Aurelia Butler

The chair of the world’s most powerful financial watchdog has called on global leaders to “think twice” before imposing crippling sanctions on Russia, warning that the most punishing penalties run the risk of undermining global financial stability. Klaas Knot, chair of the Financial Stability Board, told the Financial Times that suspending Russia’s access to the Swift international payments system, which underpins trillions of dollars of transactions a year, could result in a “severe disruption in payment flows”. “When applying severe measures, one should always think twice and also be aware of the consequences,” said Knot, who is also head of the Dutch central bank.Knot’s remarks came as Joe Biden, US president, used a speech at the White House on Tuesday to repeat warnings that the west would impose financial sanctions to exert “intense pressure on [Russia’s] largest, most significant financial institutions” if the country invades Ukraine. Hopes of a diplomatic resolution to the crisis were bolstered earlier on Tuesday when Vladimir Putin, Russia’s president, said the country’s military would draw down some troops on the Ukrainian border to enable dialogue with the West. Biden responded by saying there was “plenty of room for diplomacy” but insisted that sanctions were “ready to go as soon [as] and if Russia moves”.

Cutting off Russia’s access to Swift, the Society for Worldwide Interbank Financial Telecommunication, is one of the potential sanctions being pushed by the US should the country attack its neighbour. EU officials say it is under discussion but unlikely to be included in the first round of measures. Europe’s initial steps are more likely to be targeted sanctions on some of Russia’s biggest financial institutions, among them Sberbank, VTB, Gazprombank, Alfa-Bank and The Russian Direct Investment Fund. Knot, who was speaking before flying to Jakarta for this week’s meetings of G20 finance ministers and central bank governors, acknowledged that “the ultimate decision” of what sanctions to deploy would be “taken on different grounds” than the risk to the global financial system. “But it is clear that they might have some financial ramifications and I would urge policymakers to take those into account,” he added. Removing access to Swift would create severe operational problems for banks that are cut off from the network, but it would not in itself prevent them from dealing with other lenders around the world. Such a move might spur Russia to step up efforts to develop alternative systems. It has already formed an alternative messaging system called SPFS, although this is far less capable than the Swift network. In a wide-ranging interview, Knot said financial regulators around the world had already started trying to estimate the impact of a Ukraine invasion on global banks but that it was “very, very hard to predict” the indirect effects.

He said that the scale of the fallout would determine “how much loss of confidence we will see in the market, how much increase in risk aversion takes place, how many investors will start to run from certain markets, et cetera”. But Knot said that the economic damage might not be as bad as some feared. “Let’s see first how it develops. We’ve also had military conflicts in the past that at the end of the day had very little ramification on financial institutions. It all depends on the breadth and the scale of the conflict.”Meanwhile, Knot said global banks were prepared for any shocks emanating from the Ukraine crisis. He said: “A well-capitalised banking sector has proven its value over the last few years. I think if you look at the main difference between the pandemic shock and the global financial crisis, it was that this time around, the banks were absorbing rather than amplifying the shock.” Additional reporting by Sam Fleming in Brussels More

BENGALURU (Reuters) – The U.S. Federal Reserve will kick off its tightening cycle in March with a 25-basis-point interest rate rise, a Reuters poll of economists found, but a growing minority say it will opt for a more aggressive half-point move to tamp down inflation.While inflation is rising across the globe, it is particularly hot in the United States, hitting a 40-year high last month. That is putting pressure on the Fed to not only raise rates from a record low but also to reduce its nearly $9 trillion balance sheet, drastically inflated by emergency bond purchases as the Fed resuscitated the economy from COVID-19 pandemic damage.Now that the economy has recovered its pre-pandemic level, all 84 respondents in a Reuters poll taken Feb. 7-15 expected the Fed to raise the federal funds rate by at least 25 basis points at its upcoming March 15-16 meeting.Almost a quarter of those respondents, 20, forecast a 50-basis-point move to 0.50-0.75% following debate in markets over the past week after Fed officials discussed the merits of such a move. Rate futures are pricing in more than a 50% likelihood of a half-point hike.Rates were forecast to rise each quarter this year to reach 1.25-1.50% by end-December, roughly where they were at the start of the pandemic two years ago. One-quarter of respondents, 21 of 84, saw rates even higher by end-2022.”The risk is that at some point … they’ll shift to hiking 50 basis points, because it’s very unusual for a central bank to have a zero interest rate in the face of the kind of news we’re looking at right now,” said Ethan Harris, head of global economics research at Bank of America (NYSE:BAC) Securities, referring to inflation. “I do think the Fed is behind the curve. In my view, the Fed should have started hiking last fall, and so they’ve got some catching up to do.” GRAPHIC: Change in federal funds rate forecasts, https://fingfx.thomsonreuters.com/gfx/polling/lbvgnweojpq/Reuters%20poll%20graphic%20on%20March%20federal%20funds%20rate%20forecasts.PNG The Fed was also expected to start reducing its balance sheet quicker than in the previous cycle, beginning as soon as June or July, only a few months after the first rate hike.The poll concluded the Fed would start by cutting $60 billion per month from its portfolio with predictions in a $20 billion to $100 billion range, according to the median of 27 responses to an additional question. That follows a $120 billion-per-month purchase pace at the peak of pandemic-related stimulus. Respondents estimated the Fed’s balance sheet would amount to $5.5 trillion to $6.5 trillion once this so-called “quantitative tightening” concludes.While that would leave the central bank’s balance sheet about 30% lighter, it would still be larger than before the pandemic, roughly $4 trillion.Poll respondents also said this would not be a typical interest rate cycle.Not only was it expected to be short, but the Fed is only forecast to reach a neutral rate: one which neither stimulates nor puts the brakes on activity.Respondents put both the terminal rate and their estimated neutral rate at the same level, 2.25% to 2.50%, according to median forecasts from additional questions.That terminal rate was expected to be reached by end-2024, marking a quick tightening cycle by historical standards, something which comes with its own risks.”Since nobody knows where the neutral rate exactly is, the Fed could get into restrictive territory earlier than it realizes, and that could ultimately lead to a recession,” said Philip Marey, senior U.S. strategist at Rabobank.Still, the Fed was not expected to achieve its 2% inflation target until at least 2024.The core personal consumption expenditure (PCE) price index, the Fed’s preferred inflation gauge, was forecast to clock 3.9% and 2.4% this year and next, before falling to 2.1% in 2024.Headline inflation was forecast to average 7.1% this quarter, before falling to 2.3% by the end of next year, and average 5.0% and 2.5% in 2022 and 2023, respectively. GRAPHIC: U.S. inflation and interest rates, https://fingfx.thomsonreuters.com/gfx/polling/egpbklxmqvq/Reuters%20poll%20graphic%20on%20U.S.%20inflation%20and%20interest%20rates.PNG Disruptions to economic activity following a surge in COVID-19 cases dented growth in the final months of last year and are expected to do so as well this quarter. Growth for this quarter was downgraded for the fourth consecutive month — to an annualized rate of 1.6%. It was expected to rebound to 3.8% next quarter and then gradually slow.Economic growth was predicted to average 3.7% and 2.5% this year and next, respectively, largely unchanged from a January poll.(For other stories from the Reuters global economic poll:) More

The writer is chief economist for Asia Pacific at Natixis and a senior research fellow at think-tank BruegelThe past few months have been characterised by an increasing divergence in monetary policy between big central banks in the west and those in Asia.Pushed by higher inflation than expected, the US Federal Reserve has made an abrupt shift towards a rate rise as early as March. The same is true for the Bank of England. The consensus has also shifted towards a rise by the European Central Bank in December. This rapid monetary tightening contrasts with the increasingly accommodating stance of the People’s Bank of China and the Bank of Japan’s stubborn commitment to its quantitative easing programme to support markets and cap yields through bond buying. Both central banks have good reasons to stay the course. The Chinese economy is decelerating rapidly, and inflation seems to be under control, at least as far as consumer prices are concerned. In Japan, inflation is still well below the BoJ’s objective, which justifies the continuation of such lax monetary policy stance. And yet, things are changing rapidly. To start with, the Fed’s much more aggressive tone, which reflects a sudden realisation of the larger threat of inflation, has led to a bond market sell-off and rapid widening of the gap between short- and long-term interest rates.This is not only putting upward pressure on European treasury yields but also on Japanese government bonds. The BoJ had to intervene on Thursday to ensure the yield on its 10-year benchmark bond remained within its 0.25 per cent limit. And for China, the spread between its three-year sovereign bond yields and those of the US has kept on narrowing from around 3 percentage points to 0.50 now. Such a narrow yield differential does not bode well for China to continue to attract portfolio inflows — at least not fixed income, which accounted for 60 per cent of such investment in 2021. Given the strong renminbi and China’s big trade surplus, one could argue that a reversal of the still strong portfolio inflows cannot hurt the country much. In fact, some renminbi weakening if inflows slow could be handy to boost exports given the expected narrowing of the trade surplus in the course of 2022, as the global economy decelerates. Still, there are worries in Beijing, as revealed in comments by Chinese policymakers all the way up to Xi Jinping. “If major economies slam on the brakes or take a U-turn in their monetary policies, there would be serious negative spillovers,” the president said last month. In other words, no financial market — even China — is fully insulated from the Fed’s rapid tightening. Indeed, the dollar’s overriding role as reserve currency is key to understanding how the Fed’s “quantitative tightening” may affect China. As China is a net creditor overall with more assets than liabilities in dollars, a stronger US currency and higher interest rates should create a positive wealth effect for the country despite a lower value for its holdings of US Treasuries.However, this is not true for corporations. Big companies with access to the offshore market are heavily indebted in dollars, which means that their cost of funding will rise after the Fed tightens, and all the more so if the dollar appreciates with it. In addition, Chinese banks have stepped up their lending in a large number of emerging and developing economies, most of which is in dollars. The aftermath of the pandemic is bringing to the surface the unsustainability of many of these countries’ debt and the need for them to be restructured. Such trends are clearly not good news for the Chinese economy, which is already experiencing a cyclical, but also structural, deceleration.As for Japan, a stubborn defence by the BoJ of its yield control strategy will only weaken the yen further. That may be positive for external competitiveness and might even help push up long-depressed inflation. But there would be an important side-effect: Japanese households’ purchasing power will shrink and wages will have a hard time catching up.All in all, monetary policy divergence between major central banks is going to be increasingly difficult. Either eastern central banks will accept weaker currencies, and other related consequences, or they give up on pursuing a divergent path. For China, the problem will lie with some large corporations’ external debt as well as with banks’ exposure to developing countries. For Japan, shrinking household disposable income is bound to dent growth. More

WASHINGTON (Reuters) -The Biden administration is seeking $30 billion in additional funds from Congress to fight the COVID-19 pandemic to bolster vaccines, treatments, testing supply, and research, according to sources familiar with the matter.The $30 billion request includes $17.9 billion for vaccines and therapeutics, two sources familiar with it said.Administration officials and congressional staff have been in talks about the issue, a Department of Health and Human Services spokesperson confirmed on Tuesday.“HHS leaders regularly engage with Congress about COVID resources, and in a Tuesday conversation with congressional staff, HHS discussed the status of COVID response funds as well as the need for additional resources to support securing more lifesaving treatments and vaccines, sustaining testing capacity, and investing in research and development of next-generation vaccines,” the spokesperson said.”These resources would help us continue expanding the tools the country needs to stay ahead of the virus and help us move toward the time when COVID-19 will not disrupt our daily lives.”Democratic President Joe Biden secured a $1.9 trillion “American Rescue Plan” last year to fight the pandemic. But the Delta and Omicron variants of the coronavirus, coupled with ongoing vaccine hesitancy among a portion of the U.S. population, have fueled coronavirus cases, hospitalizations and deaths nationwide.”While we continue to have sufficient funds to respond to the current Omicron surge in the coming weeks, our goal has always been to ensure that we are well prepared to stay ahead of the virus,” White House spokesperson Jen Psaki said.The White House is eager to show progress on the pandemic ahead of the Nov. 8 midterm elections, in which Republicans hope to take over control of the House of Representatives and the Senate; Democrats have a slim majority in the House and control the 50-50 Senate now, with Vice President Kamala Harris holding a tie-breaking vote.The administration may face opposition from Republicans and even some Democrats wary of approving additional funding. Biden is also struggling to pass pieces of his Build Back Better climate and social spending bill, which has stalled in the Senate because of opposition from moderate members of his own party.The new COVID funding package includes a proposed $4.9 billion for testing, including extending community testing, and continuing development and manufacturing of at-home tests aimed at new variants, according to documents reviewed by Reuters. Another estimated $3 billion is proposed for reimbursing providers for testing, treatment and vaccination of the uninsured and vaccination of the underinsured. $3.7 billion would go to developing vaccines that would protect against future variants and half a billion dollars would be aimed at programs for tracking diseases. More

WASHINGTON (Reuters) -U.S. Treasury Secretary Janet Yellen will urge her G20 counterparts to work towards ending the COVID-19 pandemic in developing countries and ensuring they have the resources needed to support an equitable recovery, a U.S. Treasury official said on Tuesday.Yellen is due to participate virtually in the meeting of finance ministers and central bank governors from the Group of 20 major economies on Thursday and Friday.The U.S. Treasury official laid out U.S. priorities for the meeting, which comes as COVID-19 Omicron variant cases are receding in many wealthy countries but are still rising in many developing countries. Host country Indonesia reported a daily record 57,049 new cases on Tuesday.Southeast Asia’s most populous country had initially planned an in-person G20 finance meeting in Bali, but the venue was moved to Jakarta in January when it became a hybrid gathering with many officials participating virtually. Yellen will urge the G20 to tailor their policies to individual country circumstances to secure an inclusive recovery and to close the gap in vaccine access for poorer countries, the official said.This includes supporting efforts by the World Bank, the International Monetary Fund, the World Health Organization and the World Trade Organization to address global bottlenecks in the deployment of vaccines, therapeutics and diagnostics, the official said.Yellen also will urge G20 countries to support a proposed global fund housed at the World Bank to invest in pandemic prevention and preparedness, with its estimated $75 billion cost a “bargain” compared to COVID-19’s global economic and human costs.Yellen also will express confidence that momentum will be maintained among 136 countries to finalize an agreement for a 15% global minimum corporate tax this year, so that it can be put into force in 2023.The official said Democrats in the U.S. Congress broadly support the international tax provisions.”Secretary Yellen expects they will be part of any Build Back Better bill passed,” the official added, referring to U.S. President Joe Biden’s social and climate investment bill, which is currently stalled in Congress.Yellen also intends to make a pitch for more intensive climate action to meet carbon emissions reduction goals, including mobilizing more private capital to finance the transition away from fossil fuels. Public resources can help catalyze additional private financing for reducing emissions, the official said. More

(Reuters) – Senate Republicans on Tuesday delayed a pivotal committee vote on President Joe Biden’s nominees to the Federal Reserve Board, including Jerome Powell as chair, when they boycotted the proceeding over objections to Sarah Bloom Raskin as the central bank’s Wall Street regulator.Senator Sherrod Brown, an Ohio Democrat who chairs the Banking Committee reviewing the nominations, said he will try to reschedule a vote as soon as possible. It is unclear when that might happen because Republicans, who hold half the seats on the panel, are demanding Raskin be separated from the other four nominees, and Brown is refusing to acquiesce. Here’s how the delay might affect the Fed in the weeks ahead.WILL IT AFFECT PLANS FOR A MARCH INTEREST RATE HIKE?Not really. The Board of Governors earlier this month voted to have Powell act as “chair pro tempore” for the Fed system as a whole until the Senate confirmation process is completed. And in January, he was reelected chair of the Federal Open Market Committee by members of the policy-setting panel.Officials, including Powell, have signaled their intent to raise interest rates at the March 15-16 meeting, though recent high inflation readings have stirred a public debate about how fast to proceed in the months ahead.But, for instance, the delay in affirming Fed Governor Lael Brainard’s elevation to vice chair – traditionally a leading voice in Fed messaging efforts – may hamper the effort to provide clarity on the road ahead for monetary policy, said Kaleb Nygaard, senior research associate at the Yale Program on Financial Stability. “This delay in getting the nominees actually hurts the institution’s ability to signal because there’s an added degree of uncertainty about what the leadership team is going to be,” Nygaard said.WILL THIS MEAN FEWER POLICYMAKER PROJECTIONS NEXT MONTH?In all likelihood, yes.Policymakers provide individual forecasts each quarter for where they think inflation, interest rates and the unemployment rate will head in the coming months, and the median of their forecasts on the Fed’s target interest rate in particular is very influential. The next set is due at the March meeting.Since they last provided projections in December, two officials have left the Fed – Richard Clarida and Randal Quarles. With just four weeks until the meeting, it is likely that the next set of projections will include only 16 forecasts instead of 18 in December and 19 were all the nominees confirmed in time.At the margin that could affect the signal emerging from the projections on how soon officials see inflation returning to their 2% target and how aggressively they intend to raise rates this year and after that.WHAT’S NEXT IN THE CONFIRMATION PROCESS?With Republicans refusing to appear, the 12-12 committee cannot reach the quorum required to hold a vote.For now that leaves Brown and his Democratic colleagues – likely in consultation with the White House – to make a political judgment on whether to split up the vote by breaking out Raskin as Republicans have demanded, or to continue trying to get all five nominees through at once. Several Republicans on the committee have expressed support for the nominations of Powell for a second term as chair and Brainard as vice chair. A number have also said they would support economists Philip Jefferson of Davidson College and Lisa Cook of Michigan State University for open board seats. That signals those four could be “reported favorably” for confirmation consideration to the full Senate – if the committee can hold a vote. But Republicans are united in opposing Raskin over past comments on climate change and have also accused her of inappropriately lobbying on behalf of a firm where she acted as a director.WHAT HAPPENS IF THE COMMITTEE DOES EVENTUALLY VOTE?The names of the nominees winning a majority of support from committee members then go to the full Senate for final confirmation.In the event the committee “fails to report favorably” on any nominee – a likely outcome for Raskin – Senate Majority Leader Chuck Schumer can have the full Senate vote on “discharging” the Senate banking panel from considering the nomination further. Then, a final confirmation vote could occur after other technical procedures are completed. The process was used last year to move forward on the stalled nomination of Bureau of Consumer Financial Protection Director Rohit Chopra.One further twist: that vote may also depend on attendance.President Donald Trump’s attempt to get his one-time economic adviser and controversial Fed nominee Judy Shelton confirmed failed in 2020 in part because a couple of Republicans were quarantining due to COVID-19 exposure and could not come to the Senate floor to vote.Senator Ben Ray Luján, a Democrat from New Mexico, suffered a stroke last month and is recovering, putting off the earliest likely confirmation vote on the Fed nominees until March. More