Aurelia Butler

(Reuters) -The Federal Reserve will have to move faster than it has in the past to remove accommodation and tame inflation that is well above target, but it may not be necessary to start the liftoff in interest rates with a half-percentage-point hike in March, Cleveland Fed Bank President Loretta Mester said on Wednesday. Inflation could ease to above 2% later this year as some of the constraints on supply are resolved and the U.S. central bank removes some of the support it provided to the economy during the coronavirus pandemic, Mester said. “I don’t like taking anything off the table,” Mester said during a virtual event organized by the European Economics and Financial Centre. “But, you know, I don’t think there’s any compelling case to start with a 50-basis-point” rate increase. Mester, who has a vote this year on monetary policy decisions, said rate increases are going to be “in play” at each Fed meeting and future hikes after the March 15-16 meeting will depend on the strength of inflation and how much it moderates or persists. Referring to the Fed’s balance sheet, Mester said the central bank needs to move faster to reduce its nearly $9 trillion portfolio than it has in the past and that it may need to consider selling some of its mortgage-backed securities. The Fed said last month that it wants to take a primarily passive approach to shrinking its portfolio. But Mester said it may need to sell some mortgage holdings to meet its goal of having a portfolio that invests mainly in Treasury securities in the longer run. “I would support selling some of our mortgage-backed securities at some point during the reduction period to speed the conversion of our portfolio’s composition to primarily Treasuries,” Mester said. Asset sales wouldn’t necessarily be a first step for the Fed, but rather something to consider later on for mortgage holdings because the Treasury securities in the portfolio have shorter duration and are likely to run off the balance sheet quickly, she told reporters. More

OTTAWA (Reuters) -Canada’s economy does not need more stimulus, but rather more investment from both government and businesses to build up supply capacity to meet strong consumer demand, Bank of Canada Governor Tiff Macklem said on Wednesday.Macklem, when asked in an audience Q&A session if government should be spending to further stimulate the economy, said Canada is already in the midst of a consumer-led recovery, and more capacity investment is needed to sustain that.”To sustain a strong consumer-led recovery, you need investment,” he said. “Whether it’s businesses or governments, what we need is more focus on building that supply capacity.””Demand is now looking self-sustaining,” he added.Canadian Prime Minister Justin Trudeau during his election campaign last year pledged C$78 billion https://www.reuters.com/article/us-canada-election-idCAKBN2FX3M7 ($62 billion) in new spending over five years to foster Canada’s economic rebound.Macklem said that with inflation well above the central bank’s 2% target, productivity growth was more vital than ever. Businesses can help increase productivity by investing in new technology to boost efficiency, he said.”For the economy as a whole, investment is critical to non-inflationary growth,” he said.If Canadian businesses fail to go ahead with planned investments, it could impact the path of rate increases, he later told reporters.”If productivity growth is weaker, that means we’re going to have less growth in potential output in the economy, less expansion of our supply capacity and, other things equal, that means that interest rates would have to go up more,” he said.PRODUCTIVITY LAGSDespite a stronger rebound in employment than seen in the United States, Canada’s productivity growth continues to lag. This is both due to more public health restrictions and lower business investment, said Macklem.”The question is, does COVID-19 provide us with an opportunity to change our course? I believe it does,” said Macklem, pointing to the pandemic-driven rise in digital investments and remote work.Corporate balance sheets are strong, consumer demand is high and U.S. demand for Canadian exports is rising, with investment intentions among firms at their highest level since 1999, Macklem said. The central bank signaled last month it would soon start hiking rates https://www.reuters.com/business/finance/hike-or-not-its-toss-up-ahead-bank-canada-rate-decision-2022-01-26, saying the economy no longer needed pandemic-level supports. Money markets see the first increase in March, with six in total this year. [BOC WATCH]The Canadian dollar was trading 0.3% higher at 1.2670 to the greenback, or 78.93 U.S. cents.($1 = 1.2669 Canadian dollars) More

WASHINGTON (Reuters) – New data on Thursday is expected to show U.S. inflation still at multi-decade highs, but Federal Reserve officials are holding out hope that the peak may be near.”There is some evidence we are on the cusp” of inflation that begins to ease perhaps by midyear, Atlanta Fed president Raphael Bostic said in an interview with CNBC on Wednesday.In separate comments Cleveland Fed president Loretta Mester said she also expected inflation to ease this year as the Fed steadily tightens credit. The headline consumer price index is expected to have increased more than 7% in January on an annualized basis, a level reminiscent of the inflation shocks of the 1970s and 1980s that has pushed the Fed to accelerate plans to raise borrowing costs and reduce its holdings of government bonds and mortgage-backed securities But the month-to-month pace of change has been easing, a sign the economy may be working through supply-chain and other difficulties created by the pandemic. Graphic: Peaking inflation? – https://graphics.reuters.com/USA-FED/INFLATION/klvykmjjwvg/chart.png “What we have seen is inflation not get worse on a month-to-month level, and I am hopeful that will translate into a slow decline as we move through the spring and into summer,” Bostic said. That “will give me some comfort that we are heading in the right direction” and perhaps allow the Fed to raise rates at a slower pace as the economy continues to recover, he said. Graphic: Taking it in stride – https://graphics.reuters.com/USA-FED/INFLATION/lbvgnwmydpq/chart.png There is broad agreement at the Fed to begin raising interest rates at the March 15-16 policy meeting. But there is no clarity about how much the Fed will have to do to counter inflation, or how likely it is that goods supply chains and the U.S. labor market will return on their own to something like the pre-pandemic normal of low inflation alongside low rates of joblessness.Some analysts argue the Fed is already out of step with where the economy is heading. The unemployment rate is currently 4%, low by historic standards, and may be heading much lower amid record numbers of job openings, rising wages, and an economy that may surge over the year as the current pandemic wave recedes.Some see the unemployment rate dipping to or below 3% https://www.reuters.com/business/us-road-1950s-style-unemployment-it-may-only-be-pit-stop-2022-02-07 this year, something not seen since the 1950s.”The economy is blowing through stop signs,” Ethan Harris, Bank of America (NYSE:BAC)’s head of global economics, said this week. Harris has been among the most aggressive forecasters in expecting the Fed will raise interest rates seven times this year, which would mean hikes at each of its remaining policy meetings in 2022.”They are really not ready to capitulate and say we are late,” in fighting inflation, he said. “I think they should.”A lockstep, meeting-by-meeting tightening cycle has not been seen since the early 2000s, at the end of former Fed chief Alan Greenspan’s tenure.But the pandemic-era economy has surprised more than once, and there are large competing forces at work – a decline of federal government spending, for example, that could slow consumption, and healthy household balance sheets that could sustain it.Ian Shepherdson, chief economist at Pantheon Macroeconomics, said he expects a combination of rising inventories, eased global shipping conditions, and initial Fed rate increases will pull inflation down fast — back to the Fed’s 2% target sometime next year, with prices for keys goods like automobiles even falling later in 2022.Rates will still need to rise, he said, but because the economy is improving, not because of a Fed “sprint” to battle inflation. Graphic: Where’s the panic? – https://graphics.reuters.com/USA-FED/INFLATION/gdvzynjakpw/chart.png “This Fed will tread cautiously once they feel they have the trend inflation picture in hand. That should come by the middle of the year,” Shepherdson said, when he anticipates car prices will be “in free fall,” housing price appreciation will slow, and year-to-year price comparisons will work in the favor of a lower inflation reading.FINANCIAL MARKETS, SUPPLY CHAINSIn financial markets the interest rates charged to households and companies already have risen since the Fed started slowing its bond purchases late last year and signaled rate hikes to come. A “shadow” federal funds rate maintained by the Atlanta Fed shows bond markets have produced the equivalent since then of a nearly 2-percentage-point increase. The cost to finance a home is rising.There is some evidence of supply-chain improvement as well. Inventories across many goods sectors have been rebuilt, a buffer against the sort of shortages that jacked up prices for goods early in the pandemic. Following the release of its latest earnings on Wednesday, executives at shipping giant A.P. Moller-Maersk said they anticipated a “normalization” in global shipping conditions in the second half of 2022. Port backlogs and container shortages have plagued companies throughout the pandemic as world manufacturers found it harder to reopen the global economy than it was to shut it down in response to the pandemic.”Inflation has peaked,” Moody’s (NYSE:MCO) Analytics Chief Economist Mark Zandi said on Twitter (NYSE:TWTR). “As the pandemic continues to fade…so too will inflation. Global supply chains are ironing things out…And wage growth will moderate as workers get healthy again.” More