Economy

Jerome H. Powell’s no-holds-barred response to the pandemic was made possible by history. It raises questions about the future.It was July 2019 when Representative Rashida Tlaib, a Michigan Democrat, asked Jerome H. Powell, the chair of the Federal Reserve, whether he would use the central bank’s powers to help state and local governments during the next recession.“We don’t have authority, I don’t believe, to lend to state and local governments,” Mr. Powell replied. “I don’t think we want that authority.”Yet nine months later, at the start of April 2020, the central bank announced that it would do effectively what Ms. Tlaib had asked. Fed officials set up a program to make sure that state and local governments could continue to borrow as credit markets dried up.What had changed was the onset of the coronavirus pandemic. Roughly 15 of every 100 adults who wanted to work found themselves jobless that month, many of them suddenly. Stocks had plunged in value so precipitously that the nation’s households would lose 5.5 percent of their wealth in just the first three months of the year. Amid government-imposed shutdowns, with millions of people at home, there were real worries that Wall Street and small businesses alike would implode.What hadn’t changed was the Fed’s enormous power. Whether central bankers were ready to embrace it in 2019 or not, the institution has long had sweeping authority to use its ability to create money out of thin air to save the financial system and economy in times of trouble.And it could exercise that power expediently — and with considerable independence from the rest of the government — in no small part because a man named Marriner Eccles reluctantly took on the job of leading America’s central bank in 1934. That history is particularly useful for understanding what happened in 2020 — and what that might set in motion for the future. It is detailed in my new book “Limitless: The Federal Reserve Takes on a New Age of Crisis,” from which this article is adapted.The Fed staged a no-holds-barred intervention during the pandemic to stabilize Wall Street and insulate the economy, slashing interest rates to rock bottom, buying trillions of dollars’ worth of government-backed bonds to keep critical markets functioning and promising trillions more in emergency programs that would keep loans flowing to municipal and corporate borrowers and midsize businesses.It worked. The rescue was so successful that by the end of 2020 the Fed’s response effort was shutting down, rapidly fading from headline-grabbing news to mere historical artifact.But the Fed’s actions quietly opened the monetary and financial policy equivalent of Pandora’s box: They made it clear to Fed officials themselves, to Congress and to financial market players exactly what the central bank is capable of doing and whom it is capable of saving. That makes it much more likely that the central bank will be called on to use its tools expansively again.After seeing what the Fed could do during the 2008 financial meltdown, politicians asked: Why save Wall Street but not Detroit? After 2020, they may wonder: Why react to a pandemic crisis but not a climate crisis, or a military one?Inflation F.A.Q.Card 1 of 5What is inflation? More

Annual Irish inflation slowed to 7.8% in January after posting the sharpest monthly decline in seven years. It hit a 38-year high of 9.2% in October. “The good news is that inflation has now peaked, and is falling back,” McGrath said in a speech late on Friday, citing a sharp fall in wholesale energy prices.”Provided there is no further energy price shock – inflation is set to fall much more rapidly than previously assumed and we now believe it will average between 4 and 5% across the year.”McGrath added that his department expected the domestic economy to “effectively move sideways over the coming months”, before returning to growth from the second quarter of the year.In its last forecasts, the finance ministry saw modified domestic demand – its preferred measure of activity – slipping by 0.6 in the first quarter before expanding by 0.8% from April to June and averaging 1.2% for the year.McGrath also said his officials were examining the future of the government’s national reserve fund, with options potentially including establishing a more future-focussed investment fund that would cater for demographic changes in the years ahead.The government has deposited 6 billion euros ($6.3 billion) in the reserve fund in recent months, setting aside some of its corporate tax receipts that it considers windfall in nature after an enormous rise in recent years. ($1 = 0.9482 euros) More

BENGALURU (Reuters) – U.S. Treasury Secretary Janet Yellen told Reuters on Saturday that new U.S. data showing inflation jumped unexpectedly in January signals that the fight against inflation “is not a straight line” and more work is needed.In an interview with Reuters at a G20 finance leaders meeting in India, Yellen rejected arguments from some economists that a recession or significantly higher unemployment was needed for the Federal Reserve to win its inflation fight, sticking to her view that inflation still can be brought down while maintaining a strong labor market.The strongest U.S. consumer spending data in nearly two years on Friday showed that the Fed’s preferred measure of inflation, the personal consumption expenditures price index (PCE), jumped unexpectedly in January, calling into question whether the Fed remains behind in its inflation fight.Revisions to prior data showed that previous disinflation was milder than previously reported, and that data added to financial market fears that the Federal Reserve could continue raising interest rates into summer.”I think this report showed that it’s not going to be a straight line – disinflation is not a straight line,” Yellen said, adding that inflation “remains a problem.””It’s one read, but core inflation still remains at a level that’s above what’s consistent with the Fed’s objective. So, there’s more work to be done,” Yellen added.But she said that inflation has still broadly come down over the past year and that trend should continue, because housing rental contracts were still adjusting to lower levels compared to their pandemic-era peaks.”We see reasons for, in coming months, further declines in inflation, especially because of the importance of shelter in the overall indices,” she said.RECESSION NOT NECESSARY A new study by three prominent economists released on Friday also suggested that the Fed would need a recession or significantly higher unemployment to win its inflation fight.The authors, including J.P. Morgan chief economist Michael Feroli, Columbia Business School professor Frederic Mishkin and Brandeis International Business School professor Stephen Cecchetti, found that in 16 past instances of central bank-engineered disinflation, none occurred without a recession.”I don’t accept that as a general statement that always has to be true,” Yellen said, joining pushback from Fed officials against the study.She said sometimes recessions are necessary to bring inflation down, such as in the 1970s when there was a strong wage-price spiral.”But I believe that is not the situation now,” Yellen said. “And I’ve said repeatedly and continue to believe that there is a path to bringing inflation down that would be consistent with maintaining a strong labor market.” More

The remarks come amid calls by China, the world’s largest bilateral creditor, that global lenders should take haircuts on loans extended to developing nations hurt by the impact of the Russia-Ukraine war and the COVID-19 pandemic. The United States, meanwhile, has repeatedly criticised China over its “foot-dragging” on debt relief for dozens of low-and middle-income countries.”The World Bank is committed to providing net positive flows in a way that maximizes concessionality in the restructuring process,” David Malpass said at the Global Sovereign Debt Roundtable in India’s Bengaluru city on the sidelines of the G20 financial leaders’ meet.”We will provide as much concessionality to the debt treatment as possible.”Malpass also said that he noted “constructive remarks” by a deputy China central bank governor at a G20 meeting on Friday that “gave room to move forward” on settlement of debt issues.Reuters reported earlier this month that India, the current president of the G20 bloc, is drafting a proposal for G20 countries to help debtor nations by asking lenders to take a large haircut on loans.On Friday, Chinese Finance Minister Liu Kun told the G20 financial leaders that international financial institutions and commercial creditors should follow the principle of “joint action, fair burden” in debt settlements. More

The writer is an FT contributing editorOn Tuesday Lael Brainard started her new job as the top economic adviser to Joe Biden. This leaves open her old position as vice-chair of the board of governors at the Federal Reserve. Governors get to vote at every meeting of the Fed’s monetary policy committee, and so Brainard’s replacement will go through the standard political fight for every Fed nominee. Some Democrats will want a quiet, consistent voice for economic growth as a successor. Some will want a loud, defiant voice for economic growth. Central banks don’t just nudge the price of debt up and down, though. The Fed also does boring, important technical work all over America. Before joining the Fed board, Brainard had already spent time at the White House and the Treasury under two previous Democratic presidents. She trained at Harvard as an economist but worked in Washington as, among other things, an administrator, a skill among central bankers that politicians tend to undervalue.When central bankers were stunned in 2019 by the sudden announcement of a Facebook digital currency, Brainard managed both the public response for the Fed. And she chaired the Fed’s committee on the most thankless task in banking: payments.Moving money from one person to another is the oldest problem in finance. We might have been taught that people once just handed coins back and forth, but straight payment with a physical coin has never been the default case in commerce. People kept accounts of what they had delivered, expecting payments on that account to clear sometime in the future. The longer that lag, and the farther apart two people were, the more likely they were to experience liquidity risk — that someone can’t pay when asked — or credit risk — that someone can’t pay at all.Historically, clearing worked best when everyone was in the same place or even the same institution. Market towns in medieval Europe developed clearing fairs, where merchant bankers would meet regularly to first agree on payments that needed to be made, then physically walk around with their ledgers to see whether any mutual payments could be cancelled. Then and only then would they clear any remaining balances with coins. When New York banks formed their Clearing House in 1853, this process had not really changed; banks sent clerks with ledgers and hand trucks of gold and silver to stand in a room together to clear out and then settle up.In the 17th century, Amsterdam and Hamburg developed exchange banks, where merchants held deposits within the same institution, and payments cleared on a single ledger. What we now think of as central banks were developed over time, as crowns and nations figured out new uses for them. But in part they developed out of these exchange banks, and to serve the same function. The 20th-century vision of a central bank is one that manages inflation and employment by encouraging or discouraging private lending. But that’s only a part of what we’ve historically expected from central banks. Liquidity and credit risks remain inherent in payment. And, like the exchange banks and the clearing houses, we still have to decide whether it’s better to have a single public institution help handle that risk, or a private group of banks.The US, with a few powerful large banks and many widely scattered small banks, has been slower than most other large economies to develop fast payments — where a payment from one person to another clears between banks not at the end of the day or in three days but immediately.Much of what Americans loathe about banks comes from the slow pace of settlement. Cheques, a technology not much improved from a medieval bill of exchange, still account for just under a quarter of the value of non-cash payments in the US. As the central bank researcher Peter Conti-Brown pointed out in a 2020 paper, smaller transfers in particular clear slowly in the US, making people more likely to face fees on overdrafts or pay a discount to convert a check immediately into cash.In 2019, Brainard announced that the Federal Reserve would build Fednow, a fast-payment system set to launch, finally, in the middle of this year. She did not will it into existence alone. But she does seem to possess the skill set of moving complex projects forward. What democracies demand from their central bankers has changed over time. In the early 20th century, it was commercial bankers, with their pragmatic and self-interested focus on tight money. They slowly gave way to the economists, with their inflation and employment models. It is long past time for more administrators, who understand the problems of low finance and care enough to fix them. More

BENGALURU (Reuters) – G20 finance chiefs have been unable to reach a consensus on describing the war in Ukraine and are likely to end a meeting in India on Saturday without a joint communique, delegates said.The United States and its allies in the G7 group of nations have been adamant in demands that the communique squarely condemn Russia for the invasion of its neighbour, which has been opposed by the Russian and Chinese delegations, they said.Russia, which is a member of the G20, refers to its actions in Ukraine as a “special military operation”, and avoids calling it an invasion or war.Host India is also pressing the meeting to avoid using the word “war” in any communique, G20 officials have told Reuters. India, which holds the current G20 presidency, has kept a largely neutral stance on the war, declining to blame Russia for the invasion, seeking a diplomatic solution and sharply boosting its purchases of Russian oil.French Finance Minister Bruno Le Maire said there was no way the group could step back from a joint statement agreed at a G20 summit in Bali, Indonesia, last November, which said “most members strongly condemned the war in Ukraine” but also acknowledged some countries saw the conflict differently.”Either we have the same language or we do not sign on the final communique,” Le Maire told reporters on Friday.German Finance Minister Christian Lindner, speaking on the sidelines of the meeting on Friday, said the G20 must not fall behind its previous criticism of Russia.”We need absolute clarity, this is a war initiated by (Russian President Vladimir) Putin,” he said.Such stand-offs have become increasingly common in the G20, a forum created over 20 years ago in response to past economic crises but which has recently been hobbled by differences between Western nations and others including China and Russia.A senior G20 source said negotiations over the communique were difficult, with Russia and China blocking proposals made by Western countries. “India wants to stick to the Bali wording,” the source said.The source and several other officials said barring a last-minute surprise, a consensus on the communique was unlikely, and that the meeting was likely to end with a statement by the host summarising the discussions.”In the absence of a consensus, the option for India would be to issue a chair statement,” one of the officials said.India’s foreign, finance and information ministries did not immediately respond to requests seeking comment. More

BANGKOK (Reuters) – Thailand’s economy is expected to grow 3.8% this year, helped by a rebound in the vital tourism sector, while inflation should cool to its target range, the finance minister said on Saturday.Domestic spending has increased and the government will accelerate large project investment to help growth, Arkhom Termpittayapaisith told a Radio Thailand programme.As the global slowdown hurts exports, “tourism is our hope,” he said.Southeast Asia’s second-largest economy expanded a weaker-than expected 2.6% last year, lagging that of others in the region as its tourism sector just started to pick up.The finance ministry has forecast 27.5 million foreign tourist arrivals this year, after Thailand beat its forecast in 2022 with 11.15 million visitors. There were nearly 40 million foreign tourists in pre-pandemic 2019.Arkhom told Reuters this month that economic growth could beat forecasts, with the return of Chinese tourists.He said on Saturday that any aggressive interest rate hikes would increase business costs and household debt, as the central bank has said rate increases will continue to curb consumer prices.Headline inflation should return to the central bank’s target range of 1% to 3% this year, helped by government measures and lower food prices, Arkhom said. Inflation hit a 24-year high of 6.08% last year.A baht exchange rate of 34 to 35 per dollar is helpful for export prices despite falling export volumes, he added. The Thai currency closed at 34.8 per dollar on Friday. More

The Federal Reserve’s preferred measure of inflation rose more than expected in January, triggering a Wall Street sell-off as investors weighed the prospect of interest rates staying higher for longer as the central bank fights stubborn price pressures.The personal consumption expenditures (PCE) price index, which measures how much consumers are paying for goods and services, increased 0.6 per cent month on month, after rising 0.2 per cent in December. The annual rate increased to 5.4 per cent in January from an upwardly revised figure of 5.3 per cent a month earlier.The so-called core PCE index, which strips out volatile food and energy costs and is the Fed’s preferred inflation metric, rose 0.6 per cent in January, up from 0.4 per cent in December. The annual rate increased to 4.7 per cent from an upwardly revised figure of 4.6 per cent in December, missing economists’ expectations for a moderation to 4.3 per cent.The figures were the latest in a string of new data releases including on employment, retail sales and other price gauges that have come in hotter than expected, prompting markets to factor in the prospect of US interest rates going higher and staying there for longer than they had expected.Following Friday’s figures, investors priced in a 39 per cent chance of a half-point rate rise at the Fed’s March meeting, compared with an 18 per cent likelihood a week ago, according to CME Group’s FedWatch tool. Bets on a quarter-point rise dropped from 82 per cent to 61 per cent over the same period. Cleveland Federal Reserve president Loretta Mester on Friday said the Fed should lean towards pushing interest rates higher to get inflation back down to the central bank’s 2 per cent target.“In my view, at this point with the labour market still strong, the costs of undershooting on policy or prematurely loosening policy still outweigh the costs of overshooting,” said Mester at the annual US Monetary Policy Forum hosted by the University of Chicago Booth. Following the February Fed meeting, Mester had said that she would have supported a half-point increase, versus the quarter-point raise that was announced. According to the minutes from that meeting, “a few” officials said they would have preferred a larger increase in rates, or could have been persuaded to support one.US president Joe Biden said in a statement that the latest figures showed that “we have made progress on inflation, but we have more work to do”. He insisted that the economy had “continued to make progress since the data in this report”, pointing to a recent downward trend in petrol prices. Stocks were under pressure on Friday as investors adjusted their interest rate expectations. The S&P 500 closed 1.1 per cent lower on the day, taking the blue-chip index’s loss for the week to 2.7 per cent, which marked the biggest weekly drop since December. The Nasdaq Composite finished Friday’s session 1.7 per cent lower.“[The data] underscores the difficulty the Federal Reserve has in restoring price stability as consumers continue to spend at a healthy pace,” said Quincy Krosby, chief global strategist at broker LPL Financial.Bonds fell and yields moved higher as investors factored in the latest upward pressure on borrowing costs. Yields on benchmark 10-year notes rose 0.07 percentage points to 3.95 per cent, close to a three-month high hit earlier this week. Rate-sensitive two-year yields also rose and, at 4.81 per cent, were at their highest since the summer of 2007.“It is far too early . . . to buy the dips in bond prices, let alone trying to continue to buy the dips in the stock market,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “We have been exercising much more caution and have advised our clients to be careful and not aggressive at this point in the economic cycle.”Fed chair Jay Powell warned earlier this month that taming inflation would take a “significant period of time”. Friday’s PCE data is consistent with the January consumer price index that registered a smaller monthly decline than expected as services inflation remained elevated.Personal consumption rose in January to 1.8 per cent from a revised decrease of 0.1 per cent in December, according to Bureau of Economic Analysis data on Friday. That missed economists’ expectations for an increase of 1.3 per cent. Inflation-adjusted personal spending increased 1.1 per cent in January. The PCE data showed that personal income growth quickened to 0.6 per cent in January from 0.3 per cent in December, but below economists’ expectations for a 1 per cent increase. The personal savings rate increased to 4.7 per cent in January, from 4.5 per cent in the previous month. More