Aurelia Butler

WASHINGTON (Reuters) -The $350 billion in coronavirus relief aid for state and local governments has allowed U.S. cities to respond faster and stronger to an ever changing COVID-19 pandemic, U.S. Treasury Secretary Janet Yellen said on Wednesday.Yellen told a meeting of the U.S. Conference of Mayors that the response by state and local governments is helping to blunt the impact of the highly-contagious Omicron coronavirus variant.”Omicron has presented a challenge and will likely impact some of the data in the coming months, but I am confident it will not derail what has been one of the strongest periods of economic growth in a century,” Yellen said.She said that the $350 billion State and Local Fiscal Recovery Fund, which enabled cities to be flexible in how they aided their populations, had led them to be “much readier to respond.” “Rather than one burst of money that could only be spent in certain ways, it called for sustained funding, and our Treasury team has worked hard so you can use the money as flexibly as possible,” Yellen added.She cited several examples of local uses of the funds, from $1,000 signing bonuses for new teachers at child-care centers in Columbus, Ohio, to Hawaii’s move to reverse its decision to furlough 10,000 state employees.Minnesota has authorized more than $80 million in funds from the program for health needs, ranging from rapid COVID-19 tests to emergency surge staffing in hospitals, while St. Louis used $58 million from its allocation to spare residents from evictions and homelessness, supplementing rental assistance funds, she said.Yellen added that funding from the Biden administration’s $1.9 trillion American Rescue Plan stimulus package allowed cities to move from fighting fires to “start building a better post-COVID world.”The Treasury chief struck an optimistic tone on the White House’s sweeping Build Back Better social and climate spending bill, despite contentious congressional negotiations clouding its future.”While we don’t know the final form this will take, it will revolutionize how we care for children in this country, invest in climate change, and overhaul the international tax system to ensure corporations pay their fair share,” Yellen said. More

Greater tension between Russia and Ukraine were also a problem.”That is a very great concern,” Bailey told lawmakers from parliament’s Treasury Committee.”If you think about the relationship between transitory and these second round effects that can make it much longer – that again is a source of pressure in this story, which is a concern.” More

Russia’s consumer inflation stood at 8.39% in 2021 and accelerated to 8.61% as of Jan. 10, well above a 4% target and hovering near its highest levels since early 2016, denting living standards and prompting President Vladimir Putin to call for pre-emptive measures.Kremlin spokesperson Dmitry Peskov said the level of inflation was “not acceptable to anybody”. He blamed the surge on external and internal factors and said “energetic measures” were being taken to minimise the impact of inflationary pressures. The rouble recovered some ground on Wednesday to trade around 76.37 to the dollar, but remained way off levels of around 74.70 seen late last week, with investors jittery over Russia’s military build-up near Ukraine.”The rouble is a currency and of course both volatility and negative factors are having an impact, but this is exactly what the daily, scrupulous and very responsible work of the government and central bank on supporting macroeconomic stability is all about,” said Peskov.Russian assets have been under pressure since October. The central bank on Wednesday said foreign investors had sold 214 billion roubles’ ($2.81 billion) worth of OFZ treasury bonds in November-December, comparing the situation to capital outflows seen in the stressful periods of April 2018 and March 2020.Stocks were recovering after falling for several sessions and some analysts pointed to strong macroeconomic fundamentals as reasons for optimism, if and when geopolitical headwinds blew over.Moscow has been hoarding cash since Western countries imposed sanctions over its annexation of Crimea from Ukraine in 2014 and built up its international gold and foreign currency reserves to $630.5 billion as of Jan. 13, part of a wider effort to shield itself from external shocks. Soaring gas prices in recent months and a resurgent oil market last year helped Russia run a budget surplus of 514.8 billion roubles in 2021, finance ministry data showed on Wednesday.”If an investor has no positions at the moment, now is a very good moment to start building a long-term portfolio of Russian equities with a horizon of 6-12 months or more,” said the investment management firm Aton. ($1 = 76.1239 roubles) More

The funds, for fiscal year 2022, target more than 500 projects in 52 states and territories, including Florida’s Everglades and the Port of Long Beach in California, the White House said in a statement. “These key projects will strengthen the nation’s supply chain, provide significant new economic opportunities nationwide, and bolster our defenses against climate change,” it said.The allocation stems from President Joe Biden’s infrastructure plan, passed into law last year with bipartisan support from Congress and one of the Democrat’s key domestic agenda items.Among the projects spearheaded by the U.S. Army Corps of Engineers is $1.1 billion to preserve the Everglades in south Florida, which provides drinking water for more than 8 million people in the state, the administration said. The Corps will also direct $1.7 billion to reduce inland flood risk via 15 projects and $645 million to reduce coastal flood risk through another 15 projects across the country including in costal Louisiana, Norfolk, Virginia, and Stockton, California. Forty percent of the funding will be directed to climate and clean energy projects for disadvantaged communities, the administration added. More

The Mortgage Bankers Association on Wednesday said its weekly measure of the average contract rate on a 30-year, fixed-rate mortgage climbed to 3.64% in the week ended Jan. 14 from 3.52% a week earlier. That was the highest since March 2020 when the pandemic triggered a recession and drove borrowing costs to historic lows as the Fed cut its benchmark interest rate to near zero.With inflation running at the highest rate in a generation and the job market near full employment, the Fed is now seen rapidly reining in the accommodation it put in place in the spring of 2020, and financial markets are frantically repricing for an initial rate hike by the central bank by mid-March. That reset has driven up the yields on the Treasury securities that influence mortgage rates, and home financing costs have followed suit: MBA’s 30-year contract rate has climbed from 3.27% in mid-December.The rate rise is crimping application volumes for mortgage refinancings, but appears to be helping to lift applications for home-purchase loans, which saw the largest increase in six months last week as prospective buyers looked to lock in rates that, while rising, are still historically low.Overall loan application volumes rose 2.3% last week on the back of a 7.9% increase in loans to buy a home, while refinancing applications dropped 3.1% to their lowest level in more than two years. More

The Federal Reserve has made massive interventions in the US economy over the past two years © Joshua Roberts/ Reuters

The writer is Jerome and Dorothy Lemelson Professor of International Economics at MIT-Sloan School of Management and a former member of the monetary policy committee of the Bank of EnglandCentral banks do not hesitate to expand their balance sheets when a crisis hits. They should also not hesitate to reduce their balance sheets during recoveries — especially when inflation is high.In the past, the standard central bank playbook has been to wait for the recovery to solidify, then end any asset purchase programmes, then raise interest rates several times, and only then, if the recovery was still on track and inflation was nearing target, consider quantitative tightening. The US was the only country to meet these criteria during the last recovery — but only two years after the first rate rise — and even then they could only unwind about $750bn of the $3.6tn purchased since 2006.This approach may have made sense back then when inflation was low and the labour market slow to heal. If only a modest amount of tightening is needed, central banks should prioritise the tool that people understand and which can be better calibrated. And in an era of very low interest rates, it made sense to focus on raising rates.But this time is different. There are several reasons why quantitative tightening should be a priority today. My focus here is on the US, although many of the arguments apply to other countries, such as Canada, the UK, New Zealand and Australia.First, with inflation well above target, the output gap largely closed and above-trend growth likely to continue, the Federal Reserve will need to tighten monetary policy by quite a bit. Unlike the last recovery, there will be room to tighten using more than one tool. Quantitative tightening should not prevent interest rates from being raised several times.Second, accomplishing some of the necessary tightening via the balance sheet could allow the Fed to raise interest rates more gradually. This would give vulnerable segments of the economy more time to prepare. A year ago, market expectations were that the first rate rise would take place in April 2024. Now markets are expecting at least three such rises in 2022. And if inflation continues to exceed expectations, even more tightening may be needed. Some households will not be ready for the higher cost of their credit card debt, and some small companies still struggling with the impact of the pandemic will not be ready for the higher cost of bank loans. Tightening via the balance sheet has less impact on short-term borrowing rates, giving these vulnerable sectors more time to prepare.Third, tightening via the balance sheet would have a greater effect on the medium and longer end of the yield curve (which shows the different interest rates that investors demand for holding shorter and longer-dated government debt) and thereby more impact on the housing market. With house prices in the US hitting record highs, reducing stimulus for this sector could not only be manageable, but reduce the risk of a more painful adjustment later on. The Fed could also prioritise unwinding its $2.6tn of mortgage-backed securities faster than its Treasury holdings.Finally, putting more emphasis on unwinding the balance sheet would be an important signal of central bank independence. It would confirm that quantitative easing is not permanent financing of fiscal deficits, and that asset purchases to support market liquidity (a key justification in early 2020) are not permanent support for markets. This message is particularly important today after the massive interventions and expanded reach of central banks over the past two years. Additionally, a smaller balance sheet will reduce future losses when interest rates rise — losses that could undermine political support.Although these are powerful reasons for central banks to make unwinding their balance sheets a priority, there are risks as well. This would be an important change in the central bank playbook, and therefore should be communicated in advance to the public to avoid provoking a sharp market adjustment that could undermine the recovery. Also, although recent research has improved our understanding of how QE works, we have no comparable metrics for the impact of quantitative tightening. Any unwinding should initially occur gradually so that we can learn about the magnitude of the effects.After years of central banks worrying they had run out of tools, they currently have more policy levers at their disposal than at any time in history. Now is an opportune moment to use their balance sheets to fight inflation while supporting a balanced and sustainable recovery.  More