Aurelia Butler

A top Federal Reserve official said the US central bank’s decision to raise its benchmark policy rate by three-quarters of a percentage point this week risked adding to “policy uncertainty” in a statement explaining her decision to oppose the move.Esther George, president of the Fed’s Kansas City branch and typically one of the most hawkish voting members of the policy-setting Federal Open Market Committee, was the lone dissenter on Wednesday to the biggest rate rise since 1994, which lifted the federal funds rate to a new target range of 1.50 per cent to 1.75 per cent. She instead voted in favour of the Fed sticking with its previously telegraphed half-point increase. Before the scheduled “blackout” period ahead of the policy meeting — during which policymakers’ public communications are limited — officials had explicitly backed another half-point rate rise, having delivered the first since 2000 in May. But two alarming inflation reports released last week that not only indicated price pressures were mounting but also at risk of getting worse, prompted officials to rethink that pace, resulting in the larger-than-expected adjustment.In a statement released on Friday, George said she “viewed that move as adding to policy uncertainty simultaneous with the start of balance sheet run-off”. In addition to raising interest rates, the Fed is also shrinking its $9tn balance sheet, a process that officially got under way on Wednesday.“The speed with which we adjust the policy rate is important,” George said. “Policy changes affect the economy with a lag, and significant and abrupt changes can be unsettling to households and small businesses as they make necessary adjustments.”She added that it had knock-on effects for US government bond markets and broader borrowing costs, but affirmed the case for tighter monetary policy was “clear-cut”.Beyond implementing a jumbo-sized rate rise, the Fed also set forward an aggressive plan to tighten monetary policy this year and next in a bid to quell the worst inflation problem in four decades. Most officials now project rates will rise to 3.4 per cent by the end of 2022, a level chair Jay Powell said was expected to be “modestly restrictive” on economic activity. Powell said he does not expect 0.75 percentage point moves to be “common”, but did say another was possible in July. He also said the Fed would look for a string of decelerating monthly inflation prints as it determines how aggressive it needs to continue being. Neel Kashkari, the dovish president of the Minneapolis Fed, said on Friday that a move of that magnitude may be warranted in July, but warned about the risks of overdoing it. “This uncertainty about how much tightening will be needed leads me to be cautious about too much more front-loading,” he said in remarks published on the bank’s website. Kashkari said a “prudent strategy” may be continuing with half-point rate rises after the July meeting “until inflation is well on its way down to 2 per cent”.The Fed, in a monetary policy report released to Congress on Friday, said its “commitment to restoring price stability — which is necessary for sustaining a strong labour market — is unconditional”.Officials see additional adjustments in 2023, with rates potentially rising to 3.8 per cent, and modest cuts the following year. Core inflation is set to fall as a result, with officials projecting it to settle at 2.7 per cent in 2023 and 2.3 per cent in 2024, from its 4.9 per cent level as of April. Reflecting that tighter monetary policy will probably dent the US labour market, policymakers pencilled in the unemployment rate rising to 4.1 per cent in 2024 from its current level of 3.6 per cent. The economy is still expected to expand, however, by 1.7 per cent this year and in 2023. Economists say these forecasts do not fully acknowledge the extent of the economic pain probably associated with what the Fed will need to deliver if it is to root out high inflation. Many now see the economy tipping into a recession next year, as the odds of a so-called “soft landing” plummet.“There is a path to a soft landing, but I think it’s very narrow, very hidden and will take a lot of luck to find,” said Roberto Perli, a former Fed staffer who is now head of global policy at Piper Sandler. More

Senior members of Boris Johnson’s government say a looming clash with public sector workers is one of the biggest risks to the UK’s economic and political stability, with anger over pay building towards a wave of industrial action.A nationwide walkout due to cripple rail services next week has been billed as the start of a “summer of discontent”. In the public sector, unions representing teachers, junior doctors, civil servants and local authority staff are moving towards strike action. Binmen and bus drivers are already on strike, while criminal barristers and postal workers are set to vote on action.Ministers fear that a confrontation over pay with public and quasi-public sector workers — who are suffering much bigger real terms wage cuts than their private sector counterparts — could either tip a faltering economy into recession or blow a hole in the government’s spending plans. One cabinet minister said the government was walking a “delicate tightrope” of keeping pay down and avoiding an inflationary wage spiral without forcing multiple sectors on strike: “If we get this wrong, we risk going into a de facto general strike that will create further turmoil that risks grinding the whole economy to a halt.”Another senior minister said the government “will have to hold the line, no matter how hard it gets” in pay negotiations, adding: “It’s going to be tough but we can’t go back to 8 or 10 per cent wage increases as we saw in the 1970s.”Economists say the direct impact of strike action on the economy will be limited. Despite parallels with the 1970s — when industrial unrest spread from coal miners to gravediggers — unions can no longer shut the economy down, with a much smaller membership concentrated in the public sector. But there is much at stake for public services and the public finances at a time when many Tory MPs want to prioritise tax cuts over extra spending. Wage deals for public sector workers lag far behind those on offer in the private sector, where many employers have been paying big bonuses to keep scarce staff. Official data shows average total pay growth for the private sector was 8 per cent in the three months to April, compared with 1.5 per cent in the public sector — one of the biggest gaps on record.The government has been trying to keep imminent pay settlements to just 2 per cent, or 3 per cent in some instances, arguing that going any further would set a benchmark for inflationary pay deals across the economy.Paul Johnson, director of the Institute for Fiscal Studies, said if the Treasury enforced this limit, as inflation nears double digits, it would double the real terms pay cut many public sector workers have already suffered since 2010. This would cause big problems for recruitment and retention, on top of the risk of strikes shutting down schools and hospitals.A pay rise that came anywhere near matching inflation would cost an extra £10bn. Because spending plans were set in cash terms, when inflation was expected to be much lower, departments will not be able to keep pace with rising prices without compromising the delivery of public services — unless the Treasury finds more money.“This is the biggest problem for the government this year, the most difficult decision,” Johnson, from the IFS, said.Although next week’s rail strikes will do less direct damage to the economy than past disputes — most goods are shipped by road and many commuters can work remotely — business leaders are acutely worried by the prime minister’s willingness to court confrontation.“We’re expecting the economy to be pretty much stagnant. It won’t take much to tip us into a recession . . . We’ve had weeks of politicking with the country standing on the brink of a summer of gridlock,” said Tony Danker, director-general of the CBI business, the employers’ organisation, which has called the rail strikes “particularly regrettable at a time when the economy is under such strain”.Neil Carberry, chief executive of the Recruitment & Employment Confederation, said that, with both employers and workers facing soaring costs, strikes could also become more frequent in the private sector: “In any unionised workplace there is going to be a higher risk of a dispute in the next year or two than there has been for a couple of decades.”Business groups add that their members are reporting a sharp pick-up in union activity, although private sector employers have often proved more willing to strike deals on pay before disputes reach the point of industrial action.Even where unions are not involved, workers are increasingly able to secure better terms and pay in a labour market with as many vacancies as there are people out of work. The Bank of England said on Thursday that companies were still struggling to hire, despite slowing economic growth, and were offering pay deals averaging just over 5 per cent, with a significant minority of companies considering mid-year top-ups as the cost of living rose.

Brian Reading — who served as economic adviser to prime minister Edward Heath in the run-up to the miners’ strike of 1972 — argued in a recent paper that the decline of trade unions would not stop workers securing inflationary wage deals at a time of widespread labour shortages.“Private sector unions are less aggressive today, but scarce skilled workers are more powerful,” he wrote. “Public sector workers have popular support . . . Cheap labour is no more.”  More

At 1225 GMT, the rouble was 0.3% stronger against the dollar at 56.35 and was up 0.2% versus the euro at 58.90, reversing earlier losses.At Russia’s flagship annual economic forum in St. Petersburg, top Russian policymakers said the Russian economy was holding up better than expected in the face of unprecedented Western sanctions. But in a stark warning, the head of state-run Sberbank, the country’s largest lender and a bellwether for the wider economic, said Russia could take 10 years to return to its pre-sanction levels.Russian stock indexes also edged down in the first two hours of trading.The dollar-denominated RTS index shed 0.1% to 1,315.6 points. The rouble-based MOEX Russian index was 0.7% lower at 2,353.4 points.For Russian equities guide seeFor Russian treasury bonds see More

“Grateful to…(Canadian Deputy Prime Minister Chrystia Freeland) for support & comprehensive assistance to Ukraine in the fight against the aggressor,” Shmygal tweeted, referring to Russia which invaded Ukraine in February. The IMF set up the administered account in April to provide donors with a secure way to channel financial assistance to Ukraine in the form of grants and loans. Germany has also already pledged to contribute funds and other countries have expressed interest too, IMF spokesperson Gerry Rice said last week.($1 = 1.2985 Canadian dollars) More

Cryptocurrency valuations have plunged in recent weeks as investors dump risky assets in a rising rate environment, with bitcoin, which reached a record high of $69,000 in November, having lost more than half its value this year. “Recently, the crypto market has seen major fluctuations, and some institutions in the industry have experienced conductive risk events. Due to the current situation, Babel Finance is facing unusual liquidity pressures,” the company said.Crypto lenders gather crypto deposits from retail customers and re-invest them, proclaiming double-digit returns and attracting tens of billions of dollars in assets. However, the recent meltdown has lenders unable to redeem their clients’ assets.Babel, which has 500 clients and limits itself to bitcoin, ethereum and stablecoins, raised $80 million in a funding round last month, valuing it at $2 billion. It had ended last year with $3 billion of loan balances on its balance sheet.Earlier this week, U.S.-based retail crypto lending platform Celsius Network froze withdrawals and transfers between accounts “to stabilize liquidity” as the collapse of cryptocurrency TerraUSD in May triggered a rise in redemptions. More

Operation shock and awe: June 2022 will most likely be remembered as the month central banks finally decided to bring out the big guns to shoot down soaring inflation.Within 48 hours, the U.S. Federal Reserve made its biggest rate hike since 1994, the Swiss National Bank raised its policy interest rate for the first time in 15 years and the European Central Bank announced fresh emergency tools to support the bloc’s indebted south while it tightens monetary policy. The Bank of England also rose borrowing costs for the fifth time since December and its benchmark interest rates is now at its highest since January 2009 even as the economy lurches into recession.With the glaring exception of the Bank of Japan which has steadfastly stuck to its ultra-dovish policy, the hawks of monetary policy are now clearly running the show globally. A quick look at the state of financial markets gives a pretty clear idea of, as late musician Prince used to sing, what it sounds like when doves cry. The yield of Germany’s bund’s at one point yesterday surged by a whopping 20 basis point, the Swiss franc jumped a rare 2% against the euro and a multitude of equity indexes confirmed a bear market.All in all world stocks are heading for their worst week since the March 2020 pandemic meltdown as investors worry about the economic consequences of fast-rising interest rates. Speaking of which, the Philadelphia Federal Reserve’s manufacturing activity index got its first negative reading since the early months of the coronavirus pandemic and the outlook for the next six months was the lowest since February 2008. Adding to the gloom, U.S. homebuilding fell to a 13-month low in May and permits tumbled, suggesting the housing market was cooling as surging mortgage rates reduce affordability for many first-time homebuyers. GRAPHIC: BOJ and JP CPI (https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrnbyjpm/BOJ%20and%20JP%20CPI.JPG) Key developments that should provide more direction to markets on Friday:- Shanghai’s economy shrinks again in May but at slower pace – Britain’s Tesco (OTC:TSCDY) reaffirms profit guidance despite sales fall – Sweden’s Riksbank policy meeting- U.S. industrial production- Santander (BME:SAN) appoints Hector Grisi as new CEO More