Aurelia Butler

(Reuters) – If inflation does not respond to the Federal Reserve’s interest rate increases by easing as expected, then rates will have to remain “higher for longer,” St. Louis Federal Reserve President James Bullard said on Tuesday.Bullard, in response to questions at an event in New York, also said he expects growth in the second half of this year to pick up from the first half, which featured contractions in overall output in both the first and second quarters. More

The UK economy is sliding into recession, with no let-up in sight in a cost of living crisis that will leave more than 5mn households with their savings exhausted by 2024, according to new forecasts by the National Institute of Economic and Social Research.The think-tank expects GDP to fall “slightly” over the second half of 2022 and the first quarter of 2023 but said on Wednesday that the risks of a deeper recession were growing. It saw an “evens chance” that GDP would be lower at the end of 2022 than a year earlier. It also said that regional disparities were widening, with London powering ahead of the rest of the country.Niesr called on the next prime minister to step up direct support for the poorest households, rather than prioritising tax cuts, arguing that even if inflation slowed next year, food and energy prices were set to remain at levels that would cause ongoing hardship for many people into 2024.“Political uncertainty in Westminster is untimely and will delay fiscal support to millions,” Niesr said. It urged the government to increase its energy grant to low-income households and boost benefits payments for at least six months when regulated gas and electricity prices rise again in October.The £200bn of savings some households had accumulated during the pandemic could help prop up consumer spending in the second half of the year, Niesr said. But these were distributed “highly unequally”, with demand for foreign holidays “surging as millions are reported to be struggling with shopping for household essentials”.The think-tank predicts that the number of households with no savings at all to fall back on will double to 5.3mn by 2024, with almost 7mn households living from one pay cheque to the next with savings worth less than two months of disposable income.More than 1mn households could experience severe destitution, Niesr added, with food and energy bills exceeding their disposable income and forcing them “to choose between eating and heating” or to turn to loan sharks. “There is no substitute for continued targeted welfare,” Niesr said, noting that the race for the Conservative party leadership had focused on tax cuts rather than the “urgent necessity to continue support for the most vulnerable”.It also said that the government should use some of its fiscal room to raise public sector pay according to the needs of individual sectors, rather than “with an eye to inflation”, arguing that public services were generally provided without a price, so did not directly feed consumer price inflation. The think-tank blamed both the Bank of England and the government for allowing high inflation to take hold, arguing that a premature tightening of fiscal policy had left monetary policymakers “reluctant to raise rates with demand still fragile”. Stephen Millard, Niesr’s deputy director for macroeconomics, said it was now “up to the monetary policy committee to make sure inflation does come down next year and the new chancellor to support those households most affected”. More

That’s because both central banks, despite battling the stiffest inflation rates in decades, began their current efforts with considerably more credibility than their counterparts in the 1970s and ’80s, Bullard said in remarks prepared for delivery to a gathering of the Money Marketeers of New York University. Their predecessors from roughly half a century ago lacked such credibility before kicking off their own inflation-fighting efforts.In the Fed’s case, that resulted in severe back-to-back recessions in the early 1980s when Fed Chair Paul Volcker had to raise rates to punishing levels to earn credibility and to lower inflation.”Since modern central banks have more credibility than their counterparts in the 1970s, it appears that both the Fed and the ECB may be able to disinflate in an orderly manner and achieve a relatively soft landing,” Bullard said in slides prepared for the presentation.Bullard’s largely academic remarks on Tuesday followed those of a trio of his colleagues, who earlier in the day delivered a uniformly hawkish message that rattled bond and interest rate futures markets that had come out of last week’s Fed meeting positioned for the U.S. central bank to dial back the pace of rate hikes.In separate appearances, Mary Daly, Charles Evans and Loretta Mester, presidents of the San Francisco, Chicago and Cleveland regional Fed banks, respectively, said they were “completely united” on getting U.S. interest rates up to a level that will more significantly curb economic activity and put a dent in the highest inflation rate since the 1980s.Last month the Fed raised its benchmark target rate by 75 basis points for a second straight meeting, and Chair Jerome Powell said another “unusually large” increase might be appropriate at the Fed’s September policy meeting if data between now and then warrants it. The Fed’s rate now stands in a range of 2.25-2.50%.Ahead of July’s meeting, Bullard – among the most hawkish Fed policymakers – had said he wanted to see the Fed’s target rate in the range of 3.75% to 4.00% by year-end, up from his previous target of 3.50%.As of June, the median expectation among Fed officials for rates at year-end was 3.40%, a figure which also will be updated at the Sept. 20-21 meeting.Last month, the ECB lifted its benchmark deposit rate for the first time since 2011 and signaled additional rate hikes ahead. More

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