Economy

PRAGUE (Reuters) – European Central Bank policymakers see a rising risk that they will have to raise their key interest rate to 2% or more to curb record-high inflation in the euro zone despite a likely recession, sources told Reuters.With inflation hitting 9.1% in August and seen above the ECB’s 2% target for two years to come, the central bank has been raising its interest rates at record speed and urging governments to help bring down energy bills that have ballooned since Russia invaded Ukraine. The ECB raised its deposit rate from zero to 0.75% on Thursday and President Christine Lagarde guided for another two or three hikes, saying rates were still far away from a level that will bring inflation back to 2%.Five sources close to the matter said many policymakers saw a growing probability that they will need to take the rate into “restrictive territory”, jargon for a level of rates that causes the economy to slow, at 2% or above.The sources, who spoke on condition of anonymity because policy deliberations are private, said this would most likely happen if the ECB’s first inflation projection for 2025, due to be published in December, is still above 2%. An ECB spokesman declined to comment.The ECB currently sees inflation at 2.3% in 2024, though one source said an internal forecast which was presented at Thursday’s meeting put it closer to 2% after taking into account the latest gas prices.Dutch central bank governor Klaas Knot and Belgium’s Pierre Wunsch were the first to openly talk about going into restrictive territory late last month, at a time when most of their colleagues felt interest rates just needed to go back to between 1% and 2%.The sources said policymakers were bracing for a recession this winter and weaker economic growth next year than the ECB’s official projection of 0.9%. But some took comfort from the strong labour market, which should cushion the impact of the higher rates, they added.At Thursday’s meeting, policymakers also began a discussion about the tens of billions of euros that the ECB is liable to pay out to banks on their excess reserves now that the deposit rate is positive again, the sources said.Policymakers judged that current proposals, including one for a “reverse tiering system” that caps remuneration on some reserves, needed more work, the sources said. One added a decision might still come before the ECB’s next policy meeting on Oct 27. More

PRAGUE (Reuters) – The European Commission will present in the second half of October proposed changes to European Union fiscal rules that are likely to offer countries individual debt reduction paths, Commission Vice President Valdis Dombrovskis said on Saturday.At a news conference after EU finance ministers held talks in Prague, Dombrovskis said the main goal of the rules, designed to safeguard the value of the euro, would remain making sure public debt was sustainable. “This will require fiscal adjustment, reforms as well as investments,” Dombrovskis said, signalling government investment was likely get some more attention in the course of the reform.”Those three elements should all be combined so as to achieve a realistic, gradual and sustained reduction in public debt ratios,” he said.EU rules say public debt must be below 60% of gross domestic product (GDP) and government deficits below 3% of GDP.But the pandemic left many countries with debt well above 100% of GDP, with Greece at around 185% and Italy around 150%. On the other hand, Estonia has a debt of only 18.1%, Luxembourg 24.4% and Lithuania 44.3%.”Given divergent debt levels across Member States, there cannot be a one-size-fits-all approach,” Dombrovskis said. “There can be more leeway for Member States, but within a common set of rules,” he said.This would be a departure from the current rule that all countries have to cut their debt every year by one twentieth of the excess above 60% of GDP – a requirement that is far too ambitious for the high debt countries.”Rules have to be clear, and they have to be enforceable, that means they have to be realistic,” Czech Finance Minister Zbynek Stanjura, who hosted the meeting, said. “So whatever changes we make, we have to work out what is realistic.”In a nod towards Germany and some northern EU countries, the Commission will propose stronger enforcement of the rules in cases of non-compliance, Dombrovskis said, as past practice showed adhering to the rules was not a priority for some.The Commission will also propose simplifying the rules by focusing on a single observable indicator, such as the expenditure benchmark, Dombrovskis said.The expenditure benchmark is a rule that allows governments to increase spending each year by the rate of the economy’s potential growth – the rate at which an economy grows without generating excess inflation. This way, when the economy is growing faster than potential and overheating, the lower spending helps to cool it. When the economy is growing below potential, the higher government spending helps it catch up. More

A spike in natural gas prices following Russia’s invasion of Ukraine has sparked a major energy crisis across Europe, prompting some governments to push through multi-billion-euro packages to protect homes and utilities from rising costs. Greece has already spent about 8 billion euros ($8 billion) to subsidise power bills since last year.Mitsotakis, a conservative who faces a parliamentary election in 2023, will pledge to maintain the support until at least year-end during his annual economic policy speech from the northern city of Thessaloniki, the source said, speaking on condition of anonymity.At an emergency meeting on Friday, EU energy ministers tasked Brussels with drafting proposals within a few days to cap the revenues of non-gas energy producers and help power firms stay afloat, as they seek to protect citizens from sizzling prices. Greece, the euro zone’s most indebted country, emerged from its third international bailout in 2018 after a decade-long financial crisis and has relied solely on markets to cover its borrowing needs since then.Last month, the country exited its creditors’ so-called enhanced surveillance, which means greater freedom in implementing economic policy.Helped by strong growth thanks to better-than-expected tourism revenue this year, the government has decided to use any additional fiscal room to fund power bill subsidies.Mitsotakis is also expected to announce a six-pronged plan to help young people rent or buy a house.($1 = 0.9961 euros) More

Early in the pandemic, Alondra Barajas had a temporary job for the Census Bureau, doing phone work from the two-bedroom apartment she shared with her mother and four younger siblings. When that job ended in late 2020, she struggled to find employment.But Ms. Barajas learned from an ad on Instagram that she might qualify for an unusual form of assistance: monthly payments of $1,000 for a year.Since she started receiving the funds this year — while caring for her newborn, searching for a job and looking for a new place to stay — her outlook has seemed brighter.“It’s helped me from hitting rock bottom,” she said.The payments are part of a pilot program from the city of Los Angeles, one of the nation’s largest experiments with a guaranteed income. The idea is that the best way to close the wealth gap and give people the opportunity to build a more stable life is to provide unrestricted cash payments to some of the most vulnerable Americans.The concept, sometimes referred to as universal basic income, has had advocates for decades. Andrew Yang made it a centerpiece of his 2020 Democratic presidential campaign. At the same time, detractors have long argued that the approach incentivizes people not to work. Still, it is gaining traction, city by city.More than 48 guaranteed income programs have been started in cities nationwide since 2020, according to Mayors for a Guaranteed Income, a network of leaders supporting such efforts at the local, state and federal levels. Some efforts are publicly funded, and others have nongovernmental support. Jack Dorsey, the former chief executive of Twitter, donated $18 million to help the initiative.California has become the epicenter of the movement. The Los Angeles program, funded primarily by the city, benefits 3,200 people who have at least one child, as well as an annual income below the federal poverty level. Several cities have moved ahead with efforts using private money: Oakland pledged to give 600 low-income families $500 for 18 months, and in San Diego, some families with young children will get $500 a month for two years.Last year, the state set aside $35 million over five years for cities to carry out pilot programs, which can use different criteria, including income level, people leaving the foster care system and residence in low-income neighborhoods. An application process for municipalities to tap into those funds is underway.Beyond California, 300 Atlanta residents who live below the federal poverty level are receiving $500 a month for a year, and in Minneapolis, 200 residents from designated low-income neighborhoods will receive $500 a month for two years. This fall, 260 people living in motels or emergency shelters in Denver will receive a $6,500 payment and will get an additional $500 a month for 11 months, with payments planned for 560 more people.Michael Tubbs, who as mayor of Stockton, Calif., put in place one of the country’s first guaranteed income programs in 2019, notes that these payments are not meant to be a sole means of income but aim to provide a buffer for people to break the cycle of poverty.Inflation F.A.Q.Card 1 of 5What is inflation? More

WASHINGTON (Reuters) -SpaceX on Friday challenged the U.S. Federal Communications Commission’s (FCC) decision to deny the space company’s satellite internet unit $885.5 million in rural broadband subsidies, calling the move “flawed” and “grossly unfair,” in a regulatory filing.The FCC last month turned down applications from billionaire Elon Musk’s SpaceX and LTD Broadband for funds that had been tentatively awarded in 2020 under the commission’s Rural Digital Opportunity Fund, a multibillion dollar program in which SpaceX was poised to receive $885.5 million to beam satellite internet to U.S. regions with little to no internet connections.”The decision appears to have been rendered in service to a clear bias towards fiber, rather than a merits-based decision to actually connect unserved Americans,” SpaceX’s senior director of satellite policy, David Goldman, wrote in a scathing appeal filed Friday evening.The FCC declined to comment.SpaceX’s Starlink, a fast-growing network of more than 3,000 satellites in low-Earth orbit, has tens of thousands of users in the U.S. so far, with consumers paying at least $599 for a user terminal and $110 a month for service.Announcing the rejection in August, FCC Chairwoman Jessica Rosenworcel said Starlink’s technology “has real promise” but that it could not meet the program’s requirements, citing data that showed a steady decline in speeds over the past year and casting the service’s price as too steep for consumers.SpaceX under the program had sought to provide 100/20 Mbps service to 642,925 locations in 35 states. The company in its appeal said the FCC erroneously evaluated Starlink’s performance.FCC commissioner Brendan Carr in a statement last month opposed the FCC’s decision and slammed the agency for rejecting the funds without a full commission vote. “To be clear, this is a decision that tells families in states across the country that they should just keep waiting on the wrong side of the digital divide even though we have the technology to improve their lives now,” Carr said. More

WILMINGTON, Del. (Reuters) – Elon Musk contended that Twitter Inc (NYSE:TWTR)’s decision to pay millions of dollars to a whistleblower it had fired gives the world’s richest person another justification for terminating his $44 billion agreement to buy the social media company.In a Friday letter to Twitter, lawyers for Musk said Twitter’s failure to seek his consent before paying $7.75 million to Peiter Zatko and his lawyers violated the merger agreement, which restricted when Twitter could make such payments.The payment, which included $7 million for Zatko, “cannot be cured,” and Musk is therefore “not required” to complete the merger, the letter said. A copy was filed with the U.S. Securities and Exchange Commission.Twitter did not immediately respond to a request for comment.It has said it was committed to completing the merger, which calls for Musk to pay $54.20 per share for the San Francisco-based company. Twitter shares closed Friday at $42.19.Zatko, known as Mudge, had been Twitter’s top security executive before being fired in January.He later told regulators that Twitter misled them and the public about its security practices and how it fights hackers and spam.Lawyers for Musk said the severance payment was made under a June 28 separation agreement between Twitter and Zatko.Musk, who also runs the electric car company Tesla (NASDAQ:TSLA) Inc, declared the merger void 10 days later, accusing Twitter of misrepresenting the prevalence of spam or bot accounts on its platform.Twitter rejected Musk’s claims and sued him to hold him to the merger, claiming he had gotten cold feet as geopolitical concerns and rising inflation rattled markets.Musk later countersued Twitter, and on Friday amended his case to incorporate Zatko’s claims, court records show.A trial in Delaware Chancery Court is scheduled to begin on Oct. 17. More

The latest forecast for surging consumer prices is 4.8 percentage points higher than the previous month’s estimate. Analysts estimated that Argentine inflation rose 6.5% in August.By next year, the South American nation’s annual inflation rate is expected to reach 84%, and drop to 63% in 2024, according to the poll.The analysts consulted by the central bank moderately raised their projection for Argentina’s economic growth this year to 3.6%, up barely 0.2 percentage points compared to last month’s poll.The third-largest economy in Latin America has long suffered from high inflation, which has been aggravated by the effects of the war between Ukraine and Russia.Poll participants also expected the average official exchange rate in Argentina in December to reach 170.11 pesos per U.S. dollar, though Argentine traders have increasingly turned to black market foreign exchange. More

NEW YORK (Reuters) – As the Federal Reserve accelerates the unwinding of its balance sheet this month, some investors worry that so-called quantitative tightening may weigh on the economy and make this year even more brutal for stocks and bonds.After roughly doubling its balance sheet to $9 trillion after the pandemic, the Fed began unloading some of the Treasuries and mortgage-backed securities it holds in June at a pace of $47.5 billion. It has announced that this month it is ramping up the pace of quantitative-tightening to $95 billion.The scale of the Fed’s unwinding is unprecedented and the effects of the central bank ending its role as a consistent, price-insensitive buyer of Treasuries has so far been hard to pinpoint in asset prices.Some investors, however, are cutting back equities or fixed income as quantitative tightening accelerates, wary that the process could combine with factors such as higher interest rates and a soaring dollar to further weigh on asset prices and hurt growth.”The economy is already in a glide path to recession and the Fed’s quickening pace in terms of QT will accelerate the decline in stock prices and increase in bond yields,” said Phil Orlando, chief equity market strategist at Federated Hermes (NYSE:FHI), who recently increased his cash allocation to a 20-year high.The Fed’s tighter monetary policy has weighed on stocks and bonds in 2022. The S&P 500 is down 14.6%, while the yield on the benchmark 10-year U.S. Treasury, which moves inversely to prices, recently stood at 3.30%, after surging 182 basis points this year.Although recent data have shown the U.S. economy has remained resilient in the face of higher interest rates, many economists believe tighter monetary policy is increasing the chances of a recession next year. The New York Fed projected in May that the central bank will shave $2.5 trillion off its holdings by 2025.Estimates vary for how this will affect the economy: Orlando, at Federated Hermes, said every $1 trillion in Fed balance sheet reduction would equate to an additional 25 basis points in implicit rate hikes. Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, estimates it could add up to 75 basis points through the end of 2023 alone. On the other end, Solomon Tadesse, head of North American Quant Strategies at Societe Generale (OTC:SCGLY), believes the Fed will ultimately cut $3.9 trillion off its balance sheet, equating to about 450 basis points in implicit rate increases. The Fed has already raised rates by 225 basis points and another 75 basis point increase is expected later this month. “It could be the ramp-up in QT that could trigger the next fall in markets,” wrote Tadesse, who believes the S&P could drop to a range of 2900-3200. Investors next week will watch August consumer price data for signs inflation has peaked. The Fed will hold its monetary policy meeting on Sept. 21.Jake Schurmeier, a portfolio manager at Harbor Capital Advisors, said reduced liquidity from tightening financial conditions is already making it more difficult to take large bond positions and will likely contribute to more volatility ahead.”It gives us pause before we make any moves,” he said. While Schurmeier finds longer-dated Treasuries attractive, he is “hesitant to add more risk until volatility has dampened down,” he said. Timothy Braude, global head of OCIO at Goldman Sachs (NYSE:GS) Asset Management, has been reducing his equity allocation in anticipation of more volatility due to the Fed’s quantitative tightening. “It’s very hard to tell which markets are going to be the most affected,” he said. To be sure, some investors doubt quantitative tightening will have an outsized effect on markets. “The increase in the pace of QT has been known since the Fed announced its QT plans in May,” strategists at UBS Global Wealth Management wrote on Thursday. “However, when combined with a hawkish Fed, market sentiment focuses on the higher pace even though the impact to the marketplace over the long term is not material.”The energy crisis in Europe, the pace and duration of the Fed’s interest rate hikes, and a potential U.S. recession are likely to trump quantitative tightening as market drivers, said David Bianco, chief investment officer, Americas, at the DWS Group. “We’re not dismissing the risks of QT but they pale in comparison to the risks of where the Fed hikes the overnight rate and how long they have to stay there,” he said. More