Aurelia Butler

The Federal Reserve is set to confirm its plans to raise interest rates in March for the first time since the onset of the pandemic, as the US central bank charts a more aggressive course towards monetary tightening in the face of sticky inflation.Fed officials will convene this week for their inaugural policy meeting of 2022, the first since the central bank made its fight against rapid US consumer price growth its top priority.The Fed has hardened its rhetoric in recent weeks about the risks posed by high inflation, with chair Jay Powell this month calling it a “severe threat” to a sustained economic expansion and a robust labour market recovery.Its top policymakers have also made clear that they are willing to act forcefully to ensure inflation does not become ingrained, by considering raising interest rates “sooner or at a faster pace” than anticipated and swiftly shrinking the Fed’s enormous balance sheet this year.Coupled with mounting evidence that inflation is broadening out and the labour market is quickly healing, the central bank is well placed to move in March, many Fed officials and Wall Street economists argue.

“The labour market is tight, wage inflation is elevated and price inflation is substantially elevated,” said Peter Hooper, the global head of economic research at Deutsche Bank, who worked at the Fed for almost three decades. “Do we still need to be at a crisis-level of support for the economy? No.”Beyond confirmation that the Fed could soon raise rates, economists are also looking for more clarity on the path forward after the first adjustment. The central bank’s policy statement is set to be released on Wednesday, followed by a press conference with Powell.Fed-watchers are split as to whether the central bank will also announce an immediate end to its asset purchase programme, which is currently set to end in March. Powell affirmed that timeline earlier this month, but according to ING, there is “no reason” for the central bank to buy any additional bonds.In December, Fed officials coalesced around three quarter-point increases in 2022, with another three for 2023 and two in 2024. This month, however, an increasing number of policymakers have laid the groundwork for more. One of the most hawkish officials and a voting member this year on the Federal Open Market Committee — James Bullard of St Louis — said he supports four rate rises this year. Christopher Waller, a governor, said that five could be appropriate if inflation remains elevated.Jason Thomas, head of global research at Carlyle, went as far as arguing that seven this year is not “improbable”.“What the Fed is going to prepare us for is for the potential for rate hikes at every meeting after January,” he said.Some speculate the Fed could also consider raising interest rates by half a percentage point in March — something it has not done since May 2000.Bill Nelson, former deputy director of the Fed board’s division of monetary affairs, said the central bank should “prepare the public” for that possibility this week.“Responding to the current circumstances by being gradual is just going to leave them more and more behind the curve and ultimately will end with a very sharp correction,” said Nelson, who is now chief economist at the Bank Policy Institute. “So many people are taking too much of a signal from the very gradual tightening pace last time and not thinking about what it means to adopt a policy position appropriate for restraining the economy and bringing down inflation.”However Jan Hatzius, chief economist at Goldman Sachs, whose forecast aligns with market expectations for four quarter-point rate rises in 2022, said such a dramatic move is both unlikely and unnecessary.“The question is really more, do you see a string of hikes at successive meetings?” he told the Financial Times during an event hosted by the Chicago Council on Global Affairs on Thursday. “That is a possibility.”A sudden lurch towards significantly more hawkish Fed policy that threatens to dent the growth outlook is the “key downside risk” for financial markets this year, warned Holly MacDonald, chief investment officer at Bessemer Trust.“Success is not just killing this acute inflation. Success is getting away from [zero],” said Matt Toms, chief investment officer for fixed income at Voya Investment Management, referring to the current level of the federal funds rate. He added that the Fed should raise rates only gradually, given that inflation and growth are both expected to slow later this year.Equity markets have swung violently in recent days as investors have digested the implications of swifter Fed tightening, with global stocks suffering their biggest declines in more than a year last week.

Economists also this week expect further details about the Fed’s plans to shrink its balance sheet, which has more than doubled in size since early 2020 and is now just below $9tn.In its first in-depth discussion on the subject in December, the FOMC agreed to a faster reduction than the pace set after the 2008 global financial crisis.Nancy Vanden Houten, lead economist at Oxford Economics, predicts the Fed will eventually institute monthly redemption caps of $30bn for Treasuries and $15bn for agency mortgage-backed securities in the third quarter, and later raise those to $60bn and $30bn, respectively. At that pace, the balance sheet would slip below $6tn in 2025, according to her estimates. More

Humans seem able to ignore many great crimes against each other, but woe betide the individual who brings harm to a small, cuddly animal. Hong Kong is astir after the city passed a death sentence on thousands of hamsters, following three human cases of Covid-19 linked to a pet shop, where several of the rodents also tested positive. Hong Kong’s draconian pursuit of Covid elimination, with three-week quarantines for returning residents, has left the city cut off from the rest of the world. Coming on top of the crackdown on democratic opposition, that isolation has led to real concerns about the city’s survival as a financial centre. But those who raise such doubts about Hong Kong are mistaken. For hard economic reasons, the future of the Chinese territory, which retains some separation from the mainland under the principle of “one country, two systems”, is more secure than any global rival except for New York. That is because China has capital controls.China uses a range of quantity-based limits to keep its financial system fenced off from the rest of the world. Chinese citizens, for example, need a permit to exchange more than $50,000 a year into foreign currency. There is enormous pent-up appetite both from mainland Chinese wanting to diversify their savings into international markets, and foreign investors wanting to buy assets in the world’s biggest source of economic growth.To the extent that either of these demands can be satisfied, it is via Hong Kong, which retains an entirely separate and fully convertible currency pegged to the US dollar. A series of so-called Connect schemes in the city allow foreigners to access Chinese markets and Chinese investors to place money abroad. With Chinese companies no longer welcome on US stock markets, the Hong Kong exchange is the natural venue for them to seek international capital.It is a phenomenal, structural source of financial business, with few parallels anywhere in the world. As the de facto capital of global finance and home of its reserve currency, New York has a similar structural power. But almost every other financial centre must survive on its merits. London is in some ways the inverse of Hong Kong: whereas the EU is out to displace the UK capital as Europe’s financial centre, officials in Beijing are sending ever more business Hong Kong’s way.All this could change if China dropped its capital controls and made the renminbi fully convertible. But that day is still a long way off. The classic trilemma of international finance says you must choose two from an independent monetary policy, a controlled exchange rate and the free movement of capital. You cannot have all three.Independent monetary policy is indispensable to manage an economy of China’s size. The choice, then, is a dilemma: drop controls and risk periods of disorderly capital flight, as began to happen during the mini-crash of the Shanghai stock market in 2015, or keep a tight grip on the exchange rate with controls in place. China is likely to liberalise its capital account slowly, to Hong Kong’s benefit. But to surrender all control will go against every instinct of the Beijing government.What happens if capital controls do go? Until it returns fully to Chinese control in 2047, Hong Kong will still have other advantages, such as low tax rates, critical mass and decades of legal expertise. Economic geography is remarkably durable and the legacy of 200 years as a trading centre will not die easily. Most cities that are financial centres today were financial centres a century ago. It takes a lot to destroy one.None of this implies Hong Kong must be as pleasant or vibrant as it was in the past. Without freedom, it is hard to innovate. Banks may well choose to park their traders somewhere else and if senior management think there is legal risk then they will follow. In any undemocratic jurisdiction, there is the risk of a descent into outright gangsterism, if those in power are corrupt or erode the rule of law. Certainty of contract and ownership is the foundation of capitalism. Its loss would be the death knell for any financial centre. For the foreseeable future, however, people who want to move capital into and out of China are likely to find themselves doing so in Hong Kong. The Covid-19 quarantines are oppressive, but when they do eventually end, the foreign bankers will find that China is still where all the money is. The Hong Kong government could graduate from hamsters to golden retriever puppies and it would not make much difference. Money flows. And China’s money will flow through Hong [email protected] More

The Colorado Fire, which has been active since Friday, was 5% contained, the California Department of Forestry and Fire Protection (Cal Fire) said.A 20-mile stretch of State Highway 1, a scenic north-south route on the Pacific Coast, was closed from near the beach town of Carmel-by-the-Sea to Andrew Molera State Park. About 400 people in Monterey County were evacuated from 1,100 structures, a spokeswoman for the American Red Cross said, citing county reports.Four people and a pet stayed overnight at a shelter in a local school, the Red Cross said.California has long had an active wildfire season, but in recent years, fueled at least in part by climate change, it has grown longer and more punishing.Last year, the wildfire season started unusually early amid an ongoing drought and low reservoir levels, Cal Fire said. In January 2021 alone, the state battled 297 fires on 1,171 acres, the office said.The Colorado Fire is the only fire listed on Cal Fire’s incident list so far in 2022. This year, California is also grappling with the Santa Ana winds. A high wind warning was in effect for the area, with possible gusts of up to 70 miles per hour (112.65 kph), according to the National Weather Service.But winds had improved and were forecast to remain light throughout the weekend, the Red Cross said. More

Will the Federal Reserve signal an interest rate rise in March? After another month of hot inflation data, the US Federal Reserve at its two-day policy meeting next week is expected to discuss the various tools in its arsenal to combat price pressures and set the stage for an interest rate rise in March. Since the release of its December 2021 meeting minutes earlier in January, investors and analysts have been anticipating more hawkish action from the central bank. Those minutes showed officials weighing the prospects of raising interest rates “sooner or at a faster pace” than they had initially anticipated.Futures markets have since fully priced in a quarter-point increase at the March meeting, with a further three hikes priced in for 2022.“Following the hawkish shift at the Fed’s December meeting, we expect Chair [Jay} Powell to use the January press conference to consolidate expectations for a March rate hike,” wrote Luigi Speranza, chief global economist at BNP Paribas. At its December meeting, the Fed decided to accelerate the rate at which it was tapering its purchases of US government bonds and mortgage-backed securities. Winding down that programme faster gives the Fed more time to raise interest rates: the accelerated schedule now puts the taper on track to end in mid-March. Some analysts, like Andy Brenner, head of international fixed income at NatAlliance Securities, suggested the Fed could speed up its tapering cycle further next week to give itself more flexibility around a March hike. Brenner also said the Fed was likely to begin discussing a reduction in the size of its $9tn balance sheet, another topic raised in December. Kate DuguidWill the next crop of US earnings disappoint?US earnings season is now well under way and some of the largest companies’ results so far have proved lacklustre.Record full-year earnings for Wall Street bank JPMorgan were tempered by a warning that higher costs would bite into profits. Days later, Goldman Sachs pointed to a large jump in fourth-quarter expenses.Meanwhile, projections of substantially slower growth in subscriber numbers sent Netflix’s shares tumbling — a decline which seeped into equity markets more broadly, as concerns about earnings applied fresh pressure to speculative tech stocks that had already sold off dramatically in a volatile start to the year.The challenges conveyed by those big companies have brought the coming week’s crop of results into sharper focus. Financial powerhouses Blackstone, Mastercard and American Express are up next on the earnings roster, as are “Big Tech” behemoths Microsoft, Apple and Elon Musk’s carmaker Tesla — reporting on Tuesday, Thursday and Wednesday respectively.Microsoft is expected to deliver earnings per share of $2.30 for the December quarter, up from $2.03 in the same period in 2020, on sales of $50.6bn, according to FactSet data. Apple’s quarterly EPS are projected to land at $1.89, up from $1.68 on sales of $119bn.Overall, constituents of the S&P 500 blue-chip share gauge are forecast to post year-on-year earnings growth of about 23 per cent for the fourth quarter. But just over a tenth of the index’s companies had reported by the end of last week, leaving room for downward revisions.Analysts are likely to focus on how companies are managing cost pressures against a backdrop of persistently high levels of global inflation. They will also question how far the imminent prospect of interest rate rises — implemented to contain soaring price growth — will help or hinder performance.JPMorgan’s chief financial officer said on an earnings call that the bank should benefit from rising borrowing costs and greater loan demand. But higher rates also erode the present value of future cash flows for highly-valued technology companies, potentially rendering them less attractive as investments. Harriet ClarfeltHow much did Omicron weaken European business activity in January?The Omicron coronavirus variant is expected to have weighed on European economic activity in January, closely watched indicators of business sentiment due to be published on Monday are forecast to show.Economists polled by Reuters expect IHS Markit’s eurozone composite purchasing managers’ index, which tracks private manufacturing and services activity, to have weakened to a one-year low of 52.6 — dragged down by the hard-hit German services sector. Activity in France is expected to show more resilience, with PMI readings well above those in the eurozone’s largest economy.“With Omicron hitting some eurozone countries, notably Germany, in full only this month, the likelihood of a further drop in the index seems high,” said Sandra Horsfield, economist at Investec. However, she acknowledged that restrictions on activity have generally not been tightened as much as earlier in the pandemic, pointing to a more moderate pace of cooling than in previous waves.In the UK, the composite PMI index is expected to have risen to 55 from a 10-month low of 53.6 in December, reflecting an earlier spread of the latest wave. “We expect the January report to show an easing in Omicron fears as daily infection rates slowed and stricter social restrictions became less likely,” said Horsfield.The headline figures for both the eurozone and the UK are expected to be above the 50 mark, which indicates a majority of businesses reporting an expansion, with stronger readings for manufacturing than for services. While factories’ output across Europe is forecast to remain limited by shortages of components, “there are tentative signs that the supply constraints that held back output last year are beginning to ease”, said Horsfield. Valentina Romei More

BEIRUT (Reuters) – Lebanese school teacher Sara Wissam and her husband were comfortably off before a run on the local currency decimated the value of their salaries and dragged them towards poverty.The plight of the Beirut couple is common across Lebanon’s middle class, which has been forced to make once unthinkable choices by the worsening economic crisis: cutting back on food, cancelling trips or applying to emigrate for good.”It used to be that our income lasted a month,” the mother of three told Reuters.”Now it’s not enough for one trip to the supermarket to buy essentials,” said Wissam, describing how she rarely buys meat, has cut back on cheese and chooses even the smallest treats for her young kids carefully.Ayman Hadad, a 28-year-old university graduate who found a job in a shop, earns the equivalent of $125 a month and wants to join friends who have emigrated. He has applied to go to Canada. “Enough of Lebanon. We lost hope,” he said.Lebanon’s descent into financial ruin began in 2019, the result of a poorly managed spending binge that pushed up debt, political paralysis as rival factions squabbled and foreign lenders’ reluctance to bail the country out unless it reformed.The World Bank ranks the crisis as among the most severe globally since the mid-19th century, devastating a country once seen as a wealthy and liberal outpost in the Middle East before civil war broke out from 1975 to 1990.About 80% of the population of 6.5 million are considered poor; in September, more than half of families had at least one child who skipped a meal https://www.reuters.com/world/middle-east/children-skipping-meals-majority-families-lebanon-unicef-says-2021-11-23, UNICEF said, compared with just over a third in April.The currency has lost more than 90% of its value and banks have locked savers out of accounts. By some estimates, state debt reached 495% of gross domestic product in 2021, far above levels that crippled some European states a decade ago.Adding to people’s frustration is the government’s failure so far to tackle the problems.Caretaker administrations have led Lebanon for much of the last three years, and since the cabinet quit after a devastating Beirut port blast in 2020, politicians have been fighting over who should lead an investigation into who was to blame.Meanwhile people see signs of social and economic collapse. The state telecom firm shut the Internet in parts of Beirut for lack of fuel in recent days and an armed man took hostages at a bank demanding access to his trapped savings.’FRIDGE EMPTY’Lebanon’s national power grid was creaking before the crisis, with rolling cuts across the country. Now, a bankrupt government can barely run its power plants and homes often receive only an hour of state electricity a day.Yola al-Musan, who manages a supermarket in Beirut, uses electricity from a shared neighbourhood generator to keep the lights on at home.When the national grid does fire up, Musan races to switch on the washing machine as only then does she have a strong enough current.For school teacher Wissam, putting enough food on the table for her family has become tough, even though she and her husband both have steady jobs.Before the crisis, Wissam and her husband’s combined salary was 3 million Lebanese pounds a month, which at the exchange rate at the time of 1,500 to the dollar was around $2,000.Now their combined earnings are worth the equivalent of $140, even after Wissam’s modest wage hike. The currency has plummeted to 25,000 to the dollar, sending the price of imported goods and local products soaring.”Lebanon’s leaders amuse themselves insulting each other and accusing each other of corruption. In fact, they are all corrupt and thieves,” she said, echoing widespread public and international criticism of how the crisis has been handled.Politicians, some former militia leaders and others from families who wielded influence for generations over the nation’s Christian and Muslim communities, acknowledge corruption exists but deny they are responsible and say they are doing their best to rescue the economy.But a lengthy and continuing dispute over who should preside over the port blast inquiry has contributed to delays in talks with the International Monetary Fund, seen as vital to unlocking overseas support led by France.Once-reliable Gulf donors such as Sunni Muslim Saudi Arabia already stepped back years ago, voicing anger at Iran’s rising influence in Lebanon through Hezbollah, a group supported by Tehran which has a heavily armed militia.Najib Mikati, the billionaire prime minister whose post is held by a Sunni under the sectarian political system, has tried to mend Gulf ties. Hezbollah, in turn, stepped up criticism of Gulf states and hosted conferences for domestic opponents of the monarchies.Meanwhile, the cabinet is expected to hold its first meeting https://www.reuters.com/markets/rates-bonds/lebanon-draft-budget-applies-range-fx-rates-official-source-says-2022-01-21 in more than three months on Monday to discuss a draft budget it hopes will ease financial pressures and quell public anger.”If each one of them donated a small amount of their wealth to the poor, there would be no poor in Lebanon,” said Shadi Ali Hamoud, 39, after returning home to his family from work in a restaurant kitchen. “Look at the fridge, it’s empty.” More

Just how bad is the situation?- Gross domestic product has plunged to an estimated $20.5 billion in 2021 from about $55 billion in 2018, the kind of contraction usually associated with wars, the World Bank says, ranking the collapse as one of the worst globally since the mid-19th century.- The Lebanese pound has lost more than 90% of its value, driving up the cost of almost everything in a country reliant on imports, and demolishing purchasing power. A soldier’s monthly wage, once the equivalent of $900, is now worth about $50.- Poverty rates are sky-rocketing in the population of about 6.5 million, with around 80% of people classed as poor, the U.N. agency ESCWA says. The situation is worsening. In September, more than half of families had at least one child who skipped a meal, UNICEF has said, compared with just over a third in April.- The financial system has suffered eyewatering losses, including about $44 billion at the central bank related to failed efforts to prop up the currency, according to 2020 government figures, a level that is roughly twice the size of economic output. Overall losses, including anticipated sovereign debt write-downs, are even bigger.- Lebanon’s banks are paralysed. Savers have been frozen out of U.S. dollar accounts. Withdrawals in local currency apply exchange rates that erase up to 80% of the value. During an October visit to Beirut, U.S. official Victoria Nuland said the Lebanese people deserved to know where their money had gone.- Reliant on imported fuel, Lebanon is facing an energy crunch. Even before the crisis, power supplies were in short supply, including in the capital. Now households are lucky to receive more than an hour or so a day. Fuel prices have soared. A ride in a shared taxi, a popular form of transport, cost 2,000 pounds before the crisis but now costs about 30,000 pounds.- Lebanese are emigrating in the most significant exodus since the 1975-90 civil war, which pitted Lebanon’s Christian and Muslim communities against each other and among themselves. Believing their savings are lost, many Lebanese have no plans to return this time as they start over again.- Among those leaving are doctors. The World Health Organization has said most hospitals are operating at 50% capacity with around 40% of doctors, mostly specialists, permanently emigrating or working part-time abroad.- Officials and the media talk of Lebanon becoming a “failed state”. Michel Aoun, the Christian president, warned in December that the state was “falling apart”. Lebanon’s top Sunni cleric said after unrest over fuel shortages in August that the country risked complete collapse unless there was action. More

(Reuters) – Lebanon is grappling with a deep economic crisis after successive governments piled up debt following the 1975-1990 civil war with little to show for their spending binge.Banks, central to the service-oriented economy, are paralysed. Savers have been locked out of dollar accounts or told that funds they can access are now worth a fraction of their original value. The currency has crashed, driving a swathe of the population into poverty.WHERE DID IT GO WRONG?Lebanon’s financial collapse since 2019 is a story of how a vision for rebuilding a nation once known as the Switzerland of the Middle East was derailed by mismanagement as a sectarian elite borrowed with few restraints.Downtown Beirut, levelled in the civil war, rose up, with skyscrapers built by international architects and swanky shopping malls filled with designer boutiques that took payment in dollars or Lebanese pounds.But Lebanon had little else to show for a debt mountain equivalent at the time to 150% of national output, one of the world’s highest burdens. Its electricity plants can’t deliver 24-hour power and Lebanon’s only reliable export is its human capital.HOW DID IT BORROW SO MUCH?Some economists have described Lebanon’s financial system as a nationally regulated Ponzi scheme, where new money is borrowed to pay existing creditors. It works until fresh money runs out. But how did the nation of about 6.5 million people get there?After the civil war, Lebanon balanced its books with tourism receipts, foreign aid, earnings from its financial industry and the largesse of Gulf Arab states, which bankrolled the state by bolstering central bank reserves.One of its most reliable sources of dollars was remittances from the millions of Lebanese who went abroad to find work. Even in the 2008 global financial crash, they sent cash home.But remittances started slowing from 2011 as Lebanon’s sectarian squabbling led to more political sclerosis and much of the Middle East, including neighbouring Syria, descended into chaos.Sunni Muslim Gulf states, once reliable supporters, started turning away because of the rising influence in Lebanon of Iran, via Hezbollah, a heavily armed Lebanese Shi’ite group whose political power has grown.The budget deficit rocketed and the balance of payments sank deeper into the red, as transfers failed to match imports of everything from staple foods to flashy cars.That was until 2016, when banks began offering remarkable interest rates for new deposits of dollars – an officially accepted currency in the dollarised economy – and even more extraordinary rates for Lebanese pound deposits.Elsewhere in the world savers earned tiny returns.Given the Lebanese pound had been pegged to the dollar at 1,500 for over two decades and could be freely exchanged at a bank or by a supermarket cashier, what was there to lose?Dollars flowed again and banks could keep funding the spending.HOW COULD BANKS OFFER SUCH HIGH RETURNS?Lebanon was still politically dysfunctional and rivalries had left it without a president for most of 2016.But the central bank, Banque du Liban, led by former Merrill Lynch banker Riad Salameh since 1993, introduced “financial engineering”, a range of mechanisms that amounted to offering banks lavish returns for new dollars. It was a tactic bankers say might have been appropriate if it was followed swiftly by reforms – but not if, as was the case, not enough happened.Improved dollar flows showed up in climbing foreign reserves. What was less obvious – and is now a point of contention – was a rise in liabilities. By some accounts, the central bank’s assets are more than wiped out by what it owes, so it may be sitting on big losses.Meanwhile, the cost of servicing Lebanon’s debt surged to about a third or more of budget spending.WHAT TRIGGERED THE COLLAPSE?When the state needed to rein in spending, politicians splurged on a public sector pay rise before the 2018 election. And the government’s failure to deliver reforms meant foreign donors held back billions of dollars in aid they had pledged.The final spark for unrest came in October 2019 with a plan to tax WhatsApp calls. With a big diaspora and Lebanon’s low tax regime skewed in favour of the rich, slapping a fee on the way many Lebanese kept in touch was disastrous.Mass protests, driven by a disenchanted youth demanding wholesale change, erupted against a political elite, including ageing militia leaders who thrived while others struggled.Foreign exchange inflows dried up and dollars exited Lebanon. Banks no longer had enough dollars to pay depositors queuing outside, so they shut their doors. The government also defaulted on its foreign debt.The currency collapsed, sliding from 1,500 to the dollar before the crisis, to a street rate of about 23,000 in late January 2022, after hitting 34,000 earlier in the month.Compounding problems, an explosion in August 2020 at Beirut port killed 215 people and caused billions of dollars of damage.After a rapid economic contraction, government debt by some estimates was 495% of gross domestic product in 2021 – far more than levels that crippled some European states a decade ago.WHAT HAPPENS NOW?France has been leading international efforts to push Lebanon to tackle corruption and implement reforms demanded by donors. A new government was formed in late 2021, promising to revive talks with the International Monetary Fund. It has yet to implement any significant reform policies.Crucially, politicians and bankers need to agree on the scale of the vast losses and on what went wrong, so Lebanon can shift direction and stop living beyond its means. More