Economy

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased to 5.49% from 5.53%
Mortgage applications to purchase a home fell 12% week to week and were 15% lower compared with the same week one year ago.
Applications to refinance a home loan continued their landslide, falling another 10% week to week.

A sign of a home for sale is pictured in Alhambra, California on May 4, 2022.
Frederic J. Brown | AFP | Getty Images

Mortgage rates actually fell slightly last week, but the damage has already been done to housing affordability. Both refinance and purchase loan demand dropped, pulling total mortgage application volume down 11% for the week, according to the Mortgage Bankers Association’s seasonally adjusted index.
Mortgage applications to purchase a home declined 12% week to week and were 15% lower compared with the same week one year ago. That was the first weekly drop in homebuyer demand since the third week in April. Mortgage rates have risen over 2 full percentage points since the start of the year, and home prices are up more than 20% from a year ago.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased to 5.49% from 5.53%, with points increasing to 0.74 from 0.73 (including the origination fee) for loans with a 20% down payment.
Inflation isn’t helping consumers feel particularly flush either.
“General uncertainty about the near-term economic outlook, as well as recent stock market volatility, may be causing some households to delay their home search,” said Joel Kan, an MBA economist.
Applications to refinance a home loan continued their landslide, falling another 10% week to week. Refinance demand was 76% lower than the same week one year ago. Two years of record-low interest rates during the Covid pandemic incited a refinance boom which has now gone bust. There is simply a very small pool of borrowers who can now benefit from a refinance.
While dropping very slightly from the week before, the adjustable-rate mortgage share of total applications remained high at 10.5%. It was around 3% at the start of this year. ARMs offer lower interest rates and can be fixed rate for up to 10 years.

Mortgage rates moved higher again Tuesday, after strong retail sales data and comments from Federal Reserve Chairman Jerome Powell, who said the Fed would not hesitate to continue boosting interest rates until inflation came down.
The weekly drop in homebuyer mortgage demand concurs with another report out Tuesday from the nation’s homebuilders. They reported a considerable drop in both buyer traffic and current sales conditions, according to the National Association of Home Builders. Builder sentiment dropped to the lowest level in nearly two years.

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BRUSSELS — The world economy is heading into a potentially grim period as rising costs, shortages of food and other commodities and Russia’s continuing invasion of Ukraine threaten to slow economic growth and bring about a painful global slump.Two years after the coronavirus pandemic emerged and left much of the globe in a state of paralysis, policymakers are grappling with ongoing challenges, including clogged supply chains, lockdowns in China and the prospect of an energy crisis as nations wean themselves off Russian oil and gas. Those colliding forces have some economists starting to worry about a global recession as different corners of the world find their economies battered by events.Finding ways to avoid a global slowdown while continuing to exert pressure on Russia for its war in Ukraine will be the primary focus of finance ministers from the Group of 7 nations who are convening in Bonn, Germany, this week.The economic challenges that governments around the globe are facing could begin to chip away at the united front that Western nations have maintained in confronting Russia’s aggression, including sweeping sanctions aimed at crippling its economy and efforts to reduce reliance on Russian energy.Policymakers are balancing delicate trade-offs as they consider how to isolate Russia, support Ukraine and keep their own economies afloat at a moment when prices are rising rapidly and growth is slowing.Central banks around the world are beginning to raise interest rates to help tame rapid inflation, moves that will temper economic growth by raising borrowing costs and could lead to higher unemployment.Global growth is expected to slow to 3.6 percent this year, the International Monetary Fund projected in April, down from the 4.4 percent it forecast before both Russia’s invasion of Ukraine and China’s zero-Covid lockdowns.On Monday, the European Commission released its own revised economic forecast, showing a slowdown in growth to 2.7 percent this year from the 4 percent estimated in its winter report. At the same time, inflation is hitting record levels and is expected to average 6.8 percent for the year. Some Eastern European countries are in for much steeper increases, with Poland, Estonia, the Czech Republic, Bulgaria and Lithuania all facing inflation rates in excess of 11 percent.Last week, Christine Lagarde, president of the European Central Bank, signaled a possible increase in interest rates in July, the first such move in more than a decade. In a speech in Slovenia, Ms. Lagarde compared Europe to a man “who from fate receives blow on blow.”Eswar Prasad, the former head of the International Monetary Fund’s China division, summed up the challenges facing the G7 nations, saying that its “policymakers are caught in the bind that any tightening of screws on Russia by limiting energy purchases worsens inflation and hurts growth in their economies.”“Such sanctions, for all the moral justification underpinning them, are exacting an increasingly heavy economic toll that in turn could have domestic political consequences for G7 leaders,” he added.Still, the United States is expected to press its allies to continue isolating Russia and to deliver more economic aid to Ukraine despite their own economic troubles. Officials are also expected to discuss the merits of imposing tariffs on Russian energy exports ahead of a proposed European oil embargo that the United States fears could send prices skyrocketing by limiting supplies. Policymakers will also discuss whether to press countries such as India to roll back export restrictions on crucial food products that are worsening already high prices.Against this backdrop is the growing urgency to help sustain Ukraine’s economy, which the International Monetary Fund has said needs an estimated $5 billion a month in aid to keep government operations running. The U.S. Congress is close to passing a $40 billion aid package for Ukraine that will cover some of these costs, but Treasury Secretary Janet L. Yellen has called on her European counterparts to provide more financial help.Finance ministers are expected to consider other measures for providing Ukraine with relief. There is increasing interest in the idea of seizing some of the approximately $300 billion in Russian central bank reserves that the United States and its allies have immobilized and using that money to help fund Ukraine’s reconstruction. Treasury Department officials are considering the idea, but they have trepidations about the legality of such a move and the possibility that it would raise doubts about the United States as a safe place to store assets.Ahead of the G7 meeting this week, American officials saw the economic challenges facing Europe firsthand. During a stop to meet with top officials in Warsaw on Monday, Ms. Yellen acknowledged the toll that the conflict in Ukraine is having on the economy of Poland, where officials have raised interest rates sharply to combat inflation. Poland has absorbed more than three million Ukrainian refugees and has faced a cutoff in gas exports from Russia.“They have to deal with a tighter monetary policy just as countries around the world and the United States are,” Ms. Yellen told reporters. “At a time when Poland is committed to large expenditures to shore up its security, it is a difficult balancing act.”A downturn may be unavoidable in some countries, and economists are weighing multiple factors as they gauge the likelihood of a recession, including a severe slowdown in China related to continuing Covid lockdowns.The European Commission, in its economic report, said the E.U. “is first in line among advanced economies to take a hit,” because of its proximity to Ukraine and its dependence on Russian energy. At the same time, it has absorbed more than five million refugees in less than three months.Deutsche Bank analysts said this week that they thought a recession in Europe was unlikely. By contrast, Carl B. Weinberg, chief economist at High Frequency Economics, warned in a note on Monday that with consumer demand and output falling, “Germany’s economy is headed for recession.” Analysts at Capital Economics predicted that Germany, Italy and Britain are likely to face recessions, meaning there is a “reasonable chance” that the broader eurozone will also face one, defined as two consecutive quarters of falling output.Vicky Redwood, senior economic adviser at Capital Economics, warned that more aggressive interest rate increases by central banks could lead to a global contraction.“If inflation expectations and inflation prove more stubborn than we expect, and interest rates need to rise further as a result, then a recession most probably will be on the cards,” Ms. Redwood wrote in a note to clients this week.A bakery in Al Hasakah, Syria. The interruption of wheat exports from Ukraine and Russia is causing food prices to spiral and increasing global hunger, particularly in Africa and the Middle East.Diego Ibarra Sanchez for The New York TimesThe major culprit is energy prices. In Germany, which has been most dependent on Russian fuel among the major economies in Europe, the squeeze is being acutely felt by its industrial-heavy business sector as well as consumers.Russian gas shipments “underpin the competitiveness of our industry,” Martin Brudermüller, the chief executive of the chemical giant BASF, said at the company’s annual general meeting last month.While calling to decrease its dependence, Mr. Brudermüller nevertheless warned that “if the natural gas supply from Russia were to suddenly stop, it would cause irreversible economic damage” and possibly force a stop in production.Russia-Ukraine War: Key DevelopmentsCard 1 of 4In Mariupol. More

Do Kwon, a South Korean entrepreneur, hyped the Luna and TerraUSD cryptocurrencies. Their failures have devastated some traders, though not the investment firms that cashed out early.Do Kwon, a trash-talking entrepreneur from South Korea, called the cryptocurrency he created in 2018 “my greatest invention.” In countless tweets and interviews, he trumpeted the world-changing potential of the currency, Luna, rallying a band of investors and supporters he proudly referred to as “Lunatics.”Mr. Kwon’s company, Terraform Labs, raised more than $200 million from investment firms such as Lightspeed Venture Partners and Galaxy Digital to fund crypto projects built with the currency, even as critics questioned its technological underpinnings. Luna’s total value ballooned to more than $40 billion, creating a frenzy of excitement that swept up day traders and start-up founders, as well as wealthy investors.Mr. Kwon dismissed concerns with a taunt: “I don’t debate the poor.”But last week, Luna and another currency that Mr. Kwon developed, TerraUSD, suffered a spectacular collapse. Their meltdowns had a domino effect on the rest of the cryptocurrency market, tanking the price of Bitcoin and accelerating the loss of $300 billion in value across the crypto economy. This week, the price of Luna remained close to zero, while TerraUSD continued to slide.The downfall of Luna and TerraUSD offers a case study in crypto hype and who is left holding the bag when it all comes crashing down. Mr. Kwon’s rise was enabled by respected financiers who were willing to back highly speculative financial products. Some of those investors sold their Luna and TerraUSD coins early, reaping substantial profits, while retail traders now grapple with devastating losses.Pantera Capital, a hedge fund that invested in Mr. Kwon’s efforts, made a profit of about 100 times its initial investment, after selling roughly 80 percent of its holdings of Luna over the last year, said Paul Veradittakit, an investor at the firm.Pantera turned $1.7 million into around $170 million. The recent crash was “unfortunate,” Mr. Veradittakit said. “A lot of retail investors have lost money. I’m sure a lot of institutional investors have, too.”Mr. Kwon did not respond to messages. Most of his other investors declined to comment.Kathleen Breitman, a founder of the crypto platform Tezos, said the rise and fall of Luna and TerraUSD were driven by the irresponsible behavior of the institutions backing Mr. Kwon. “You’ve seen a bunch of people trying to trade in their reputations to make quick bucks,” she said. Now, she said, “they’re trying to console people who are seeing their life savings slip out from underneath them. There’s no defense for that.”Mr. Kwon, a 30-year-old graduate of Stanford University, founded Terraform Labs in 2018 after stints as a software engineer at Microsoft and Apple. (He had a partner, Daniel Shin, who later left the company.) His company claimed it was creating a “modern financial system” in which users could conduct complicated transactions without relying on banks or other middlemen.Mr. Shin and Mr. Kwon began marketing the Luna currency in 2018. In 2020, Terraform started offering TerraUSD, which is known as a stablecoin, a type of cryptocurrency designed to serve as a reliable means of exchange. Stablecoins are typically pegged to a stable asset like the U.S. dollar and are not supposed to fluctuate in value like other cryptocurrencies. Traders often use stablecoins to buy and sell other riskier assets.But TerraUSD was risky even by the standards of experimental crypto technology. Unlike the popular stablecoin Tether, it was not backed by cash, treasuries or other traditional assets. Instead, it derived its supposed stability from algorithms that linked its value to Luna. Mr. Kwon used the two related coins as the basis for more elaborate borrowing and lending projects in the murky world of decentralized finance, or DeFi.Read More on the World of CryptocurrenciesA Perfect Storm: A steep sell-off that gained momentum this week is illustrating the risks of cryptocurrencies. Crypto Emperor: Sam Bankman-Fried, a studiously disheveled billionaire, is hoping to put a new face on the still-chaotic world of digital assets.Crypto Critic: The actor Ben McKenzie, best known for “The O.C.,” has become an outspoken skeptic of digital currencies. Who’s listening?Fund-raising Efforts: Activists and nonprofits are considering digital currencies as a way to raise funds for causes like abortion rights. Can it work?From the beginning, crypto experts were skeptical that an algorithm would keep Mr. Kwon’s twin cryptocurrencies stable. In 2018, a white paper outlining the stablecoin proposal reached the desk of Cyrus Younessi, an analyst for the crypto investment firm Scalar Capital. Mr. Younessi sent a note to his boss, explaining that the project could enter a “death spiral” in which a crash in Luna’s price would bring the stablecoin down with it.“I was like, ‘This is crazy,’” he said in an interview. “This obviously doesn’t work.”As Luna caught on, the naysayers grew louder. Charles Cascarilla, a founder of Paxos, a blockchain company that offers a competing stablecoin, cast doubt on Luna’s underlying technology in an interview last year. (Mr. Kwon responded by taunting him on Twitter: “Wtf is Paxos.”) Kevin Zhou, a hedge fund manager, repeatedly predicted that the two currencies would crash.But venture investment came pouring in anyway to fund projects built on Luna’s underlying technology, like services for people to exchange cryptocurrencies or borrow and lend TerraUSD. Investors including Arrington Capital and Coinbase Ventures shoveled in more than $200 million between 2018 and 2021, according to PitchBook, which tracks funding.In April, Luna’s price rose to a peak of $116 from less than $1 in early 2021, minting a generation of crypto millionaires. A community of retail traders formed around the coin, hailing Mr. Kwon as a cult hero. Mike Novogratz, chief executive of Galaxy Digital, which invested in Terraform Labs, announced his support by getting a Luna-themed tattoo.Mr. Kwon, who operates out of South Korea and Singapore, gloated on social media. In April, he announced that he had named his newborn daughter Luna, tweeting, “My dearest creation named after my greatest invention.”“It’s the cult of personality — the bombastic, arrogant, Do Kwon attitude — that sucks people in,” said Brad Nickel, who hosts the cryptocurrency podcast “Mission: DeFi.”Earlier this year, a nonprofit that Mr. Kwon also runs sold $1 billion of Luna to investors, using the proceeds to buy a stockpile of Bitcoin — a reserve designed to keep the price of TerraUSD stable if the markets ever dipped.Around the same time, some of the venture capital firms that had backed Mr. Kwon started to have concerns. Hack VC, a venture firm focused on crypto, sold its Luna tokens in December, partly because “we felt the market was due for a broader pullback,” said Ed Roman, a managing director at the firm.Martin Baumann, a founder of the Hong Kong-based venture firm CMCC Global, said his company sold its holdings in March, at about $100 per coin. “We had gotten increasing concerns,” he said in an email, “both from tech side as well as regulatory side.” (CMCC and Hack VC declined to comment on their profits.)Even Mr. Kwon alluded to the possibility of a crypto collapse, publicly joking that some crypto ventures might ultimately go under. He said he found it “entertaining” to watch companies crumble.Last week, falling crypto prices and challenging economic trends combined to create a panic in the markets. The price of Luna fell to nearly zero. As critics had predicted, the price of TerraUSD crashed in tandem, dropping from its $1 peg to as low as 11 cents this week. In a matter of days, the crypto ecosystem Mr. Kwon had built was essentially worthless.“I am heartbroken about the pain my invention has brought on all of you,” he tweeted last week.Some of Mr. Kwon’s major investors have lost money. Changpeng Zhao, chief executive of the crypto exchange Binance, which invested in Terraform Labs, said his firm had bought $3 million of Luna, which grew to a peak value of $1.6 billion. But Binance never sold its tokens. Its Luna holdings are currently worth less than $3,000.That loss is still only a drop in the bucket for a company as large as Binance, whose U.S. arm is valued at $4.5 billion.Expand Your Cryptocurrency VocabularyCard 1 of 9A glossary. More

UK inflation hit 9 per cent in April, its highest level in more than 40 years, after soaring gas and electricity bills intensified the cost of living crisis facing households. The rate of consumer price inflation is almost double the rate the Bank of England expected only six months ago.With economic activity slowing sharply during the first quarter of the year, the UK economy is suffering its worst bout of stagflation — weak growth alongside high inflation — since the second oil shock of the 1970s. CPI inflation rose from 7 per cent in March to 9 per cent in April, putting it at the highest level among G7 countries and among the highest of any advanced economy in the world.It is expected to rise further in the autumn to more than 10 per cent.The sharp rise in the cost of living will add to pressure on Chancellor Rishi Sunak to accelerate promised measures to help poorer families and pensioners cope with prices rising much faster than their incomes. In response to the figures, Sunak released a statement blaming global shocks on energy prices. “We cannot protect people completely from these global challenges but are providing significant support where we can, and stand ready to take further action,” he said. The Office for National Statistics said the 54 per cent increase in Britain’s energy price cap in April caused almost three-quarters of the rise in the inflation rate that month, but prices were also climbing rapidly in almost all categories of expenditure and in goods leaving factories. Grant Fitzner, ONS chief economist, said the rise in raw material prices was adding to pressure on manufacturers to pass on their higher costs. “This was driven by increases for food products, transport equipment and metals, machinery and equipment,” he said. With inflation far in excess of the Bank of England’s 2 per cent target and the price of services up 4.7 per cent on a year earlier, widespread evidence that inflation is becoming more persistent is likely to add force to those wanting the central bank to raise interest rates further to cool the economy.Kitty Ussher, chief economist at the Institute of Directors, said business leaders were saying the weak economy was now “their number one negative issue” and was making them “more reluctant to invest, storing up problems for the economy in future”.But, according to research on business attitudes for Accenture, just 9 per cent of consumer industry executives believed their customers had less disposable income than a year ago and only a fifth thought their clients were having money troubles. Using the ONS figures on Wednesday, the Institute for Fiscal Studies showed that the 54 per cent rise in energy prices resulted in a much higher inflation rate for poorer households than richer ones because they spent a higher proportion of their incomes on gas and electricity. Heidi Karjalainen, economist at the IFS, estimated that inflation for the poorest 10 per cent of Britain’s households was running at 10.9 per cent in April, compared with 7.9 per cent among the richest 10 per cent. With state benefits rising only 3.1 per cent in April, it meant “big real-terms cuts to the living standards”, said Karjalainen.

The Bank of England this week sought to deflect blame for the lack of control of inflation. Andrew Bailey, BoE governor, blamed global shocks for rising prices and said there was “not a lot we can do about it”. Yael Selfin, chief UK economist at KPMG, said: “The [bank’s] Monetary Policy Committee will be keen to show they can keep inflation expectations anchored down the line. The key risk facing policymakers is if today’s high pace of inflation becomes embedded in pay negotiations, which will put additional pressure on prices to rise”.Retail price inflation, using a discredited measure that still underpins the cost of index-linked government debt, rose to 11.1 per cent in April, also a 40-year high. More

Japan’s economy contracted in the first three months of the year as its recovery was hampered by Covid-19 restrictions and soaring commodity prices caused by Russia’s invasion of Ukraine. While the pace of contraction was slower than expected, Asia’s largest advanced economy has wrestled with surging import costs that have been accelerated by the yen’s fall to a multi-decade low. Japan’s gross domestic product shrank at an annualised rate of 1 per cent in the January-to-March period, compared with economists’ expectations of a 1.8 per cent decline. The data translated into a drop of 0.2 per cent from the previous quarter, according to preliminary figures released by the cabinet office on Wednesday.The GDP figure was released a day after Prime Minister Fumio Kishida’s cabinet approved a ¥2.7tn ($21bn) supplementary budget consisting of subsidies and cash handouts to low-income households to address rising oil and food prices.The Kishida administration has come under pressure to address the squeeze on living standards caused by surging inflation ahead of an upper house election in a few months.Private consumption was flat compared with the October-to-December quarter as the service sector was hit by a rapid rise in Omicron coronavirus variant infections early in the year.In addition to weak spending, net exports knocked 0.4 percentage points off GDP growth as a result of imports gaining 3.4 per cent, exceeding the 1.1 per cent growth in exports.

Many economists expect a rebound in consumer spending as the government eases Covid-19 restrictions. That could allow the Japanese economy to return to pre-Covid growth levels in the latter half of the year, far behind the recovery in the US and Europe. But Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, said the pace of the recovery was expected to be weak as the sharp increase in the cost of imported goods hurt consumer sentiment.“The rise in oil prices will be a big damper on spending,” he added. “The economic rebound expected towards the end of the year may not be as strong as anticipated.”Kazuma Maeda, an economist at Barclays, said another risk factor for exports, particularly for cars, was supply chain disruption that had deepened as a result of lockdowns in China. “The outlook for the global economy has grown increasingly uncertain,” Maeda said, pointing to signs of a slowdown in China and the impact of the war in Ukraine on industrial production in Europe. More

Tulo, an African refugee in the UK, is living in challenging circumstances. She relies on state benefits and uses a local food bank. As inflation soars, bringing higher fuel and food bills, her financial situation is likely to worsen. Yet how is it she has one of the happiest dispositions of anyone I know?An active member of her local church community group, Tulo (not her real name) has a wide circle of friends. The emotional support she gains from her social network sustains and enriches her in a way that money, beyond a basic level of sustenance, never can. She says: “I have lots of friends [in my community group] and many of them are much worse off than me. I feel part of something special here that money can’t buy.”Compare her outlook with that of a 35-year-old investment banker I had as a client when I was a financial planner. Let’s call him Peter. Despite earning around £1mn a year, Peter hated his job, worked long hours, had few friends and was prone to bouts of depression.I had shown Peter that he could give up his job tomorrow and never have to work for the rest of his life if he lived a modest lifestyle. His answer was always the same: “I just need to accumulate another £1mn, then I’m done with this job.” I remember asking Peter what things gave him joy in life. He thought carefully and replied, “I love painting. I love losing myself in the process.” When I asked him how often he painted, he replied, “I don’t have the time with my job. And anyway, I’ve not painted since my mother died when I was 20.”Peter had suffered the loss of his mother while he was still at university. By immersing himself in a job he had come to hate, he may have felt he could address emotional problems that I suspected lay unresolved at her death. But there are few such issues that can be addressed by the accumulation of financial wealth.Readers may regard these examples as extreme or special cases — or even irrelevant during a cost of living crunch that is plunging more people into financial distress. If you are unable to afford food or a roof over your head, dealing with emotional concerns is likely to be low on the list of your priorities. When more people have money troubles, it’s no surprise that mental health issues will be on the rise. While money can’t make you happy, its absence can cause stress and anxiety. And when you feel frightened and anxious about money, it’s easy to become overwhelmed and not seek support. Money worries are far from unusual. In a recent financial wellbeing webinar I gave to more than 1,000 people from some of the UK’s biggest employers, I asked attendees how they felt about their financial situation. More than 60 per cent were slightly concerned, while 15 per cent were worried and concerned. Twenty per cent were cautiously optimistic and only 3 per cent were totally relaxed.Citizens Advice Bureau offers free personalised and practical help to people in financial distress, as do debt advice charities such as StepChange. But there is high demand for the services offered by these organisations and getting an appointment can take a while.Offering a helping hand to someone trying to cope with their money troubles could be the most caring thing any of us can do right now. This could mean anything from talking through the issues, helping complete applications and providing moral support.While a significant minority of people are struggling financially, an even greater number are not. A surge in holiday bookings and strong demand for property and second-hand cars over the past few months suggests many are feeling financially confident. But just because you aren’t struggling to make ends meet and are willing to spend on luxuries and other non-essentials, having a high income doesn’t stop money worries. Research by Salary Finance, a small loans provider, found those earning £90,000 or more a year had almost the same level of financial worries as those earning between £10,000 and £30,000.There still seems to be a stigma in talking about money, which means many suffer in silence and those who can help don’t. But there is no shame in having money worries, and the cost of living squeeze, which affects millions of Britons, makes talking about them easier. We all need to feel that we have control over our lives, and have choices that make life more bearable or fulfilling. Being part of a tribe or, in modern parlance, feeling connected to other people can give us this sense of security.The best thing we can all do in these tricky financial times is make time for each other. It’s far easier to cope with financial adversity when you don’t feel alone. Jason Butler is an expert on financial wellbeing and presenter of the “Real Money Stories” podcast. Twitter: @jbthewealthman. He is head of financial education at Salary Finance. More

Almost all central bankers in the US and Europe agree rates must rise to tackle soaring inflation. What is open for debate is where they should stop.Monetary policymakers and markets are trying to assess where lies the “Goldilocks”, or neutral, level of rates — the optimal level where an economy is neither overheating nor being held back. But, after almost 15 years of tepid inflation and ultra-low borrowing costs, no one is quite sure what “just right” looks like. “Everybody is trying to understand where the neutral rate is and where the tightening cycle will end up,” said Camille de Courcel, head of strategy for G10 rates in Europe at BNP Paribas. “It will be the driving factor for rates markets in the coming months.”The risk is that policymakers get it wrong and let inflation jump out of control by keeping rates too low, or trigger a brutal recession by increasing too much. US Federal Reserve chair Jay Powell has said he hopes for a “softish landing”, but warned last week that raising rates may cause “some pain”. Bank of England governor Andrew Bailey has talked of a “narrow path” to rein in inflation without sending growth into reverse. European Central Bank president Christine Lagarde said “the challenges we still face are many”. The neutral rate, where price pressures cool and output is near capacity, cannot be measured, only estimated. It is also a moving target that changes over time — before 2008, it was thought to be about 5 per cent in advanced economies. Fed officials think it is now between 2 per cent and 3 per cent, when inflation is at 2 per cent. They raised interest rates by 50 basis points to 1 per cent at their last vote, and are expected to increase borrowing costs by another 50 basis points at each of their next two votes, leaving them on track to hit the range later this year. Others believe the neutral rate is higher; Bill Nelson, former deputy director of the Fed board’s division of monetary affairs, who is now chief economist at the Bank Policy Institute, puts it at between 4.5 per cent and 6.5 per cent. The BoE believes neutral is even lower in the UK. Their forecasts show inflation persistently overshooting the 2 per cent target if interest rates remain at their current 1 per cent level, but falling short of this goal if rates rise to 2.5 per cent. That suggests the Monetary Policy Committee believes the right level lies somewhere in between the two bounds. Eurozone policymakers think it is lower still. France’s central bank governor François Villeroy de Galhau puts the rate at about 1 per cent to 2 per cent, comparing it with “the moment when, while driving your car, you lift your foot from the accelerator pedal as you approach the desired speed”. Fears are mounting that neutral might not be enough. Behind closed doors, officials are becoming increasingly concerned that their economies are now running so hot that rates will need to slam on the brakes. Inflation, now at multi-decade highs on both sides of the Atlantic, could prove stickier than expected, forcing them to tip the economy into a deep contraction, just as Fed chair Paul Volcker did in the early 1980s when he raised the federal funds rate to 20 per cent. Vicky Redwood, a former BoE official who is senior economic adviser at Capital Economics, said: “If high inflation has become more ingrained than we think, then a Volcker-shock style recession probably will be required.”Krishna Guha, a former Fed staffer who is now vice-chair at Evercore ISI, said the question facing all central banks was “will you be forced to go beyond the neutral rate, even if you then have to come back down once inflation is tamed?” Powell said on Tuesday the Fed “won’t hesitate at all” to raise rates above neutral if inflation stays high, adding that officials do not know with “any confidence” where neutral is. “They’ll try in phase one to get back to neutral and then they’ll evaluate,” said Jean Boivin, a former central banker in Canada now at BlackRock, forecasting that at that point “the world will be very different from where it is right now”.With figures out on Wednesday showing UK inflation soaring to a 40-year high of 9 per cent in the year to April, the BoE — which has already raised rates three times this year — is under massive pressure to step up its response. Michael Saunders, one of the MPC hawks, said the central bank would need to move “relatively quickly towards a more neutral stance”, although he gave little hint about whether they would need to increase rates beyond that. Lagarde has made clear that the ECB, which has yet to raise its deposit rate from minus 0.5 per cent but is expected to do so for the first time in a decade in July, aims to “normalise” rather than “tighten” monetary policy, moving towards the neutral rate but not beyond it. The ECB president last week signalled that the bank was in less of a rush than the Fed to reach neutral, saying: “The normalisation process will be gradual.” But Dutch central bank head Klaas Knot on Tuesday became the first top ECB official to raise the prospect of a half-point rate increase in July, rather than the quarter-point rise that is widely expected.Along with being more exposed to the conflict in Ukraine, the ECB is also hampered by the risk of borrowing costs shooting up in heavily indebted southern European countries such as Italy.The spread between Italy’s 10-year borrowing costs and those of Germany has already become the widest since the pandemic caused turmoil in debt markets in 2020. While some ECB officials have talked about launching a “new instrument” to counter this risk, without a firmer commitment Guha said “spreads could blow out and force the ECB to take a timeout on rate rises”. More

Fed Chair Jerome Powell said he will back interest rate increases until prices start falling back toward a healthy level.
“If that involves moving past broadly understood levels of neutral we won’t hesitate to do that,” the central bank leader told the Wall Street Journal

Jerome Powell, chairman of the U.S. Federal Reserve, arrives for a Senate Banking Committee hearing in Washington, D.C., on Thursday, July 15, 2021.
Al Drago | Bloomberg | Getty Images

Federal Reserve Chair Jerome Powell emphasized his resolve to get inflation down, saying Tuesday he will back interest rate increases until prices start falling back toward a healthy level.
“If that involves moving past broadly understood levels of neutral we won’t hesitate to do that,” the central bank leader told The Wall Street Journal in a livestreamed interview. “We will go until we feel we’re at a place where we can say financial conditions are in an appropriate place, we see inflation coming down.

“We’ll go to that point. There won’t be any hesitation about that,” he added.
Earlier this month, the Fed raised benchmark borrowing rates by half a percentage point, the second increase of 2022 as inflation runs around a 40-year high.

Powell said following that increase that similar 50 basis point moves were likely to come at ensuing meetings so long as economic conditions remained similar to where they are now.
On Tuesday, he repeated his commitment to getting inflation closer to the Fed’s 2% target, and cautioned that it might not be easy and could come at the expense of a 3.6% unemployment rate that is just above the lowest level since the late 1960s.
“You’d still have a strong labor market if unemployment were to move up a few ticks,” he said. “I would say there are a number of plausible paths to have a soft as I said softish landing. Our job isn’t to handicap the odds, it’s to try to achieve that.”

The U.S. economy saw growth contract at a 1.4% pace in the first quarter of 2022, due largely to ongoing supply side constraints, spread of the omicron Covid variant and the war in Ukraine.

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However, tighter monetary policy has added to concerns about a steeper downturn and has sparked an aggressive sell-off on Wall Street. In addition to the 75 basis points in interest rate hikes, the Fed also has halted its monthly bond-buying program, which is also known as quantitative easing, and will begin shedding some of the $9 trillion in assets it has acquired starting next month.
Powell said he still hopes the Fed can achieve its inflation goals without tanking the economy.
“You’d still have a strong labor market if unemployment were to move up a few ticks. I would say there are a number of plausible paths to have a soft as I said softish landing. Our job isn’t to handicap the odds, it’s to try to achieve that,” he said.
He added that “there could be some pain involved to restoring price stability” but said the labor market should remain strong, with low unemployment and higher wages.

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