Aurelia Butler

Top Federal Reserve officials think entrenched inflation is a “significant risk” to the US economy and fear tighter monetary policy will be needed if price growth exceeds their expectations, according to an account of their most recent meeting.The minutes of the US central bank’s June meeting, when the Fed delivered the first 0.75 percentage point rate rise since 1994, also showed that policymakers now support raising interest rates to the point at which economic activity is restrained, with the possibility that they could become “even more restrictive” if warranted by the data.“Many participants judged that a significant risk now facing the committee was that elevated inflation could become entrenched if the public began to question the resolve of the committee to adjust the stance of policy as warranted,” the minutes said.The notes from the Federal Open Market Committee, which were released on Wednesday, revealed the alarm spreading through the top ranks of the US central bank over inflation, which is running at an annual pace of 8.6 per cent. The account also showed the lengths officials were willing to go to ensure prices do not spiral further out of control.The Fed will decide whether to raise rates by 0.50 percentage points or 0.75 percentage points at its meeting this month, although several officials have indicated their support for the larger increase. “If inflation becomes entrenched in consumer and business psyches, it will be much more difficult to lower it over the medium term,” said Kathy Bostjancic, chief US economist at Oxford Economics. “That is the breaking point for [the Fed], and they really want to do their best to ensure that it doesn’t happen.”She added: “The longer inflation remains high, the more it will become embedded in expectations.”The minutes showed that participants were increasingly aware that their plans to tighten monetary policy would slow the pace of economic growth. Most noted that the risks to the outlook were “skewed to the downside” given the possibility that further tightening could weigh on activity.The minutes echoed recent comments from Fed chair Jay Powell, who has emphasised that the central bank has little room for manoeuvre as it tries to tame inflation without causing widespread job losses. A US recession is now “certainly a possibility”, and would in large part depend on factors outside of the Fed’s control, he said last month, pointing to the war in Ukraine and prolonged Covid-19 lockdowns in China.Powell reiterated that message last week on a panel with other central bankers, when he warned that a failure to restore price stability would lead to an even worse outcome for the US economy.“The process is highly likely to involve some pain, but the worst pain would be from failing to address this high inflation and allowing it to become persistent,” he said.

The account of the June meeting shed further light on why the Fed abruptly decided to dramatically step up the pace at which it is tightening monetary policy, opting to jettison its previously signalled plans for a second consecutive 0.50 percentage point rate rise. Instead, a 0.75 percentage point increase lifted the federal funds rate to a new target range of between 1.50 per cent and 1.75 per cent. The decision followed the publication of two economic reports, one showing a large jump in consumer prices in May and the other a rise in inflation expectations.Participants expressed concern that the former report suggested inflationary pressures were not yet abating and “[solidified] the view that inflation would be more persistent than they had previously anticipated”, according to the minutes. The June meeting also featured revised forecasts, which indicated officials envisaged rates rising to just under 3.5 per cent by year-end. Further rate increases that push the policy rate to 3.75 per cent are expected next year before reductions in 2024. Officials also pencilled in higher unemployment and lower growth over that period.The minutes detailed why the Fed scrubbed an important line in its policy statement last month, in which it had said it expected inflation to fall back to its 2 per cent target and the labour market to “remain strong” as it tightens monetary policy.“As the further firming in the policy stance would likely result in some slowing in economic growth and tempering in labour market conditions, members also agreed to remove the previous statement language,” the minutes said. More

Researchers surveyed more than 5,000 Americans living in poverty to find out how effective the unconditional cash transfers were. Recipients increased expenditures for a few weeks, but the extra money had no long-term impact on spending or savings, according to the paper, published Tuesday.“These results suggest that the cash allowed participants to spend more money, improving objective financial outcomes for the few weeks immediately following the transfer and then dissipating thereafter,” wrote the researchers, led by Ania Jaroszewicz at Harvard University’s Institute for Quantitative Social Sciences. The survey covered three groups: the first received a one-time payment of $500, the second got $2,000 and the third nothing.In the two weeks following the payment, the first and second groups spent $26 and $82 more per day on average, respectively, compared with the control group. Both groups also had higher bank balances immediately after getting the money. Expenditures and bank balances returned to levels similar to that of people who received no payment about four weeks later. The cash recipients also did more poorly on financial, psychological and health measures in the survey. This is consistent with the notion that receiving some money — but not enough — makes the gap between needs and resources more salient for low-income individuals, which is source of distress, according to the paper.“These results hint that while the cash did not actually produce worse outcomes in some objective sense, in some situations it made recipients feel worse,” the researchers wrote.In the survey, participants mainly used the checks to make debit and credit card payments, pay bills, buy food, shop and fund transportation. The study, which was conducted from July 2020 to May 2021, found no evidence that the extra money helped reduce bank fees, including overdraft and late payment penalties. Read More: Cash Payments Were Lifeline for Low-Income Americans in PandemicThe researchers pointed out that the three rounds of stimulus checks in the US covered small amounts of money compared with people’s financial needs, especially those living in poverty. The checks ranged from $600 to $1,400 for each adult and $500 to $1,400 per qualifying child.Larger amounts could have a long-term impact. That type of relief package would be costly, though, so it may be more useful to partner future cash payments with increased community resources, the researchers wrote.©2022 Bloomberg L.P. More

By Rachel SavageLONDON (Reuters) – Rising interest rates and high oil prices are a positive for business even while inflation is taking a toll on African countries, the chief executive of pan-African lender Ecobank said in an interview on Wednesday.The bank’s net interest margin will increase as central banks continue to tighten monetary policy to fight inflation, Ade Ayeyemi said in an interview on the sidelines of The Africa Debate conference in London, but would not say by how much ahead of the release of half-year results.The Togo-headquartered lender’s non-performing loans fell to 6.3% in the first quarter of 2022 from 7.7% a year earlier and will continue dropping as oil and gas companies in Nigeria benefit from high prices, Ayeyemi said.”The impact of inflation on our results is going to be minimal this year, but it’s not something we want to continue,” he said. “If it persists in the long run it will affect the ability of our customers to pay.” Ecobank’s profit before tax rose 25% year-on-year to $125 million in the first quarter of 2022, while net revenue increased 8.9% to 436 million.Ayeyemi said the weakening of West Africa’s CFA Franc against the dollar, due to its Euro peg, as well as Ghana’s Cedi, had been an issue, but “it’s not something we expect to be persistent for a long time.”He added that he saw opportunities for Ecobank to invest in local currency debt in Kenya and Ghana, the latter of which he described as “oversold.”Mali paid a debt on Monday that was due that day after regional grouping ECOWAS lifted sanctions and is working on fulfilling missed payments, Ayeyemi said.He said he would like Ecobank to operate in Ethiopia, but was otherwise happy with its geographic footprint in 33 countries on the continent. (The story refiles to add quotation marks at end of paragraph 6) More

Based on data released in the days prior to the session, “participants concurred … that the near-term inflation outlook had deteriorated since the time of the May meeting,” the minutes stated, justifying the 0.75-percentage-point increase, the first such since 1994, and a move to “restrictive” monetary policy. Participants also judged that an increase of 50 or 75 basis points would likely be appropriate at the policy meeting later this month, a show of unanimity that has erased typical fault lines between inflation “hawks” and “doves.” STORY: MARKET REACTION:STOCKS: The S&P 500 turned 0.61% higherBONDS: The yield on the 10-year Treasury note ticked up to 2.9096%. The 2-year note yield rose to 2.9466%DOLLAR: The US dollar index added to a gain, up 0.52% COMMENTS:JIM PAULSEN, CHIEF INVESTMENT STRATEGIST, LEUTHOLD GROUP, MINNEAPOLIS     “They talked about 50 to 75 (basis points). If that’s where they were at last month I’ve got to believe they’re at 50 now. There really has been a lot of change since they last met.”    “Commodity prices from industrial to agriculture to energy have collapsed. Breakeven rates across the yield curve have fallen. Yeah. And not only that, but bond yields have fallen. So there’s a strong message coming from the economy and the bond market and the commodity market that this seems to be working and maybe the Fed would want to think about slowing down.”PETER TUZ, PRESIDENT, CHASE INVESTMENT COUNSEL, CHARLOTTESVILLE, VIRGINIA“I’m thinking (the Fed is) sticking to the game plan, but they’re cognizant of the softening economy and the impact higher interest rates and inflation are having on consumers.” “They cited some signs of a slowdown. They’re aware that growth may be slowing. It’s steady as she goes until we see another month or two of data.”“Markets haven’t really done much of anything. We’re pretty much flat for the day. People are looking for things that have typically done well in a slowdown.” More