Economy

Since the Federal Reserve started raising interest rates in its battle against inflation 18 months ago, the US central bank has made one thing clear: all policy options must be kept on the table at all times.From jumbo interest rate rises — it has implemented several — to the repeated warnings that they could remain elevated for an extended period, chair Jay Powell has refused to rule out anything that will enable the Fed to get a grip on price pressures that have proved far more persistent than most economists and policymakers ever expected.He stuck to that line on Wednesday, after the central bank’s latest decision to hold its benchmark federal funds rate at a 22-year high of between 5.25 per cent and 5.5 per cent, for the second gathering in succession. Powell used a press conference afterwards to stress that additional rate rises would very much remain an option if the economic conditions warranted it.“The question we’re asking is, should we hike more?” he said.It was a prompt that lingered over an hour-long media conference, and yet Powell made little effort to suggest the Fed was readying further tightening. The conclusion of leading economists afterwards was plain: the central bank at this stage is likely done with the rate-rising phase of its historic monetary policy campaign. Its focus from now on is not how high rates should go, but how long they should stay at elevated levels.“The overall message is that the Fed wants to say ‘we are done’ and the bar has really risen for further tightening,” said Yelena Shulyatyeva, a senior US economist at BNP Paribas.Underpinning this view was Powell’s repeated emphasis that the central bank would continue proceeding “carefully” with future interest rate decisions, given not only how much it has raised rates since March 2022, but also amid signs that all that monetary tightening is starting to have an effect.“We’ve come very far with this rate-hiking cycle,” Powell said. “We’re proceeding carefully because we can proceed carefully at this time. Monetary policy is restrictive [and] we see its effects.”Powell drew that conclusion despite a recent spate of surprisingly strong data that showed the staying power of American consumers and businesses’ unexpectedly robust demand for workers — a demonstration of the economy’s resilience that has prompted concern among economists that the recent fall in inflation could stall or even reverse.But Powell on Wednesday largely dismissed those fears, emphasising instead that inflation was coming down even if further progress could “come in lumps and be bumpy”. Even the recent acceleration in jobs growth had been driven primarily by increased labour supply, he noted — a welcome, not alarming, development.The improved backdrop had left the Fed in a much less reactive mood, said analysts.“Last year, because inflation was so far from target, they didn’t have the luxury of even letting one strong data print go by. They almost had to respond each time,” said Priya Misra, a portfolio manager at JPMorgan Asset Management. “Now, they’re able to buy time because inflation is lower.”The sharp tightening of financial conditions over the past two months, following a surge in long-term interest rates, has also bolstered the view that the Fed can take a less hawkish stance on rates. The Federal Open Market Committee’s statement on Wednesday said as much, stressing that tighter financial and credit conditions “are likely to weigh on economic activity, hiring, and inflation”.Powell said monetary policy would depend in large part on the duration of the market moves, which have seen government bond yields hit multiyear highs. Torsten Slok, chief economist at Apollo Global Management, said the implications of higher borrowing costs should not be underestimated.“Ultimately, Fed hikes and tighter financial conditions will continue to increase delinquency rates for consumers, increase default rates for companies and put downward pressure on loan growth,” he said. Slok’s worry is a “sudden stop” in consumer spending and business activity that snowballs into a painful economic contraction. Misra and Shulyatyeva are also bracing themselves for a so-called hard landing next year.So far, staffers at the Fed are not forecasting a recession. But Powell did acknowledge that the risks of doing too little to tackle inflation versus doing too much had become more “two-sided”.Even if the Fed appears to be in a more comfortable place in its battle against inflation, economists warn that the coast is not entirely clear. As Powell spoke on Wednesday, equity markets rallied and US government bond yields edged lower, delivering slightly looser financial conditions on the day. That could prove problematic if the economic data remains strong, warned Richard Clarida, who previously served as the Fed’s vice-chair and is now at bond manager Pimco.“They need financial conditions to tighten to help them reduce inflation,” he said. “The trade-off is that the more relaxed they seem about relying on financial conditions, the easier they may become.”Getting inflation all the way back to the Fed’s 2 per cent target is poised to be far more difficult than the initial retreat from last year’s peak in rates, Clarida warned, saying that he would opt for another rate rise in December if he were still at the central bank. More

TOKYO (Reuters) – Japanese Prime Minister Fumio Kishida said on Thursday the government will spend over 17 trillion yen ($113 billion) in a package of measures to cushion the economic blow from rising inflation, which will include tax cuts.To fund part of the spending, the government will compile a supplementary budget for the current fiscal year of 13.1 trillion yen, Kishida told reporters.Reuters reported on Wednesday the government is considering spending over 17 trillion yen for the package, which will include temporary cuts to income and residential taxes as well as subsidies to curb gasoline and utility bills.Inflation, fuelled by rising costs of raw materials, has kept above the central bank’s target of 2% for more than a year, weighing on consumption and clouding the outlook for an economy making a delayed recovery from scars left by COVID-19.The rising cost of living is partly blamed for pushing down Kishida’s approval ratings, piling pressure on the prime minister to take steps to ease the pain on households.With increases in wages proving too slow to offset rising prices, Kishida had said the government will cushion the blow by returning to households some of the expected increase in tax revenues generated by solid economic growth.($1 = 150.5100 yen) More

SINGAPORE (Reuters) – The dollar fell broadly on Thursday, tracking a slide in U.S. Treasury yields as markets grew more convinced the Federal Reserve was done with its aggressive monetary policy tightening cycle after it left rates unchanged.The Fed on Wednesday held interest rates steady as widely expected, as policymakers struggled to determine whether financial conditions may be sufficiently tight to control inflation.However, Fed Chair Jerome Powell acknowledged that a recent market-driven rise in Treasury bond yields, home mortgage rates and other financing costs could have their own impact on the economy as long as they persist.The decision lifted sentiment in Wall Street, which spilled over into the Asia day, giving a small boost to the risk-sensitive Australian and New Zealand dollars.The Aussie rose 0.5% to a three-week high of $0.6426, while the kiwi similarly jumped more than 0.5% to hit a two-week top of $0.58825.The dollar edged broadly lower alongside U.S. Treasury yields which touched multi-week lows in early Asia trade. [US/]”It seems to us that the FOMC is now in hold mode, albeit in a hawkish way, rather than simply on pause,” said Wells Fargo chief economist Jay Bryson. “That is, we think the bar to further rate increases is higher now than it was a few months ago.”The two-year U.S. Treasury yield, which typically reflects near-term interest rate expectations, slid to a nearly two-month low of 4.9250% on Thursday, while the benchmark 10-year yield fell to an over two-week low of 4.7070%.Against the dollar, the euro rose 0.18% to $1.0589.The U.S. dollar index fell 0.11% to 106.34.Traders also drew further conviction that U.S. rates could have peaked after data showed U.S. manufacturing contracted sharply in October, though separate data pointed to a still-resilient labour market, which is likely to see the Fed keeping rates at restrictive levels for longer.”We will likely need to see some labour market weakness before target inflation is reached,” said Lon Erickson, portfolio manager at Thornburg Investment Management.”This could take some time to develop and is one reason we are likely to see higher rates for longer.”Market pricing shows a nearly 15% chance that the Fed could begin cutting rates as early as next March, according to the CME FedWatch tool, compared with a roughly 10% chance a week ago.The move lower in the dollar brought some respite for the yen, though it remained on the weaker side of 150 per dollar.The Japanese currency last stood at 150.44 per dollar, having slid to a one-year low of 151.74 per dollar earlier in the week in the wake of the Bank of Japan’s (BOJ) monetary policy decision.Investors were still struggling to digest the implications of the central bank’s piecemeal tweak to its controversial bond yield control policy – a move that has sent Japan’s bond market and currency reacting in divergence.”This almost feels like the end of the line for YCC, but the extent to which the BOJ will intervene in the JGB market should 10-year yields rise above 1% is as yet unclear,” said Tom Kenny, senior international economist at ANZ.”We think the BOJ will be content to let longer duration yields move higher in an orderly manner and that intervention is likely to occur if moves are volatile.”Elsewhere, sterling rose 0.35% to $1.2192 ahead of the Bank of England’s rate decision later on Thursday, where expectations are for the central bank to keep rates on hold. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.China’s biggest memory-chip maker has had to raise billions of dollars in fresh capital, after burning through $7bn in funding over the past year trying to adapt to tough US restrictions on its business.Yangtze Memory Technologies Corp, which last December was added to a trade blacklist and prohibited from procuring US equipment to manufacture chips, exceeded its target for a new round, according to four people familiar with the situation.They could not confirm the exact figure raised, but said it was equivalent to billions of dollars.As China’s largest producer of Nand memory chips, the Wuhan-based company holds a crucial position in the country’s efforts to become self-reliant in semiconductors. But since last October, it has been hit by a series of US actions that restricted China’s access to advanced chip technology.Last year, YMTC received a Rmb50bn ($7bn) capital increase from shareholders, including the China Integrated Circuit Industry Investment Fund, known as “the Big Fund”, for its major role in backing China’s chip industry.Two people said high expenditure on finding replacement equipment and the development of new components and core chipmaking tools had already accounted for most of YMTC’s cash, necessitating a fresh financing campaign within less than a year.The round was oversubscribed by domestic investors, according to another two people close to the company.YMTC’s latest financing had concluded before Washington announced even stricter export controls last month, but the strong investor backing is being seen as a sign of solidarity in the face of the US restrictions.YMTC chair Chen Nanxiang was elected as the new head of the China Semiconductor Industry Association last week and called for unity in countering an “unprecedented upheaval” in the global supply chain.“YMTC is following in Huawei’s footsteps in bringing together the Chinese semiconductor industry to cope with the challenges of US pressure,” said a government official close to the company.The company was expected to procure more equipment from Chinese suppliers while “tapping” some Japanese, South Korean and European vendors that the Chinese ones could not easily replace, said two company investors.“If Chinese companies have equipment that can be used, [YMTC] will use it. If not, it will see if countries other than the US can sell to it,” said one of the investors. “If that doesn’t work, YMTC will develop it together with the supplier.”The company had been working closely with Chinese etching equipment makers Naura and Advanced Micro-Fabrication Equipment (AMEC) to upgrade their technology, said two people close to YMTC. Etching equipment plays a key role in determining how many layers can be successfully stacked on a chip to achieve better storage performance at a lower cost.Chinese companies won almost half of all equipment tenders from local chipmakers from January to August this year, according to an analysis by Huatai Securities last month.“The ones that can be quickly replaced by Chinese equipment are less technically challenging tools,” said an executive at one Chinese chipmaker, who did not wish to be named. “The real challenge is to make the advanced ones.”YMTC, Naura and AMEC did not respond to a request for comment.Video: The race for semiconductor supremacy | FT Film More

Layoffs dropped to 1.5 million from August’s 1.7 million, further demonstrating the strength of the job market. The unemployment rate held steady at 3.8%, slightly above a historic low, highlighting an impressively robust labor market by historical standards.The Federal Reserve has hiked its benchmark interest rate 11 times since March last year in response to four-decade-high inflation. This has resulted in a year-on-year rise in consumer prices by 3.7% in September, exceeding the Fed’s 2% target but falling from June’s peak of 9.1%.In an attempt to achieve a ‘soft landing’, the Federal Reserve aims to raise rates just enough to keep price increases in check without inducing a recession. It is expected to leave its benchmark rate unchanged for the second consecutive meeting while assessing the impact of its measures.The Labor Department and FactSet project October’s jobs report to reveal a solid addition of approximately 189,000 jobs while maintaining unemployment at 3.8%. An employee at Hanwha Qcells Solar plant represents the current labor market conditions, further emphasizing the resilience of the US job market amidst ongoing economic challenges.This article was generated with the support of AI and reviewed by an editor. For more information see our T&C. More

In Yuxinzhuang village, a warren of narrow streets on Beijing’s outskirts known for its vibrant community of migrant workers, Zhou wolfs down noodles in a tiny Muslim restaurant.The 30-year-old father of one has a job setting up shell companies with fake cash flow for struggling small business owners, who then use them to raise new loans to pay off their previous creditors.But even this dubious line of business, which should thrive in a downturn, is suffering from China’s economic slowdown. Last month, Zhou’s income fell to a fraction of last year’s levels. Zhou, who did not want to give his full name, now plans to return to his family farm in the poorer central province of Henan and sell organic eggs.“I don’t know who to blame for the economic downturn but all I know is that this year the economy is really bad,” he says. “Lay-offs everywhere.”As China’s economic growth slows, stories such as Zhou’s abound. The country’s 296mn migrant workers are facing slowing wage growth, its new university graduates are struggling to find jobs, the urban middle class has lost money in a policy-induced property meltdown and the rich are reeling from Beijing’s crackdowns on the internet, finance and health sectors.National security regulations are worrying foreign companies, many of which have stopped investing. Only those working in some areas of the government or sectors deemed strategic, such as semiconductors, are being spared.Xi Jinping, China’s most powerful leader since Mao Zedong who embarked on an unprecedented third term in March, claims everything is going to plan. The country is marching towards “national rejuvenation” and “high-quality development” as the party’s “common prosperity” policy reduces inequality.But beneath the triumphant rhetoric, many observers wonder whether policymaking is adrift. The Communist party used to allow its people abundant economic opportunity in exchange for heavy restrictions on their political freedom. Now the so-called social contract is no longer clear. In the place of growth and opportunity are vague promises of security and “a better life”. But with about 600mn people struggling to get by on less than $140 a month, will that be enough? A once optimistic society now worries about the future. “The old contract was a pretty simple one which is: ‘We’ll stay out of politics, we won’t express sensitive opinions, provided we can expect to be prosperous in the future’,” says George Magnus, author of Red Flags: Why Xi’s China is in Jeopardy, and a research associate at the University of Oxford’s China Centre. That “has been undermined and not just by the fact that China’s old development model is not really working anymore but also by the government’s own culpability for not addressing the issues,” he says. “Fundamentally, it’s an issue of trust.”The promise of common prosperityAfter securing his second term as party secretary at the 19th party congress in 2017, Xi signalled a “new deal” for China, according to a paper at the time by Evan Feigenbaum, of the Carnegie Endowment for Peace. Chinese Marxists think in terms of contradictions — the dialectical opposition of different forces or influences, Feigenbaum wrote. During the reform and opening up period that followed the end of the Mao era, the party concentrated on economic growth, or resolving the “contradiction” between the people’s “ever-growing material” needs and the country’s “backward social production”, according to an account of Xi’s comments at the congress in state media. But Xi declared China was facing a new challenge. After decades of rapid growth, he said the “principle contradiction” was “between unbalanced and inadequate development and the people’s ever-growing needs for a better life”. A demolished housing settlement in Daxing district, Beijing. Some migrants suspect that buildings are being torn down as part of efforts to drive them out of the city More

DAKAR (Reuters) – The International Monetary Fund and Gambian authorities have reached a staff-level agreement on a new three-year support package of around $100 million, the Fund said in a statement on Wednesday.The program will support agreed economic policies and reforms. It aims to tackle inflation and foreign exchange pressures, reduce debt and foster growth in the West African country. More

LONDON (Reuters) – The Bank of England looks set to hold borrowing costs at a 15-year high on Thursday and signal that it does not plan to cut them anytime soon as it remains locked in a battle against the most elevated inflation rate among the world’s rich economies.Despite strain in the economy that some see as a sign of a recession starting, the BoE is expected to keep Bank Rate at 5.25% for a second meeting in a row after 14 back-to-back increases, a Reuters poll of economists showed last week.Last week the European Central Bank kept rates unchanged and the U.S. Federal Reserve did the same on Wednesday as they wait to see if the worst inflation outbreak in decades has really been quelled. The BoE’s Monetary Policy Committee is facing an inflation rate more than double that of the euro zone and almost twice the U.S. rate. It voted by only a narrow 5-4 margin in September to halt its run of increases in borrowing costs. But signs of a slowdown in much of the British economy have become clearer since then and some economists say a recession might already be under way.Mike Riddell, a senior portfolio manager at Allianz (ETR:ALVG) Global Investors, said the long lags between changes in rates and their impact meant most of the BoE’s increases in borrowing costs between late 2021 and August this year was yet to be felt.”The BoE will most likely therefore be keen to keep all options open, but seems set to wait and observe how much pain the previous hikes have caused before changing rates again in either direction,” Riddell said.SLOW FALL OF INFLATIONBoE Governor Andrew Bailey and other top officials at the central bank have acknowledged that their rate hikes to date are weighing on the economy. But they have also stressed they will not flinch in their task of bringing inflation down.The BoE – which some economists and politicians criticised for not sounding aggressive enough about quashing the surge in prices early on – has said it is determined to stamp out the long-term inflation risks to the economy, chief among them strong rises in pay growth.Although inflation has fallen from 11.1% just over a year ago to 6.7% in the most recent data, it remains more than three times the BoE’s 2% target. The central bank said in its last set of economic forecasts in August that inflation would only return to 2% in the second quarter of 2025. Inflation is expected to resume its fall in October after stalling in September but rising oil and gas prices since the start of the turmoil in the Middle East could slow its fall. The BoE will publish new forecasts on Thursday.Most investors believe it is now done with rate hikes and will keep borrowing costs on hold until at least August next year before starting to cut them. But Bailey and his MPC colleagues are likely to reiterate that they are ready to raise rates higher if needed.As well the data, the BoE is keeping an eye on political news: Prime Minister Rishi Sunak is under pressure from within his Conservative Party to cut taxes ahead of a national election expected next year. Sunak and his finance minister Jeremy Hunt have said they cannot offer major sweeteners to voters in a budget update on Nov. 22, given the need to focus on bringing down inflation. Sunak pledged in January to halve inflation this year.But Hunt is likely to have one more budget statement to deliver in the spring of next year before the election. More