Economy

CHICAGO (Reuters) -The U.S. Federal Reserve is clear on the need for restrictive monetary policy to lower inflation, Fed Vice Chair Lael Brainard said on Monday, but the path and pace of rate increases will remain “data-dependent” as the central bank monitors the economy and the evolution of domestic and global risks.In prepared remarks and responses to questions, Brainard said Fed rate hikes to date were beginning to slow the economy – perhaps even more than expected – and that the full brunt of tighter policy would not even be felt for months to come.Additionally, the “concurrent” rate hikes by central banks abroad as they all fight local outbreaks of inflation was creating an impact “larger than the sum of its parts” that posed potential risks U.S. officials need to monitor, Brainard said. “There is clarity that monetary policy will be restrictive for some time, until there is confidence inflation comes down. … The (Federal Open Market) Committee has said policy rates will increase further,” Brainard said. But “we also will be learning as we go and that assessment will reflect incoming data and also risks domestically and globally … The actual policy path will be data-dependent.”She referred to projections of policymakers about the path of interest rates, which as of September showed the median officials anticipating the federal funds rate rising to around 4.6% next year, as “very helpful at a point in time,” but also based on expectations about how the economy will evolve. “Things can change,” she said.Brainard gave no sense the Fed was weakening in its resolve to quell inflation that is currently triple the central bank’s 2% target, or that the Fed will not proceed with planned rate increases including a possible three-quarter point hike at its Nov. 1-2 session. In an appearance at a National Association for Business Economics conference, she restated that it would be risky for the Fed to back off “prematurely” in its rate tightening, and that it would “take some time” for inflation to fall.However she spoke at a time of mounting external concern that the speed of Fed rate increases was stressing the global economy and had outrun the central bank’s ability to monitor the impact it was having.In a poll of 45 professional forecasters conducted by the NABE, a little over half said that “the greatest downside risk to the U.S. economic outlook is too much monetary tightness.”Fed officials have for the most part discounted those concerns, acknowledging the risks of over-tightening but also saying they need to get the target federal funds rate to a level they feel will bring inflation under control by restraining the economy.The Fed has raised rates rapidly this year, using three-quarter point increments of late to bring the target federal funds rate to a range between 3% and 3.25%.In separate remarks at the NABE event, Chicago Fed President Charles Evans said incoming data would have to “rock” policymakers’ economic projections to throw officials off the 4.6% rate they have penciled in for next year.”We’re headed for this four and a half percent-ish federal funds rate by March,” Evans said, with little time left for data to shift officials’ views. Like Evans, Brainard laid out some of the dynamics she thought might help bring inflation down while leaving the U.S. job market and economy intact.Brainard said for example that in retail and other industries there was “ample room for margin recompression” – in effect lower business profits – to bring down the price of goods, along with further improvements in supply chains and hiring.But she also emphasized some of the evolving risks, including possible stress in financial markets and what could be a faster than expected slowdown in the United States.”Output has decelerated so far this year by more than anticipated,” in sectors like housing that are directly influenced by borrowing costs, Brainard said. There are indications as well that U.S. consumers have spent down household balances faster than previously estimated, a possible signal of slowed consumer spending to come, she said.Globally, “uncertainty remains high,” Brainard said, noting that a sharp shift in risk sentiment “could be amplified, especially given fragile liquidity in core financial markets.” More

Another day, another stock market sell-off and round of Asian currency weakness kicked off what is shaping up to be another volatile week.Russia’s bombing of Kyiv and other Ukrainian cities on Monday darkened what was already a pretty bleak mood across world markets, and investors will be hoping something somewhere eases the selling pressure on Tuesday.Unfortunately, nothing obvious jumps out. Fed Vice Chair Lael Brainard said on Monday that further policy tightening will be dependent on data and risks, giving some investors hope that the Fed might take its foot off the pedal soon. But she also stressed that policy will need to stay restrictive for some time.World stocks ended in the red, and the dollar rose again. Asian assets suffered more – the MSCI Asia ex-Japan equity index fell 2%, and several currencies in the region weakened sharply.GRAPHIC: MSCI World vs MSCI Asia (ex-Japan) – https://fingfx.thomsonreuters.com/gfx/mkt/znvneyqyepl/MSCISTX.pngThe yen is right back in 24-year low and BOJ intervention territory, around 146 per dollar, and China’s market reopening after Golden Week was rocky, to put it mildly. Shares in tech giants Alibaba (NYSE:BABA) and Tencent as well as in chipmakers slumped following the sweeping set of new U.S. export control measures on Friday aimed at slowing China’s technological and military advances.The Biden administration’s proposals include measures to cut off China from certain semiconductors made anywhere in the world with U.S. equipment.With Beijing already battling to support the property sector, currency, and economy at large, this is an extra headache it could do without.Key developments that could provide more direction to markets on Tuesday:Australia consumer sentiment (October)Australia business confidence (September)Japan current account (August)IMF/World Bank meetings in WashingtonFed’s Harker and Mester speak More

The Federal Reserve is leading a worldwide rush of central bank rate rises that risks tipping the world into a recession, the EU’s top diplomat said, as he warned the union is not fighting its corner in the world. Josep Borrell, the high representative of the 27-member bloc, said central banks were being forced to follow the Fed’s multiple rate rises to prevent their currencies from slumping against the dollar — comparing the US central bank’s influence to Germany’s dominance of European monetary policy before the creation of the euro.“Everybody has to follow, because otherwise their currency will be [devalued],” Borrell said to an audience of EU ambassadors. “Everybody is running to increase interest rates, this will bring us to a world recession.”The unguarded comments on the Fed came in a wide-ranging speech in which he criticised the EU for failing to listen to foreign countries and seeking to “export” its governance model and standards on to others, and admitted that the bloc failed to anticipate Russia’s full-scale invasion of Ukraine despite warnings from Washington.Borrell’s words on US monetary policy follow the World Bank’s warning last month that rate rises by multiple central banks could trigger a global downturn in 2023, as it argued the “degree of synchronicity” by central banks was unlike anything seen in five decades. His warnings come as the World Bank and IMF kick off a week of joint meetings in Washington, where officials will discuss the multiple threats to the global economy. The fund is expected to downgrade its global economic forecasts for the fourth consecutive quarter.The Fed is debating whether to deliver a fourth consecutive 0.75 percentage point interest rate increase at its meeting in November, a move that would lift the federal funds rate to 3.75 per cent-4 per cent. Facing inflation of 10 per cent, the European Central Bank has raised its deposit rate by 1.25 percentage points at its last two policy meetings and markets are pricing in a further 0.75 percentage point rise on October 27.Top Fed officials have recently more directly acknowledged that their campaign to tighten monetary policy — the most aggressive since the early 1980s — risks creating “spillovers” that could imperil weaker economies. But they underscore that their chief concern remains bringing US inflation under control, suggesting that the global ramifications of their plans are secondary considerations.Lael Brainard, vice-chair of the Fed, on Monday said that while the US central bank should continue raising rates it must do so “deliberately and in a data-dependent manner” due to “elevated global economic and financial uncertainty”. She added that the Fed “takes into account the spillovers of higher interest rates, a stronger dollar, and weaker demand from foreign economies” and that financial market liquidity — the ease of buying and selling securities — is “a little fragile”. Last month she highlighted the risks posed to highly indebted emerging markets as borrowing costs rapidly rise. Following the Fed’s most recent policy meeting in September, chair Jay Powell also said the central bank was in “pretty regular contact” with its global counterparts. “We are very aware of what’s going on in other economies around the world and what that means for us, and vice versa,” he added. Brainard on Monday

The Fed’s influence over current monetary policy trends mirrored the situation in Europe before the euro, when countries were forced to follow the policies of Germany’s Bundesbank, said Borrell. “You had to do it. Even if it was not the right policy for your internal reasons.”Borrell, speaking at an annual conference of EU ambassadors, admitted that Brussels was “quite reluctant” to believe US warnings that Russia was going to invade Ukraine in February and had failed to analyse Russian president Vladimir Putin’s actions.“We didn’t believe it will happen . . . And we haven’t foreseen neither the capacity of Putin to escalate,” he said.Borrell added Brussels failed to understand what other countries wanted, and instead pushed its own ideas on them.“We think that we know better what is in other people’s interests,” he said. “We have to listen more . . . to the rest of the world. We need to have more empathy.“We try to export our model, but we don’t think how others will perceive this,” he added. More

The Fed likely is making a mistake in its hard-line stance against inflation because it is looking backward, Ark Invest’s Cathie Wood said Monday.
In an open letter, Wood suggested the central bank “has shocked not just the US but the world and raised the risks of a deflationary bust.”

Cathie Wood, Founder, CEO, and CIO of ARK Invest, speaks at the 2022 Milken Institute Global Conference in Beverly Hills, California, May 2, 2022.
David Swanson | Reuters

The Federal Reserve likely is making a mistake in its hard-line stance against inflation Ark Investment Management’s Cathie Wood said Monday in an open letter to the central bank.
Instead of looking at employment and price indexes from previous months, Wood said the Fed should be taking lessons from commodity prices that indicate the biggest economic risk going forward is deflation, not inflation.

“The Fed seems focused on two variables that, in our view, are lagging indicators –– downstream inflation and employment ––both of which have been sending conflicting signals and should be calling into question the Fed’s unanimous call for higher interest rates,” Wood said in the letter posted on the firm’s website.
Specifically, the consumer price and personal consumption expenditures price indexes both showed inflation running high. Headline CPI rose 0.1% in August and was up 8.3% year over year, while headline PCE accelerated 0.3% and 6.2% respectively. Both readings were even higher excluding food and energy, which saw large price drops over the summer.
On employment, payroll growth has decelerated but remains strong, with job gains totaling 263,000 in September as the unemployment rate fell to 3.5%.
But Wood, whose firm manages some $14.4 billion in client money across a family of active ETFs, said falling prices for items such as lumber, copper and housing are telling a different story.

Worries over a ‘deflationary bust’

The Fed has approved three consecutive interest rate increases of 0.75 percentage point, mostly by unanimous vote, and is expected to OK a fourth when it meets again Nov. 1-2.

“Unanimous? Really?” Wood wrote. “Could it be that the unprecedented 13-fold increase in interest rates during the last six months––likely 16-fold come November 2––has shocked not just the US but the world and raised the risks of a deflationary bust?”
Inflation is bad for the economy because it raises the cost of living and depresses consumer spending; deflation is a converse risk that reflects tumbling demand and is associated with steep economic downturns.
To be sure, the Fed is hardly alone in raising rates.
Nearly 40 central banks around the world approved increases during September, and the markets have largely expected all the Fed’s moves.
However, criticism has emerged recently that the Fed could be going too far and is at risk of pulling the economy into an unnecessary recession.
“Without question, food and energy prices are important, but we do not believe that the Fed should be fighting and exacerbating the global pain associated with a supply shock to agriculture and energy commodities caused by Russia’s invasion of Ukraine,” Wood wrote.
The Fed is expected to follow the November hike with a 0.5 percentage point rise in December, then a 0.25 percentage point move early in 2023.
One area of the market known as overnight indexed swaps is pricing in two rate cuts by the end of 2023, according to Morgan Stanley.

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JPMorgan Chase chief executive Jamie Dimon predicted the American economy will tip into a recession next year, warning the downturn threatened to spark “panic” in credit markets and wipe an additional 20 per cent from the value of US stocks.The comments from Dimon, whose economic pronouncements are closely followed by investors, followed similar remarks last month by billionaire investor Ken Griffin and point to a growing consensus among senior figures on Wall Street about the likelihood of a US recession.In an interview with CNBC on Monday, Dimon listed rising interest rates and Russia’s invasion of Ukraine as factors stoking the risk of a downturn in 2023.“These are very, very serious things, which I think are likely to push the US and the world — I mean, Europe is already in recession — and they’re likely to put the US in some kind of recession six to nine months from now,” Dimon said.Dimon said early signs of distress were evident in the financial system, pointing to the depressed market for initial public offerings and high-yield debt deals, and anticipated the pain would soon spread into other areas.“The likely place you’re gonna see more of a crack and maybe a little bit more of a panic is in credit markets,” he added.In June, Dimon warned of an economic “hurricane”, and on Monday he again encouraged investors to be “very, very cautious”. He added: “If you need money, go raise it.”

Asked where he saw the trough for the benchmark S&P 500 share index, which is down more than 20 per cent this year, Dimon said the decline may still “have a ways to go” and “could be another easy 20 per cent”.“I think the next 20 per cent will be much more painful than the first. Rates going up another 100 basis points are a lot more painful than the first 100 because people aren’t used to it.”JPMorgan, the largest US bank by assets, will report earnings on Friday. Analysts expect JPMorgan and other big banks will collectively set aside more than $4bn to cover potential losses from bad loans, in a sign of growing pessimism about the US economy. More

Good eveningNever has the subject matter of a Nobel Prize been more apt than today’s award to former Fed chief Ben Bernanke and colleagues for their work on the role of banks in the economy and financial crises. The announcement comes as the annual autumn meetings of the World Bank and IMF get under way in Washington DC at a perilous moment for the global economy. War in Ukraine, a serious energy crisis, rising interest rates, soaring food prices and a fracturing relationship between the world’s two biggest economies follow more than two years of damage wrought by the pandemic. IMF chief Kristalina Georgieva has already warned that the global economy would feel like it was in recession next year from “shrinking real incomes and rising prices,” suggesting the fund will downgrade its forecasts again this week.Business and consumer confidence is diving. According to new data from the twice-yearly Brookings-FT tracking index, pessimism is mounting in the face of surging prices and geopolitical uncertainties. Meanwhile policymakers across the world continue to scramble for solutions to the energy crisis.While Europe hunts for alternatives to Russian gas (as we report in Europe Express for Premium subscribers), relations between the world’s leading oil producers are under strain after the Opec+ group decided to cut production to raise prices (here’s our explainer if you’re late to the story). The US has accused the cartel of aligning with Russia, but analysts have warned that President Joe Biden has few meaningful options to lessen the impact of the historic cuts.The transition to clean energy is going to be another big issue in DC this week, with the US and Germany leading calls for the World Bank to be more responsive to developing countries’ needs. (You can read more on the move to renewable sources in our new special report: Managing Climate Change.) Climate change and rising costs of inputs such as fertiliser are also reshaping global agriculture, as our Big Read details. The US meanwhile is at loggerheads with China over tech exports. Shares in top Chinese chipmakers lost $8.6bn in market value today after Washington on Friday announced new controls to limit Chinese companies’ attempts to develop new technologies with military applications. The move will slow their progress in artificial intelligence by making it extremely difficult for them to obtain or manufacture advanced chips.The Washington meetings could also throw up some potentially uncomfortable moments for the British contingent. Chancellor Kwasi Kwarteng was criticised by the IMF for his recent “mini” Budget and its “untargeted” package of tax cuts, while Bank of England chief Andrew Bailey faces intense scrutiny as the BoE prepares to end its emergency backstop support for government bonds on Friday.Latest newsFed-led dash for higher rates risks ‘world recession’, warns EU’s top diplomatUAE president to meet Putin in Moscow after Opec+ output cutAmazon-backed Rivian sinks on recall of almost all its electric trucksFor up-to-the-minute news updates, visit our live blogNeed to know: the economyThe Bank of England announced measures to stave off rushed asset sales by pension funds while chancellor Kwasi Kwarteng brought forward his much-anticipated debt-cutting plan to October 31 in an attempt to reassure jittery markets. The latest warning about the economic downturn came from retailers in London’s West End, although they may get some solace from the recent cut in VAT for overseas shoppers. Latest for the UK and Europe A German commission of experts outlined a €91bn energy aid package which included paying all households’ gas bills in December and subsidising residential and industrial gas prices for more than a year. France, Europe’s biggest power exporter, reassured the UK that it could maintain electricity flows over the winter.The UN-backed deal enabling Ukraine to export millions of tonnes of wheat is under strain from a backlog of cargo ships waiting to sail to or from the country’s ports.Demographic changes, Brexit, and a surge in support for pro-unity Sinn Féin on both sides of the border has led to increased backing for the unification of Ireland, reports Jude Webber. Global latestRecent employment data suggest the hiring frenzy in developed economies is starting to ease as employers worry about rising costs and a darkening economic outlook.Dimming economic prospects and the end of the low-interest rates era is also putting pressure on global property markets. Falling sales numbers and stretched affordability could herald painful price corrections in the UK, US and elsewhere. Buyers and sellers in the UK have been hit particularly hard by the fallout from the “mini” Budget.Global Business Columnist Rana Foroohar reads the runes on neoliberalism and trickle-down economics, a theory that has become “political Kryptonite”. While Washington has yet to develop a fully articulated industrial policy, there are clear signs that laissez-faire economics is over, she argues.The FT Editorial Board called for a new model of Chinese growth where consumers were empowered to spend more and save less.Need to know: businessWall Street banks and other big US companies have drastically cut back expectations for third-quarter earnings as fears mount over rate rises and a deteriorating economy.Cathay Pacific, one of the biggest business casualties of Hong Kong’s strict lockdown rules, said normal levels of flying would not return for at least two years.Aerospace and defence has been a rare bright spot for UK manufacturing in recent years but is coming under increasing pressure as it falls prey to foreign takeovers as well as being faced with rising inflation and interest rates and a weakening pound.The World of WorkThe UK hospitality sector, which has lost 121,000 EU workers in the past two years, is increasingly turning to older workers to plug the gaps in the labour market. Staff aged 50 and above now account for a quarter of the 2.2mn-strong workforce.Brexit aside, one of the key drivers of UK labour shortages is a shrinking workforce. Some half a million people have dropped out of the workforce since the pandemic because of chronic illness and mental health problems, reports John Burn-Murdoch.A rapidly changing labour market means skills are more important than ever. A skills-first hiring approach, rather than focusing on education and past experience, can pay a handsome dividend, writes Sophia Smith, editor of our Working It newsletter.Get the latest worldwide picture with our vaccine trackerSome good news …Glaswegian arts centre SWG3 has launched a pioneering energy system, harnessing body heat from dancers which can be stored and used to heat or cool the venue.Glasgow arts venue SWG3 launches its BodyHeat system with a mass rendition of the Slosh line dance © Photo:Michael Hunter More

Edward Price is principal at Ergo Consulting. A former British trade official, he also teaches at New York University’s Center for Global Affairs.How fascinating it is that Bernanke, Diamond and Dybvig won Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel — and how super fascinating that they won it together.There’s good reason of course. Diamond and Dybvig’s 1983 paper was the first real model of its kind. Its explanation of sunspot bank runs is genius. Diamond and Dybvig are geniuses. Meanwhile Ben Bernanke (plus Mervyn King, US Treasury officials and, frankly, Vishnu the Preserver) saved the financial system. After 2008, we avoided another Great Depression. In the immortal words of Gordon Brown, they saved the world . . . the world’s banking system. They deserve their prize.But in 2022, are we really still vibing on loose monetary policy? Insert the “hmm” emoticon here.Go with me on this. There’s a winding, multi-decade line between recognising bank runs in the 1980s, building out central bank independence in the 1990s, fighting a financial crisis in the 2000s, persistent low rates in the 2010s and Modern Monetary Theory (lol) in the 2020s. This winding line might even continue to who knows what crisis in the 2030s? If so, rinse and repeat.Now, Bernanke’s often teased for blogging. But he’s absolutely no slouch. Quite the opposite. In 1995, he and Mark Gertler wrote a paper Inside the Black Box: The Credit Channel of Monetary Policy Transmission. The paper’s observation? Well, back then, conventional understanding of monetary policy transmission was inadequate. The paper’s conclusion? Fear not! Spend a little more time thinking about how credit and banking works and Bob’s your uncle. Very prescient. Certainly that work jived well with Diamond and Dybvig’s. As it turned out, credit and banking were central to the story of how finance and policy work.Or, indeed, central to the story of how finance and policy don’t work. Maybe think about it like this. The pre-2008 banking system captured the prerogatives of post-2008 monetary policy. How? Well, the banks created surplus credit. Call that period one. Then, in period two, the central bank had to create dollars to replace that lost liquidity. Look at that chronology through squinted eyes and you might see private banks, ultimately, creating policy dollars. The Fed was, ironically, merely the financial intermediary — the lender. Now whisper this question. Are the dollars that were created since 2008 to replace what was surplus credit before 2008 themselves now in surplus?Perhaps. Perhaps not. Today’s strong dollar suggests otherwise. But it’s undeniable that we may have over-baked our monetary soufflé. Was there ever an alternative to accepting that upcycles end in disaster? Was there ever a different approach to bank runs than lenders-of-last-resort, low rates, bailouts, QE, OMT, and a panoply of other acronyms? Given today’s inflation, we really have to ask. Maybe the banking sector should have had its own equivalent of an inflation target. What is the point of a 2 per cent target if the financial system can inflate itself at will? (OK, that would have been too much communism.)Alternatively, what about letting the wildfire burn through the system in 2008, Ayn Rand style, and then picking up the charred pieces of Freddie and Fannie afterwards? (OK, that would have been too little communism.)So all we really have to wonder is this: have we yet had the 2008 correction come through the system? Or have we figured out how to deal with bank runs and financial crises today at the expense of tomorrow? Answers, please, on a postcard. More

Sweden’s Riksbank is sometimes accused, only half in jest, of awarding the Nobel memorial prize for economic research decades after the research in question actually made a difference. One could be forgiven for wishing the accusation were true today. The work that the 2022 prize honours — runs on financial institutions, the damage they do, and how to prevent them — remains depressingly timely.The laureates — former Federal Reserve chair Ben Bernanke, and economics professors Douglas Diamond and Philip Dybvig — have demonstrated the fundamental role banks play in the economy and above all the role they play when things go wrong. The Diamond-Dybvig model, a staple of economics teaching since it was developed in the 1980s, clarifies how banks intermediate between depositors who want immediate access to their savings and businesses that need long-term investment funding. The model sets out how and why banks are therefore vulnerable to deposit runs and establishes the central argument for government deposit insurance. Bernanke at around the same time analysed the devastating effect bank runs can have on economic functioning by blocking credit flows and destroying knowledge about creditworthiness. His research on the 1930s downturn showed how bank failures helped turn a run-of-the-mill recession into the Great Depression — which had until then been explained largely as the result of bad monetary policy. The real world importance of this work is clear in the influence it has had on how economic policymakers have done their job. “[Bernanke] himself used many of these ideas in his approach” to the 2008-10 global financial crisis, says Ricardo Reis, economics professor at the London School of Economics and an expert on the area. But Reis warns against taking the prize as a comment on Bernanke’s performance at the helm of the Fed.As Reis points out, the lesson that a lender of last resort and fiscal backstops are needed to prevent runs has been internalised across the board. In the financial crisis “you [saw] clearly how central banks all over the world . . . immediately stepped in to reassure depositors . . . This was the major difference that prevented the Great Recession [of 2009-10] from becoming another Great Depression.” Similarly, during the pandemic, governments keen to preserve the health of the banking sector issued guarantees for crisis lending to businesses hurt by lockdowns.Today’s award, then, should serve as a reminder that despite the blow to its reputation caused by the failure to predict financial crises, mainstream economics has much useful to say about how to tackle them. The Bank of England’s swift intervention in gilt markets last month, which faced dynamics in some ways analogous to bank runs, is just the most recent example. It also illustrates that banks are only one side of the story. Partly because of Bernanke, Diamond and Dybvig’s influence, the risk of runs is greater in the non-bank or “shadow” financial sector than in banking. And banks that know governments will not let them fail are tempted to pile on risk if they are not prevented from doing so by regulators.These are topics of more recent research, which some economists say would have been just as deserving of a Nobel. In that sense, at least, the joke about the prize committee being behind the times remains [email protected] More