Aurelia Butler

Jay Powell has said the Federal Reserve needs to move “expeditiously” towards tighter monetary policy and is prepared to act even more aggressively if necessary to tackle excessive inflation. In remarks delivered at a conference hosted by the National Association for Business Economics on Monday, the Fed chair laid out the case for a series of interest rate increases this year and substantive steps to shrink the central bank’s $9tn balance sheet, as it confronted a labour market that looked “extremely tight” and inflation that was “much too high”.Powell expressed confidence that the Fed could continue to tighten policy without sparking a recession, which some fear is inevitable. “There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level and then to move to more restrictive levels if that is what is required to restore price stability,” he said. The “neutral” rate is one that neither aids nor hampers growth and most policymakers believe that figure to be around 2.4 per cent.Powell’s comments come just days after the Fed delivered its first interest rate increase since 2018, which is expected to be the first of many rate rises this year and into 2023.US stocks sold off after Powell affirmed the Fed’s commitment to using its tools to quell inflation, including possibly raising rates by half a percentage point, rather than the standard quarter-point increase — a move the central bank has not made since 2000. Powell said there was “nothing” to prevent the bank moving forward with a half point rate increase in May but added that the committee had not yet made a decision on the next policy move.The S&P 500 was down as much as 0.8 per cent before recouping some of those losses, and US government bonds remained under pressure. The benchmark 10-year yield was up 0.15 percentage points on the day at 2.3 per cent.Treasuries have suffered their worst month since Donald Trump was elected president in 2016, driven by inflation fears exacerbated by Russia’s invasion of Ukraine and by tightening in the supply of oil and other key commodities. A majority of Fed officials signalled last week that the benchmark policy rate would jump to 1.9 per cent by the end of the year, from the current range of 0.25 per cent to 0.50 per cent. Getting there would require six quarter-point increases at each of the remaining gatherings of the Federal Open Market Committee this year.The so-called “dot plot” of individual policymakers’ interest rate projections showed seven out of 16 officials expected rates to rise above 2 per cent in 2022, indicating at least one of the adjustments this year will be a half point. Most officials, meanwhile, predicted rates would rise to 2.8 per cent in 2023.Powell said on Monday a “substantial firming in the stance of policy” was necessary despite a sharp escalation in geopolitical tensions tied to Russia’s invasion of Ukraine, and would continue until the Fed saw signs of actual progress on supply-related issues. The war was expected to add “near-term upward pressure” to the prices of energy, food and commodities at a time of “already too high inflation”.The Fed chair’s challenge this year will be in forging consensus among committee members about how swiftly monetary policy needs to tighten in order to bring inflation in line with the Fed’s 2 per cent target.Officials last week raised the median estimate for core inflation this year to 4.1 per cent from 2.7 per cent in December. Their forecasts for the funds rate during this year ranged between 1.4 per cent and 3.1 per cent.Raphael Bostic, president of the Atlanta Fed, said on Monday that he supported just five more interest rate increases this year, which would bring the fed funds rate to roughly 1.63 per cent. He pushed back on the idea that the Fed would need to “actively slow the economy” in order to get inflation back under control by moving rates above neutral.

Bostic’s views stand in sharp contrast to those outlined by James Bullard, president of the St Louis Fed, who on Friday said he supported the fed funds rate rising above 3 per cent this year.Bullard dissented from the committee’s decision to raise the benchmark interest rate just a quarter of a percentage point last week, favouring a half-point move instead.Bullard was joined on Friday by Christopher Waller, a Fed governor, who advocated for “front-loading” rate increases this year, with half-point rate rises “at one or multiple meetings in the near future”. He supports a policy rate above a range of 2 per cent and 2.25 per cent by the end of the year and for the Fed to soon begin shrinking its $9tn balance sheet. Powell on Monday pushed back on concerns that future monetary policy tightening would cause a recession, citing episodes in 1965, 1984 and 1994 when the Fed slowed an overheated economy without prompting a sharp contraction. Fed officials forecast marginally slower growth this year, which they see steadying at 2 per cent in 2024. They also expect the unemployment rate to stabilise at 3.5 per cent before ticking up to 3.6 per cent in two years’ time. Economists have previously warned these projections amount to “wishful thinking”.“I hasten to add that no one expects that bringing about a soft landing will be straightforward in the current context — very little is straightforward in the current context,” Powell warned. “And monetary policy is often said to be a blunt instrument, not capable of surgical precision.” More

The writer is executive director of American CompassThe Ronald Reagan Presidential Library is playing host this year to prominent Republicans speaking about their party’s future. Senator Tom Cotton used his recent turn to disavow the longstanding alliance on America’s right-of-centre between conservatives and libertarians. “Whereas libertarian ideas have helpfully influenced domestic tax and regulatory policy,” he said, “these ideas often falter in a world of borders. There’s no natural level of people, goods, or money moving across borders; it’s a policy choice that must be made by the people and their representatives.” Despite the priority that the Republican party has traditionally given to the free flow of capital, elevating it almost to a core principle, a wide range of conservatives are now making the case that China should be the exception. Cotton is one such intellectual bellwether. His speech was a sign of how far the economic consensus has shifted against globalisation. Investors should anticipate major policy responses, he made clear, in financial markets. Since 2020, Beijing has been opening China’s financial markets to foreign participation, setting off a gold rush led by US firms like BlackRock, Goldman Sachs, and JPMorgan Chase. The latter two, as well as Citigroup, have received permission in recent months to operate wholly-owned investment banking ventures, which the Chinese Communist party hopes will facilitate greater inbound investment and acquisition of foreign assets. The banks, for their part, hope to earn a great deal of money. Some US policymakers have other ideas. For his part, Cotton argued that America “ought to ban US investment in strategic Chinese industries and encourage reshoring of US factories and jobs — and punish offshoring to China. Further, we need to scrutinise and regulate Chinese investment in America much more closely.” In a 2021 report he highlighted a wide range of “financial weapons”. Republican senator Marco Rubio is another outspoken critic of globalisation. In December, he sent an open letter to his colleagues, declaring it a “strategic disaster” that “American financial investment is pouring into [China] at its highest rate ever” and seeking support for his “American Financial Markets Integrity and Security Act,” which would block investment in Chinese companies flagged by the Departments of Defense and Commerce. Even bastions of free-market dogma like the Heritage Foundation and the American Enterprise Institute (AEI) are repositioning themselves. Speaking in January, Heritage president Kevin Roberts announced that his organisation is “investing resources . . . to help [state legislatures] write legislation that divests their state-level investments from companies that are engaged with China”. The AEI director of economic policy studies, Michael Strain, recently acknowledged that, because of “the geopolitical situation that we’re in”, a dollar invested in Shanghai raises concerns that one in Berlin would not.Financial flows are gaining attention over imports for a number of reasons. Capital is fungible in ways goods and services are not, so the economic effect of curtailing one source or destination is less economically disruptive. Chinese components in telecommunications equipment may be unwise, but Chinese ownership of the domestic network is much worse. Purchasing something that had forced labour somewhere in its supply chain may be unsavoury, but it can also feel unavoidable. Investing in the company that forces the labour is indefensible.Cracking down on Wall Street may be the first step, but a broader decoupling is the logical endpoint. Last month, Republican senator Rick Scott’s “11-Point Plan to Rescue America” contained a distinctive final bullet point: “We will gradually end all imports from Communist China until a new regime honours basic human rights and freedoms.” If that becomes standard GOP fare, watch out. More

“I penciled in six rate hikes for 2022 and two more for 2023,” Bostic said Monday in prepared remarks to a National Association for Business Economics conference in Washington. “I recognize that I am toward the bottom of the distribution relative to my colleagues, but the elevated levels of uncertainty are front forward in my mind and have tempered my confidence that an extremely aggressive rate path is appropriate today.”Federal Open Market Committee policy makers led by Chair Jerome Powell voted 8-1 last week to raise interest rates by a quarter point for the first increase since 2018 as they confront the highest inflation in four decades. The move took the target range for their benchmark policy rate to 0.25% to 0.5%. St. Louis Fed President James Bullard’s dissent in favor of a half-point hike was the first vote against a decision since September 2020.“Events are shifting rapidly, and we could see marked changes along key dimensions, such as aggregate demand, that could warrant quickly adjusting the trajectory of policy,” Bostic said.The FOMC’s “dot plot” in its economic forecasts showed policy makers penciling in their expectation of rate hikes through each of the remaining six meetings in 2022, with the median projection for a quarter point every time. With almost half of policy makers seeking to go even faster, that would imply a half-point move at some time during the year.“The risks go both ways,” Bostic said. “Should demand falter in the face of economic uncertainty or removal of monetary policy accommodation, then the appropriate path may be shallower than I currently project. But there are other developments, such as shifts in supply strategies, that could mean higher costs and thus motivate a steeper policy path than I expect.”Bostic said he considered inflation as the top concern for policy makers this year and described the U.S. labor market as tight.©2022 Bloomberg L.P. More

Looks like I was wrong. (It happens sometimes, for meanings of “sometimes” that include “all too often”.) A tentative deal has emerged from the “quad” inner core of World Trade Organization members — the EU, US, South Africa and India — about an intellectual property waiver for Covid-19 vaccines, a mere 17 months after it was first proposed. I’ll look at the detail once a final version has been agreed. It needs consensus among the full WTO membership but I suspect they’ll come on board. It seems unlikely that WTO director-general Ngozi Okonjo-Iweala would take the risk of publicly welcoming the deal if she thought it was likely to fall apart.The UK, Switzerland and Japan have big pharma industries, but as of Friday it sounded like they were coming around and I’d be surprised if they vetoed a deal signed off by the EU and the US. The UK complained recently about the quad format excluding other countries, but that’s Brexit for you, guys. And guess what? Germany didn’t block it inside the EU after all, despite repeated strident claims of some health campaigners that Berlin was standing in the way.I was sceptical the waiver would happen, not because it’s a terrible idea — while mainly irrelevant, a limited provision might concentrate pharma companies’ minds — but because India likes being ostentatiously obstreperous and crashing all manner of trade discussions to make a point. (My call to the Indian mission in Geneva asking about this remarkable conversion went unanswered last week, as others have since 2020.)According to the leaked draft of the agreement, it’s been drawn to allow India’s pharmaceutical industry to make use of the waiver, but the reaction of Indian NGOs was still pretty negative. However limited the waiver and however disappointed campaigners in general may be, we do at least now have something to work with. And the fact that the agreement appears to contain a review mechanism hopefully means we can have the conversation on a more constructive, fact-based and transparent basis.Today’s main piece is on the perennial suggestion, on this occasion provoked by the US’s extraordinarily aggressive use of financial sanctions against Russia, that the dollar will be dethroned as the dominant international currency. (It will not.) Charted waters is on the impact of the Ukraine conflict on wheat prices in Arab nations. As ever, I’m keen to hear your thoughts, ideas and reactions, and I promise I will read them all even if I don’t immediately reply.Bypassing the buckIt’s a topic that rumbles on continually with sudden eruptions during periods of financial stress or the US imposing sanctions that don’t have universal support — that is, all of them. Will the renminbi, or the euro, or a digital currency or even (God help us) cryptocurrencies supplant the dollar? And even if they don’t, does the fear of over-reach constrain the US from weaponising the dollar for strategic ends?As I’ve said before, the EU’s sanction package is impressive but it’s the US’s control of the dollar payments system that’s enabled it to freeze Russia’s central bank assets and cripple its banks. Naturally, this has caused much whingeing and mewling in countries less committed to punishing Russia, notably in the Middle East, India and China. Any payment to Russia through the dollar system is ultimately at risk. India, a big net energy importer and very much not part of the US-EU coalition, is rapidly increasing its oil purchases from Russia, at knockdown prices, and is thinking of setting up a rouble-rupee exchange. There are also stories that Saudi Arabia will price some oil sales to China in renminbi to avoid the dollar system.I remain highly unconvinced that these moves, if they happen, will set a new international pricing standard that will harm the US currency. “[Random Middle Eastern country] is just about to price oil in [other currency] to destroy the dollar” has been a staple fantasy of the anti-American left for decades. It rather falls down on the point that it’s not the currency used for the actual sale that’s the point — that simply creates a fleeting transactional demand. A sustained fall in demand for dollars would require the country to want to shift its reserves en masse into euros or any other currency.That would mean finding a massive pool of safe liquid euro (or other currency) assets, which hitherto hasn’t existed, and then either buying imports priced in euros rather than dollars or taking on some serious exchange rate risk. Amazingly, no one has wanted to do that yet. And shifting to the euro is difficult enough, but only reserve managers who feel their drab and predictable lives need pepping up by gambling with billions of dollars of public money will really put their funds in renminbi-denominated assets subject to the whims of Chinese capital controls.In any case, the idea of a reserve asset being synonymous with an internationalised currency is a bit outdated. Currency pegs that had to be backed by reserves have substantially been replaced by floating exchange rates. It’s the dollar’s role as a funding and payment currency that really gives it power, and that has such a massive network effect it’s going to take a lot of replacing.You can understand why the US et al would make a big fuss about Russia avoiding its sanctions by flogging knockdown oil to India or cheap gas to China — though I would note in passing that Russia’s imperialist westward surge making it a de facto colony economically dependent on countries to the east would be darkly comic. But even assuming India goes ahead with this swap, it’s not likely to do much to shift the dollar’s pre-eminence more widely. After all, as I said the other week, the EU tried bypassing former US president Donald Trump’s sanctions on Iran by setting up a quasi-barter system called Instex and it’s had almost no impact.As for digital currencies and crypto: with the former, a digital dollar, which will be part of any payments network set up by the leading economies, will have similar advantages over a digital renminbi. And while oligarchs may try using crypto to evade sanctions, the long reach of the US Treasury is coming after them, as it did after Venezuela’s digital currency. It would be very bold to assume that crypto could build a broad role in the global financial system under constant pressure from the US government.Each time the dollar is weaponised like this there’s a flurry of commentary about its international role being jeopardised by politicised misuse. Sure, if the US tries to isolate a really huge economy like China’s then the reward to promoting an alternative will increase. But there’s no sign of it yet. Charted watersIn a globalised world, international conflicts have an impact across the planet. That is obvious to Lebanese bakers, long reliant on Ukrainian wheat, which is now two-thirds more expensive than a year ago.Since the start of March, flour has disappeared from the shops in Lebanon and the price of bread has increased by 70 per cent. The country was caught in a financial crisis before Russia invaded Ukraine — its currency has lost more than 90 per cent of its value since 2019 — but the war has created an additional hardship for citizens struggling to put food on the table.Trade linksAfter doing the Lord’s work tracking China’s (entirely worthless) promises to buy more US exports, the saintly Chad Bown of the Peterson Institute and colleagues are now running a sanctions monitor for actions against Russia.Two of the global gurus of weaponising economic interdependence, Henry Farrell and Abraham Newman, warn in the New York Times of the risks of US over-reach in sanctioning Russia.The Financial Times looks at how the impact on EU and US relations with China of the war in Ukraine has underlined the risks for companies such as Volkswagen in depending on production and sales in authoritarian states.The Biden administration just released 1,358 pages of plans on remaking supply chains, and Todd Tucker of the Roosevelt Institute provides a handy guide.German finance minister Christian Lindner, who doesn’t actually have trade in his brief, has called for new talks over a transatlantic trade deal, apparently undaunted by the miserable failure of the previous attempt.David Frost, who negotiated the Brexit deal for the UK, has done another of his speeches pretending he doesn’t understand what he signed, and someone briefing on behalf of foreign secretary Liz Truss is pretending she’s about to rip up the Northern Ireland Protocol. Steve Peers of the University of Essex has the rebuttal to Frost’s rebuttal of a rebuttal to his speech. More