Aurelia Butler

Powell met with two regional Fed bank presidents and three board members on Monday, June 13, his monthly schedule published on Friday shows, including a virtual meeting with a member of the Fed Board of Governors for just 10 minutes that day at 3 p.m. (1900 GMT). The Fed’s policy meeting was held June 14-15, with its policy decision released at the close of the meeting on Wednesday, June 15.Typically, the meetings that Powell has with his colleagues in the run-up to policy meetings last 30 minutes each. He had a 15-minute meeting with another unnamed Board member later in the day on June 13. It was the first time he had met more than two policymakers on a Monday preceding a policy meeting since April 2021.That same afternoon the Wall Street Journal reported the U.S. central bank was considering a 75 basis point interest rate hike, which was interpreted as being an informal communication by the Fed and was the catalyst for economists and investors to sharply raise their rate hike forecasts to a 75 basis point move. Fed officials had previously flagged a half percentage point rise as the likely outcome on June 15. The central bank’s own rules forbid policymakers’ commenting publicly on monetary policy in the 10 days running up to interest-rate-decision meetings.The Fed ended up raising interest rates at the June meeting by 75 basis points, the largest hike in more than a quarter of a century, as it ramped up its battle to quell inflation running at a four-decade high.Following the meeting, Powell told reporters the Fed’s hand had been forced over the preceding days by “quite eye-catching” inflation expectations data, as well as data on price pressures the prior Friday, and that he had settled on such an outcome with his colleagues before the meeting.Last week, the Fed raised its benchmark overnight lending rate by another three-quarters of a percentage point to a target range between 2.25% and 2.50%. It has hiked that rate by a total of 225 basis points since March in an increasingly aggressive effort to quash stubbornly high inflation even as recession fears gather pace. More

The Bank of England has come under growing criticism from Conservative MPs who claim the central bank has been too slow in tackling surging inflation. Andrew Bailey, the bank’s governor, warned this week consumer price inflation, which already hit a 40-year high of 9.4 per cent in June, will exceed 13 per cent by the end of the year.Liz Truss, the foreign secretary and frontrunner in the race to become the UK’s next prime minister, said at one of the leadership hustings this week that she wants to change the central bank’s mandate to ensure it controlled inflation. Here the FT looks at how the BoE performs its role and where it stands in relation to its peers.What is the BoE’s mandate? The Bank of England has a primary mandate to maintain price stability. It also supports the government’s economic policy, including its objectives on growth and employment. The UK government of the day sets the inflation target for price stability, which is currently 2 per cent based on the consumer price index. This target is the same for most central banks of advanced economies, including the US Federal Reserve, the European Central Bank and the Bank of Japan. In contrast to the BoE, all three of its peers set their own inflation targets. The Fed has a second target for maximum employment, which allows the US central bank to give more weight to developments in the labour market than the BoE can when setting monetary policy. The BoE’s inflation target is usually confirmed by the government annually. The last time it was changed was in December 2003 when it replaced a 2.5 per cent target based on the retail price index.If inflation overshoots or undershoots the target by more than 1 percentage point, the BoE’s governor is required to write a letter to the chancellor explaining why and what action the bank is taking to resolve the situation. Ruth Gregory, senior UK economist at Capital Economics, said the BoE’s mandate was “at least on paper, the least tolerant” of higher inflation compared to Fed, ECB and the BoJ.How does the mandate relate to the bank’s ability to set interest rates? Since it was given operational independence by Labour chancellor Gordon Brown in 1997, the BoE alone decides what policy action it should take to meet its inflation target. The bank influences price growth in two main ways. First, it sets the “bank rate” — the interest rate a central bank charges other domestic banks to borrow funds — and takes steps to ensure it is passed through to households and businesses. Second, it can use asset purchases, also known as “quantitative easing”. When the bank buys bonds, the interest rate for the bondholders goes down, leading to lower rates on loans for households and businesses. This should help to boost spending and keep inflation on target.James Smith, research director at the Resolution Foundation, said this approach has been “a mainstay of British economic policymaking for the past quarter of a century,” a period during which inflation has averaged almost exactly 2 per cent. Would changes to its mandate compromise the BoE’s independence?Some experts argue there is scope for a review. “It makes sense, 25 years on, to revisit the issue [of the mandate] and look at things that can get better,” said Costas Milas, professor of finance at University of Liverpool. In 2013, Tory chancellor George Osborne revised the BoE’s mandate to give formal backing to the central bank’s practice of letting inflation overshoot its target if the alternative threatened to trigger an economic downturn.Changes to the mandate could include a different tolerance range for the target, the introduction of money supply targeting or tweaks in the voting system for the external members of the monetary policy committee. However, some economists point out that in most other advanced economies, rather than looking to change the mandate, most central banks review their strategies to ensure they can fully comply with it.And many have expressed concern that any call to review the mandate by the government raises questions about the BoE’s independence.To the extent that this has become a central part of the leadership debate, “there is a concern about the degree of politicisation of this issue and the potential risk to the perceptions of BoE independence”, said Paul Hollingsworth, chief European economist at BNP Paribas.Krishna Guha, vice-chair at the investment banking advisory firm Evercore ISI, said any talk of reviewing the mandate risked injecting “uncertainty into financial markets and the business community. This uncertainty has economic costs, and so it should not be done lightly or without great care.”Has the BoE met its mandate? CPI annual inflation averaging almost exactly 2 per cent since the bank’s independence in 1997 “suggests the BoE has done a good job”, said Andrew Goodwin, economist at Oxford Economics. Inflation is now well above the inflation target, but that is also the case in most countries, reflecting the surge in commodity prices following Russia’s invasion of Ukraine.

With an inflation rate of 9.1 per cent, the US has only a marginally lower price pressure than the UK. In many eurozone economies, looser labour markets and governments’ support for households facing surging energy prices have kept price growth lower. Beyond differences in rates, inflation is at a multi-decade high in most advanced economies.Hollingsworth said that to have achieved the 2 per cent target given the double shock of the coronavirus pandemic and the war in Ukraine would have been nearly “impossible for monetary policy alone”. More

Annual inflation in Peru, the world’s second-largest copper producer, reached 8.74% last month, its highest level since July 1997, driven by soaring food and energy prices on the back a global prices spike related to the Ukrainian war.In a bid to rein in high consumer prices, Peru’s central bank has been hiking interest rates – in July, it raised the country’s benchmark rate by 50 basis points to 6%, a 13-year high. Peru’s annualized inflation target ranges from 1% to 3%.The latest poll also showed that market participants in the country expect the local economy to expand 2.5% to 3% this year, a range similar to the one seen in the previous survey. The central bank itself sees the local economy growing 3.1% in 2022, after a 13.3% jump in 2021. More

Good evening,A positive set of US jobs figures has allayed some of the concerns of a downturn in the world’s largest economy.A more than expected 528,000 posts were created in July, up from 398,000 the previous month, with the unemployment rate inching down from 3.6 per cent to 3.5 per cent, the lowest level since the pandemic began.Today’s figures follow GDP data last week showing the economy shrank for the second quarter in a row, sparking concerns that the US was entering recession — a status as yet unconfirmed — although the government maintains it is still in good shape. Federal Reserve chair Jay Powell has warned against giving too much prominence to the GDP reading, arguing that interest rates could rise further without triggering a slump.Separate data yesterday showed the number of people applying for unemployment benefits last week hit 260,000, the highest in more than six months, suggesting the labour market was beginning to cool.Several big companies have recently announced they are shedding jobs, including retail giant Walmart, brokerage Robinhood, media companies Netflix and Twitter, and electric car maker Tesla. Tech groups Meta and Google-parent Alphabet have announced a slowdown in hiring.US government bonds and stock futures sold off after today’s more positive news, as traders bet on the Fed continuing with its aggressive series of interest rate increases.“The unexpected acceleration in non-farm payroll growth in July, together with the further decline in the unemployment rate and the renewed pick-up in wage pressure, make a mockery of claims that the economy is on the brink of recession,” said Michael Pearce, senior US economist at Capital Economics. “All the details [of the report] appear to support continued aggressive rate hikes from the Fed.”Latest newsRussia and Turkey close to trade deal after meeting between Putin and Erdoğan Workers at UK Felixstowe port to strike for eight days in pay dispute (PA)Amazon acquires Roomba maker iRobot for $1.7bnFor up-to-the-minute news updates, visit our live blogNeed to know: the economyEurope and Asia are battling each other to secure gas supplies, risking a further surge in prices that could intensify the cost of living squeeze on consumers.Bank of England governor Andrew Bailey defended its strategy after the central bank increased interest rates by 0.5 percentage points to 1.75 per cent yesterday, the highest level since the global financial crisis. The BoE said the country would enter a protracted recession later this year, with inflation hitting 13 per cent by year-end. It has come under criticism from prime ministerial hopeful Liz Truss and the FT editorial board, which said it needed to be more forceful.Latest for the UK and EuropeUK fuel poverty campaigners hit out at regulator Ofgem’s move to alter the energy price cap every three months instead of twice a year. Meanwhile, earnings data for low-income households highlighted the country’s poor level of social mobility. Scammers who had exploited victims’ fears over coronavirus are now preying on those hit by the cost of living crisis.The number of British businesses in “critical financial distress” has risen by more than a third over the past year. UK construction activity has fallen for the first time since the start of last year as rising inflation and interest rates take their toll.Ukraine has called for the relaxation of Russia’s blockade of its grain exports to be extended to other products such as metals.A European Central Bank survey showed eurozone consumers getting gloomier, with expectations that inflation would remain above 2 per cent for the next three years and that the economy would shrink 1.3 per cent in the next 12 months.Global latestRising tensions across the Taiwan Strait have highlighted risks to global supply chains, as cargo ships and airlines are disrupted by China’s military exercises. The Strait is the primary shipping route between China and Japan, the world’s second and third-biggest economies, as well as carrying manufactured goods from the factories of Asia to world markets.India has raised its key interest rate by half a percentage point to 5.4 per cent to try and curb rising inflation, currently running at 7 per cent.Sergio Massa, the third person to take charge of Argentina’s economy in barely a month, pledged to bring fiscal order and regain market confidence through a new “super ministry”. His first measures include ending money printing to fund the budget, building dollar reserves and “reworking” state subsidies.The recent Japanese invention of heatstroke insurance, while eye-catching as a piece of commercial innovation, tells an unsettling story about the status of the country’s “retirees”, writes Asia business editor Leo Lewis.A review into the Reserve Bank of Australia’s handling of surging inflation is being closely watched by central bankers around the world who stand accused of policy and communication failures.Need to know: businessRecent turmoil in financial markets was reflected in falling profits and slowing new business at UK investment platform Hargreaves Lansdown and outflows from Pimco, the world’s largest credit-focused fund manager.Lufthansa said demand from wealthy passengers would bring “substantially higher” profits in the following quarters, despite the industry’s current state of chaos. Profits at Glencore, one of the biggest winners from the turmoil in commodity markets, more than doubled in the first half of the year. Coal accounted for almost half its record $18.9bn in adjusted earnings.Bayer, the German drugs and chemicals group, doubled its growth forecast for 2022 after rising food prices boosted demand for seeds and weedkiller.Profits at Toyota, the world’s biggest carmaker, almost halved to ¥579bn ($4.3bn) in the second quarter thanks to rising costs and pandemic lockdowns in China. Meanwhile, Rolls-Royce has warned of the effect of rising inflation and supply chain problems.UK retail bellwether Next upped its full-year profit forecast after warm weather boosted first-half in-store sales. There is hope on the horizon too for online retail. Innovation editor John Thornhill examines an Indian ecommerce network enabling millions of small merchants to hook up with suppliers, customers and delivery firms to take on the likes of Amazon.US media companies have been hit by a “perfect storm” of problems, causing them to lose nearly $400bn in market value this year. Warner Bros Discovery said the “spend, spend, spend” streaming era was at an end as it reported a $3.4bn quarterly loss. Advertising demand remains strong, according to WPP, the world’s biggest ad group, even if its investors were not convinced.FC Barcelona was previously declared “clinically dead” by its president after years of high spending on players coupled with the forced closure of its stadium during the pandemic. Sports editor Josh Noble considers whether a new spending splurge will help it reclaim past glories or just store up more financial problems for the future.

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Science round-upCovid infections in the UK, although still at high levels, have fallen for the second consecutive week, fuelling hopes that the latest wave — driven by the BA.5 variant — has peaked. The US is switching focus to monkeypox after declaring the outbreak a public health emergency yesterday and appointing a new team to improve access to testing, vaccines and treatments. The country accounts for about a quarter of the 22,100 global infections of the virus, which spreads via skin-to-skin contact and is usually found in west and central Africa.Two reports cast doubt on the UK’s goal of becoming a “science superpower” without a better focus on results and more spending on research and development. A lack of lab space is also threatening the life sciences boom in Oxford and Cambridge.US president Joe Biden’s positive test for Covid just three days after announcing he was negative has thrown the spotlight on “rebound” cases of patients who have been prescribed Paxlovid, which has been hailed for preventing some of the Covid’s worst effects in older patients or patients with pre-existing conditions.Japan is struggling with its biggest coronavirus outbreak since the start of the pandemic, fuelled by children and adolescents who have not been fully vaccinated.Get the latest worldwide picture with our vaccine trackerSome good newsThe tram is back! Dozens of cities across Europe are reintroducing tramways, easing congestion and pollution, as well as reclaiming urban centres in a new golden age for transit. (Reasons to be Cheerful)A tram passes through Birmingham, UK host city of the Commonwealth Games © Kirsty Wigglesworth/APHave you spotted some good news stories you’d like to share with FT readers? Comment below or email us at [email protected]. More

The Old Lady is in a sticky spot. Inflation is at a 40-year high and an early 1990s-style recession looms. The UK has a tight labour market, like the US, and an energy shock, like the eurozone. Finding an escape route may be further complicated by the unorthodox economic policies of Liz Truss, the candidate likely to become the next prime minister.Tax cuts are set to be an important feature of the Truss premiership. That, as her rival Rishi Sunak argues, is likely to stoke inflation and put upward pressure on interest rates. Nigel Lawson, chancellor in the Thatcher government, draws parallels with the 1972 “dash for growth” Budget that was followed by years of high inflation. In that era, gold outperformed. Its value increased almost seven-fold in real terms. Commodities like oil and wheat also did well. The dismal performance of equities showed they were a feeble hedge against inflation. Analysis of markets dating back to 1900 tells a similar story. In periods of high inflation, equities’ real return was -10 per cent, according to a Credit Suisse study. Bonds meanwhile produced a negative return of 24.7 per cent. Separately, the study showed that in periods when interest rates were rising, investors in UK equities would have done better to stay in cash, which returned 0.6 per cent a year more.Some sectors could do well, however. Though banks could be hit by bad loans as the recession bites, higher interest rates are fattening their net interest margins. Truss is an opponent of windfall taxes, making it unlikely she would copy the 1981 one-off bank levy imposed by her role model Margaret Thatcher. Truss is avowedly pro-business. Her policy of cancelling corporation tax increases would benefit investors in companies that are doing well. But protecting company profits would be an unpopular policy when voters want help with utility bills. As the economy tips into recession, she may find it hard to stick to her policies. No plan survives contact with reality intact.The Lex team is interested in hearing more from readers. Please tell us what you think the economic consequences of a Liz Truss premiership would be in the comments section below. More

Millions of people struggling with the rising cost of living are facing growing financial pain over the coming months as higher UK inflation leads to surging bills for variable and fixed-rate mortgage borrowers.The Bank of England on Thursday raised its main interest rate by 0.5 of a percentage point to 1.75 per cent, the largest increase in 27 years. Around 2mn people in the UK either have home loans with standard variable rates or tracker mortgages, which follow the BoE’s base rate.Barclays and Santander were among several lenders to say their standard variable-rate mortgages would increase by 0.5 percentage points following the announcement. Nationwide, HSBC and NatWest are yet to make a decision on changing standard variable-rate products but will increase tracker mortgage rates in line with the BoE’s decision.Borrowers on fixed-rate mortgages — the prevalent type of home loan in the UK — are protected from immediate changes in interest rates. However around 40 per cent of these are set to expire this year or next, exposing borrowers to higher rates.“The people who are going to feel this immediately are on the variable deals — particularly those on standard variable rates,” said David Hollingworth, associate director at L&C Mortgages. “But there’s not too much room for complacency for those who are on fixed rates, which have been moving astonishingly quickly since the end of last year.”Several big lenders had made changes to their fixed-rate products ahead of the BoE announcement, with Halifax, NatWest and HSBC raising rates on a number of their fixes, and lenders including Co-operative Bank and Leeds Building Society withdrawing selected fixed-rate deals. According to Moneyfacts, a 0.5 percentage point rise in the current average standard variable rate of 5.17 per cent would add £1,400 to a total home loan bill over two years, based on a £200,000 repayment mortgage.But borrowers who switched to a fixed-rate deal could make substantial savings. Moving to a two-year rate at the current average of 3.95 per cent would save about £3,333 over two years, Moneyfacts said. Alongside its rates decision, the BoE said that it expected inflation to rise above 13 per cent by the end of the year — significantly higher than its May forecast — following the latest surge in gas prices.Housing market experts pointed to the impact of this bleak economic outlook on house prices, which have fallen for the first time in a year, according to Halifax, one of the UK’s biggest mortgage lenders. It said on Friday that average house prices dropped 0.1 per cent in July, noting that “rising borrowing costs are adding to the squeeze on household budgets”.Halifax cautioned against setting too much store against one month’s data, particularly when the supply of housing remained tight. However, managing director Russell Galley said the leading indicators suggested a softening of activity in recent weeks — and more to come. “Looking ahead, house prices are likely to come under more pressure as . . . the headwinds of rising interest rates and increased living costs take a firmer hold.”UK households face growing pressures on their household spending, with fuel and food prices surging in part due to the Russian invasion of Ukraine. “The cost of living crisis, interest rate rises and house price growth could price out would-be buyers if they have little disposable income and subsequently eat into their savings,” said Rachel Springall, finance expert at Moneyfacts. Rate rises can nonetheless be good news for savers, who see bigger returns on their cash. But few banks have yet passed on increases in full to savers from successive BoE rate rises over the past eight months. Santander said it would increase rates on its 123 current account, junior Isa and first home saver account, so that customers would earn 1 per cent a year on balances up to £20,000. The move represents a rise of 0.25 percentage points, half the BoE base rate rise — though its Help to Buy Isa will see the full rise passed on.

Laura Suter, head of personal finance at investment broker AJ Bell, said savers would continue to benefit from increased competition between banks on their savings rates after the BoE began raising base rates last year. “The leap in rates should put fuel into that savings boom,” she said. “However, with inflation now expected to go higher and for longer, savers are being rewarded on the one hand but seeing far more taken on the other.”In July, William Chalmers, chief financial officer of the UK’s largest mortgage provider Lloyds Banking Group, said the lender had seen a “light softening” in new applications for mortgages but that remortgaging activity remained strong. More

The writer is author of ‘Two Hundred Years of Muddling Through: The Surprising Story of the British Economy’The Bank of England’s new forecasts make for exceptionally grim reading. In recent months the bank’s governor Andrew Bailey has warned that the institution is walking “a narrow path” between the risks of continuing high inflation and the chance of a recession. The UK is now set to experience both, leaving the next prime minister with some uncomfortable choices.The BoE forecasts that inflation will peak at an annual rate of more than 13 per cent and remain above 10 per cent for much of 2023. It foresees the economy slipping into recession in the coming quarter and not returning to growth until 2024. Even then, the eventual recovery will be anaemic. Unemployment, in the bank’s central scenario, will rise for each of the coming three years.The BoE expects the depth of the recession to be comparable to that of the early 1990s, and milder than that which followed either the financial crisis or the lockdowns associated with the pandemic, but the hit to household incomes will run far deeper. The forecasts show the largest two-year fall in real household disposable income on record.Yet despite forecasting a recession, the Monetary Policy Committee delivered a 0.5 per cent rise in interest rates — the largest single increase since the bank gained operational independence in 1997. While the UK is far from unique among advanced economies when it comes to suffering from uncomfortably high inflation, the nature of Britain’s inflation is beginning to look more troubling. European inflation is primarily a story of soaring energy prices while American inflation is now being driven by a tight jobs market pushing up costs in the service sector. Britain has a dose of both. The MPC has been content to mostly look past above-target inflation driven by higher global commodity prices and pandemic-related supply chain disruptions, but now believes that domestically generated price pressures require firmer action. Bringing those domestic pressures down, in the MPC’s view, requires painful medicine: higher interest rates to slow hiring decisions and take some of the heat out of the jobs market even as high energy prices already put the squeeze on consumer incomes and spending.That view is certainly open to question. Cornwall Insight, a consultancy, reckons that the typical household domestic energy bill will be about £3,500 in 2023 — up from closer to £1,000 in 2021. With consumers forced to spend about 9 per cent of their post-tax income on energy in 2023, up from 4.6 per cent before the price rise, discretionary spending on other goods and services will fall sharply. Labour-intensive consumer-facing services firms may rethink recruitment plans relatively quickly as demand dries up. A proportion of the fifty and sixty-somethings who took an earlier than expected retirement in 2020 and 2021 may find themselves drawn back into work to make ends meet, pushing up labour supply. Soaring energy bills are inflationary in the short term. But in the medium term they act as a deflationary tax rise on households and firms.But whether the BoE’s forecasts are correct or not on how the jobs market and domestic price pressures will develop, they are almost certainly wrong when it comes to how the Treasury will respond. The bank’s latest numbers, as is always the case, are conditional on there being no change in fiscal policy. Once Britain has a new prime minister in early September, however, some form of fiscal easing in the shape of tax cuts, further energy bill rebates or both will follow. It is hard to see any of these measures being enough to avert a recession at this point, but they could still ease some of the pressure on household income in the months ahead.Whoever is Britain’s next premier, their relationship with the BoE will become increasingly fraught. An MPC prepared to raise interest rates into a forecast recession is signalling that it will move to offset any fiscal easing coming from the government with tighter policy. The bank has concluded that a recession is necessary to return inflation to target. Liz Truss, the favourite to win the Conservative leadership contest according to both the polls and the bookmakers, has berated the BoE in recent weeks for its failure to control inflation. She is unlikely to be especially happy with a central bank prepared to take action by raising rates into a slowing economy and offsetting any policy easing by a government she leads.Against a backdrop of global energy price inflation, a mix of looser fiscal policy and tighter monetary policy may well be appropriate for Britain. Targeted fiscal support can support the households most at risk from rising prices and prevent some otherwise viable firms from going under. Higher rates may support the value of sterling and help damp imported price pressures. But choosing the right policy mix for Britain now is very much akin to picking out the least crumpled shirt from the laundry basket: the best option is not necessarily a good one. The country is poorer than it thought it would be. In the short term that is unavoidable. The real policy debate is about how that pain is divided between households, firms and the government’s balance sheet — not how it is avoided. More