Economy

(Reuters) – The Federal Reserve’s commitment to reining in 40-year-high inflation is “unconditional,” U.S. central bank chief Jerome Powell told lawmakers on Thursday, even as he acknowledged that sharply higher interest rates may push up unemployment.”We really need to restore price stability … because without that we’re not going to be able to have a sustained period of maximum employment where the benefits are spread very widely,” Powell told the U.S. House of Representatives Financial Services Committee. “It’s something that we need to do, we must do.”Powell’s testimony marked a second straight day of grilling in Congress over the Fed’s efforts to control inflation that, by the central bank’s preferred measure, is running at more than three times its 2% target. Fast-rising prices for gas, food, housing and a broad array of other items are sapping American wages, hurting businesses, and lifting fears of a sharp economic downturn and a steep rise in unemployment.On Wednesday, Powell told the U.S. Senate Banking Committee that the Fed was not trying to provoke a recession but that one was “certainly a possibility,” with recent global events, specifically the Ukraine war and COVID-19 pandemic, making it more difficult to tame inflation without inducing a downturn.Price pressures have continued to build for months, forcing the Fed to ramp up its tightening of financial conditions in an attempt to cool demand while hoping that some supply chain issues begin to untangle this year.Last week, the Fed raised its benchmark overnight interest rate by three-quarters of a percentage point – its biggest hike since 1994 – to a range of 1.50% to 1.75%, and signaled its policy rate would rise to 3.4% by the end of this year.Speaking in a June 15 news conference, Powell said the central bank would very likely need to raise rates by either 50 or 75 basis points at its next meeting in July. Since then, other Fed officials have echoed his stance on getting borrowing costs into slightly restrictive territory in short order.Some have gone further.Fed Governor Michelle Bowman on Thursday said she supported a 75-basis-point increase in July, followed by 50-basis-point increases in “the next few” subsequent meetings, a more aggressive path of rate hikes than most of her fellow central bankers currently contemplate.Economists polled by Reuters earlier this week forecast the Fed would deliver another 75-basis-point rate hike next month, followed by a half-percentage-point rise in September, with no scaling back to quarter-percentage-point moves until November at the earliest.NO PRECISION TOOLSThere are already some tentative signs of softening in the still red-hot U.S. labor market. Data released on Thursday showed new claims for unemployment benefits, which hit a 53-year low in March, edged down last week while a key gauge of manufacturing and services activity cooled to its slowest growth path in five months.Under questioning by members of the House panel on Thursday, Powell said there was a risk the Fed’s actions could lead to a rise in unemployment. The U.S. jobless rate stood at 3.6% in May. “We don’t have precision tools,” he said, “so there is a risk that unemployment would move up, from what is historically a low level though. A labor market with 4.1% or 4.3% unemployment is still a very strong labor market.”At the same time, however, Powell said a recession is not inevitable, as even former Fed colleagues have claimed; he expects U.S. economic growth to pick up in the second half of this year after a sluggish start to 2022.Over the course of the three-hour session, Powell was asked about the possibility of raising the Fed’s 2% inflation target, a solution proposed in some circles as one way to give the central bank more scope to boost employment. His response was definitive: “That’s just not something we would do.” Powell was equally dismissive of the possibility of cutting interest rates in a hypothetical situation where unemployment was rising and inflation remained high. “We can’t fail on this: we really have to get inflation down to 2%,” he said.The Fed chief also was asked about the central bank’s balance sheet, which was built up to around $9 trillion during the pandemic in an effort to ease financial conditions and is now being pared. The Fed aims to get it “roughly in the range of $2.5 or $3 trillion smaller than it is now,” Powell said. More

WASHINGTON (Reuters) – The U.S. Federal Reserve is due to release the results of its annual bank health checks on Thursday. Under the “stress test” exercise, the Fed tests banks’ balance sheets against a hypothetical severe economic downturn, the elements of which change annually.The results dictate how much capital banks need to be healthy and how much they can return to shareholders via share buybacks and dividends. WHY DOES THE FED “STRESS TEST” BANKS?The Fed established the tests following the 2007-2009 financial crisis as a tool to ensure banks could withstand a similar shock in future. The tests formally began in 2011, and large lenders initially struggled to earn passing grades. Citigroup Inc (NYSE:C), Bank of America Corp (NYSE:BAC)., JPMorgan Chase & Co (NYSE:JPM) and Goldman Sachs Group Inc (NYSE:GS), for example, had to adjust their capital plans to address the Fed’s concerns. Deutsche Bank (ETR:DBKGn)’s U.S. subsidiary failed in 2015, 2016 and 2018 on the “qualitative” aspect of the test, which assessed banks’ operational controls.However, years of practice has made banks more adept at navigating the tests and under its previous Republican leadership the Fed made the tests more transparent and dropped the “qualitative” aspect. It also ended much of the drama of the tests by scrapping the “pass-fail” model and introducing a more nuanced, bank-specific capital regime. SO HOW ARE BANKS ASSESSED NOW?The test assesses whether banks would stay above the required 4.5% minimum capital ratio during the hypothetical downturn. Banks that perform well typically stay well above that. How well a bank performs on the test also dictates the size of its “stress capital buffer,” an additional layer of capital introduced in 2020 which sits on top of the 4.5% minimum.That extra cushion is determined by each bank’s hypothetical losses. The larger the losses, the larger the buffer.THE ROLLOUTThe Fed will release the results after market close on Thursday. It typically publishes each bank’s capital ratios and aggregate losses under the test, with details on how their specific portfolios – like credit cards or mortgages – fared.Banks are not allowed, however, to announce their plans for dividends and buybacks until the following Monday, June 27. The Fed will announce the size of each bank’s stress capital buffer in the coming months.The country’s largest lenders, particularly JPMorgan, Citi, Wells Fargo (NYSE:WFC) & Co, Bank of America, Goldman Sachs, and Morgan Stanley (NYSE:MS) are closely-watched by the markets. A TOUGHER TEST?The Fed changes the scenarios each year. They take months to devise, which means they risk becoming outdated. In 2020, for example, the real economic crash caused by the COVID-19 pandemic was by many measures more severe than the Fed’s scenario that year.The Fed devised this year’s scenario before Russia’s invasion of Ukraine and the current hyper-inflationary outlook.Still, the 2022 test is expected to be more difficult than last year because the actual economic baseline is healthier. That means spikes in unemployment and drops in the size of the economy under the test are felt more acutely. For example, the 2021 stress test envisioned a 4 percentage point jump in unemployment under a “severely adverse” scenario. In 2022, that increase is 5.75 percentage points, thanks largely to rising employment over the past year. As a result, analysts expect banks will be told to set aside slightly more capital than in 2021 to account for expected growth in modeled losses.STRESSES IN COMMERCIAL REAL ESTATE, CORPORATE DEBTThis year’s tests will also include “heightened stress” in commercial real estate, which was hit by the pandemic as workers were sent home, and corporate debt markets. Global watchdogs, including the International Monetary Fund, have warned of high levels of risky corporate debt as interest rates rise globally.ALL BANKS TESTEDIn 2022, all 34 U.S. banks monitored by the Fed with over $100 billion in assets will undergo the stress test, compared with 23 lenders last year. That’s because the Fed adopted a new standard in 2020 that stipulated that banks with less than $250 billion in assets only have to take the test every other year. That means that large regional banks, like Ally Financial (NYSE:ALLY) Inc and Fifth Third Bancorp (NASDAQ:FITB) are up again after a year off. More

LONDON (Reuters) – Dashed hopes, so far at least, that Brexit would tilt Britain’s economy towards growth driven by trade and investment are threatening another of Prime Minister Boris Johnson’s flagship policies: “levelling up” the regions outside of London.Six years on from the vote to leave the European Union, the classic low-productivity British model of growth driven by consumption, supported in part by rising house prices, looks as strong as ever.Britain has missed out on much of the global recovery in goods exports as economies re-opened from COVID-19 lockdowns, leaving it bottom among Group of Seven rich industrialised nations by this measure over the last 12 months. The Resolution Foundation think tank this week said that lacklustre performance reflects a more closed economy since Brexit.It also represents a missed opportunity for Johnson’s levelling-up agenda, which aims to reduce regional inequalities. Had British goods exports grown in line with the average among the other six countries in the G7, they would have been worth around 38 billion pounds ($47 billion) more during the year to April 2022, based on a simple extrapolation.This represents several billions of pounds of lost revenue for British factories and by extension the regions outside of London, since around 95% of manufacturing output takes place outside the capital, according to 2017 official data. GRAPHIC: https://fingfx.thomsonreuters.com/gfx/polling/jnpweojzlpw/Pasted%20image%201655990997235.png Manufacturing comprises only about 10% of British economic output overall. But it is a key driver of growth and investment in many of the parts of England and Wales that voted heavily to leave the EU in 2016, such as the East Midlands and North East regions.Unless Britain can meaningfully improve its trade performance, it could mean more missed opportunities to level up. “The regions that probably asked for Brexit are the most likely to have seen the biggest impact negative impact from trade,” said Flaheen Khan, senior economist from the Make UK manufacturing trade group.On Wednesday the Resolution Foundation said Brexit was unlikely to result in a big restructuring of the main sectors of Britain’s economy – but it would have consequences for levelling-up.”Our assessment finds that the North East, one of the poorest regions in the UK, will be one of the hardest hit, and that Brexit will increase its existing – and large – productivity and income gaps,” the think tank said.Estimates of regional economic growth hint at the scale of the opportunity already lost.In the first quarter of 2022, London’s economy – dominated by services firms – was 2.6% larger than its level of late 2019, before the onset of COVID-19.By comparison, no other regional economy in the United Kingdom except for Northern Ireland had fully recovered its pre-pandemic size.GETTING ON WITH ITProponents of Brexit say it is a long-term project that cannot be judged over the space of a few years, before the benefits of an independent trade and regulatory policy become fully apparent.”Regurgitations of Project Fear don’t seem to get anyone anywhere,” said Britain’s minister for Brexit opportunities, Jacob Rees-Mogg, of this week’s Resolution Foundation report.Britain’s government wants to boost exports of goods and services to reach 1 trillion pounds per year in current prices by the end of the decade, up from their pre-pandemic level of 700 billion pounds. The highest rate of inflation in the G7 is likely to be a big driver behind meeting that goal but an improved underlying trade performance would go a long way to boosting economic activity across the United Kingdom. GRAPHIC: https://fingfx.thomsonreuters.com/gfx/polling/zdvxoeqenpx/Pasted%20image%201655993231730.png Businesses, however, need more help to get there, the British Chambers of Commerce said.It pointed to five practical measures that would boost trade with the EU which accounts for more than 40% of British exports, ranging from less red tape for food exports and a sales tax deal for small businesses trading digitally with the EU to arrangements for markings and testing of industrial goods.”Businesses in the UK and EU still have good relationships and trust each other. We need decision-makers to follow our lead and negotiate practical improvements to the Brexit trade deal,” said William Bain, head of trade policy at the BCC.Khan from Make UK said part of the problem for policymakers was that manufacturers had different needs in different parts of the country, with companies in the south of England seeking more spending on digital infrastructure, while those in the north were demanding better transport links.One thing that is shared across the country is an acceptance that Brexit is now an economic reality, for better or worse.”In an ideal world, trade would be frictionless, but they’ve accepted that’s not going to happen and most businesses, despite the impact, are getting on with it,” Khan said.($1 = 0.8148 pounds) More

SANTIAGO (Reuters) -Union leaders at Chile’s state-owned mining firm Codelco, the world’s largest copper producer, reached an agreement with the company on Thursday to end a national strike over the decision to close a smelter located in a highly polluted area. The Federation of Copper Workers (FTC), an umbrella group of Codelco’s unions, started the strike early Wednesday morning after Codelco’s board of directors decided to close its Ventanas smelter on Friday.”We’re officially declaring the end of the strike,” Amador Pantoja, president of the FTC said to reporters outside of Codelco’s headquarters in Santiago after hours of negotiations, adding that strike leaders were already lifting blockades around the country.Workers had blocked roads outside Codelco facilities around the country, lit fires, and held up banners and Chilean flags calling for more investment in the smelter.After spending nearly $156 million over a decade to reduce emissions at the smelter, Codelco decided to close it due ongoing health concerns in the surrounding community, which is home to several industrial companies, citing the smelter’s outdated technology which made it harder to curb emissions.About 350 people worked at the smelter.Thursday’s agreement does not include more investment in the troubled Ventanas smelter, but it involved strengthening the Ventanas copper refinery, Pantoja said without elaborating.”That lets us look forward with optimism and hope,” Pantoja said. Andre Sougarret, Codelco’s interim chief executive, said that the company was starting a working dialogue with workers starting Monday regarding the closure of the Ventanas smelter.”We’re with the workers; we plan on meeting their demands,” Sougarret said, saying that retraining, relocation and exit packages were on the table for workers currently employed at the smelter. Closing the smelter will take years, according to Sougarret and the process is reliant on Congress modifying a law that forces the company to use the Ventanas smelter, which could take months.The smelter is located in a populated area filled with industrial companies and has been the site of multiple pollution incidents that have affected residents’ health and prompted environmental emergencies, including one earlier this month that caused the Ventanas smelter to close. More

How well did you keep up with the news this week? Take our quiz. Singapore will be “brutal and unrelentingly hard” on bad behaviour in the crypto industry, according to its fintech policy chief, marking a stark shift in rhetoric after years of the city-state courting the sector. Sopnendu Mohanty, chief fintech officer at the Monetary Authority of Singapore, the country’s central bank, questioned the value of private cryptocurrencies and said he expected a state-backed alternative to be launched within three years. “We have been called out by many cryptocurrencies for not being friendly,” he told the Financial Times in an interview. “My response has been: friendly for what? Friendly for a real economy or friendly for some unreal economy?” Mohanty added: “We have no tolerance for any market bad behaviour. If somebody has done a bad thing, we are brutal and unrelentingly hard.” The crypto meltdown has hardened the stance of officials in Singapore, where many crypto businesses had been set up because of the perceived friendly regulatory environment and low taxes.Opinion: I would not be ready to bet that private digital money will actually die — mutation seems more likely, writes Gillian Tett.

Video: Cryptocurrencies: how regulators lost control

Do you think Singapore is right to crack down on crypto? Tell me what you think at [email protected]. Thanks for reading FirstFT Asia. Here is the rest of the day’s news — Emily Five more stories in the news1. EU leaders grant Ukraine and Moldova candidate member status EU leaders agreed at a summit on Thursday to make Ukraine and Moldova candidates to join the bloc, a historic move by Brussels in the wake of Vladimir Putin’s invasion of Ukraine.Related read: The EU’s top diplomat has insisted the bloc has no intention of blocking lawful transport of Russian goods to Kaliningrad through Lithuania in comments designed to de-escalate tensions with Moscow.2. China’s zero-Covid strategy has increased risk of flu epidemic Health officials are warning that the country’s focus on eradicating Covid-19 has left it unprepared for a possible flu epidemic that risks killing tens of thousands of citizens. Some health authorities are particularly concerned about a flu outbreak in southern China.3. Toyota recalls EV fleet Toyota is recalling its fleet of 2,700 electric vehicles less than two months after launching its first mass-produced battery-powered sport utility vehicle, which was designed to take on Tesla. The world’s largest carmaker issued the global recall yesterday, warning that the wheels could potentially fall off because of issues with bolts that connect them to the vehicle.4. Early vote could help Najib avoid jail over 1MDB, opposition warns Najib Razak, the former Malaysian prime minister convicted of money laundering linked to the 1MDB scandal, could capitalise on an early general election victory to avoid imprisonment, the country’s opposition leader has warned. Some members of Najib’s party were trying to bring forward the 2023 election so they could consolidate power and influence the judiciary, Anwar Ibrahim said. 5. Investors crank up bets on BoJ surrendering yield curve controls At last week’s policy meeting, the Bank of Japan renewed its pledge to buy as much government debt as it takes to keep 10-year borrowing costs below 0.25 per cent. But pressure is growing on the central bank to lighten its touch, with many investors entering short positions on Japanese government bonds (JGBs).

© BoJ graphic

Thanks to readers who took our poll yesterday. Ninety per cent of respondents said they expect corruption and mismanagement will plague the Philippines’ new administration.The days aheadRemarks from China’s ambassador to Australia Xiao Qian will speak at University of Technology Sydney today and address bilateral relations between the two nations. Japan inflation data Japan will release its consumer price index figures today. CPI inflation is expected to hold steady at 2.5 per cent. (FX Street) UK by-election results When results are announced on Friday, Conservatives are braced to lose two parliamentary by-elections, according to senior party strategists, in moves that could prompt a renewed backlash against Boris Johnson.What else we’re readingShe was loved for standing up to China. She may die in jail Over the years that Claudia Mo has been warning of China’s growing authoritarianism towards Hong Kong, her sense of humour and honesty that have made her a beloved figure among democracy supporters. Later this year, Mo, one of the Hong Kong 47, will find out if she is to spend the rest of her life in jail.Taiwanese military training must be improved Rising tensions in US-China relations, coupled with the war in Ukraine, have accelerated Taiwan’s consideration of military reforms. The most popular plan is to triple the length of compulsory service. “Such lengthening of service will do little . . . to prepare my country for a possible Chinese invasion. My own experience did not do much to prepare my comrades and me for war,” a former servicemember writes. The time to put Donald Trump on trial is drawing near The evidence amassed by the US House of Representatives’ January 6 committee is making it much harder for US Attorney-General Merrick Garland to turn a blind eye. But any prosecution of the former president comes with acute risks, writes Edward Luce.Revlon has become a meme stock Revlon shares have zoomed from about $1 a share to $8 a share — less than a week after the company was placed in bankruptcy. But don’t expect a resurgence in the company’s fortunes reminiscent of car hire company Hertz, says Sujeet Indap.Food crisis bites across Africa Steep global rises in food, fuel and fertiliser prices since Russia’s invasion of Ukraine have compounded economic pain from the coronavirus pandemic and left millions of Africans facing an “unprecedented food emergency”, the World Food Programme has warned. It has also raised the risk of social unrest in poorer countries.

© Food in Africa graphic

FashionAutomation, digitisation and globalisation have brought us incredible material abundance at very low prices. This is, in itself, a good thing, and it is not just a story of iniquity and waste. We should insist on sustainability, but also celebrate good, cheap clothes, writes Robert Armstrong. More

MEXICO CITY (Reuters) -The Bank of Mexico on Thursday increased its benchmark interest rate by a record 75 basis points to 7.75%, saying it would hike rates again and by as much if necessary to tame inflation that has surged to double its target.Inflation in the year through mid-June hit 7.88%, data showed earlier in the day, well above the central bank’s target of 3%, plus or minus one percentage point..”For the next policy decisions, the board intends to continue raising the reference rate and will evaluate taking the same forceful measures if conditions so require,” the bank said in a post-meeting statement after its ninth hike in a row.All five board members voted unanimously for the rate increase, the largest hike under the Bank of Mexico’s current regime, in place since 2008.Banxico, as the bank is known, has been trying to moderate spiraling consumer prices. It has increased the benchmark rate by 375 basis points since mid-2021.Thursday’s move echoes the U.S. Federal Reserve’s hike last week of three-quarters of a percentage point, its largest increase in more than 25 years. Policy makers in regional powerhouse Brazil raised rates to 13.25% and penciled in another hike for August.Banxico underscored that in addition to inflationary shocks from the COVID-19 pandemic, there are pressures linked to Russia’s war in Ukraine and strict lockdown measures imposed by China.”The balance of risks for the trajectory of inflation within the forecast horizon is biased significantly to the upside,” said Banxico.In view of pressures on prices, Banxico revised up its forecasts for headline and core inflation. However, the bank still expects inflation to converge to its 3% target in the first quarter of 2024.”Further tightening of the U.S. monetary policy, a prolonged duration of Russia’s invasion of Ukraine and supply chain disruptions from China’s lockdown measures will result in further rate hikes from Banxico in the near term,” said Carlos Morales, director, Latin America Sovereigns at Fitch Ratings.Morales projected Banxico would hike rates to 8.5% by the end of 2022. More

The companies signed up for $9.4 billion in new loans, leases and lines of credit, compared with $8.1 billion a year earlier.”The economy continues to provide jobs and corporate America, in general, reports strong balance sheets – all in the face of a waning health pandemic,” Ralph Petta, ELFA’s chief executive officer, said in a statement.”Offsetting this good news is high inflation, creating havoc for many consumers, and continued supply chain disruptions and higher interest rates”, Petta added.ELFA, which reports economic activity for the nearly $1-trillion equipment finance sector, said credit approvals totaled 76.8%, down from 77.4% in April.The sustained rising interest rate environment, a pandemic overhang and extreme supply chain bottlenecks have pushed for a greater need in the equipment financing industry, said Scott Dienes, senior vice president of Associated Bank, which offers machinery loans.Washington-based ELFA’s leasing and finance index measures the volume of commercial equipment financed in the United States.The index is based on a survey of 25 members, including Bank of America Corp (NYSE:BAC), and financing affiliates or units of Caterpillar Inc (NYSE:CAT), Dell Technologies (NYSE:DELL) Inc, Siemens AG (OTC:SIEGY), Canon Inc and Volvo AB (OTC:VLVLY).The Equipment Leasing and Finance Foundation, ELFA’s non-profit affiliate, said its confidence index for June was 50.9, up from 49.6 in May. A reading above 50 indicates a positive business outlook. More

UK oil and gas producers on Thursday warned Rishi Sunak, the chancellor, that his new windfall tax on their profits could force the cancellation of projects as well as prompt investors to deploy their capital elsewhere.At a meeting with Sunak in Aberdeen, about 20 executives from companies with UK North Sea operations — including Equinor, Harbour Energy, Ithaca Energy and Shell — highlighted negative consequences from the chancellor’s 25 per cent “energy profits levy”.The windfall tax, unveiled by Sunak in May, is meant to partly fund a £15bn support package for UK households struggling with soaring energy bills.Simon Roddy, senior vice-president for Shell’s UK upstream oil and gas business, told Sunak the levy sent a “negative signal” that was undermining investment in British waters, according to people at the meeting. It raises the headline tax rate paid by North Sea oil and gas producers to 65 per cent.An executive from Norwegian state-backed energy company Equinor suggested to Sunak it was questioning whether the UK was a sensible place to invest, said several people at the meeting.Equinor is leading on one of the most eagerly anticipated investments in the UK North Sea, the £4.5bn Rosebank oil and gasfield 130km north-west of the Shetland islands. Equinor said later it was committed to delivering Rosebank and planned to take a final investment decision in the spring of 2023.An executive from London-listed Serica Energy told Sunak the windfall tax would disproportionately harm smaller oil and gas producers compared to their larger rivals, which have big global portfolios of assets.Executives asked for several key commitments from Sunak, including a review of the windfall tax every six months. The levy has a so-called sunset clause that would remove it at the end of 2025.The industry also wants greater clarity on what the trigger might be for the removal of the windfall tax. When Sunak announced the energy profits levy, the Treasury described it as “temporary” and said it would “be phased out when oil and gas prices return to historically more normal levels”.This month he indicated that a retreat in prices to a range of $60-$70 a barrel may be the trigger for the levy’s repeal. Brent crude was trading at $111 a barrel on Thursday.Executives would also like carbon capture and storage projects to be eligible for a new investment allowance that Sunak announced alongside the levy. The allowance is meant to provide incentives for companies to press ahead with schemes to boost UK oil and gas production.But one executive at the meeting with Sunak in Aberdeen said the chancellor “was lacking in answers to the main questions the industry had”.Another person with knowledge of the meeting with the chancellor said: “He found himself on the receiving end of some rather robust feedback.“The relationship between the Treasury and the oil and gas industry might be characterised as several layers of frost.”Deirdre Michie, chief executive of the North Sea trade body Offshore Energies UK, described the meeting with Sunak as “candid” and warned the windfall tax would undermine attempts to attract investment to Britain.Shell, Serica Energy and Harbour Energy declined to comment.

A government spokesperson said its energy security strategy had set out how “North Sea oil and gas are going to be crucial to the UK’s domestic energy supply and security for the foreseeable future — so it is right we continue to encourage investment there”.The spokesperson added that the levy’s investment allowance “means businesses will overall get a 91p tax saving for every £1 they invest — this nearly doubles the tax relief available”. More