Economy

(Reuters) – The Federal Reserve on Wednesday delivered its third straight 75-basis point interest rate hike in its campaign to drive borrowing costs high enough to bring down 40-year high inflation. The goal: to get businesses and households to pull back on spending and reduce demand for goods, services and labor, thereby easing upward pressure on prices. But the process won’t be smooth. Regular Americans have felt the sting of inflation for months, and the Fed’s effort to lower it so far have already made it harder for many consumers to buy things like a house or a car. Other shoes have yet to drop, though, such as a jump in unemployment or even a recession.Here’s how it could play out:UNEMPLOYMENT SEEN RISING, INFLATION STILL HIGHFed Chair Jerome Powell has said that the rapid and forceful action the central bank is taking will have “unfortunate costs” including a rise in the unemployment rate, currently at a very low 3.7%. Fed policymakers expect it to rise to 4.4% by the end of next year, projections released Wednesday show. Earlier this month Fed Governor Chris Waller warned the Fed would be comfortable with the unemployment rate increasing to 5% before policymakers start to mull any change in strategy. An increase of that degree – which could translate to more than 2 million jobs lost – has historically been consistent with the economy being in recession. For perspective: in the last three recessions, the jobless rate peaked at roughly 14.7%, 9.5% and 5.5% in 2020, 2009 and 2001, respectively.None of those recessions, though, were preceded by inflation anywhere near as high as today, a fact that could make a coming downturn more painful. WAGE GROWTH SLOWS, FEWER JOB OPENINGSWages grew at a 5.2% annual rate in August, a strong clip, with the lowest paid workers seeing the biggest rise in their pay packets. But that’s where the good news ends. Policymakers view that pace of wage growth as too strong to be consistent with the Fed getting overall inflation back to its 2% goal, so they are trying to tamp it down. The longer those outsized wage gains continue, they worry, the more likely high inflation becomes embedded in the economy in a self-perpetuating spiral. One reason wage gains have been so strong is fierce demand for a pool of labor that has only just regained its pre-pandemic size, even as the economy has gotten bigger. The availability of nearly two job openings for every job seeker reflects that, and Fed policymakers hope businesses will respond to interest rate hikes mostly by trimming hiring rather than with outright layoffs. Fewer job openings should translate to slower wage growth, meaning that unless inflation comes down quickly more workers will see their pay packets actually shrink after accounting for the hit from inflation. Fed policymakers see inflation, now at 6.3% by their preferred measure, falling to 2.8% by the end of next year, projections released on Wednesday show. SAVINGS RATES WILL RISE, BUT SO WILL RATES ON CONSUMER LOANSHouseholds will see an increase in the interest rate on their savings accounts, particularly at online institutions. But in general, banks are slow to pass on the Fed’s rate increases to savers and do so at levels typically far below the central bank’s policy rate and, currently, inflation.Finance companies will also raise their rates on most consumer and auto loans, rates that are generally far above the central bank’s benchmark to begin with.BUYING HOMES LESS AFFORDABLE, BUT RENTS ALSO KEEP RISINGOf all the economy’s sectors, the housing market is where the Fed’s rate hikes have hit hardest and fastest, with mortgage rates doubling in just over eight months to a current average of 6.25% for a 30-year fixed rate mortgage. Home sales have dropped. But, in part because of a still-acute shortage of homes, prices have only edged down slightly, to $389,500 for the median existing house in August — still up 7.7% compared with just a year earlier. With the rise in rates, monthly mortgage payments on a median-priced existing home have jumped nearly 60% to $1,940 this year. Roughly 17 million fewer households have the income to qualify for a mortgage for a median-priced home than at the end of last year, economists at Oxford Economics estimate.Rising rental prices are also squeezing incomes, offering little relief at least over the next few months. The rate of increase based on a weighted average of the two main rent indexes climbed to 6.4% in August from one year ago, while the 3 month annualized rate of increase jumped to 8.6% “suggesting that rents are still in the process of accelerating higher,” according to Ryan Wang, U.S. economist at HSBC.FOOD AND GAS PRICES: NOT MUCH THE FED CAN DOAs much as the Fed raises interest rates to quash inflation, the everyday prices that Americans perhaps care most about — food and gas – are beyond the central bank’s reach, as their cost is determined by global factors largely affecting supply. Gasoline prices, which spiked in the U.S. to more than $5 a gallon in mid June as a result of the fallout from Russia’s invasion of Ukraine, have dropped to roughly $3.70 a gallon, the 11th straight week of declines. Wholesale gasoline prices are expected to keep falling in coming months as U.S. refiners overproduce fuel to try to rebuild low stocks of diesel and heating oil, according to analysts and traders.But the ongoing war in Ukraine as well as severe droughts in Europe and China, will keep U.S. food prices, already up more than 11% compared to one year ago, elevated at least into early next year. Russia’s announcement earlier on Wednesday that it will send significantly more troops to Ukraine further escalates the conflict, and could jeopardize a Black Sea corridor established under a U.N.-backed deal that had recently allowed maritime grain exports from Ukraine. More

UK consumer confidence has defied expectations of an improvement and fallen to a new all-time low, as households struggle under the pressure of the cost of living crisis.The consumer confidence index, a closely watched measure of how people view their personal finances and wider economic prospects, dropped 5 percentage points to minus 49 in September, research group GfK said on Friday. That was the lowest since records began in 1974.Joe Staton, GfK client strategy director, said confidence had “tumbled” in September to a new low as households “buckl[ed] under the pressure of the UK’s growing cost of living crisis driven by rapidly rising food prices, domestic fuel bills and mortgage payments”.The fall defied expectations of a small rise to minus 42 forecast by economists polled by Reuters, who thought there would be some improvement following the government’s £150bn package aimed at freezing household energy bills. The data come the day after the Bank of England lifted interest rates by 50 basis points to 2.25 per cent, the highest since 2008, meaning borrowing will become more expensive for businesses and households. “For consumers already struggling to keep their household finances in check, the increased cost of borrowing as a result of the rate rise . . . may signify the breaking point, leading to the acceleration of decrease in demand,” said James Brown, managing partner at global consultancy Simon-Kucher & Partners.Incorporating the energy bills freeze, the BoE expects UK inflation to peak at 11 per cent in October from its current 9.9 per cent, a near 40-year high, further eroding households’ real incomes. The data also follow confirmation, ahead of Friday’s mini-Budget, that the government will from November reverse the 1.25 per cent rise in national insurance contributions that was introduced in April. Staton said the “mini-Budget, and the longer-term agenda to drive the economy and help rebalance household finances, will be a major test for the popularity of Liz Truss’s new government”.The GfK index, based on interviews collected in the first two weeks of the month, showed scores in relation to four of the five questions posed, which touch on personal finances and the wider economic picture, at record lows.Forward-looking indicators, which track expectations for the next 12 months, registered the largest fall, dropping 9 percentage points for personal finances and 8 percentage points for the economy.Economists expect record-low consumer confidence to result in falling spending, a trend registered by the BoE in its agents survey published on Thursday.

It showed that food retailers reported customers opting for cheaper goods and cutting back on non-essential items, such as confectionery. Discount chains gained market share, while sales of household items, such as furniture, electrical goods and home-improvement products, fell.Clothing sales were supported by the return to the office, but in hospitality, sales were down on pre-pandemic levels. Holiday booking also weakened and domestic tourism was limited by higher petrol prices.Demand was strong, however, for financial services and legal advice, such as tax planning, equity release, debt consolidation and early repayment. Third sector organisations also reported a large rise in people seeking debt advice. More

WASHINGTON (Reuters) -The International Monetary Fund’s board is expected to approve a new “food shock window” in the next few weeks that will allow the global lender to provide emergency funding to Ukraine, the head of the fund’s European department said on Thursday.Alfred Kammer told a conference hosted by Bloomberg that the Ukrainian government and its central bank deserved “huge credit” for managing the economic shocks caused by Russia’s invasion of the country on Feb. 24.He said an IMF mission would examine Ukraine’s budget plans and the fiscal-monetary policy mix in late October, and stressed that the central bank needed to avoid printing money to finance its budget deficit, while focusing on tax revenues instead.The fund provided $1.4 billion in emergency assistance to Ukraine in March, shortly after the war began, and worked with authorities with great success, using “orthodox and unorthodox” measures to stabilize the macroeconomy. Ukraine could receive another $1.3 billion in emergency assistance when the IMF’s board approves expanded access to its Rapid Finance Instrument (RFI) for countries experiencing food shocks as a result of the war, Kammer said.Kammer said that vote was expected in the next few weeks, and a source familiar with the matter said it was likely to occur on Sept. 30.”We are discussing with Ukraine a macro stabilization framework … that will help Ukraine in terms of internal coordination of policies, it will help in terms of identifying the external financing needs, and it will help donors to provide that financing in a timely manner,” he said.Kammer said the fund had remained in close touch with Ukrainian authorities since the war began, and was now discussing a more formal monitoring arrangement.”What we’re aiming at ultimately – this is leading towards a fully-fledged IMF program,” he added, noting that the situation was challenging given that planning was only possible on a “month-to-month” basis at the month given the ongoing war. More

Japan intervened in the foreign exchange market earlier to buy yen in an attempt to shore up the battered currency after the Bank of Japan stuck to its ultra-low interest rates, further pressuring the currency against the dollar.”The government will continue watching market moves closely with a high sense of urgency, and take necessary steps decisively in response to excessive fluctuations,” Kishida told a news conference in New York.Kishida, visiting the United States to attend the U.N. General Assembly, said Japan will ease its border controls from Oct. 11, eliminating the cap on the number of entrants into Japan and allowing visa-free travel, including by individuals.The prime minister also said he would issue instructions to his ministers on Sept. 30 about compiling a fresh stimulus package.”Upon compiling it in October, we will swiftly move to execution,” he said. More

He is expected to detail more measures in a mini-budget on Friday, including tax cuts, energy subsidies and planning reforms.Below is a brief overview of the key measures announced so far, and additional steps that could be announced on Friday.PAYROLL TAX RISE REVERSEDA 1.25 percentage point increase in payroll tax – or national insurance – that took effect earlier this year will be reversed from Nov. 6.DIVIDEND TAX RISE SCRAPPEDAn increase to dividend tax rates which had been brought in alongside the payroll tax increase – to raise contributions from those who are paid through different channels – will be scrapped from April 2023.INVESTMENT ZONESKwarteng is expected to say on Friday the government is in talks with 38 local authority areas in England to set up investment zones offering “generous, targeted and time-limited tax cuts” for businesses to create jobs and increase productivity.The zones will also see reforms to environmental regulation and streamlined planning polices.INFRASTRUCTURE PROJECTSKwarteng will also set out measures to speed up the delivery of around 100 major infrastructure projects including wind farms, roads and railways.The measures will include legislation in the coming months to help reduce “unnecessary burdens” to infrastructure projects.NO CORPORATION TAX INCREASEBritain’s 19% corporation tax rate – the lowest among the G7 club of rich nations – had been due to rise to 25% in 2023 but Friday’s mini-budget is expected to scrap those plans.STAMP DUTY CUTStamp duty on house purchases will be cut to boost economic growth by enabling first-time buyers to get on the property ladder, the Times newspaper reported on Wednesday. More

Federal Reserve officials and their counterparts around the world are trying to defeat inflation by rapidly raising interest rates. They know it will come at a cost.A day after the Federal Reserve lifted interest rates sharply and signaled more to come, central banks across Asia and Europe followed suit on Thursday, waging their own campaigns to crush an outbreak of inflation that is bedeviling consumers and worrying policymakers around the globe.Central bankers typically move slowly. That’s because their policy tools are blunt and work with a lag. The interest rate increases taking place from Washington to Jakarta will need months to filter out across the global economy and take full effect. Jerome H. Powell, the Fed chair, once likened policymaking to walking through a furnished room with the lights off: You go slowly to avoid a painful outcome.Yet officials, learning from a history that has illustrated the perils of taking too long to stamp out price increases, have decided that they no longer have the luxury of patience.Inflation has been relentlessly rapid for a year and a half now. The longer that remains the case, the greater the risk that it is going to become a permanent feature of the economy. Employment contracts might begin to factor in cost-of-living increases, companies might begin to routinely raise prices and inflation might become part of the fabric of society. Many economists think that happened in the 1970s, when the Fed tolerated out-of-control price increases for years — allowing an “inflationary psychology” to take hold that later proved excruciating to crush.But the aggressiveness of the monetary policy action now underway also pushes central banks into new and risky territory. By tightening quickly and simultaneously when growth in China and Europe is already slowing and supply chain pressures are easing, global central banks risk overdoing it, some economists warn. They may plunge economies into recessions that are deeper than necessary to curb inflation, sending unemployment significantly higher.“The margin of error now is very thin,” said Robin Brooks, chief economist at the Institute of International Finance. “A lot of this comes down to judgment, and how much emphasis to put on the 1970s scenario.”In the 1970s, Fed policymakers did lift interest rates in a bid to control inflation, but they backed off when the economy began to slow. That allowed inflation to remain elevated for years, and when oil prices spiked in 1979, it reached untenable levels. The Fed, under Paul A. Volcker, ultimately raised rates to nearly 20 percent — and sent unemployment soaring to more than 10 percent — in an effort to wrestle the price increases down.That example weighs heavily on policymakers’ minds today.“We think that a failure to restore price stability would mean far greater pain later on,” Mr. Powell said at his news conference on Wednesday, after the Fed raised rates three-quarters of a percentage point for a third straight time. The Fed expects to raise borrowing costs to 4.4 percent next year in the fastest tightening campaign since the 1980s.The Bank of England raised interest rates half a point to 2.25 percent on Thursday, even as it said the United Kingdom might already be in a recession. The European Central Bank is similarly expected to continue raising rates at its meeting in October to combat high inflation, even as Russia’s war in Ukraine throws Europe’s economy into turmoil.As the major monetary authorities lift borrowing costs, their trading partners are following suit, in some cases to avoid big moves in their currencies that could push up local import prices or cause financial instability. On Thursday, Indonesia, Taiwan, the Philippines, South Africa and Norway lifted rates, and a large move by Switzerland’s central bank ended the era of below-zero interest rates in Europe. Japan has comparatively low inflation and is keeping rates low, but it intervened in currency markets for the first time in 24 years on Thursday to prop up the yen in light of all of the action by its counterparts.The wave of central bank action is expected to have consequences, working by design to sharply slow both interconnected commerce and national economies. The Fed, for instance, sees its moves pushing U.S. unemployment to 4.4 percent in 2023, up from the current 3.7 percent.A housing development in Phoenix. Climbing interest rates are already making it more expensive to borrow money to buy a car or purchase a house in many nations.Adriana Zehbrauskas for The New York TimesAlready, the moves are beginning to have an impact. Climbing interest rates are making it more expensive to borrow money to buy a car or a house in many nations. Mortgage rates in the United States are back above 6 percent for the first time since 2008, and the housing market is cooling down. Markets have swooned this year in response to the tough talk coming from central banks, reducing the amount of capital available to big companies and cutting into household wealth.Yet the full effect could take months or even years to be felt.Rates are rising from low levels, and the latest moves have not yet had time to fully play out. In continental Europe and Britain, the war in Ukraine rather than monetary tightening is pushing economies toward recession. And in the United States, where the fallout from the war is far less severe, hiring and the job market remain strong, at least for now. Consumer spending, while slowing, is not plummeting.That is why the Fed believes it has more work to do to slow the economy — even if that increases the risk of a downturn.“We have always understood that restoring price stability while achieving a relatively modest increase in unemployment, and a soft landing, would be very challenging,” Mr. Powell said on Wednesday. “No one knows whether this process will lead to a recession, or if so, how significant that recession would be.”Many global central bankers have painted today’s inflation burst as a situation in which their credibility is on the line.“For the first time in four decades, central banks need to prove how determined they are to protect price stability,” Isabel Schnabel, an executive board member of the European Central Bank, said at a Fed conference in Wyoming last month.A FedEx worker making deliveries in Miami Beach. Consumer spending in the United States, while slowing, is not plummeting.Scott McIntyre for The New York TimesBut that does not mean that the policy path the Fed and its counterparts are carving out is unanimously agreed upon — or unambiguously the correct one. This is not the 1970s, some economists have pointed out. Inflation has not been elevated for as long, supply chains appear to be healing and measures of inflation expectations remain under control.Mr. Brooks at the Institute of International Finance sees the pace of tightening in Europe as a mistake, and thinks that the Fed, too, could overdo it at a time when supply shocks are fading and the full effects of recent policy moves have yet to play out.Maurice Obstfeld, an economist at the Peterson Institute for International Economics and a former chief economist of the International Monetary Fund, wrote in a recent analysis that there is a risk that global central banks are not paying enough attention to one another.“Central banks clearly are scrambling to raise interest rates as inflation runs at levels not seen for nearly two generations,” he wrote. “But there can be too much of a good thing. Now is the time for monetary policymakers to put their heads up and look around.”Still, at many central banks around the world — and clearly at Mr. Powell’s Fed — policymakers are treating it as their duty to remain resolute in the fight against price increases. And that is translating into forceful action now, regardless of the imminent and uncertain costs.Mr. Powell may have once warned that moving quickly in a dark room could end painfully. But now, it’s as if the room is on fire: The threat of a stubbed toe still exists, but moving slowly and cautiously risks even greater peril. More

PARIS (Reuters) -France’s biggest retailer Carrefour (EPA:CARR) has increased its offer in the third round of wage talks with unions, suggesting a 2.5% pay hike from November this year, a company spokesperson said on Thursday. The offer would mean an overall 8.3% wage increase when compared to August 2021. Some unions had threatened to call a strike late this week, saying the supermarket chain’s previous offer of 2% was insufficient as workers struggle with soaring inflation. The CFDT union said on Twitter (NYSE:TWTR) it would now discuss the offer with workers. The offer also includes a 100 euro ($98.49) extra payment in October and a 12% discount on purchases at Carrefour made by workers, the union added. French companies have come under pressure to do their part in helping staff maintain their purchasing power. Large companies including Air France and Renault (EPA:RENA) recently announced they would in an exceptional move raise wages or pay extra bonuses this year.French consumer price inflation stood at 6.6% last month in EU-harmonised terms. ($1 = 1.0153 euros) More

NEW YORK (Reuters) – Chile estimates it will issue $12 billion in total debt next year and the largest budget increases will be in social protection and science and technology, Finance Minister Mario Marcel told Reuters on Thursday.”So we’re cutting (issuance) by half, reflecting the fact that we will have an overall balance that will be considerably stronger than what people thought we would have,” said Marcel, adding most of it will be to refinance maturing issues.The minister is confident Chile will soon make a dent on inflation, running at double digits.”We’re particularly confident in terms of curbing inflation earlier than other countries,” he said, citing an early and consistent monetary policy tightening that began in mid-July 2021.PENSION AND PESOThe Chilean peso has been pressured like many other currencies by the dollar strength, breaching the 1,000 pesos per dollar mark for the first time last July. It currently sits at 944 pesos per greenback, down nearly 10% so far this year.Marcel said between 100 and 150 pesos in the exchange are due to an uncertainty premium he says shot up in late 2019 when Chileans took to the streets in what were the largest social protests in decades. The COVID-19 pandemic and a string of votes in Chile, including a referendum that rejected a new constitution that would have sharply expanded social benefits, helped keep uncertainty high.Marcel said clear signals for another moderate constitutional proposal, progress on tax reforms and hopeful pension reforms will help reduce uncertainty.The pension reform is expected to be presented to Congress in a matter of weeks, aiming among other things to expand the basic benefit by some 30% and increase contributions from employers by 6%.”Pension reform should cost in the longer run something between 4% and 5% of (gross domestic product),” Marcel said. “It should take at least six years to face-in all this increase so as not to have an impact on employment.” More