Aurelia Butler

A top Federal Reserve official has warned it is a “fantasy” to think the US central bank can bring inflation down sufficiently without raising interest rates to a level where they constrain the economy. James Bullard, president of the St Louis branch of the Fed, said the central bank needed to be more aggressive in its efforts to root out the highest inflation in four decades as he called for rates to rise to a point where they actively curtail growth. The comments from Bullard, a voting member of the policy-setting Federal Open Market Committee and one of its foremost hawks, run counter to other officials, who are broadly aligned on the need to push rates closer to a “neutral” level this year. That is the level at which rates neither fuel nor restrict economic activity and is estimated to be around 2.4 per cent. Bullard said the central bank would need to get beyond that threshold as quickly as possible this year if it wanted to bring inflation closer to the Fed’s longstanding 2 per cent target. “There’s a bit of a fantasy, I think, in current policy in central banks,” Bullard said in an interview with the Financial Times. “Neutral is not putting downward pressure on inflation. It’s just ceasing to put upward pressure on inflation.”“We have to put downward pressure on the component of inflation that we think is persistent,” he added. “Getting to neutral isn’t going to be enough it doesn’t look like, because while some of the inflation may moderate naturally . . . there will be a component of it which won’t.”His comments come on the heels of new inflation data that showed consumer prices increased at an annual rate of 8.5 per cent in March following a surge in energy and fuel costs driven by Russia’s invasion of Ukraine. “Core” inflation, which strips out volatile items such as food and energy, came in slightly lower than expected, but Bullard warned it would not come down without a concerted effort from the Fed and that the US was vulnerable to unforeseen shocks that could further stoke prices. “This [inflation] report just underscores the urgency that the Fed is behind the curve and needs to get moving,” he said. Bullard supports the Fed raising rates by half a percentage point at the next policy meeting in May, something he urged the FOMC to do at its gathering in March, when it raised them by a quarter-point. More officials now back such a move, as well as a reduction in the size of the Fed’s $9tn balance sheet soon.He said the Fed’s benchmark policy rate should move up “sharply” after the May meeting and endorsed a 3 percentage point increase in the federal funds rate from its current range of 0.25 per cent to 0.50 per cent by the third quarter. Bullard acknowledged that such a level was “aspirational” in such a short period of time, but warned the Fed’s credibility would be on the line if it did not take action. “If markets and households get the idea that the Fed’s not going to do the right thing and not going to keep inflation under control, then you have to gain credibility by actually doing things that show them that you are serious,” he said. Bullard pointed to former Fed chair Paul Volcker’s decision to raise rates to 20 per cent at one point in the early 1980s, which did contain inflation but resulted in a sharp economic contraction that resulted in millions of job losses. Volcker had no choice other than implementing such a large increase “because the committee didn’t have enough credibility”, Bullard added.“So far I think we’re holding on to our credibility, but if it slips away, then it’s going to be much more difficult to keep inflation under control going forward.”Still, Bullard said he was optimistic the Fed would be able to cool down the economy without causing a recession — as it did in 1994. More

Wealthier UK investors have suffered greater losses than smaller traders since the beginning of the year, as market turbulence struck down the riskier portfolios typically favoured by those with higher levels of investment.Interactive Investor, which has roughly a one-fifth share of the UK’s self-directed investment market, said on Monday that customers with more than £1mn invested lost 4.2 per cent in the first three months of 2022, more than the 3.6 per cent loss for the average account holder.The losses for private investors, compounded by the rising cost of living, has prompted signs that savers are retreating from the markets, with little prospect of better conditions ahead. “The combination of higher inflation and slower growth could lead to, dare I say it, stagflation,” said Alex Funk, chief investment officer at Schroder Investment Solutions. “That could be quite difficult for most asset classes.”Funk said Russia’s invasion of Ukraine had compounded tricky market conditions, as inflation stayed higher than central banks had anticipated. “Because severe inflation hasn’t been around since the 1970s, I don’t think people quite understand how markets react to high inflation,” he said. This hit to investors came as global stock and bond markets, which normally move in opposite directions and provide balance to portfolios, suffered one of their worst joint declines on record in the first quarter, leading professional money managers to warn that markets left “nowhere to hide”. Investment funds had notched up a record year of inflows from retail savings in 2021, but the torrent of bad news sent investors into reverse in January. Savers and their advisers pulled £3.68bn out of funds in January and February, according to the most recent figures available from the Investment Association. Data from funds network Calastone, which tracks both retail and institutional investors’ movements, suggest the selling of funds continued into March. “High inflation and growing economic uncertainty provided an uncomfortable backdrop for escalating tensions between Russia and Ukraine,” said Chris Cummings, chief executive of the IA. Those with money in savings became more wary about entering the market. Hargreaves Lansdown, the investment platform, said that roughly one-third of investors who deposited into a stocks and shares Isa this year kept money in cash rather than investing it, compared with one-quarter of savers who hoarded cash in the two previous years.

“Investors are reticent to take the plunge with their Isa,” said Emma Wall, head of investment analysis and research at Hargreaves Lansdown. But she added that people should not wait for the perfect moment before investing: “Investors should be mindful that timing the market perfectly is near impossible . . . so waiting for total certainty can mean missing out on gains.” To avoid unfortunate timing during turbulent markets, Wall suggested investors “drip feed” their cash into the market in small, regular tranches. Other investors have cut back on their regular investment habits because of pressure on their budgets. A poll by Interactive Investor found one-quarter of respondents had stopped paying into their investments or savings pots because of the cost of living. “It’s understandable given the current outlook for household budgets — as well as the knowledge that things will most likely get worse before they get better, that people are looking to make cutbacks wherever they can,” said Becky O’Connor, head of pensions and savings at Interactive Investor. “Future financial security is important and in cutting back on things like pension contributions now, people may be storing up difficulties for the future,” she said.

Unusually, the first three months of trading delivered sharper losses for wealthy investors compared with those with smaller pots. Richer investors are generally able to take on more risk in their portfolios, which left them with greater gains during the run-up in markets in 2021. Those fortunes reversed this year, with particularly sharp losses for those who invested heavily in high-growth tech shares. The rough patch for growth stocks inflicted short-term knocks to the performance of two of the UK’s best-loved investment vehicles, despite their impressive record in recent years. Terry Smith’s Fundsmith fund has tumbled 10 per cent this year, according to Morningstar data, while shares in Scottish Mortgage Investment Trust are down about 25 per cent.Funk said the short-term hit to growth stocks was a reminder to diversify across different investing styles, keeping a balance between different approaches like growth and value. “Never bet the farm on one style because timing those factors can be very difficult,” he said.Despite the rocky run for many investments, Funk advised investors against “knee-jerk” reactions. “During times of volatility, emotional decision-making will be your biggest enemy,” he said. More

WASHINGTON (Reuters) – U.S. consumer inflation hit another four-decade high in March when it reached 8.5% in large part on gasoline prices surging to a record, but the data sported enough soft spots for some Wall Street pundits to declare “peak inflation” was at hand. The Federal Reserve certainly hopes it is. Officials there are banking in fact that a long-awaited crest may be here.Fed Governor Lael Brainard, speaking on the heels of the Consumer Price Index’s release on Tuesday, said the fact that one main measure of the pace of month-to-month inflation slowed in March gave her “confidence that we are going to be successful in achieving” the Fed’s 2% inflation goal. A drop in used car prices did help bring the so-called core CPI – excluding food and energy costs – to a six-month low. But looked at through a lens other policymakers feel is the appropriate focus – the annual increase in overall inflation – the pace of price increases continues moving up.In response the central bank has already begun what may prove one of the fastest moves to tighten monetary policy in modern Fed history. If it is forced to become even more aggressive the risks of a mistake – and a recession – will increase.Recent data on inflation, and of how people think about it, have held little good news for the Fed, though some argue there’s a silver lining. Maybe.Here’s a look: PRICE PRESSURES HAVE BROADENEDInflation began to accelerate last spring, and at first policymakers insisted it was all a temporary shock from the pandemic as government aid payments and the arrival of vaccines created a gusher of demand that crashed against snarled global supply chains. Since then, prices increases have broadened to services as well as goods. GRAPHIC: Pandemic inflation https://graphics.reuters.com/USA-FED/INFLATION/gkplgqobovb/chart.png PANDEMIC “LOSERS” REBOUNDEven the industries pounded down early in the pandemic have seen prices accelerate – and it doesn’t take a tangled global supply chain or shipping crisis to make it happen. As quarantines lifted, people started traveling again, booking hotel rooms and going to restaurants. At the same time workers found they had more bargaining power in a tight labor market, and wages rose. Demand and higher operating costs, coupled with consumers ready to spend, are driving prices higher. GRAPHIC: Changes in contribution to inflation https://graphics.reuters.com/USA-FED/INFLATION/akpezjknmvr/chart.png BACK TO BASICSFor consumers, inflation was felt first and most pointedly in areas like car prices, where sticker shock over the cost of used cars was a feature of the pandemic. In recent months necessities like food, shelter and, yes, transportation, have contributed more to the headline pace of price increases. GRAPHIC: Price of daily life climbs https://graphics.reuters.com/USA-FED/INFLATION/xmvjoqmjwpr/chart.png EXPECTATIONS REMAIN CONTAINEDThe main bit of good news for the Fed is that views about inflation seem to have remain contained – at least over the longer term. Expectations are considered to play an important role in how people set wages and prices, and so far traders in inflation-linked securities appear to believe the Fed will bring inflation back towards the formal 2% target. The fact that the month to month pace of core price increases slowed in March – and fell for core goods – could be a sign that a peak has indeed been reached. GRAPHIC: ICE (NYSE:ICE) inflation expectations index https://graphics.reuters.com/USA-FED/INFLATION/akvezxjwrpr/chart.png More

ISLAMABAD (Reuters) – Pakistan’s new government is facing the daunting task of managing a stuttering economy with huge deficits, an aide to new Prime Minister Shehbaz Sharif said on Tuesday.Sharif, 70, the younger brother of former premier Nawaz Sharif, was elected as prime minister on Monday followed a week-long constitutional crisis after parliament ousted Imran Khan in a no-confidence vote.”Imran Khan has left a critical mess,” Miftah Ismail, who is likely to be Sharif’s finance minister, told a news conference in Islamabad, adding the suspended talks with the International Monetary Fund (IMF) would be resumed as a priority. “We will restart talks with the IMF,” he said. Ismail repeated Sharif’s concerns raised in his maiden speech in parliament at what he described as record deficits his government will inherit from Khan, who was accused by the opposition of mismanaging the economy.Sharif set up a National Economic Advisory Council in his first meeting on Tuesday. The IMF has suspended talks ahead of the seventh review of a $6 billion rescue programme agreed in July 2019.Pakistan’s current account deficit is projected at around 4% of GDP for the 2022 fiscal year (FY), the country’s central bank said last week, while foreign reserves dropped to $11.3 billion as at April 1, compared with $16.2 billion less than a month earlier.The central bank last week hiked key interest rates by 250 basis points to 12.25% in an emergency decision, the biggest hike in decades, citing deterioration in the outlook for inflation and an increase in risks to external stability, heightened by the Russia-Ukraine conflict, as well as local political uncertainty.The bank also revised average inflation forecasts upwards to slightly above 11% in FY22, which ends in June. More

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The US will extend a public transportation mask mandate for 15 days while the country’s top public health agency monitors a recent rise in coronavirus cases.The federal mandate, which requires travellers on public transport including aeroplanes, trains and buses to wear masks, was set to expire on April 18.“In order to assess the potential impact the rise of cases has on severe disease, including hospitalisations and deaths, and healthcare system capacity, the CDC order will remain in place at this time,” the US Centers for Disease Control said.“The Transportation Security Administration has decided to extend the security directive and emergency amendment for 15 days, through May 3, 2022,” the CDC continued.The public health agency also said it would change its alert system for international travel, so travellers will only be warned to avoid visiting a country in extraordinary circumstances, such as the emergence of a dangerous new variant, rather than anywhere where the spread of Covid-19 is deemed very high. This Level 4 category currently applies to a wide list of countries, including most of Europe and Australia.The Biden administration has been pressured by the travel industry and Republican politicians to lift the mask mandate. Domestic airline executives have cited threats to the safety of airline employees, as they are essentially tasked with policing mask wearing.The Transport Security Administration, which is responsible for airport security, indicated in March that government agencies are working with the CDC on “a revised policy framework” for when, and under what circumstances, masks should be required on forms of public transport.Covid-19 cases are “starting to tick up a little bit,” particularly in areas including northern New England, New York, Colorado and Washington, DC, said David Dowdy, an epidemiologist at the Johns Hopkins Bloomberg School of Public Health. Philadelphia on Monday became the first major US city to reimpose an indoor mask mandate.Airlines have also called for an end to pre-departure testing requirements for international travel. Lifting them is expected to further increase demand for travel. More

“How far we will need to raise rates, in fact, won’t be clear until we get closer to our destination, but rest assured we will do what we must to address this recent bout of above-target inflation,” Barkin said in remarks prepared for delivery to the Money Marketeers in New York. “The best short-term path for us is to move rapidly to the neutral range and then test whether pandemic-era inflation pressures are easing, and how persistent inflation has become. If necessary, we can move further.” Consumer prices jumped 8.5% in March from a year earlier, a government report showed on Tuesday, marking the fastest pace of inflation since late 1981 as Russia’s war against Ukraine sent gasoline and food prices higher and lockdowns in China threatened to worsen inflationary supply chain disruptions. The Fed, which aims for 2% inflation, last month raised interest rates from near zero to begin to deal with what it sees as largely pandemic-induced inflation. Policymakers have signaled they may accelerate the pace of rate hikes and begin to rapidly reduce the Fed’s balance sheet — bloated by its purchases of bonds — to deal a more decisive blow to inflation. Barkin’s remarks show he backs that approach, and then some.Many Fed policymakers say they expect the pressures that for decades pushed down on inflation to reassert themselves once pandemic-related constraints on labor and materials fade. On Tuesday, Barkin said he was not so sure of that narrative, noting that price pressures could remain higher than before if companies choose to remake supply chains so they are more resistant to potential disruptions, if the government needs to spend more to provide benefits to an aging population, and if the labor supply continues to be limited by slowing population growth. If bouts of high inflation do become more common in the future than they were before the pandemic, Barkin said, “Our efforts to stabilize inflation expectations could require periods where we tighten monetary policy more than has been our recent pattern.” Doing that could create communication challenges as Fed policymakers explain why stabilizing prices may need to be balanced against costs to employment. More