Economy

Jill Dauchy is founder and CEO of Potomac Group LLC, a Washington DC-based financial advisory firm for sovereign governments and public sector borrowers, as well as a podcast host.To meet the demands of the 21st century, our international financial architecture requires urgent renovation.The cornerstone of the architecture is paradoxically the piece that is now missing. Within the arcane and little understood policies of the IMF there is a concept of “financing assurances” that must be given before the IMF executive board can approve an IMF program and disburse funds. As a lender of last resort that is funded globally through taxpayer money, the fund must be assured that the country in question has a financing plan for the program period and will not use IMF funds to satisfy other creditors.In the old days, financing assurances were easy to provide. The debtor country would normally call the IMF and apply for debt relief from the Paris Club of Official Creditors at the same time. Conveniently, the major shareholders of the IMF were the same countries that comprised the Paris Club, which meant that they had effective veto power over the program, and back in the day, they also enjoyed considerable influence over national commercial banks active in emerging markets. Official debt relief and comparability of treatment across creditor groups was therefore an efficient process and financing assurances could essentially be assumed from the onset.But herein lies the problem. In the highly negotiated wording of IMF policies, financing assurances can only be given by a “representative standing forum” — and the only representative standing forum recognised by the IMF is the Paris Club. But the Paris Club is no longer representative. Most countries owe very little debt to its 22 permanent member countries after they provided debt relief under the HIPC Initiative of the late 1990s and early 2000s; in today’s world, emerging markets borrow heavily from China and the international capital markets. There is no forum — recognised or otherwise — that brings these diverse players together and no mechanism for providing assurances to the fund.The Common Framework, introduced in response to the Covid-19 pandemic, is a valiant attempt to cut and paste the practices and approach of the Paris Club onto the G20. Developing countries however are not convinced. They watch in fear the downgrades and years of delay experienced by Chad, Ethiopia, and Zambia — the only three countries to initiate debt relief though the Common Framework. Zambia recently received IMF Board approval of its program, based on financing assurances of the Creditor Committee co-chaired by China and France, however, negotiations continue with official bilateral and private creditors on the terms of the actual debt relief. It does not inspire confidence that the IMF Executive Board itself continues to be reluctant to recognise the Common Framework as a representative standing forum.All eyes are now turning to Sri Lanka, a middle-income country in undeniable debt distress that has just entered that limbo period between staff-level and Board-level approvals, where everything hinges on financing assurances. With rising rates in developed economies, other countries will probably soon follow. It is time to think boldly and bravely and create a system that can deliver financing assurances — through debt relief, grants, and concessional finance — quickly and efficiently and targeted to meet the many needs of low and middle-income countries. Four proposed reforms include:Automate debt service suspension on debt owed to G20 member countries. When a low-income country applies for the Common Framework, G20 countries should automatically grant a suspension of debt service during the IMF program period. This would provide immediate financing assurances from official bilateral creditors.Enshrine early engagement with all creditors. The IMF debt sustainability analysis (DSA) is in essence an internal tool to determine the ability of a debtor country to repay the fund. In practice, it effectively sets the parameters of negotiations with other creditors. The IMF should at an earlier stage be more transparent with these creditors to allow them to understand the DSA’s underlying assumptions, permit them to formulate their own views and, at the IMF’s option, obtain input on the DSA. These are after all the people from whom financing assurances are sought and who will help make the IMF program a success.Introduce automatic stabilisers into bond and other debt documentation to ensure private sector participation. Drawing upon lessons learned from collective action clauses and catastrophe bonds, as well as earlier designs of GDP-linked bonds, contractual terms and conditions could be developed to provide automatic debt service suspension if a ‘trigger event’ occurred. Staff-level approval of an IMF program could be such an event.Use the global momentum around climate and nature. Debt swaps and sustainability-linked bonds are tools that we can use to provide credible and specific debt relief and new financing to countries in distress. Global players eager to support vulnerable countries should be brought in. Programs and instruments that will allow new money to flow into the country should complement the request for financing assurances which otherwise risk being synonymous for losses. UN agencies, the World Bank, regional development banks, global funds such as GEF and GCF, and others like The Nature Conservancy have shown interest and creativity in mobilising finance and supporting debt relief efforts by linking them to sustainable outcomes that can be specified, monitored, and verified. These techniques can be used to treat existing debt owed to official bilateral and/or private creditors, as well as to raise new financing with credit enhancements.These innovations would reintroduce an element of automaticity currently lacking in the international financial architecture, while also providing information to all parties early in the process and allowing them to find creative solutions beyond haircuts. By bringing in other global players and investors, it also allows for the mobilisation of new money that can be used for a wide range of development goals. More

As UK politics returns to normal, we are finding out what “Trussonomics”, the new British prime minister Liz Truss’s approach to economic policy, means. According to my reporting colleagues, she is preparing a “radical” shift. My fellow economics commentators Chris Giles and Martin Wolf have looked at the tax and spending plans of Truss and her chancellor, Kwasi Kwarteng, and put them both down as gamblers with the UK economy and the public finances.They have a point: Truss and Kwarteng are preparing to throw a lot of money around. The chancellor committed to a fiscal loosening in his recent op-ed for the FT; the UK will subsidise energy prices more than any other European country; and on Friday we should see the government make good on promised tax cuts. And all this is premised on the unsubstantiated belief that their policies will lift the growth rate permanently so as to pay for their largesse and make everyone better off.It is all rather reckless. But there is one area where I think the carefree attitude displayed by the new stewards of the UK economy has something going for it, which is their lack of worry about the level of public debt. The FT has reported on the Truss team’s economic plans that “Kwarteng would assess the principal fiscal rule that debt should be falling as a share of national income [in the medium term] to make sure it still worked for the economy” — which rather sounds like not letting concerns about the debt get in the way of the deficits they want to run.This puts the UK counter-current to the EU, where governments are finally gearing up to agree how to update the bloc’s fiscal rules. While it seems likely the debt rules will be made more flexible, to avoid self-harming demands for too-fast debt reduction, there seems no prospect of abandoning a framework that sets goals for acceptable public debt-to-output ratios.But what if Truss and Kwarteng are right on this one? To be precise, what if there is no good reason to think that any particular debt level is too high — and whatever it is, it should be treated with benign neglect?Heretical as that view may sound, there are some powerful arguments in its favour. In 2015, an IMF discussion note, explicitly concluded that in countries not facing prohibitive interest rates, “policies to deliberately pay down debt are normatively undesirable”. The reason is that taxation over and above the amount needed to fund public spending causes more harm to the economy than the existence of legacy debt. Debt inherited from crises should instead simply be left where it has ended up, and allowed to be gradually eroded by growth.And three years ago Olivier Blanchard gave a prestigious lecture to the American Economic Association in which he argued that the financial and welfare cost of public debt was likely to be small if not negative. That need not mean governments should borrow more, but it also entails that it may not be necessary to tighten the public budget for the purpose of bringing down debt. I would highlight that Blanchard’s analysis was conservative in that it accepts the premise that public borrowing could crowd out private investment. If public spending boosts private investment — by increasing confidence in strong demand or expectations of good infrastructure — that strengthens the case further.Given the insights of the IMF and of Blanchard, what can we say about what debt levels should be? It seems to me that the answer is “nothing”, because the implication of their analysis is that there is no “optimal” debt level. What these arguments point to, then, is what in technical terms is called to “be chill about public debt levels”.Which is anathema to the EU’s fiscal rules, where the notion of “fiscal sustainability” is central to both their letter and their spirit. In practice, fiscal sustainability is understood by policymakers as a sense that public debt can be “too high”. But the arguments above should make us rethink whether “sustainability” makes any sense when applied to debt levels rather than budget deficits.To be clear, there is certainly an issue of the financial stability of public debt. New debt has to be funded, and old debt has to be rolled over. The eurozone learnt from its sovereign debt crisis not to take these for granted. But market funding is a matter of interest rates and refinancing schedules, which only indirectly relate to the levels of debt outstanding. And that relation is something a government can influence through prudent maturity management (as Blanchard’s lecture also points out). As an illustration, consider stretching out sovereign bond issuances evenly over 100 years. Even a highly indebted government would never face more than a couple of per cent of output in refinancing. And interest rates could be locked in for equally long. It is a great shame that governments did not vastly extend their debt maturities when interest rates were at rock bottom. But even today, most rich countries face long-term rates below their long-term nominal growth rate. The implication is that while governments should worry about maturity management, deficits in relation to the economic cycle, and above all how they tax and spend, they would do well to forget any targets for debt levels. That will not happen in talks on the EU’s fiscal rule reforms. But the reforms would be better if it did.Here is a yet more provocative thought: there may be types of inflation we should also treat with benign neglect. It is no surprise to Free Lunch readers that I think central banks are mistaken in their zeal to increase borrowing costs in response to current high inflation. In a nutshell, my view is that inflation in rich countries is not driven by excessive demand — which is near normal levels thanks to the strong policies to get us out of the pandemic shutdown of our economies — but by two or three other phenomena. In early 2021, it was the enormous sectoral shift in US consumer spending (from services to goods) that meant goods production could not keep up, especially with supply-chain disruption added in. Since late 2021, it has been Russian president Vladimir Putin’s bellicose squeeze on energy markets (which started by throttling gas reserve replenishments in Europe).I have argued that there is little central banks can do to contain these pressures in the short run, and that there is no need to do so in the longer run because the shocks will dissipate by themselves. Above all, it cannot be an economically optimal response to shocks hitting output and jobs growth to deliberately depress them even further. But what, then, should one do with such inflation? Maybe — like with debt levels — there is a case for benign neglect here, too. If I am right that trying to rein in this particular type of inflation will only make things worse, then it’s better to leave things alone. But what if — as the best argument for tightening assumes — expectations of higher inflation get entrenched, and that causes inflation to be permanently higher?What if, indeed? Well, it depends on how much higher. Take the US. Expectations for inflation three years hence have gone at most 1 to 1.5 percentage points above where they were in the five years before the pandemic; at five-year, 10- and 30-year horizons the increases are much smaller. In other words, the expectations central bankers worry about are for current inflation to come down fast, but perhaps to slightly higher rates than before. Since expectations were consistent with somewhat below 2 per cent before, if these new ones were entrenched, we might be risking a 3 per cent inflation rate. But since expectations visibly follow current price movements, they could likely settle even lower once inflation slows. So what if we had 3 per cent inflation for a while? The scourges of central banks’ supposed error have not done much to spell out, let alone quantify, what the cost would be. But what we do know is that more supply shocks are likely to happen. And some of those will be positive ones, which increase growth and reduce inflation. A policy of benign neglect — but to be clear, for these types of shocks, not traditional demand-driven inflation shocks — would amount to this: allowing inflation expectations to drift up a bit when external supply shocks raise prices (and not kill the economy to try to stop this), and then waiting for positive supply shocks to let them drift down (again without trying too hard to stop that). I am not pretending to have offered arguments that this would be the wisest policy. This is merely a first stab at answering the question “what would you do”. But it spells out what an alternative to the current policy would be. And given that current policy involves the loss of millions of jobs and billions in incomes, it rather behoves its advocates to clarify why they think the alternative of benign neglect is so much worse. Other readablesAnother reason to treat inflation with benign neglect — or even welcome it — comes courtesy of economist Brad DeLong, who argues that wage and price inflation have to be temporarily high to ease the structural transformation the pandemic forced the economy into.James Plunkett has published the first essay in a series on social justice in the digital age, aiming to enlighten us about what the “invidious hand” of platform companies really does.Norway’s sovereign wealth fund has a new climate action plan, and wants all the companies it invests in to reach net zero emissions by 2050.FT Alphaville has tried to measure the monetary value of joining The Queue — or of giving up one’s place in it.Numbers newsAfter raising rates by another 0.75 percentage points on Wednesday, the by now uber-hawkish Federal Reserve expects them to reach 4.4 per cent by the end of the year.

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As European central banks follow suit, the era of negative interest rates is drawing to a close.Claire Jones highlights the global backlash from the risks US monetary tightening imposes on emerging economies. More

Hello everyone! This is Ting-Fang from Taipei. This week, I had a chance to tune into leading US chipmaker Nvidia’s annual technology conference, where it unveiled its latest chip platform for autonomous driving.Nvidia described its Drive Thor, an automotive-grade system-on-chip, as capable of providing level 4 self-driving capabilities. The most advanced cars on the market are still at level 2 and level 3, meaning they can drive themselves only under limited circumstances.But just as interesting as Nvidia’s tech is its list of clients. The first customer for the Drive Thor will be Zeekr, the premium EV brand of major Chinese carmaker Geely. Executives from several other Chinese EV makers roundly applauded the chip’s debut, with one hailing its “unprecedented level” of AI capabilities.Drive Thor’s enthusiastic reception underscores China’s hunger to keep using cutting-edge American chipsets in its self-driving cars and other products, even as Washington further restricts access to advanced tech.Huawei keeps fightingPerhaps no other company in China is battling so urgently to decouple from the US. Formerly a major smartphone maker, Huawei is banned from using American technology without specific approval, and it has lost access to some of its most important global partners, including TSMC of Taiwan.The Chinese company’s latest attempt to overcome these headwinds is to put its own chips for telecom equipment back into production as early as this year, Nikkei Asia’s Cheng Ting-Fang writes.For that, Huawei has partnered with multiple chipmakers across China, with a focus on those that are also blacklisted by the US. To speed up the process, Huawei has even redesigned its core chips to be produced with older 28-nanometer process technology as it’s easier to find such production domestically.The company is also courting international allies on its path to decoupling from the west. Huawei moved its annual tech showcase to Bangkok this year, where it was warmly welcomed by officials from Thailand, Indonesia, the Philippines and Bangladesh. All four countries have allowed local mobile network operators to source 5G equipment from Huawei, despite security warnings and bans issued by the US and European governments.China’s chip cool-downChina’s semiconductor sector, suffering from a stuttering economy and redirected industrial funding, is having to scale back its hiring plans despite a talent shortage, writes the Financial Times’ Qianer Liu.The shortfall in the number of chip workers will exceed 250,000 this year and reach 300,000 by 2025, according to the China Semiconductor Association. Spurred by this huge skill gap and support from Beijing, China’s chip companies had been hiring workers switching careers but found that underqualified employees created more problems than they solved.Now, these companies are cutting back on their hiring as the economy deteriorates and financing becomes harder to secure. Startups have been particularly hard hit, especially compared to large state-owned enterprises, and are hiring far fewer staff to ensure survival. Business data provider Qichacha revealed that more than 3,400 Chinese chip-related companies have collapsed so far this year, surpassing the total for all of 2021.China has been trying for years to accelerate the development of its homegrown chip sector to decrease its reliance on imports. But the chaotic and cooling job market should be alarming China’s leadership, as it appears to be extending the time it will take the country to reach semiconductor self-sufficiency.Auditing the auditsUS inspectors are in Hong Kong to look into the audit records of selected US-listed Chinese companies. Their arrival followed a deal between Washington and Beijing to settle a long-running dispute over such companies. The US insists its officials be given access to their audit accounts, while China deems the records too sensitive to be shared.The recently arrived inspectors could decide to look into any of the 200 or so Chinese companies with American listings, including top tech companies like Alibaba Group Holding and JD.com, Nikkei Asia’s Cissy Zhou writes. If they are not satisfied with what they see, forced delisting of Chinese companies could follow.Given the tensions between Beijing and Washington, will the world’s biggest financial market continue to attract Chinese listings? Last year, 38 Chinese companies began trading shares in the US, taking in over $13bn in combined IPO proceeds. This year, 10 have done so, raising a mere $400mn in total.Vietnam’s uphill battleVietnam has a tech manufacturing sector that many countries would be proud of. High-tech goods accounted for over 40 per cent of its exports in 2020, and the more than 20 Apple suppliers operating manufacturing facilities there play a vital role in producing AirPods and the Apple Watch. The country is also a key production base for Samsung Electronics’ smartphone business.Yet none of these facilities are operated by Vietnamese suppliers, highlighting the dilemma facing the country, writes Nikkei Asia’s Lien Hoang. While US-China tensions have helped fuel a boom in local tech investment, Vietnam is struggling to foster a homegrown high-tech sector.The south-east Asian country is hoping to follow in the footsteps of China. Its larger neighbour, once dubbed the world’s factory, has leveraged its own manufacturing might to create a thriving domestic tech sector. Chinese-based companies now make up the single largest group on Apple’s official list of suppliers, surpassing Taiwan and Japan.The question is whether Vietnam can unleash its own potential, or whether it will languish lower down the ladder as an “assembly platform” valued primarily for its cheap labour.Suggested readsTencent chooses health over wealth in gaming return (FT)Thailand and Vietnam emerge as Asean crypto trading hotspots (Nikkei Asia)China’s livestream king resurfaces after mystery disappearance (Nikkei Asia)Blockchain gaming groups try to lose ‘dodgy’ tag in Japan (FT)Taiwan’s Appier eyes US expansion with AI marketing software (Nikkei Asia)White House sounds alert on inbound Chinese investment (FT)Philippines’ top payment app GCash to offer stock trading service (Nikkei Asia)Liz Truss plans last-ditch bid to persuade SoftBank to list Arm in London (FT)Fortress China: Xi Jinping’s plan for economic independence (FT)Toyota, Honda to pay connected-car patent fees to telecoms (Nikkei Asia)Sign up here at Nikkei Asia to receive #techAsia each week. The editorial team can be reached at [email protected] More

Good morning. On a day when Donald Trump was sued for fraud and Vladimir Putin called up extra troops, all anyone in finance could talk about was the Federal Reserve. We join in, below. Email us: [email protected] and [email protected] FedThe Fed’s summary of economic projections (SEP) for September looked very different from the last one, released three months ago. At a high level of abstraction, the change is not surprising. The new SEP just put into words the bluntly and emphatically hawkish message from chair Jay Powell in, for example, his Jackson Hole speech a month ago. But words leave more room for interpretation, and therefore misunderstanding, than numbers do. There were three particularly big changes:2022 GDP growth was downgraded from 1.7 per cent to 0.2 per cent. 2023 got a half-point haircut to 1.2 per cent. The projected policy rate for year-end 2023 was upgraded from 3.8 per cent to 4.6 per cent — a shade higher than the 4.5 per cent peak policy rate the futures market had anticipated would arrive for the middle of that year.The 2023 unemployment projection went from 3.9 per cent to 4.4 per cent. This is meaty stuff, and consistent with the repeated message of yesterday’s press conference, which was that rates are not just going to be high, but are going to be high for long enough to hurt. A taste: Over the next three years, the median unemployment rate [projection] runs above the median estimate of its longer-run normal level . . . The historical record cautions strongly against prematurely loosening policy . . . Reducing inflation is likely to require a sustained period of below-trend growth and it will very likely be some softening of labour market conditions . . . We’ll need to bring our funds rate to a restrictive level and to keep it there for some time.And so on. Judging by the market reaction, it was all a touch more hawkish than expected. The futures market nudged its expectations for the peak policy rate, and pushed the peak out from March to May. The bond market took it all in stride, with a little move up in the short end and a little move down in the long end (tougher policy today, lower inflation tomorrow). The stock market didn’t like the show much; the S&P 500 fell 1.7 per cent. But it’s hard to read much into that move in a market that had loads of downward momentum coming in. There do remain two important disconnects between the Fed’s projections and what the market expects, however.The futures market is looking for a policy rate of 4.2 per cent at the end of next year; the Fed is looking for 4.6. That’s big: it appears that the market expects core inflation to fall enough in the next 12 months for the Fed to start cutting. The Fed thinks otherwise. But take Powell at his word. Speaking of the rate projections yesterday, he said that they “do not represent a committee decision or plan, and no one knows where the economy will be a year or more from now”. That’s the fact, Jack. The Fed’s projections don’t say, here is what we will do. They say, here is what we are prepared to do, if core inflation stays above 3 per cent. Whether or not core inflation does that, well, your guess is quite literally as good as theirs.The second disconnect is more substantive. The SEP projects unemployment to rise 0.6 percentage points between the end of 2022 and the end of 2023, to 4.4 per cent. This is significant. One well-known recession indicator, the Sahm Rule, starts blinking red after a move in unemployment of 0.5 percentage points or more over a 12-month period. At the same time, though, the SEP calls for GDP to grow a non-recessionary 1.2 per cent in 2023. A lot of pundits (Unhedged included) can’t figure out how these two things fit together. Here, for example, is Andrzej Skiba of RBC Global Asset Management:We struggle to understand how the Fed expects unemployment to move upwards and rates head beyond 4.5 per cent, while US growth remaining in 1.2-1.7 per cent range in 23-24’. We think that with rates now expected to peak meaningfully above 4 per cent US recession next year is likely.RBC does not struggle alone. Here is Aneta Markowska of Jefferies:Unemployment has never increased by more than 0.5 per cent without causing a recession, so the FOMC is betting that time is different . . . since it’s extremely unlikely that the Fed’s forecast comes to fruition, we see little value in the FOMC’s rate projections beyond next year.But even if you think the Fed is too optimistic about the chances of the soft landing, it would be foolhardy to doubt its commitment to keep raising rates — to say nothing of cutting them — until it sees much better inflation data and significantly tighter financial conditions. Rick Rieder of BlackRock points out, rightly, that the next step is not a Fed pivot, but a Fed pause: The question today, then, becomes how close are we to a policy resting place, whereby the Fed could wait for restrictive policy to work its way through the economy over coming months, allowing the now famous “long and variable lags” to tamp down inflationHow close to that are we? Powell made a telling comment in the press conference that “we believe that we need to raise our policy stance overall to a level that is restrictive” and that, among other things, this means “you would see positive real rates across the yield curve and that is an important consideration”.How close are we to positive real rates across the board? At the short end of the rates spectrum, an intuitive way to see this is to look at the real policy rate, that is, the federal funds rate minus the Fed’s preferred inflation measure, core personal consumption expenditure. A fed funds rate at zero plus surging inflation pushed the real policy rate down rapidly. We are still in negative territory, but there has been a major change in trajectory (and the Fed foresees more of the same).

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At the middle and long end of the curve, real rates are in positive territory if you use inflation-protected Treasuries, or nominal Treasuries less survey inflation expectations, as the benchmark. Subtracting core PCE from nominal Treasuries, however, still renders a negative real rate. Core PCE is running at 4.6 per cent annually, and the 10-year Treasury is at 3.5. Don’t count on a Fed pause, much less a pivot, until that gap is far tighter. (Armstrong & Wu)One good readWas anyone actually cooking their chicken in NyQuil? More

Fed chair Jay Powell has long contended that the US central bank could tame rampant inflation without tipping the world’s largest economy into a recession, saying as recently as July that he and his colleagues are “not trying to have a recession, and we don’t think we have to”.On Wednesday, however, that optimism evaporated as Powell delivered one of his gloomiest pronouncements to date about the economic outlook amid what has become the most aggressive campaign to tighten monetary policy since 1981.“We have got to get inflation behind us. I wish there were a painless way to do that,” he said at the press conference following the Fed’s decision to further extend its recent string of supersized rate rises. “There isn’t.”Powell’s comments came as the US central bank delivered a third consecutive 0.75 percentage point increase to its benchmark policy rate, a move that lifted the federal funds rate to a new target range of 3 per cent to 3.25 per cent. Economists interpreted the message as an admission that Powell’s previously stated goal of achieving a “soft landing”, whereby the central bank can cool the economy without excessive job losses, was becoming increasingly unrealistic. The Fed chair himself admitted that the odds of that outcome “diminish” the longer restrictive rates are sustained.But what they also found striking about Powell’s comments was the uncertainty he expressed about just how severe a recession could result from the Fed’s efforts to root out inflation.“The news from the press conference is the chair’s acknowledgment that it’s not really just about weak growth,” said Jonathan Pingle, the chief US economist at UBS who previously worked at the Fed. “There is a very real risk of recession and he displays a very real willingness to go through with a hard landing.”Powell’s stark assessment jolted financial markets, with US stocks erasing an earlier rally to end the day down nearly 2 per cent. The yield on the two-year Treasury note, which is highly sensitive to changes in the outlook for monetary policy, surged to a roughly 15-year high of 4.1 per cent.Powell’s message was reinforced by a revised set of economic projections published by the Fed on Wednesday, which compiled officials’ individual forecasts for the fed funds rate, growth, inflation and unemployment to the end of 2025. Officials project rates to rise as high as 4.4 per cent by the end of the year before peaking at 4.6 per cent in 2023. Over that period, the median estimate has the unemployment rate rising to 4.4 per cent as growth slows to 0.2 per cent this year and settles at 1.2 per cent next year. “Core” inflation, which strips out volatile items such as energy and food, is expected to drop from 4.5 per cent by the end of the year to 3.1 per cent and 2.3 per cent in 2023 and 2024, respectively. In 2025, it is expected to remain just above the Fed’s 2 per cent target.The revisions — which still stopped short of forecasting an outright economic contraction — marked a sea change from the previous estimates published in June. Those showed a much more benign path for rate rises, far less unemployment and more robust growth even as inflation slowed.

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“They’ve written down a forecast that really pretty implicitly has a recession,” said Vincent Reinhart, who worked at the Fed for more than 20 years and is now at BNY Mellon. He added that when the unemployment rate rises as significantly as policymakers now expect it to, history suggests that an economic downturn takes hold. Moreover, Reinhart said the unemployment rate may need to rise higher than what is currently anticipated for the Fed to achieve its price stability goal.“They admitted they have a lot of work to do, they admitted there would be pain associated with it, but they did try to downplay the pain,” he said of the new economic projections.Many economists warn getting inflation back under control may require the unemployment rate rising beyond 5 per cent, with a group of academic economists recently suggesting that it may need to exceed 7 per cent. Some also warn the fed funds rate will eventually eclipse Fed officials’ median forecast, peaking around 5 per cent instead.Much will depend on what happens to inflation, which has proven far more persistent and difficult to root out than expected.Powell said the Fed will be closely monitoring incoming data to determine whether it can slow its aggressive pace of 0.75 percentage point rate rises. But according to Gargi Chaudhuri at BlackRock, it is unlikely that both inflation and the labour market will dip sufficiently to warrant a smaller increase at the November meeting.

To pause the tightening cycle altogether, Powell said the central bank would need to be “confident” that inflation is coming down, reiterating the hawkish message he delivered to the annual gathering of central bankers last month in Jackson Hole, Wyoming, that the Fed will “keep at it until the job is done”.Peter Hooper, a Fed veteran of almost three decades who is now the global head of economic research at Deutsche Bank, said that pledge will become increasingly difficult to stick to as job losses begin to mount and the economic data take a more decisive turn.“The Fed is in a tough spot here politically,” he said. “They’ve told us it’s going to be painful, but the minute you start getting specific about how much of a recession it is going to take, it starts to generate a lot of opposition.” More

As soon as 22-year-old Cáit Fitzgerald finishes her studies, she intends to “get out” of her native Ireland. “I can’t afford anything here,” she says. “There’s not much hope for people our age.”Ireland’s long history of emigration has seen an estimated 10mn people leave since 1800. While in the past many were forced out by famines and economic crises, young people in recent years have been drawn to jobs abroad or the freedoms of living in more open societies.But now, the tone is changing again from pull to push. Rather than the lure of foreign opportunities, young people complain that the soaring cost of living — and in particular housing — is pricing them out of their own country.“I don’t know anyone planning on staying,” said Fitzgerald, who wants to move to Australia after she graduates. “It’s a vicious cycle.”According to a new poll commissioned by the National Youth Council of Ireland, seven out of 10 Irish people aged 18-24 are contemplating moving abroad in search of a better quality of life. A similar poll in 2012 found just 51 per cent were contemplating emigrating, the NYCI said.Student Cáit Fitzgerald wants to move to Australia after she graduates. ‘I don’t know anyone planning on staying,’ she says © Jude Webber/FT“Ireland has such a long history of emigration, but what is happening now is different, it’s a different type of crisis,” said Mary Gilmartin, professor of geography at Maynooth University and an expert on contemporary migration.“Whether or not young people do actually end up leaving, “the intention [to emigrate] is certainly the highest I’ve seen,” she added.Official data does not yet confirm an exodus. The number of Irish people emigrating rose 21 per cent in the year to April 2022, but that is slightly below the pre-Covid level, according to the Central Statistics Office. It does not break the figures down by age.Ireland had big waves of emigration in the 1950s, the 1970s and after the financial crash of 2008. Destinations included the UK, the US, Australia, New Zealand and Dubai. All were driven by a lack of jobs or economic crisis. Today, Ireland is far richer, has a massive tax windfall from the tech companies that have become the backbone of its economy, and a record 2.55mn people have jobs. Youth unemployment is the lowest in the EU.But not all are in jobs of sufficient quality to join what Leo Varadkar, the deputy prime minister who will become prime minister in December, calls Ireland’s “homeowning democracy”.Student Rachel Richards works in a restaurant to pay the €700 per month to rent a room in a shared house © Jude Webber/FT“My parents bought their first house when they were 26,” said Rachel Richards, a 24-year-old student who works in a restaurant to pay the €700 per month to rent a room in a shared house and €5,000 a year for college.“I’m stuck here for two years [to finish my psychology course]. After that, I’ll be gone. There’ll be no chance I can buy a house. It’s just insane.”Property prices have now surpassed the peak of the Celtic Tiger boom in April 2007, the Central Statistics Office confirmed last week, with the median price of a home in the 12 months to July nearly €300,000. Ireland is also the EU’s most expensive country, with housing costs as much as 84 per cent higher than the bloc’s average between 2010 and 2020, EU data show.The asking prices for three bedroom, semi-detached houses has risen sharply nationwide — as much as 45 per cent in County Roscommon in central Ireland in the second quarter compared with the same period last year, according to a report by stockbrokers Davy for MyHome.ie, a property site.Rents are also rising across the country — new rent charges are up 9 per cent in the first quarter compared with the previous year — driven by a housing supply crunch.“I don’t see myself staying here, housing prices are just too much,” said Ben Murray, 19, who has recently left school. “I was working in a coffee shop over the summer, but I wasn’t making nearly enough to even rent.”Nathan Mannion, head of exhibitions and programmes at Ireland’s emigration museum, Epic, said the only historical precedent for the situation today took place in 1700s Ulster, when “land leases were auctioned to the highest bidder and a huge number of people left”.But some young people remain trapped.In working class or rural areas, “our young people wouldn’t even see emigration as a possibility,” said Dannielle McKenna, project manager of the Rialto Youth Project.“The cost of living is pushing them further into poverty,” she said. “A whole generation of young people is being failed.”Barra Roantree, an economist at independent think-tank the Economic and Social Research Institute, said the crisis for young people “all links back to the housing situation”.

And while employment overall bounced back after the financial crisis, by the time the Covid-19 pandemic struck, employment rates for people in their 20s and early 30s — despite outperforming other EU nations — had still not fully recovered and their real earnings were no better than people born in the 1960s and 1970s. “We’ve [already] had a lost decade for younger adults,” he said.Paul Gordon, NYCI director of policy and advocacy, called for the Irish government to provide support “so that young people can remain in this country” when it publishes its 2023 Budget on September 27.For some, the decision has already been made. After 12 years in a house-share, 30-year-old Ian Connelly is planning to move with his partner to France next year, despite just having opened a coffee shop in Dublin, which he will run remotely.“For €700 a month, I can rent a two-bedroom apartment in Toulouse,” he said. “That’s enough for me.” More

In March 2021, when the US Federal Reserve was still buying $120bn-worth of securities a month, Brazil’s central bankers raised their benchmark rate by 0.75 percentage points on the back of concerns that a surge in global commodity prices would trigger inflation. It took another year for the US central bank to catch on to the fact that price pressures would prove far from transitory and finally raise the federal funds target from near zero. By then, Brazil had increased borrowing costs to 11.75 per cent. Time has proven Brazil’s monetary guardians right. Yet the Fed’s tardiness in keeping inflation in check is unlikely to leave the South American country — or, indeed, anywhere — unscathed. The Fed, which on Wednesday made its third 75 basis point increase in a row, is playing catch-up. While that may be the best course of action for the US economy, its aggression is triggering what Maurice Obstfeld, of the Peterson Institute for International Economics, labels “beggar-thy-neighbour” policies. The consequences of the Fed‘s mistakes are effectively exported from the US, burdening America‘s trade partners. Higher US rates have bolstered the dollar, exacerbating inflation elsewhere by raising the cost of commodities which are, more often than not, priced in the greenback. A “reverse currency war” is in full flow, with monetary authorities across the world now ditching their standard quarter-point increases in favour of 50, 75 and — in the case of Sweden and Canada — 100 basis point moves in order to stem dollar declines. Rate rises, while necessary to quell inflation, have become so aggressive the World Bank warned last week they risk sending the global economy into a devastating recession that would leave the world’s poorest countries at risk of collapse. The World Bank described the situation now as akin to the early 1980s, when the surge in global interest rates and slump in world trade sparked the Latin American debt crisis and a wave of defaults in sub-Saharan Africa. That comparison rings true. Since the 2008 global financial crisis the Fed and other major market central banks have deployed wave after wave of stimulus. That left global interest rates at ultra-low levels for years on end. The result of that — plus the pandemic — is international debt levels are close to all-time highs. As financing costs rise, more and more of the world’s poorest countries are seeking support from the IMF and the World Bank. China, meanwhile, is providing emergency support worth tens of billions of dollars to the likes of Sri Lanka, Pakistan and Argentina — creating uneasiness among western creditors, who view the bailouts as opaque and argue they leave states in hock to Beijing. Some economists want a greater awareness of the spillover effects of its monetary policy and more international co-operation. Raghuram Rajan, a professor at the University of Chicago’s Booth School of Business and the former head of India’s central bank, said: “If a poorer country over borrows in the good times because global interest rates are low, what responsibility does the US have for that? Does it have none? We need to find a middle ground.” Yet, it is difficult to see what the US central bank can do but raise rates. When asked about the global repercussions of the Fed’s actions on Wednesday, chair Jay Powell flagged that he, while aware of what was going on elsewhere, had a mandate to lower domestic inflation and protect domestic jobs. It is clear from its economic projections the Fed believes the best way to fulfil that mandate is to impose another 75 basis point increase at its next meeting, followed by a rise of a further 50 basis points before the year ends. As Mohamed El-Erian, president of Queens’ College, Cambridge, acknowledges, the consequence of the Fed’s reluctance to remove its aggressive monetary policy support until it was too late has placed us “deep into the world of second and third-best solutions”. Harmful as the repercussions might be, there are no courses of action that are not without pernicious side effects. Daniela Gabor, a professor at the University of the West of England, has referred to an era of Zugzwang central banking. The toxic combination of lingering inflation and slowing growth has left officials facing a situation common to chess players down on their luck — stuck with nothing but bad moves to play. With inflation in the US still looking distinctly sticky, increasing borrowing costs looks like the least worst. More

WASHINGTON (Reuters) -Federal Reserve Chair Jerome Powell vowed on Wednesday that he and his fellow policymakers would “keep at” their battle to beat down inflation, as the U.S. central bank hiked interest rates by three-quarters of a percentage point for a third straight time and signaled that borrowing costs would keep rising this year.In a sobering new set of projections, the Fed foresees its policy rate rising at a faster pace and to a higher level than expected, the economy slowing to a crawl, and unemployment rising to a degree historically associated with recessions.Powell was blunt about the “pain” to come, citing rising joblessness and singling out the housing market, a persistent source of rising consumer inflation, as being likely in need of a “correction.” Earlier on Wednesday, the National Association of Realtors reported that U.S. existing home sales dropped for a seventh straight month in August. The United States has had a “red hot housing market … There was a big imbalance,” Powell said in a news conference after Fed policymakers unanimously agreed to raise the central bank’s benchmark overnight interest rate to a range of 3.00%-3.25%. “What we need is supply and demand to get better aligned … We probably in the housing market have to go through a correction to get back to that place.”That theme, of a continuing mismatch between U.S. demand for goods and services and the ability of the country to produce or import them, ran through a briefing in which Powell stuck with the hawkish tone set during his remarks last month at the Jackson Hole central banking conference in Wyoming.Recent inflation data has shown little to no improvement despite the Fed’s aggressive tightening – it also announced 75-basis-point rate hikes in June and July – and the labor market remains robust with wages increasing as well.The federal funds rate projected for the end of this year signals another 1.25 percentage points in rate hikes to come in the Fed’s two remaining policy meetings in 2022, a level that implies another 75-basis-point increase in the offing. “The committee is strongly committed to returning inflation to its 2% objective,” the central bank’s rate-setting Federal Open Market Committee said in its policy statement after the end of a two-day policy meeting.The Fed “anticipates that ongoing increases in the target range will be appropriate.”GROWTH SLOWDOWN The Fed’s target policy rate is now at its highest level since 2008 – and new projections show it rising to the 4.25%-4.50% range by the end of this year and ending 2023 at 4.50%-4.75%.Powell said the indicated path of rates showed the Fed was “strongly resolved” to bring down inflation from the highest levels in four decades and that officials would “keep at it until the job is done” even at the risk of unemployment rising and growth slowing to a stall.”We have got to get inflation behind us,” Powell told reporters. “I wish there were a painless way to do that. There isn’t.”Inflation by the Fed’s preferred measure has been running at more than three times the central bank’s target. The new projections put it on a slow path back to 2% in 2025, an extended Fed battle to quell the highest bout of inflation since the 1980s, and one that potentially pushes the economy to the borderline of a recession.The Fed said that “recent indicators point to modest growth in spending and production,” but the new projections put year-end economic growth for 2022 at 0.2%, rising to 1.2% in 2023, well below the economy’s potential. The unemployment rate, currently at 3.7%, is projected to rise to 3.8% this year and to 4.4% in 2023. That would be above the half-percentage-point rise in unemployment that has been associated with past recessions.”The Fed was late to recognize inflation, late to start raising interest rates, and late to start unwinding bond purchases. They’ve been playing catch-up ever since. And they’re not done yet,” said Greg McBride, chief financial analyst at Bankrate.U.S. stocks, already mired in a bear market over concerns about the Fed’s monetary policy tightening, ended the day sharply lower, with the S&P 500 index skidding 1.8%.In the U.S. Treasury market, which plays a key role in the transmission of Fed policy decisions into the real economy, yields on the 2-year note vaulted over the 4% mark, their highest levels since 2007.The dollar hit a fresh two-decade high against a basket of currencies, gaining more than 1%. The U.S. currency’s strength – it has appreciated by more than 16% on a year-to-date basis – has stoked concern at central banks around the world about potential exchange rate and other financial shocks.Some are not even trying to match the Fed’s blistering pace of tightening, with the Bank of Japan on Thursday expected to hold fast to its ultra-easy policy and keep its policy rate at minus 0.1%, likely leaving it as the last major monetary policy authority in the world with a negative policy rate.Others are making an effort to stay somewhat abreast of the Fed. The Bank of England, for example, is expected to lift its policy rate by at least half a percentage point on Thursday. More