Economy

This article is an on-site version of our Chris Giles on Central Banks newsletter. Sign up here to get the newsletter sent straight to your inbox every TuesdayAll the four big central banks met in the past week. As expected, none shifted interest rates. My main analysis today will look at how the Federal Reserve, European Central Bank, Bank of England and Bank of Japan responded to changed economic facts. It is early days for the BoJ but none of the other big beasts landed their statements well with financial markets. Could they have done better to get their point across? Email me: [email protected] is the last newsletter of this year. On January 2, my colleague Claire Jones, who is currently covering the Federal Reserve, will be substituting for me. When the facts change, I change my mind. What do you do, sir?The economic facts have changed significantly since the leading central banks last met to set monetary policy in late October or early November. How much did they change their minds? And what were the consequences? Everyone tends to agree in theory with this phrase attributed to John Maynard Keynes. But today’s newsletter will look at how difficult some central banks have found it to follow the advice and how others failed to execute the pivot they desired. The Fed: ‘We changed, but really not that much’Following encouraging inflation data and a cooling labour market, the Fed performed a full pivot last Wednesday, switching from a tightening bias to one that foresees rate cuts in 2024. The central bank’s summary of economic projections showed Federal Open Market Committee members believed they could now cut interest rates by 0.75 percentage points in 2024 to a range of 4.5 to 4.75 per cent without triggering a renewed bout of inflation. As the chart shows, the Fed removed its hawkish tendency from September and returned to roughly the view it had in July. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Fed chair Jay Powell gave a notably dovish press conference in which he revealed that some FOMC members were revising their dots of expected interest rates and their forecasts up to the middle of the morning in US time on Wednesday before the announcement. This is impressively up to date.Sadly, for the Fed, going the full Keynes did not achieve the financial market response it hoped. Before the meeting, forward market prices were for the Fed’s policy rate to fall to around 4.25 per cent in 2024, further than the FOMC’s projections. Instead of taking on board the Fed’s more cautious predictions of its ability to cut rates, markets assumed the Fed’s pivot showed it was now on a rapid rate-cutting journey. They doubled down on their bets for cuts and by the end of the week, market expectations were for US rates to fall to 3.75 to 4 per cent by the end of 2024. How do we know the Fed was caught out by these market reactions? It rapidly sent out the chairs of the New York, Atlanta and Cleveland regional Feds, John Williams, Raphael Bostic and Loretta Mester to hose down the exuberance. These words were then promptly undermined by Chicago Fed’s Austan Goolsbee who did not rule out a rate cut as soon as March when speaking to the Wall Street Journal. For the Fed, its communication last week was not its finest. It did the right thing in responding to the news but had a bad outcome. Forecasts and words sought to temper enthusiasm with a realistic outlook, but the result only encouraged the bulls. The ECB: ‘You have to wait — we’re out of date’If the Fed had a difficult time last week, so did the ECB. Eurozone economic data has been weak and inflation has been dropping like a stone. But these facts did not really appear in the ECB’s staff forecasts because the central bank has a cut off for new data set three weeks before the interest rate meeting — in this case November 23. Compared with its projections in September, the ECB’s growth numbers were revised slightly down alongside lower inflation. The scale of these forecast changes was not large, and as with the Fed, these outcomes were achieved with assumptions of slightly lower interest rates. For 2025, the outcomes were conditioned on an interest rate of 2.8 per cent compared with 3.1 per cent in the September forecasts. What was odd in the ECB’s forecasts was a staff view (not explained) that labour costs would remain stubbornly high, leaving the underlying core inflation forecast higher by the middle of 2024 than it was in the September even though recent core inflation data has been good. The November 23 cut off also prevented the ECB staff taking account of large falls in oil and natural gas prices. Natural gas prices in Europe for 2024 are down almost 25 per cent, for example (see chart). You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.These unexplained and out-of-date forecasts allowed Christine Lagarde, ECB president, to insist that little had changed in its outlook and that policy rates still needed to remain at “sufficiently restrictive levels for as long as necessary”. But the inability of the ECB to update its forecasts as the facts change meant that Lagarde’s claims in her press conference that the ECB would be “data dependent” were not credible because the data underpinning decisions was problematically out of date. Not surprisingly, financial markets did not lend much credibility to the central bank’s forecasts or Lagarde’s words and ended the week expecting ECB interest rates to fall even further during 2024 from the current 4 per cent rate to 2.5 per cent. It was not a good week for ECB credibility.BoE: ‘La la la, we’re not listening’The BoE did not produce new forecasts this month because it works to a different schedule. It did publish extensive minutes of its meeting which left the interest rate at 5.25 per cent on a six to three vote with the minority still favouring a quarter-point hike. I would love to know other people’s opinion on this set of Monetary Policy Committee minutes because I fear I am about to sound a bit dismissive. It is fine for the MPC to decide to hold rates and correct for it to worry that the UK has potentially worse inflationary dynamics than the US or eurozone, but everything in the committee’s reasoning suggested a group of people inconvenienced and annoyed by changing facts. Inflation was better than the MPC had expected, so were wage increases, so were oil and gas prices, but all of these significant facts were summarily dismissed in the minutes. The MPC noted these changes (unlike the ECB) and then ignored them. The following quotes give a sense of how odd the minutes are. In paragraph six, the MPC noted big changes in energy prices since it last met in November. Since the MPC’s November meeting and despite the continuing conflict in the Middle East, the Brent spot oil price had fallen by 17 per cent, to around $75 per barrel . . . European wholesale gas spot and near-term futures prices had fallen by nearly 30 per cent. But instead of talking about how these real changes would affect the outlook for wages and inflation, the MPC chose instead to analyse a wholly fictitious alternative scenario and discuss this in paragraph nine. There was also a risk that developments in the Middle East could lead to a renewed rise in energy, and potentially other traded goods, prices. Such a shock would push inflation higher once again, and could interact with inflation expectations and lead to second-round effects.The unwillingness of the BoE even to acknowledge that changing facts might lead the MPC to have to change its mind on the economic outlook in February (it will), puts it again behind the curve. BoJ: ‘Nothing has changed’No one expected the BoJ to end its negative interest rate policy at the December meeting but quite a few thought a policy change was possible in January. That would mean raising the interest rate from -0.1 per cent or ending yield curve control. After the meeting and press conference by governor Kazuo Ueda, analysts scaled back even these expectations. The yen fell. Ueda said there had not been enough evidence of a positive wage price spiral to change policy and he was not expecting “much new data to come in during the period [before the January meeting]”. All hopes are on real wages rising as price inflation moderates and a positive dynamic occurring. Flurries of excitement that things were changing in Japan a little more quickly, were premature. What I’ve been reading and watchingOver at Unhedged, Robert Armstrong interviewed Larry Summers of Harvard University. He gives a coherent account of why the Fed needs to be careful about interest rate cuts, alongside a regrettable call for central bankers to become Delphic again with languageBoE officials published useful research showing households were already cutting expenditure ahead of upward resets of their mortgage rates suggesting faster pass through of higher interest ratesThe Dutch central bank has produced simulations showing that commercial banks could easily withstand potentially radical regulations to boost nature and biodiversity. It has caused a bit of controversy and is written up by Banking Risk and Regulation, a news service published by FT SpecialistThe FT has run numerous stories of central bankers having to clarify what their statements means. For a flavour, here are one each from the Fed, the ECB and the BoEA chart that mattersThe FT reported on rapidly rising bankruptcies on Monday. Importantly, levels of company failures are still low and this is a demonstration of why it is always important to look at both levels and changes. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Recommended newsletters for you Free lunch — Your guide to the global economic policy debate. Sign up hereUnhedged — Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here More

HAVANA (Reuters) – Cuban craft vendor Melani Ramos says she is feeling pretty down ahead of the holidays this year, as shelves that are bare and friends and family lost to a record-breaking exodus off the island mean there is little Christmas cheer to go around.Few homes, she told Reuters, would enjoy the aroma of roast pork, black beans and cassava, traditional Cuban favorites for the holidays.”You see everyone enjoying Christmas in the movies. It just makes me sad,” she said. “It’s a very quiet day here for a day that should mean unity, hope and family.”Cuba’s economy – saddled by U.S. sanctions, a tourism shortfall and a lingering pandemic hangover – is nearing collapse, with fuel, food and medicine shortages rampant, public transportation scarce and tensions running high. The crisis has spurred a record-breaking migration of nearly half a million people who have arrived at the U.S. border alone in the past two years, according to U.S. government statistics.The food situation on the communist-run island this holiday season is acute for many. Inflation has driven up prices for even basic items like eggs, while salaries for state workers remain stagnant. Production of pork, rice and beans – all staples on the traditional holiday dinner table – has plunged 80% in 2023, according to the Minister of Agriculture, Ydael Perez, in statements on television.The Christmas holiday has had a checkered past in Cuba even in the best of times.Former leader Fidel Castro initially described his revolution as atheist and erased the date from the Cuban calendar in 1959. He later softened his stance towards the Catholic Church and reinstated Christmas as a public holiday in 1997, a goodwill gesture ahead of a trip to the island by the late Pope John Paul II.For some Cubans, keeping the Christmas spirit alive is important despite the difficulties.”For me this little tree is very valuable… I have never stopped displaying it,” said 59-year old Havana resident Raquel Contreras, as she decorated a small artificial Christmas tree with ornaments, some homemade and others that looked antique.She said she had put her tree up in her home “even in times when the celebration was frowned upon.”Yaqueline Areces del Rio, 38, is unemployed and her younger brother recently migrated, she says, but she and her family make the effort to decorate a tree anyway. “We always try to put it up … because it is something that has united our family,” she said. More

The move was part of the ECB’s push, set to continue next year, to ensure banks are preparing for more delinquencies and tighter liquidity after it jacked up interest rates to fight high inflation. Presenting its annual evaluation of the euro zone banking sector, the ECB said it had slapped capital “add-ons” on 20 large banks over their bad loans.”In these cases, a shortfall was identified relative to the ECB’s coverage expectations,” the euro zone’s central bank and top banking supervisor said, without naming individual lenders, as is its policy. It said there were already some early signs of asset quality deterioration given the weak economic environment and warned this could boost the stock of soured credit. The ECB also imposed capital charges on eight banks over their exposure to “leveraged finance” – lending to already indebted borrowers.In addition, it applied an extra capital requirement to six banks, and gave “guidance” to a further seven, for taking on too much leverage or trying to paint an excessively rosy picture of their financial position.”We focused on persistent, and in some cases long-standing, weaknesses in risk management, governance and internal controls,” the ECB’s outgoing chief supervisor Andrea Enria said at a news conference.Enria’s term will run out at the end of the year, when he will be replaced by Claudia Buch, currently the vice-president of Germany’s Bundesbank.NEXT YEARIn 2024, the ECB will keep its focus on credit and liquidity risks, the latter of which was thrown into the spotlight by this year’s crises at Credit Suisse and Silicon Valley Bank. “The higher interest rate environment is expected to increase both the volatility of some funding sources and banks’ funding costs in the medium term, just when substantial amounts of central bank funding are to be replaced,” the ECB said.This year, the ECB has told two banks to extend their “survival period”, the number of days that their available cash and collateral can buy.Another bank was told to build a liquidity buffer in a foreign currency. Banks will also be urged to remediate their “shortcomings” in the management of climate-related risks, the ECB said. It gave them time to do so until the end of next year, with several interim deadlines.”To support this objective, ECB Banking Supervision stands ready to make use of the tools at its disposal (including, when needed, capital add-ons, enforcement and sanctions and reviews of fit and proper assessments),” the ECB said. More

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BERLIN (Reuters) – German Finance Minister Christian Lindner and his French counterpart Minister Bruno Le Maire will meet in Paris on Tuesday to try to reach an agreement on the reform of EU fiscal rules, German finance ministry sources said. France and Germany are at odds on how to sustain investment when budget deficits exceed EU limits, and other countries, roughly in two camps behind Paris and Berlin, are wrangling over other issues, including the minimum pace of debt reduction.”It is important for both ministers to reach an agreement before the end of this year,” German finance ministry sources said. The aim of the meeting is to help stalled negotiations on the reform of the fiscal rules, known as the European Stability and Growth Pact, which underpin the euro currency by setting limits on government debt at 60% of GDP and for deficits at 3%. The main issue left to agree between Paris and Berlin is how quickly a country with a deficit above the EU limit of 3% of GDP should reduce it while having enough money to invest and reform.France wants countries to be able to move at a slower pace to retain more cash for investment while Germany wants a faster reduction of debt.EU finance ministers are expected to meet online on Wednesday with the aim of agreeing a joint position that would then be negotiated with the European Parliament early in 2024. More

1. Futures little changedU.S. stock futures were little changed on Tuesday, as investors weighed commentary from Federal Reserve officials that tried to temper exhuberance over potential interest rate cuts next year.By 04:57 ET (09:57 GMT), Dow futures and S&P 500 futures had both moved up by 0.1%, while Nasdaq 100 futures hovered mostly around the flatline.The main indices on Wall Street were broadly higher on Monday, with the benchmark S&P 500 adding 0.5% and the tech-heavy Nasdaq Composite climbing by 0.6%.Cleveland Fed President Loretta Mester pushed back against the notion that borrowing costs will soon be lowered, telling the Financial Times that markets are “a little bit ahead” in their projections for a reduction as early as March. She added that traders jumped too quickly to the “end part” that the Fed is “going to normalize quickly,” the FT reported. Her comments echoed sentiments from other Fed policymakers since the bank held rates at more than two-decade highs last week, but suggested that a dovish pivot may be coming in 2024.In corporate news, FedEx (NYSE:FDX) is due to report its November quarter results after the closing bell.2. Google to pay $700 million in Play store settlementAlphabet’s (NASDAQ:GOOGL) Google has agreed to pay $700 million to settle a lawsuit brought against the search giant by U.S. states and consumers over anticompetitive practices at its Play app store on Android devices, court filings showed on Monday.The settlement, which was first agreed upon in September and still requires a judge’s final approval, will see Google place $630M into a fund for consumers and $70M into a separate fund for the states. Google has also promised to make changes to the Play store that will help boost competition.Google had been accused of quashing the use of alternative payment methods on the Play Store, allowing it to collect greater fees on digital purchases. The company did not admit to any wrongdoing, but said it was moving to give app and game developers an expanded selection of billing options.The terms of the settlement come after “Fortnite”-maker Epic Games emerged victorious in a similar case last week.3. Tesla to increase pay for workers at Nevada gigafactory – CNBCTesla is planning a 10% or greater pay rise for some set-rate hourly employees at its battery factory in Sparks, Nevada, CNBC reported.Citing internal materials and workers at the plant who were informed of “cost of living adjustments,” the news channel said that the electric vehicle manufacturer will increase hourly wages from $20 to $22 on the low end and from $30.65 to $34.50 per hour on the high end. The raise can add anywhere from $2 to $8.30 an hour to the employees’ pay, the report noted.Some levels will also be streamlined, CNBC added. For example, several levels of workers currently making between $26.20 to $30.65 per hour will see a pay bump to $34.50 an hour, the report said.The adjustments could help Tesla persuade workers at the Nevada site not to form a union and demand a collective agreement, according to CNBC. Chief Executive Elon Musk has previously said he “disagree[s] with the idea of unions.”Tesla already faces an escalating labor dispute in Sweden that is threatening to spread into neighboring Denmark, Norway and Finland.4. Yen falls as Bank of Japan maintains dovish courseThe Japanese yen weakened against the U.S. dollar on Tuesday after the Bank of Japan kept its ultra-dovish stance and offered no clues into a possible policy pivot, while broader Asian currencies were muted as a post-Federal Reserve rally cooled.The BOJ left interest rates in negative territory as widely expected, and said it will continue with its yield curve control measures to support Japanese economic growth. But the bank offered scant cues on its plans for any monetary policy tightening in 2024.“With extremely high uncertainties surrounding economies and financial markets at home and abroad, the Bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions,” the BOJ said in a statement.5. Oil inches lowerOil prices moved slightly lower on Tuesday after the previous session’s gains, as the U.S. announced plans to expand a naval task force to protect shipping through the Red Sea.By 04:57 ET, the U.S. crude futures shed 0.5% to $72.48 per barrel, while the Brent contract dipped by 0.4% to $77.64 per barrel.Both benchmarks rose more than 1% on Monday following a decision by several shippers and oil major BP to divert vessels away from the crucial Red Sea waterway. The move, a response to assaults by Houthi militants in Yemen on commercial shipping, exacerbated fears over supply disruptions. More

Josiah Citrin, the owner and chef of a Santa Monica restaurant with two Michelin stars, opened a new steakhouse a few months ago off the Sunset Strip. He is already concerned about whether the restaurant can survive.The reason, Mr. Citrin said, is singular: a West Hollywood city mandate that workers be paid at least $19.08 an hour, the highest minimum wage in the country.“It’s very challenging,” Mr. Citrin, 55, said of the new minimum wage, which took effect about two weeks before he opened his doors in July. “Really, it’s almost impossible to operate.”His sentiment is widely shared among business owners in West Hollywood, a city of 35,000 known for restaurants, boutiques and progressive politics. In recent weeks, many owners have written to lawmakers, pleading for a moratorium on further increases to the minimum wage; another is scheduled for July, based on inflation. And last month, several marched to a local government building carrying signs that read, “My WeHo” and “R.I.P. Restaurants in West Hollywood.”Their sense of duress arises partly from geography. The jaggedly shaped city is bordered by Beverly Hills to the west and Los Angeles to the north, south and east. Some streets begin in Los Angeles, slice through West Hollywood and end in Beverly Hills. You can be in three cities — barring, of course, traffic — in a matter of minutes.And that means West Hollywood’s small businesses have competitors down the street with lower costs.Beyond raising the minimum wage, the West Hollywood ordinance, which the City Council approved in 2021, requires that all full-time employees receive at least 96 hours a year of paid time off for sick leave, vacation or other personal necessities, as well as 80 hours that they can take off without pay.The State of California’s hourly minimum wage is $15.50, the third highest in the nation, trailing only the District of Columbia at $17 and Washington State at $15.74. But just as each state’s minimum wage can supersede the federal minimum of $7.25 an hour, more than two dozen cities across California, including West Hollywood and several in the Bay Area, have higher minimum wages than the state, according to the Economic Policy Institute, a nonpartisan think tank.The number of workers at Charcoal Sunset restaurant in West Hollywood has fallen to 35 from around 50. The owner is wondering about his future in the city.Mark Abramson for The New York TimesIn San Francisco, it’s $18.07; in Los Angeles, $16.78.Chris Tilly, a professor at the University of California, Los Angeles, who studies labor markets and public policies that shape the workplace, said research had shown that gradual and moderate increases to the minimum wage had no significant impact on employment levels.“The claim that minimum wage increases are job-killers is overblown,” Mr. Tilly said. But “there are possible downsides,” he added. “One is that economic theory tells us an overly large increase in the minimum is bound to deter businesses from hiring.”Over the past year, workers in several California industries have seen significant pay raises due, in many instances, to wins by organized labor. Health care workers at Kaiser Permanente facilities secured a contract that includes a $25-an-hour minimum wage in the state. Fast food workers across the state will soon make a minimum wage of $20 per hour, and hotel workers have received significant pay bumps across Southern California.Until recently, West Hollywood followed the state’s minimum wage increases, which have risen every year since 2017, often by a dollar at a time. But that changed with the new ordinance, which included a series of increases.Genevieve Morrill, president of the West Hollywood Chamber of Commerce, said that while her group wanted workers to earn a living wage in an increasingly expensive part of the country, she felt that the ordinance had done more to hurt workers, who have lost hours or, in some cases, their jobs after places have shuttered.Around the time the recent wage bump took effect, Ms. Morrill helped more than 50 local businesses, including Mr. Citrin’s restaurant, write a letter to the City Council outlining their concerns. They called for a moratorium on further minimum wage increases through 2025 or until the rate aligns with the Los Angeles rate. They also asked that the city roll back the mandated paid time-off policy.West Hollywood has promoted itself as “a leader in many critical social movements.”Mark Abramson for The New York TimesA journey of mere blocks can pass through Los Angeles, West Hollywood and Beverly Hills.Mark Abramson for The New York TimesWest Hollywood, which was incorporated in 1984, was the first city in the nation to have a City Council with a majority of members who were openly gay. It has promoted itself as “a leader in many critical social movements,” including, among other things, advocacy for H.I.V. causes, affordable housing and women’s rights, according to a post on the city’s website.When you walk along Santa Monica Boulevard, which cuts through the center of this city, a bustling energy fills the sidewalks. Several residents are catching up with phone calls while out walking their dogs, and others are grabbing a latte or strolling through an art gallery. People are doing calisthenics in a park. At night, the city’s vibrant bar and restaurant scene brings a buzz.Mayor Sepi Shyne, who was sworn in this year, said businesses had long been a part of the fabric of the community.“Our businesses are also the backbone of support for workers: Lifting workers with fair pay is part of securing economic justice and a brighter future for everyone,” said Ms. Shyne, who supports the minimum wage ordinance but said she was seriously listening to resistance from the business community.Last month, the City Council, of which Ms. Shyne is a member, approved about $2.8 million in waivers, credits and marketing dollars to help the business community. The City Council, she said, has also directed staff members to get feedback from workers about the effect of paid time off.A major supporter of the ordinance was UNITE HERE Local 11, which represents 30,000 workers at hotels and restaurants across Southern California.West Hollywood has a vibrant bar and restaurant scene that brings a buzz to the city.Mark Abramson for The New York TimesSunset Plaza is a center of various businesses on the Sunset Strip in West Hollywood.Mark Abramson for The New York TimesKurt Petersen, co-president of the local, said West Hollywood was setting a standard that should be replicated across California and the country. “It has raised living standards and given workers the security of paid time off,” he said.Near the intersection of Santa Monica and La Cienega Boulevards, Paul Leonard plans to open a location for his pet grooming business, Collar & Comb. He has operated at other locations, a few blocks away in Los Angeles, since 2019. The most popular service, Mr. Leonard said, is a full-spectrum specialty groom for dogs under 20 pounds at $166.In an interview, Mr. Leonard said he was not concerned about the minimum wage because he paid his groomers at least $23 an hour.“Everything is going up, and so should wages,” he said.Steve Lococo, who has been a part of the business community for decades, said small-business owners “have not at all been heard” over the last two years in West Hollywood. He has raised prices — an average haircut, previously $150, is now $195 — and his business, B2V Salon, which he co-owns with Alberto Borrelli, has cut back to five employees from nine. At the start of the new year, Mr. Lococo said, the salon will assess staffing again.“There need to be modifications to this ordinance,” he said. “Lately, it’s just like, you feel as if you have no say as a business owner in how things are done in the city.”Paul Leonard of Collar & Comb with his dog, Lincoln. “Everything is going up,” Mr. Leonard said, “and so should wages.”Mark Abramson for The New York TimesMeanwhile, Mr. Citrin, who has run restaurants in the Los Angeles area for more than 25 years, said the staff at his West Hollywood restaurant, Charcoal Sunset, which specializes in prime cuts of meat, had fallen to 35 from around 50.At high-end restaurants like his, Mr. Citrin noted, servers often make good money — sometimes more than $50 an hour when tips are included, he said. Most nights, his West Hollywood restaurant makes revenue comparable to what his Los Angeles and Santa Monica restaurants bring in, but his overhead costs are higher in West Hollywood. For now, he said, he is unsure of his future in the city.He often wonders if it’s easier to simply focus on his restaurants elsewhere in the area.“That’s something I need to answer in the coming months,” he said. More

China’s economy is likely to grow 5% next year, if investment rises 4-5%, consumption rises 6-7%, and exports return to growth, Wang told an economic forum in Beijing.China has space to step up support for the economy, given that its central government debt burden is relatively low and consumer prices are also low, Wang said. China’s consumer prices fell at the fastest rate in three years in November. Wang said China may be able to cut interest rates as the Federal Reserve has likely stopped raising its own rates, although a wide interest rate gap between the two countries and worries about the impact on banks could act as constraints.At the annual Central Economic Work conference held from Dec. 11-12, Chinese leaders pledged to adjust policy to support an economic recovery in 2024.China’s growth is expected to hit the government’s target of around 5% this year. More