Aurelia Butler

A top Federal Reserve official has called for the US central bank to raise its benchmark interest rate above 3 per cent this year, arguing that policymakers need to move quickly to combat inflation and avoid “losing credibility”. James Bullard, president of the St Louis branch was the lone dissenter at the Fed’s meeting this week, when the central bank raised rates for the first time since 2018 in what officials signalled would be the start of a series of increases at all of the remaining six meetings this year. At that pace, the fed funds rate would rise to 1.9 per cent.In a statement released on Friday, Bullard, a voting member of the policy-setting Federal Open Market Committee, said a half-point rate rise — a tool that has not been used since 2000 — would have been “more appropriate” than the Fed’s quarter-point increase, given the strength of the labour market and broader economy, as well as the “excessive” level of inflation. At 5.2 per cent, the Fed’s preferred core personal consumption expenditures index is well above the central bank’s 2 per cent target.“In my judgment, given this constellation of macroeconomic data, a 50-basis-point upward adjustment to the policy rate would have been a better decision for this meeting,” he said.Bullard noted that US monetary policy has been “unwittingly easing”, as rising price pressures have pushed short-term “real” or inflation-adjusted rates lower and kept them well into negative territory. At these levels, rates remain highly stimulative, spurring borrowing and the very demand the Fed is seeking to dampen.“The combination of strong real economic performance and unexpectedly high inflation means that the Committee’s policy rate is currently far too low to prudently manage the US macroeconomic situation,” he said. “The Committee will have to move quickly to address this situation or risk losing credibility on its inflation target.”A bulk of the 16 policymakers who pencilled in their forecasts on Wednesday did express support for more aggressive action, with seven projecting rates to rise above 2 per cent in 2022. That would require at least one half-point adjustment.Most officials saw rates rising to 2.8 per cent in 2023, slightly higher than the level a majority of policymakers believe will neither hasten nor hold up growth, known as the neutral rate, which they pegged at 2.4 per cent. Jay Powell, the Fed chair, kept the door open to half-point adjustments and lifting rates above neutral, in his bid to prove the committee is “acutely aware of the need to return the economy to price stability and determined to use our tools to do exactly that”. More

It is a hard time to be an oil refiner in China. As the cost of crude oil imports surges, Beijing caps domestic fuel prices. That means a squeeze on margins.Some help has arrived. From Friday, retail gasoline prices were raised by 750 yuan ($118) a tonne, the biggest hike since the pricing system was introduced nearly a decade ago. That puts pump charges back at 2006 levels.Tight restrictions are needed to control inflation. In Beijing, for example, retail gasoline reached a near-record high last week of around $1.40 per litre. Government policy typically delays price increases on retail gasoline and diesel when crude exceeds $80 a barrel. Beyond $130, retail fuel costs are effectively frozen.As Brent approached $140 last week, it had been largely left to refiners to absorb excess costs. Teapots, as smaller independent refiners are referred to locally, have boosted purchases of cheaper Iranian oil. These independents have also used special cash transfers to pay for Russia’s Eastern Siberia blends, in an attempt to salvage margins.Yet, as tanker rates, trucking costs and global oil benchmarks remain elevated, smaller refiners have had to cut back their operations. More than 40 teapots have been running at only around half capacity due to unsustainable margins.Refiners started the year on a shaky footing. The local giants — Sinopec, PetroChina, Cnooc and Sinochem — had reduced imports and decreased production capacity starting in December. Beijing had cracked down on excess domestic fuel production, partly to reduce energy consumption. Increasing crude prices over the past year had already caused problems. Local refining margins have contracted, while petrochemical unit earnings turned to a loss.The structural squeeze on local refiners is reflected in the shares of China’s largest, Sinopec. They have steadily declined for over four years. Accelerating inflation means Beijing has little leeway in allowing further fuel price hikes. Refiner profits look unlikely to benefit soon from the energy boom. More

For something so long discussed and anticipated, the Federal Reserve’s quarter-point rate rise, the first since 2018, caused remarkably little stir when it finally arrived on Wednesday. The central bank, long the most important player in financial markets, had to compete with Russia’s invasion of Ukraine and a new wave of coronavirus infections in China as a topic for discussion. The lack of reaction is testament to how Jay Powell, Fed chair, had prepared markets for the gradual tightening of monetary policy since the central bank changed its tone last September.Moderation in monetary tightening is justified, at least during wartime. There was no need to add another shock to markets that are following the conflict in Ukraine as well as the impact of locking down large parts of China which is already, on some measures, the world’s largest economy. Energy traders are already considering asking central bankers for emergency support as the disruption to their markets risks causing a liquidity crisis.There was a case for going further. The data has indicated for a while that inflationary pressure in the US is broadening from pandemic-related bottlenecks and surges in global energy prices to domestic services. Indeed, the Fed, in its messaging, struck a hawkish tone and members of its rate-setting committee indicated they expect six further rate rises this year. While there are disagreements about the speed and eventual endpoint of the tightening cycle there is consensus that the US no longer needs the stimulus launched at the start of the pandemic. There are risks on both sides to the Fed’s outlook — not least the progress of the war in Ukraine. Any ceasefire or even a lasting peace deal would be disinflationary — partly reversing the increase in oil prices since the invasion began — while escalations of the violence could exacerbate the stagflationary pressure in the world economy. China’s Covid lockdowns, too, could have unforeseen effects, reducing global demand for commodities but also aggravating the problems with supply chains that have driven up prices for some manufactured goods. The Fed’s recent forecasts are notable for the central bank’s apparent belief that it can painlessly reduce inflation. The central bank predicts that the unemployment rate will fall further to 3.5 per cent and then remain there, even as rates rise from the current 0.5 per cent to an expected 2.8 per cent by 2023. Powell has previously expressed admiration for his predecessor Paul Volcker’s choices in the late 1970s to raise rates aggressively even in the face of mass joblessness; the latest forecasts deny such trade-offs even exist. The Bank of England, which raised rates for the third consecutive time on Thursday, struck a far more cautious note. While at its previous meeting four members of the monetary policy committee dissented and argued for faster rate rises, at this one there was only one dissenter, who said the BoE should hold fast. The MPC argued that Russia’s invasion would, in the short term, increase the rate of inflation at its peak but over a longer period damp economic activity, bringing inflation down more swiftly than the committee had first anticipated. The outlook is murky but the Fed certainly appears too optimistic. It is not clear whether it is overconfident about its ability to control the inflationary pressure that has built up over the past year — pressure that it has consistently underestimated — or to limit the slowdown in the US economy and knock-on effects on unemployment from the oil shock. The rest of us can only hope whatever mistake they make it is not too large. More