Aurelia Butler

(Reuters) -With expectations for a half-percentage point rate hike at the Federal Reserve’s May meeting now locked in, traders on Friday piled into bets that the central bank will go even bigger in subsequent months, but one Fed policymaker pushed back, saying a more “methodical” approach was appropriate even in the face of too-high inflation. “You don’t need to go there at this point,” Cleveland Fed President Loretta Mester told CNBC, referring to possibility of a 75 basis point rate hike. Traders are now pricing in two such outsized rate hikes, at the Fed’s June and July meetings. Coming from Mester, one of the Fed’s more hawkish policymakers and a supporter of using half-point hikes to get inflation on a downward trajectory more quickly, it was a notable bid to tamp down market panic on a day when U.S. stock indexes tumbled. “Let’s be on this methodical rather than overly aggressive path,” Mester told CNBC in what is likely to be the last public set of comments from Fed policymaker ahead of their May meeting.Fed Chair Jerome Powell on Thursday gave a “go” sign to a half-point hike then and signaled he would be open to “front-end loading” the U.S. central bank’s retreat from super-easy monetary policy.Those remarks solidified traders’ bets on a rise in short-term borrowing costs to the 0.75%-1% range at the Fed’s May 3-4 meeting, and sent them newly piling into expectations for bigger hikes in June and July. At Friday’s market close, after Mester spoke, futures contracts tied to the Fed’s policy rate signaled a more than 80% chance of another 1.5 percentage point increase in the fed funds rate, to the 2%-2.25% range, by the close of the Fed’s July 26-27 meeting.Some economists are also newly penciling in stepped-up policy tightening. Jefferies chief economist Aneta Markowska on Friday said she expects the Fed to use a string of half-point hikes to get rates to a 2.25%-2.5% level by September, a more aggressive path than she had previously anticipated.And Nomura Research analysts, who now see the Fed delivering increases of 0.75 percentage points at each of the Fed’s June and July meetings, said Friday that market bets could help cement that actual outcome. “Stronger (market) pricing for such a move would likely ease the path for the FOMC and participants could likely forge a consensus on such action quickly,” they wrote in a note published early Friday.The Fed lifted its policy rate by a quarter-percentage point last month in its first increase after what had been two years of a near-zero policy rate, though “many, many” Fed policymakers felt bigger rates hikes would be appropriate, Powell noted Thursday. “50 basis points will be on the table for the May meeting,” Powell said. “I also think there’s something in the idea of front-end loading” the removal of accommodation, he added.The Fed raised its target range for the fed funds rate to 0.25%-0.5% in March, from the 0%-0.25% range it had been for the prior two years.Adding to the sense of urgency, even dovish Fed policymakers like San Francisco Fed President Mary Daly and Chicago Fed chief Charles Evans this week embraced the idea of a half-point hike in May and of getting interest rates to a “neutral” level by the end of the year. Most at the U.S. central bank say that level is likely between 2.25%-2.5% in the long run. But with inflation as high as it is — consumer prices rose 8.5% last month, well above the Fed’s goal of 2% — some observers say interest rates will need to rise even further for the “real” cost of borrowing to be high enough to start biting into economic activity.Daly told reporters earlier this week that she believes 2.25%-2.5% is still a “reasonable” estimate for neutral, but noted that policymakers won’t really know until rates get closer to that level and they can observe what happens in the economy. More

WASHINGTON (Reuters) -Indonesia’s new palm oil export ban will hurt other countries but is necessary to try to bring down the soaring domestic price of cooking oil driven up by Russia’s war in Ukraine, Indonesia’s finance minister told Reuters on Friday.Sri Mulyani Indrawati said that with demand exceeding supplies, the ban announced earlier on Friday is “among the harshest moves” the government could take after previous measures failed to stabilize domestic prices. “We know that this is not going to be the best result,” for global supplies, she said in an interview on the sidelines of the International Monetary Fund and World Bank spring meetings. “If we are not going to export, that’s definitely going to hit the other countries.”China and India are among big importers of palm oil from Indonesia, the world’s largest producer accounting for more than half the world’s supply. Palm oil is used in products from cooking oils to processed foods, cosmetics and biofuels.Indrawati said previous measures requiring producers to reserve stocks for domestic use did not result in “the level of prices that we want. It’s still too expensive for the ordinary household to buy those cooking oils.”At this week’s meetings in Washington, policymakers have expressed concern about growing prospects of food shortages due to the war in Ukraine, a major producer of wheat, corn and sunflower oil. World Bank President David Malpass said repeatedly that countries should avoid hoarding of food stocks, export controls and other trade barriers to food.COUNTRY NEEDS FIRSTBut Indrawati, a former World Bank managing director, said that as a political leader and policy maker food security issues needed to be defined first at the country level, then regionally and globally.She likened the current food supply situation to the early weeks of the COVID-19 pandemic, when countries competed with each other for masks, medical protective gear and other critical supplies.”Just like we were facing during the pandemic, we know this is not good in the medium and long term, but in the short term, you cannot stand in front of your people when you have the commodity which is needed by your people and you let (supplies) just go out” of the country.Indonesia’s move, which takes effect on April 28, caused prices of alternative vegetable oils to surge, with soybean oil hitting a record high on Friday. An Indian trade group called the ban “rather unfortunate and totally unexpected.”Indrawati said her government would analyze the impact of the measure on global and regional market dynamics.For palm oil and other food commodities, she said the World Bank and other international institutions needed to focus on “supply side measures” to increase production.But Indrawati said Indonesia has limited ability to increase palm oil production due to environmental concerns. Since 2018, the government stopped issuing new permits for palm oil plantations, which are often blamed for deforestation and destroying habitats of endangered animals such as orangutans.Instead, Indonesia was focusing on improving infrastructure to allow producers to become more efficient and increasing production of other crops in high demand, including corn and soybeans, she said. More

LONDON (Reuters) – Energy prices that have soared since Russia’s war in Ukraine are a “major concern” for South Africa’s economy, Finance Minister Enoch Godongwana said on Friday, while it was too soon to quantify the full impact of last week’s devastating floods. Whether high prices of the commodities that South Africa exports, including gold and platinum metals, would counter this was still unclear, Godongwana told Reuters in a video call from Washington at the International Monetary Fund Spring Meetings.Inflation has risen worldwide after Russia invaded Ukraine on Feb. 24, particularly food, fertiliser and fuel, with subsequent interest rate rises by the U.S. Federal Reserve and lockdowns in China adding pressure to the global economy.”Energy prices are of major concern,” Godongwana said. “Fuel prices are pervasive in the economy – they push your food prices up… It is becoming a more worrying threat.”He said interruptions to Durban port operations caused by floods, which killed 435 people and caused at least 10 billion rand ($640 million) of infrastructure damage in KwaZulu-Natal province, would limit the benefits of commodity exports.”It is still too early to estimate the impact of the floods on the broader economy.”South Africa’s rand had been among the best performing currencies in the world this year, thanks to metal exports, but fell 7% this week in the wake of the floods and severe power cuts that have long held back the country’s economy.CHINA-AFRICA LENDINGThe IMF meetings also focused on a lack of progress with the issue of debt sustainability, Godongwana said, welcoming the “breakthrough” that came with China’s pledge on Thursday to join the creditor committee for restructuring Zambia’s debt.”China has been the one who has been slowing progress in relation to Zambia. I don’t blame them. Their approach has been… let’s do it on a case-by-case basis,” he said.Godongwana described China’s approach to lending in Africa as “aggressive”, but said that it may have reached “saturation” both from its perspective and as borrowing countries realise the loans are just as stringent as others.Chinese bank financing for infrastructure projects in Africa fell from $11 billion in 2017 to $3.3 billion in 2020, according to a report by international law firm Baker McKenzie.”The reason China went case-by-case is that they are more exposed than any other nation as a lender to the African continent,” Godongwana said.”And that suggests that it may have become a problem for China as a lender and it is also becoming a problem for the recipients.”Godongwana said that in late May African governments would discuss changes they wanted to see to the Common Framework, the debt restructuring process set up in response to the coronavirus pandemic by the Group of 20 (G20) major economies.”There’s little uptake, which shows that there’s some problem with the design of the policy,” he said.Chad, Ethiopia and Zambia requested relief from the programme over a year ago and have yet to receive any.($1 = 15.6150 rand) More

“I would support at this point, given where the economy is, a 50 basis point rise in May and a few more to get to that 2.5 percentish level by the end of the year,” Mester said on CBNC, referring to the level of borrowing costs she believes would be “neutral” for economic activity. At that point, she said, the Fed could assess the state of the economy and inflation, and either pause rate hikes or make further increases. Asked if she would support a 75 basis point rate hike, she said: “You don’t need to go there at this point.” Traders on Friday were pricing in two such rate hikes following a half-point hike in May, a day after Fed Chair Jerome Powell signaled he would be open to “front-end loading” the U.S. central bank’s retreat from super-easy monetary policy.”Doing one outsized move in the funds rate doesn’t really appear to me to be the right way to go,” Mester said. “I would rather be more deliberative and more consistent in bringing up the funds rate.” Her remarks are likely to be the last public commentary from any Fed policymaker before they next meet, on May 3-4. More

MARKET REACTION:* STOCKS: Dow down 2.71%, S&P 500 down 2.65%, Nasdaq down 2.42%* BONDS: The yield on the benchmark 10-year note fell to 2.9025%. [US/]* FOREX: The dollar index rose 0.527% [FRX/]* VIX: The VIX was up 23.5% at 28.01 and touched its highest level in more than a monthCOMMENTS:JOHN LYNCH, CHIEF INVESTMENT OFFICER, COMERICA WEALTH MANAGEMENT, CHARLOTTE, NC (email)“The combination of Jerome Powell’s comments and some disappointing earnings news was too much for investors to handle heading into the weekend. Moreover, market-based breakeven inflation expectations are climbing, providing a more powerful statement on the potential for persistent pricing pressures than headlines have been suggesting.”We believe the concerns over the likelihood of 50-basis point rate hikes at the next two FOMC meetings is an overreaction.  Approximately $150 billion in securities on the Fed’s balance sheet are maturing over the next few months, suggesting the central bank could still be purchasing up to $100 billion in bonds, essentially offsetting any impact from the interest rate moves.”In the months ahead, though, balance sheet reduction will not require elevated asset purchases, providing a better lever for the Fed to pull regarding rates and runoff.”STEPHEN MASSOCCA, SENIOR VICE PRESIDENT, WEDBUSH SECURITIES, SAN FRANCISCO “The market has concerns inflation is going to prompt central banks to tighten further and faster than investors are comfortable with and that it will have a negative effect on asset pricing including stocks,” “Inflation is starting to have an impact on corporate earnings and we saw that today.” “It’s starting to be pervasive.” THOMAS HAYES, CHAIRMAN, MANAGING MEMBER, GREAT HILL CAPITAL LLC, NEW YORK“This has nothing to do with Fed and interest rates. The one thing that no one is talking about is the French election on Sunday. There is a lot of fear in Europe that Le Pen gets elected. Le Pen is a populist who’d be potentially anti-euro and the fear is that it could be a shock along the magnitude of what Brexit was. Because if Le Pen wins, the knock-on implication is that they might withdraw from the European Union or that would be a possibility that’s on the table. “No one’s thinking about that. It was evident with the selling into the 11:30 a.m. close in Europe and then it carried through with margin calls in the U.S. through 2:30 p.m. No we’re getting a little relief, not much, after the margin calls at 2:30 p.m. This is all about the election on Sunday because that would be a something that nobody’s pricing in.”JAMIE COX, MANAGING PARTNER, HARRIS FINANCIAL GROUP, RICHMOND, VIRGINIA (email)“Markets are very uneasy about the growing likelihood of a policy error by the Federal Reserve.  When a Fed official suggests a 50 basis points hike, markets immediately start trying to price in 75 basis point hikes.  It’s madness really.  Most investors would be well served to ignore the machinations of the pricing craziness and wait to see what actually happens with rates.” More