with economists suggesting that it may need to be adapted to fit a more fractured global economy. Long before the inflation surge, the Fed in 2020 announced it would target inflation at a 2 per cent average over time, in order to make up for past periods of undershooting the target. Last year the ECB said it would tolerate inflation temporarily rising above 2 per cent at times.

Many economists advocated for a 3 per cent inflation target. According to Stephanie Aaronson, a former Fed staffer now at the Brookings Institution, it would give central banks more flexibility to look beyond supply shocks and support the economy during downturns.“If you’re coming down to 2 per cent and you can shorten the amount of low growth you need and also move to a better regime in the long-run, because you are less constrained by the zero lower bound, it seems to me like a win-win,” said Maurice Obstfeld, the former chief economist of the IMF, in an interview.When and how a central bank like the Fed and other central banks approach changes in their mandates will be critical, given their tenuous control on inflation and the risk that households’ and businesses’ expectations of future price increases could become entrenched.Karen Dynan, an economics professor at Harvard University who previously worked at the US central bank, said it would be “very risky” for the Fed and its counterparts to even broach the topic until they have reined in inflation.“They need to do everything they can to preserve their credibility — and maybe in some cases, restore their credibility — but they are going to have to think hard about what that new goal should be.” More