Economy

In an emergency meeting this week, the ECB decided to direct bond reinvestment to help nations on the bloc’s southern rim, and to devise a new instrument to contain divergence in borrowing costs.But ECB action will only go as far as preventing “unwarranted” market moves and will not help countries in case of profound debt issues, Rehn, Finland’s central bank chief, said at an event organized by the Dallas Federal Reserve. “We are fully committed to preventing fiscal dominance – and/or financial dominance, for that matter,” Rehn said, referring to a situation when fiscal, not monetary, considerations dictate central bank policy.”In the case of more profound structural economic weaknesses and debt sustainability problems, there is always the option to activate Outright Monetary Transactions.” OMT, a never-used emergency debt purchase scheme, can only be activated if a country is taking part in an economic adjustment programme, a politically unpopular option since the bloc’s debt crisis a decade ago. Borrowing costs have risen sharply around the world this year as high inflation is forcing central banks to rise interest rates to prevent rapid price growth from getting entrenched. Italy, with gross debt of around 150% of GDP, is among the most vulnerable in the bloc and the ECB sprang into action this week when its 10-year borrowing cost surged, exceeding Germany’s by 250 basis points. Rehn said that help to individual members will only go as far as ensuring that monetary policy gets transmitted to all corners of the bloc and inflation is brought under control. “While fiscal-monetary interaction is a basic feature of policy coordination in a currency union like the eurozone, it cannot be in contradiction with the independence of central banks,” he said.The ECB promised hikes in July and September, and said further moves are also likely in the fight against high inflation. More

A top US Federal Reserve official expressed early support for another 0.75 percentage point interest rate rise at the central bank’s next meeting in July, in anticipation that inflation will not moderate sufficiently to slow the pace of monetary tightening. In a remarks delivered on Saturday, Christopher Waller, a Fed governor, affirmed the central bank’s commitment to tackling the worst inflation problem in more than forty years, saying it was “all in on re-establishing price stability”.Waller’s comments come just days after the Fed significantly stepped up its efforts to tackle soaring prices and implemented the first 0.75 percentage point rate rise since 1994. The Swiss National Bank and Bank of England also raised interest rates this week, as the world’s central banks took aggressive action to stamp out surging inflation.

“If the data comes in as I expect I will support a similar-sized move at our July meeting,” Waller said on a panel hosted by the Fed’s Dallas branch, characterising this week’s decision as “another significant step toward achieving our inflation objective”.In addition to raising the federal funds rate to a new target range of 1.50 to 1.75 per cent, the US central bank also signalled support for what looks set to be the fastest monetary tightening since the 1980s.Most officials now expect the policy rate to rise well above 3 per cent by the end of the year and potentially notch as high as 3.8 per cent in 2023. Reflecting that this rapid rise in borrowing costs is likely to cause some economic pain, policymakers projected the unemployment rate rising over the next two years from its current 3.6 per cent level to 4.1 per cent in 2024, with core inflation still just above its 2 per cent target. Rate cuts are also expected by then, as growth is projected to slow below 2 per cent.

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Many economists believe that the economic fallout from the Fed’s actions to tame inflation — which they anticipate could get worse in coming months and be more persistent than expected — will be far greater than what the central bank has so far acknowledged. That means higher unemployment and increased odds of a recession next year, they warned.While Jay Powell, the chair, conceded this week that it is becoming “more challenging” to achieve a so-called “soft landing”, he maintains there are still paths to cool the economy to the point where inflation moderates but without causing undue economic harm. The Fed has faced substantial criticism for contributing in part to this problem by moving too slowly last year to tackle inflation and treating it instead as a “transitory” phenomenon that would work itself out organically. By allowing price pressures to get out of hand, the Fed now must act much more aggressively than otherwise would have been the case, its detractors say, putting the economic recovery at risk.Waller on Saturday addressed these judgments, admitting that some of the criteria the Fed had put in place before it began scaling back its monetary stimulus were too “restrictive”. Instead of reducing monetary accommodation “later and faster”, Waller said the Fed may have been able to do so “sooner and gradually”.The central bank is now poised to continue tightening the screws of its monetary policy in forceful fashion, with Powell indicating it will maintain an aggressive pace until officials see “compelling evidence” that inflation is moderating. That entails a series of decelerating monthly inflation numbers. For its next meeting in July, the chair said the Fed would probably choose between a 0.50 or 0.75 percentage point increase, but some economists believe an even bigger move of a full percentage point is not completely off the table.Neel Kashkari, the dovish president of the Minneapolis Fed, on Friday said he could support another 0.75 percentage point move next month, but cautioned the central bank against doing “too much more front-loading”.He said a “prudent strategy” may be continuing with half-point rate rises after the July meeting “until inflation is well on its way down to 2 per cent”. More

The Federal Reserve suddenly finds itself second-guessed as it tries to navigate the economy through inflation and away from recession.
Complaints center on three themes: That the Fed didn’t act quickly enough to tame inflation, that it isn’t acting aggressively enough now, and that it should have been better at seeing the current crisis coming.
“The Fed is going to have to raise rates much higher than they are now,” said Lewis Black, CEO of Almonty Industries, a Toronto-based global miner of tungsten

The exterior of the Marriner S. Eccles Federal Reserve Board Building is seen in Washington, D.C., June 14, 2022.
Sarah Silbiger | Reuters

After years of being a beacon for financial markets, the Federal Reserve suddenly finds itself second-guessed as it tries to navigate the economy through a wicked bout of inflation and away from ever-darkening recession clouds.
Complaints around the Fed have a familiar tone, with economists, market strategists and business leaders weighing in on what they feel is a series of policy mistakes.

Essentially, the complaints center on three themes for actions past, present and future: That the Fed didn’t act quickly enough to tame inflation, that it isn’t acting aggressively enough now even with a series of rate increases, and that it should have been better at seeing the current crisis coming.
“They should have known inflation was broadening and becoming more entrenched,” said Quincy Krosby, chief equity strategist at LPL Financial. “Why haven’t you seen this coming? This shouldn’t have been a shock. That, I think is a concern. I don’t know if it’s as stark a concern as ‘the emperor has no clothes.’ But it’s the man in the street vs. the PhDs.”
Consumers in fact had been expressing worries over price increases well before the Fed started raising rates. The Fed, however, stuck to its “transitory” script on inflation for months before finally enacting a meager quarter-point rate hike in March.
Then things accelerated suddenly earlier this week, when word leaked out that policymakers were getting more serious.

‘Just doesn’t add up’

The path to the three-quarter-point increase Wednesday was a peculiar one, particularly for a central bank that prides itself on clear communication.

After officials for weeks had insisted that hiking 75 basis points was not on the table, a Wall Street Journal report Monday afternoon, with little sourcing, said that it was likely more aggressive action was coming than the planned 50-basis-point move. The report was followed with similar accounts from CNBC and other outlets. (A basis point is one-one hundredth of 1 percentage point.)
Ostensibly, the move came about following a consumer sentiment survey Friday showing that expectations were ramping up for longer-run inflation. That followed a report that the consumer price index in May gained 8.6% over the past year, higher than Wall Street expectations.
Addressing the notion that the Fed should have been more prescient about inflation, Krosby said it’s hard to believe the data points could have caught the central bankers so off guard.
“You come to something that just doesn’t add up, that they didn’t see this before the blackout,” she said, referring to the period before Federal Open Market Committee meetings when members are prohibited from addressing the public.

“You could applaud them for moving quickly, not waiting six weeks [until the next meeting]. But then you go back to, if it was that dire that you couldn’t wait six weeks, how is it that you didn’t see it before Friday?” Krosby added. “That’s the market’s assessment at this point.”
Fed Chair Jerome Powell did himself no favors at Wednesday’s news conference when he insisted that there is “no sign of a broader slowdown that I can see in the economy.”
On Friday, a New York Fed economic model in fact pointed to elevated inflation of 3.8% in 2022 and negative GDP growth in both 2022 and 2023, respectively at minus-0.6% and minus-0.5%.
The market did not look kindly on the Fed’s actions, with the Dow Jones Industrial Average losing 4.8% for the week to fall below 30,000 for the first time since January 2021 and wiping out all the gains achieved since President Joe Biden took office.
Why the market moves in a particular way in a particular week is generally anybody’s guess. But at least some of the damage seems to have come from impatience with the Fed.

The need to be bold

Though the 75 basis point move was the biggest one-meeting increase since 1994, there’s a feeling among investors and business leaders that the approach still smacks of incrementalism.
After all, bond markets already have priced in hundreds of basis points of Fed tightening, with the 2-year yield rising about 2.4 percentage points to around its highest level since 2007. The fed funds rate, by contrast, is still only in a range between 1.5% and 1.75%, well behind even the six-month Treasury bill.
So why not just go big?
“The Fed is going to have to raise rates much higher than they are now,” said Lewis Black, CEO of Almonty Industries, a Toronto-based global miner of tungsten, a heavy metal used in a multitude of products. “They’re going to have to start getting up into the high single digits to nip this in the bud, because if they don’t, if this gets hold, really gets hold, it’s going to be very problematic, especially for those with the least.”
Black sees inflation’s impact up close, beyond what it will cost his business for capital.
He expects the workers in his mines, based largely in Spain, Portugal and South Korea, to start demanding more money. That’s because many of them took advantage of easily accessed mortgages in Europe and now will have higher housing costs as well as sharp increases in the daily cost of living.
In retrospect, Black thinks the Fed should have started hiking last summer. But he sees pointing fingers as useless at this point.
“Ultimately, we should stop looking for who is to blame. There was no choice. This was the best strategy they thought they had to deal with Covid,” he said. “They know what has to be done. I don’t think you can possibly say with the amount of money in circulation that they can just say, ‘let’s raise 75 basis points and see what happens.’ That’s not going to be sufficient, that’s not going to slow it down. What you need now is to avoid recession.”

What happens now

Powell has repeatedly said he thinks the Fed can manage its way through the minefield, notably quipping in May that he thinks the economy can have a “soft or softish” landing.
But with GDP teetering on a second consecutive quarter of negative growth, the market is having its doubts, and there’s some feeling the Fed should just acknowledge the painful path ahead.
“Since we’re already in recession, the Fed might as well go for broke and give up on the soft landing. I think that’s what investors are expecting now for the short term,” said Mitchell Goldberg, president of ClientFirst Strategy.
“We could argue that the Fed went too far. We could argue that too much money was handed out. It is what it is, and now we have to correct it. We have to look forward now,” he added. “The Fed is way behind the inflation curve. They have to move quickly and they have to move aggressively, and that’s what they’re doing.”
While the S&P 500 and Nasdaq are in bear markets — down more than 20% from their last highs — Goldberg said investors shouldn’t despair too much.
He said the current market run will end, and investors who keep their heads and stick to their longer-term goals will recover.
“People just had this sense of invincibility, that the Fed would come to the rescue,” Goldberg said. “Every new bear market and recession seems like the worst one ever in history and that things will never be good again. Then we climb out of each one with a new set of stock market winners and a new set of winning sectors in the economy. It always happens.”

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Japan is forging ahead with plans to buy up vast quantities of bonds in a bid to support the country’s economy, drawing a stark contrast to other major countries that are exiting stimulus programmes.The Bank of Japan will buy about ¥10tn worth of bonds in June — roughly equal to the US Federal Reserve scooping up $300bn worth of debt per month when adjusting for gross domestic product, according to Deutsche Bank calculations.Policymakers in Tokyo are pursuing the bond-buying programme as part of a plan to keep a lid on medium-term costs known as yield-curve control that has been in place since 2016. The scheme’s continuation pushes Japan far out of line with even its most dovish global peers, such as the Swiss National Bank that this week surprised markets with its first interest rate rise in 15 years. “This is an extreme level of money printing given that every other central bank in the world is tightening policy,” said George Saravelos, head of European foreign exchange strategy at Deutsche Bank.The BoJ on Friday said it would hold interest rates in negative territory and also continue targeting a 10-year bond yield of within 0.25 percentage points either side of zero. Intense pressures in the global bond market have pushed the 10-year Japanese government bond yield right up to the upper limit, meaning the central bank has had to purchase big batches of debt on a regular basis to maintain its target. Japan’s decision to continue buying bonds has hit the yen, which plunged earlier this week to a near 24-year low beyond ¥135 against the dollar. BoJ policymakers say the underlying economy is too weak to withstand monetary policy tightening and are also wary of reversing progress on exiting a protracted period of tepid price growth and even deflation. Core consumer prices, which exclude volatile food prices, have risen at their fastest pace in seven years, hitting the BoJ’s target with annual growth of 2.1 per cent in April.However, even as price growth in Japan has heated up in recent months, it remains much lower than levels across other major economies. US core inflation registered 6 per cent in May, while that figure was almost 4 per cent in the eurozone last month. “The Bank of Japan is happy to continue being the ‘odd one out’ among central banks,” said Takayuki Toji, an economist at Sumitomo Mitsui Trust Asset Management. Additional reporting by Hudson Lockett in Hong Kong More

Countries worldwide are battling cost-of-living levels not seen in decades, ratcheted up by the reopening of the global economy after the COVID-19 pandemic and the Russia-Ukraine war. The Bank of England predicts inflation will top 11% in October.”If you think about all the money that’s spent on marketing and doing deals to promote some of the big leisure activities that the British people enjoy, let’s take some of that money,” David Buttress, former chief executive of Just Eat, told the BBC.”Let’s refocus it on what really matters to people which is making their prices more competitive so their money goes further.”Buttress was appointed by the government this week to work with the private sector to develop, identify and promote schemes such as discounted prices or product offers to help ease the increasing pressures on household budgets.”I want my old friends and colleagues and business and industry to come to the party the next six months and help because reality is this is a global challenge we all face and it’s on all of us I think to try and muck in and do something about it,” he said.Thousands of people are expected to join a demonstration in central London on Saturday organised by trade unions to call on the government to do more to tackle the cost of living.Junior finance minister Simon Clarke warned on Friday that while pay was part of the answer to helping with the cost of living, the government had to be careful about “preventing inflation from becoming a self-fulfilling prophecy.””What we can’t do is have unrealistic expectations around pay, which do in turn prolong and intensify this inflation problem because we all want it to end. And the way it will end soonest is if we are sensible about pay,” he told the BBC. More

Lindner said he wanted to bring an end next year to the three years of government largesse that had characterised attempts to prop up the economy through the coronavirus crisis and reapply Germany’s constitutional debt brake next year.”We are experiencing dangerous inflation that has to be braked,” he told the Welt am Sonntag newspaper in an interview. “Preparedness to take entrepreneurial risks could be reduced. We can’t let this become an economic crisis.”Germany spent 4 billion euros on interest last year, said Lindner, from the business-friendly Free Democrat party, adding that he would resist calls from his coalition partners for increased spending.”We can’t afford ill-directed subsidies any more,” he said. He listed subsidies for buying electric and hybrid cars that were available even to very high earners as examples of subsidies that should be scrapped. More

Soaring consumer prices and creeping borrowing costs have clipped growth expectations across Latin America, with developing economies especially vulnerable to the economic volatility.Peru’s central bank lowered its 2022 growth projection to 3.1% from 3.4% previously, while maintaining its estimate for 3.2% growth next year, bank president Julio Velarde said in a presentation.Velarde cited persistent mining conflicts, in addition to the impact of the Russia-Ukraine war, as driving the downwardly revised growth projection.Protests by indigenous people have disrupted Peru’s mining sector in recent months, including a 51-day shutdown at China-based MMG Ltd’s Las Bambas copper mine, a top global producer of the red metal.”Other sectors are behaving better than we expected in March. What is falling is mining,” said Velarde.The central bank slashed its 2022 growth expectation for the mining sector from 5.9% to 2.9%.Velarde said he sees mining investment falling by nearly 5% this year, and a much steeper fall potentially in 2023.”If no new projects appear next year … there will be a contraction in mining investment next year of almost 16%.”The bank’s projections also include a lower fiscal deficit this year of 1.9% of gross domestic product compared to 2.5% previously projected in March, principally due to higher revenue, Velarde said.The bank expects annual inflation of 6.4% for 2022 and 2.5% for 2023. In March, the bank said it expected 3.6% inflation this year.Annual inflation in May reached 8.09%, its highest level in two dozen years, leading the bank to raise its benchmark interest rate to 5.5% earlier this month. More