Economy

“I don’t think we’re (going to) have a recession. Consumer spending is very strong. Investment spending is solid,” she told a New York Times Dealbook event.”I know people are very upset and rightly so about inflation, but there’s nothing to suggest that a … recession is in the works.”Yellen, who last week conceded she had been wrong about predicting inflation would be transitory, told the event she would not change U.S. policy decisions if she could go back in time.”I wouldn’t do it differently,” Yellen said, saying President Joe Biden’s signature $1.9 trillion American Rescue Plan was needed to prevent a generation of Americans suffering from high unemployment rates.”Things can always happen that you don’t expect. The world’s very uncertain,” she said.Combating inflation was President Joe Biden’s top priority, Yellen said, adding she did not expect gasoline prices, which just reached $5 a gallon, to come down anytime soon.She said American households were clearly concerned about surging pump prices, which played a key role in shaping consumer expectations, but it was “amazing” how pessimistic Americans were about the economy given the fact that the United States now had the strongest labor market since World War Two.Biden had done “what he can do” to address high gasoline prices by directing an historic drawdown from the Strategic Petroleum Reserve, Yellen said. She added that U.S. officials would also keep tightening sanctions aiming at punishing Russia and getting it to stop the war in Ukraine.As the Federal Reserve tightened monetary policy to contain demand and bring inflation down, Yellen said she saw a path to a soft landing that would avoid a recession. More

Household net worth edged down to $149.3 trillion from a record $149.8 trillion at the end of last year, the Fed’s quarterly snapshot of the national balance sheet showed. The drop was driven by a $3 trillion fall in the value of corporate equities – a plunge that has worsened in the current quarter – while real estate values climbed another $1.7 trillion. It was the first decline in household wealth since the first quarter of 2020, when the onset of the coronavirus pandemic shook financial markets and caused a short but deep recession.Still, the report showed household balance sheets overall remained healthy through the first three months of the year – some $32.5 trillion above pre-pandemic levels – and looked likely to continue to support strength in consumer spending in the face of high inflation.Of particular note, bank account balances rose, with checkable deposits and currency rising about $210 billion to $4.47 trillion, and time and savings deposits up about $90 billion to $11.28 trillion. That added cash may help maintain consumer outlays even as the Fed seeks to tamp down demand and slow price rises. As yet is unclear whether the net effect will be to cushion decelerating growth as the Fed raises interest rates so as to achieve the desired soft-landing, or to dull the impact of higher borrowing costs so much that the central bank ends up needing to push up rates so far and fast that it triggers a recession.So far, the long-awaited consumer shift from buying goods to buying more services appears to have simply pushed inflation pressures over into services, rather than cooled price pressures overallStocks have continued weakening into the second quarter over concern about a surge in inflation to 40-year highs and whether the Fed’s aggressive response to it could stall the economy. The decline suggests Americans’ wealth likely took another hit from the start of April onward. More

How well did you keep up with the news this week? Take our quiz.China is building hundreds of thousands of permanent coronavirus testing facilities and expanding quarantine centres across many of its biggest cities as part of its zero-Covid policy, despite the economic and human toll on the world’s most populous country.Residents of Shanghai woke up yesterday to an announcement that lockdown measures and mass testing would be conducted in the Minhang district, home to more than 2mn people, for at least two days. The directive was issued just a week after President Xi Jinping’s administration declared victory in defending the city from the pandemic after a punishing two-month lockdown. Tough restrictions in scores of cities have driven the country to the edge of recession for just the second time in three decades. But even though measures have been eased in many areas, experts believe the government’s virus infrastructure programme is designed to sustain the mass-testing and quarantine policies through 2023. Yanzhong Huang, a senior fellow for Global Health at the Council for Foreign Relations think-tank, said such measures demonstrated Beijing’s commitment to zero-Covid “despite this growing social, economic cost associated with this approach”. “The government believes they could outrun the virus. But we know for the Omicron variant this is not realistic. And for an even more transmissible variant, that will make it even less feasible,” he said.

Share your feedback on this newsletter be emailing [email protected]. Here’s the rest of the day’s news — EmilyThe latest on the war in Ukraine On the front line: Two Britons and a Moroccan national have been sentenced to death by a court controlled by Russian-backed separatists after being found guilty of working as mercenaries for Ukraine.Energy: The Biden administration has called on India not to go “too far” as it increases imports of discounted Russian crude that has lost buyers in Europe.Opinion: Martin Sandbu argues why ending energy imports from Russia remains essential.Five more stories in the news1. ECB takes hawkish turn to counter record-high inflation ECB president Christine Lagarde yesterday announced plans to lift interest rates above zero for the first time in a decade by September. The ECB surprised markets by signalling it was likely to raise rates by half a percentage point in September, in addition to a planned quarter-point rise in July — a bigger increase than expected.2. State Street knocks down Credit Suisse takeover rumours The US custody bank denied it was in talks to acquire Credit Suisse, knocking back a report that it was pursuing the troubled Zurich-based lender. State Street on Wednesday had initially declined to comment on a report from a Swiss blog that it was preparing an offer, exacerbating sharp moves in the shares of both lenders.3. Apple goes in-house for lending service Apple is making its biggest move into finance by offering loans directly to consumers for its new “buy now, pay later” product, taking on a role played in its other lending services by banking partners such as Goldman Sachs.4. Runs on Chinese local banks Thousands of desperate depositors in China have been fighting for almost two months to recover their savings after a bank run that has raised concerns over the financial health of the country’s smaller lenders. Analysts said an economic slowdown sparked by President Xi Jinping’s zero-Covid policy is also worsening the problem.5. Iran to remove 27 cameras from nuclear facilities Iran has warned the UN atomic watchdog that it is removing 27 cameras used to monitor nuclear activity from its facilities, in an escalation of the Islamic republic’s stand-off with the west.The day aheadInflation figures China and the US will report consumer price index data on Friday. US stocks and government bonds dropped on Thursday ahead of the release. China will also announce producer price index figures. See how your country compares on rising prices with our inflation tracker.Philippines Independence Day The country will have a public holiday on Sunday commemorating the country’s independence from Spain in 1898.G7 science ministers meeting Officials will gather in Frankfurt on Sunday to discuss opportunities to collaborate on the study of long Covid, carbon capture and removal, and research “values”, said Bettina Stark-Watzinger, Germany’s minister for education and research. (Science Business) Join us June 16-17 for the FT Future of Finance, live-streamed from the heart of The Next Web (TNW) tech festival. Register here.What else we’re reading Singapore’s wealthy pursue luxury cars despite inflation The price of food, energy and other necessities is soaring globally. But in Singapore, the rich still want luxury cars. People in the city-state are paying the highest amount in decades just for the right to own a premium car, official data showed on Wednesday.The global race for supercomputing power From modelling climate change to developing products, the capabilities of machines are speeding up as the US, China and Japan jockey for computing speed. China, in particular, has exhibited explosive growth in supercomputing since the late 2000s.

The LME debacle raises serious questions for the City of London This episode threatens to undermine the Square Mile’s claim to ensure a level playing field, writes Gillian Tett. LME’s reforms are sensible, albeit hopelessly belated. But they may not be enough to rebuild confidence.‘The product is dead. There’s no more Spacs’ Rising interest rates, a weakening stock market and warnings of a regulatory crackdown have fed disillusionment with an earlier frenzy of special purpose acquisition company deals. Now, as some banks adopt a far warier approach, focus is starting to shift to what the future holds for the once hot asset class.Who would want to own a hotel now? It is still a grim time to be in hospitality after stringent lockdowns and international travel bans slashed demand. But Sonesta, a little-known yet rapidly expanding hotel company, thinks it has cracked the code to post-pandemic travel.TravelFT Weekend editor Alec Russell recently visited Athens to see 3,000 years of history — on a tight timeline: just three days. Here’s what was on his itinerary.

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NEW YORK (Reuters) – Bridgewater’s Karen Karniol-Tambour, co-chief investment officer for sustainability, said on Thursday that the U.S. stock market has not yet priced in an economic slowdown in the United States.”Profits are extremely high and it seems very unlikely they can remain this high at unprecedented levels forever,” she told the audience at the Sohn Investment Conference.Although the S&P 500 is down 14.8% this year, Karniol-Tambour believes investors have only taken into consideration a rise in interest rates, ignoring a very significant economic slowdown and higher volatility brought by persistent inflation.”The market is not really reflecting a significant economic slowdown,” she said. Bridgewater, founded by Ray Dalio, manages $150 billion in assets. More

The head of Britain’s largest union has warned of potential strikes this year if the government does not heed its call for inflation-linked wage increases for staff in the NHS and local government. Christina McAnea, general secretary of Unison — which represents 1.3mn mostly public-sector workers — said prime minister Boris Johnson had “no idea” about the huge financial strains facing ordinary people at the moment. She urged Johnson to find £10bn this year from tax rises to fund pay increases in line with inflation, which is expected to rise to 10 per cent within months. The intervention by McAnea, whose union is a donor to the opposition Labour party, comes amid growing industrial unrest this summer, with three days of RMT strikes set to cause chaos on the rail network at the end of this month. The government is trying to hold imminent pay settlements to just 2 per cent — or 3 per cent in some instances — while inflation is racing far ahead because of the global energy price shock. Wage deals for public-sector workers are already lagging those on offer in the private sector, where employers have been offering big bonuses to keep hold of scarce staff. Official data shows average total pay growth was 8.2 per cent in the private sector in January to March, against 1.6 per cent in the public sector — one of the biggest gaps on record. McAnea told the Financial Times that the rising cost of fuel bills and soaring petrol costs meant many public-sector workers were struggling. Without inflation-proof pay rises, many staff in public services would quit to find better-paying jobs elsewhere, she warned. “The government in Westminster has completely forgotten who got the country through the pandemic and the impact on public-sector workers of that,” she said. “Care workers who were having to hold the hands of dying patients because the families couldn’t get to them . . . for [the government] to say, you need to show pay restraint, is completely inappropriate.” 

Her plea came as Johnson insisted that the government would hold firm in the face of higher wage demands, warning that a “wage-price spiral” would lead to higher interest rates — forcing up rents and mortgages and the cost of borrowing for business and government. “When a country faces an inflationary problem, you can’t just pay more and spend more,” he said in a speech in Lancashire. “You have to find ways of tackling the underlying causes of inflation. If wages continually chase the increase in prices, then we risk a wage price spiral.”Some 25,000 Unison members working in schools are balloting for strike action in Scotland this week. Meanwhile Unison with the GMB and Unite unions have submitted a joint submission to local government for a pay rise for 1.4mn council and school workers of either £2,000 or keeping pace with retail price index inflation — which is generally higher than the consumer price inflation rate targeted by the Bank of England.Other unions representing public-sector workers are also threatening industrial action over pay: the Public and Commercial Services union is preparing to ballot its civil service membership, while the National Education Union is moving towards a potential ballot in the autumn. McAnea said Boris Johnson’s government had been ignoring union leaders for years and had instigated the toughest industrial action legislation in Europe: “They just don’t talk to us,” she said.She added that Unison took part in hundreds of disputes every year which did not result in strike action but did result in higher wages for members. “We don’t want to bring our low-paid workers out to strike but if there’s no alternative what else can people do?” she asked. McAnea said that Unison members already paid a disproportionate amount of their income on fuel, housing and transport costs. “They lead what my mother would call a hand-to-mouth existence where there’s no money left at the end of the week or month to save for anything.” More

OTTAWA (Reuters) -Hot inflation is the Bank of Canada’s primary focus as it raises interest rates, a senior central bank official told Reuters on Thursday, making it clear that the bank was willing to accept a housing market correction in order to curb consumer price gains.Senior Deputy Governor Carolyn Rogers (NYSE:ROG), in an interview with Reuters, said higher interest rates will weigh on housing and highly-indepted Canadians, but are needed to curb inflation, which is running at a 31-year high of 6.8%.The Bank of Canada last week raised its policy rate to 1.5% from 1.0%, its second consecutive 50-basis point increase, and said it was ready to act “more forcefully” if needed. With borrowing costs rising, home sales have dropped sharply in recent months and prices have come off peak levels.”Of course we look at this, but we look at more than housing,” said Rogers. “And at the end of the day, the really important thing to remember is our target is inflation … so that’s our primary focus when we’re making our decisions.”The Bank said earlier the housing market had been unsustainably strong and a moderation would be healthy.Rogers made clear the central bank is also keeping an eye on the small but growing number of Canadians who are heavily indebted after stretching to buy homes at elevated prices. A correction could restrict their access to credit and dampen consumer spending.”We know very well that they’re the folks who will be most affected by interest rate increases. It’s something we’re going to watch closely,” she said. “But all Canadians are affected by high inflation and that’s our mandate.”Despite those higher prices, consumer spending is strong, said Rogers. “There’s a lot of pent up demand, to travel, to spend, to get together. And that’s having an effect on demand in the economy generally,” she said.Earlier, Bank of Canada Governor Tiff Macklem said inflation would dictate how fast interest rates go up, reiterating that the bank might need to make more increases in a row or consider a larger than 50-bp move.Money markets see a 40% chance the bank will hike by 75-bp at its next decision on July 13, with rates expected to hit 3.25% by year-end, a level not seen since 2008.Macklem said higher rates were needed bring domestic demand more in line with supply, though the bank was aiming to avoid overcooling the economy.”We don’t want to choke off demand. We want to get rid of the excess demand, the excess part of it,” he said.The Canadian dollar was trading 1.1% lower at 1.2695 to the greenback, or 78.77 U.S. cents, after touching its weakest since May 30 at 1.2698. More

To stop 40-year highs in price increases, the economy will have to slow, supply chains will need to get fixed and demand will have to come back in line with pre-pandemic norms.
Friday’s highly anticipated CPI inflation report for May is likely to show only modest relief, if any.
A recent paper by former Treasury secretary and Obama administration advisor Larry Summers suggests harsh interest rate hikes may be needed.
President Joe Biden himself noted that much of the heavy lifting has to be done by the Fed.

Products are seen in a supermarket, in Los Angeles, California, May 27, 2022.
Lucy Nicholson | Reuters

Tackling runaway inflation won’t be easy and it won’t be quick, and it may carry a steep price tag that is just beginning to be paid.
To stop 40-year highs in price increases, the economy will have to slow. The ability of producers to get their goods to the marketplace will have to get a lot better, and demand and supply will have to come back into balance. Most troublingly, until the Ukraine war settles, these factors will have a limited impact on fixing the economy.

Even under the best of conditions, a trend that has seen gasoline reach nominal new highs near $5 a gallon, the price of everyday foods like cereal, eggs and hamburger jump by double-digit percentages over the past year and housing costs rise ever higher, will ease only incrementally. That means little relief for consumers anytime soon.
“Slow descent” is how Wells Fargo senior economist Sarah House described the likely downward trajectory of inflation from here. “If you think about inflation, a lot of it is momentum driven. Price setting is slow moving. Companies don’t just change their prices on a dime.”
Indeed, Friday’s highly anticipated inflation report is likely to show only modest relief, if any.

The consumer price index, a measure that encompasses the cost of a massive basket of goods and services, is expected to show inflation increasing at an 8.3% pace over the past year, same as in April, according to Dow Jones estimates. Excluding food and energy prices, so-called core CPI is expected to show growth of 5.9%, slightly off the 6.2% pace from the previous month.
What’s more, the monthly gains are expected to accelerate — 0.7% for headline inflation versus a gain of just 0.3% in April. Core is expected to be little changed, up 0.5%, which would be a one-tenth point month-over-month decline.

Peering through the numbers

Economists, though, will look beyond the headline numbers and try to find trends in the CPI components.
Food and energy, for instance, comprise about 22% of the index, so any slowdown there will be considered noteworthy. Shelter costs, a vital component, make up 32%. More broadly, services comprise about 60% of CPI compared to 40% for goods. Most of the current inflation wave comes from the goods component.
“Slowing the economy would help. Seeing weaker demand growth would take some of the pressure off,” House said. “It’s not just about a slowdown, though. Compositions effects are important. Some areas are more important than others. Goods inflation is one area where we could begin to see spending slow. That’s where a lot of the pressure points are.”
The Federal Reserve is hoping to help that process along by raising short-term interest rates, which had been anchored near zero as the economy recovered from pandemic-related restrictions.
Markets widely expect the Fed to keep raising its benchmark borrowing rate to around 2.75%-3% from the current range of 0.75%-1%.
However, the Fed may have even more work to do than that.

A lesson from the ’80s

A National Bureau of Economic Research working paper released recently by former Treasury secretary and Obama administration advisor Larry Summers, along with a team of other economists, suggests that the Fed could need to raise rates by considerably more to bring inflation down to its 2% goal.
The paper compared the current run of inflation to the early 1980s, which was the last time price increases were of a similar concern. During that time, the Paul Volcker-led Fed took the funds rate up to 19%, causing a recession that eventually helped send inflation on a downward spiral that would last almost 40 years, until the current run-up in prices.
Many economists say that kind of tightening won’t be necessary because inflation was running at 14.8% back then.
But the Summers paper said CPI was calculated differently then, primarily in the way it accounted for housing costs. Using the same methodology would bring core CPI to about 9.1% now.
“To return to 2 percent core CPI inflation today will thus require nearly the same amount of disinflation as achieved under Chairman Volcker,” the Summers team wrote.

Biden’s plan

President Joe Biden recently released his plan to help bring down inflation.
In a Wall Street Journal op-ed, Biden said he would take measures to fix supply chain problems and bring down the budget deficit, which ran to nearly $2.8 trillion in fiscal 2021 but is on track to be a fraction of that this year — at just $360 billion through seven months, due largely to Congress not approving additional Covid-19 relief money.
But those measures are likely to just nibble at the edges of inflation, and the president himself noted that much of the heavy lifting has to be done by the Fed.
“They have the primary role on bringing inflation down,” Treasury Secretary and former Fed Chair Janet Yellen said at a congressional hearing earlier this week. “It’s up to them in how they go about doing it.”
But Fed hikes also take time to work through the system and, until then, economists will be looking at other factors.
Recent announcements from Target and other retailers saying they will work to bring down excess inventory also could be deflationary. But with apparel carrying just a 2.5% weighting in the CPI, those kinds of moves won’t make a big dent in the potentially scary headline numbers.
“If someone tells you recent news that some retailers are discounting clothes will have any measurably effect on CPI, ignore them,” DataTrek Research co-founder Nicholas Colas wrote in his daily market note. “Retailers could give clothes away for free and U.S. inflation would still be over 5 percent.”
Ultimately then, taming inflation will require a slow bleed of the forces that have led up to the current situation. That means a mix of lower growth, reduced strain on the labor market and a recipe of other things that will have to go right before measurable relief is possible.
“It’s not going to be easy,” said House, the Wells Fargo economist. “Given that you have decent consumer spending and business spending, that’s going to keep the pressure on inflation overall.”

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The Biden administration’s leading international energy adviser has called on India not to go “too far” as it increases imports of discounted Russian crude that has lost buyers in Europe. Indian purchases of seaborne Russian oil have surged as exporters slash prices for Urals, the country’s main crude export stream, after European refineries began shunning the cargoes and the EU moved to end its dependence on Russian energy following Moscow’s invasion of Ukraine.The deals are causing frustration in western countries, which are paying higher prices for oil in part due to efforts to restrict Russian export revenue that is being used to wage war.Amos Hochstein, the US state department’s senior energy security adviser, said he had urged India not to profit from the discounted Russian oil while western consumers pay record fuel prices. “I’ve said, ‘Look, we don’t have secondary sanctions that can ban your purchases from Russia’,” Hochstein told a Senate committee hearing on Thursday. “I would ask two things: ‘One, don’t go too far. Don’t look like you’re taking advantage of the pain that is being felt in European households and the United States. Second, make sure you negotiate well, because if you don’t buy [the oil], nobody else is.’” Exports of Urals have sold in recent weeks for almost $30 a barrel less than Brent crude, the international benchmark. But Russian export volumes have remained stable despite the widening western embargo on its oil, while Brent has risen by almost 60 per cent since the start of year to settle at $123.07 a barrel on Thursday, delivering a windfall to the Kremlin.

“Russia is actually in a better position, revenue-wise . . . at this stage in the war than they were at the start of the war,” said Ron Johnson, a Republican senator from Wisconsin, referring to Russia’s oil-export income.“If you look at it narrowly, just on the price they get per barrel sold, then I would agree with you on that,” Hochstein said, but added that the “broader picture was that they have a harder time getting the money back into Russia”, as western financial sanctions tighten on Moscow. India’s Urals imports are expected to hit more than 1mn barrels a day in June compared with zero before the invasion in January and February, according to data provider Kpler. Chinese oil imports have risen more marginally due to Beijing’s recent lockdowns to control Covid-19, which have curbed demand. India’s strategy came under fire from other US politicians on Thursday. Chris Murphy, a Democratic senator from Connecticut, suggested it could change “our willingness to look the other way, as they have more deeply integrated themselves with both Russian energy sources and Russian military equipment”.Chris Van Hollen, a Democratic senator from Maryland, did not name India but described countries that had increased imports of Russian oil at discounted prices as “essentially war profiteering”.India’s embassy in Washington did not immediately respond to a request for comment. More