Economy

“It’s time to raise rates now when the economy can take it,” Waller told the Economic Club of Minnesota. “Front-load it, get it done, and then we can judge how the economy is proceeding later, and if we have to do more, we’re going to do more.” The U.S. central bank last week raised interest rates by half a percentage point and Fed Chair Jerome Powell signaled similar-sized rate hikes were likely at the next two policy meetings. Waller was asked why, if inflation is as high as it is, the Fed isn’t raising rates even faster.”It’s not a shock-and-awe Volcker moment,” Waller said, referring to former Fed Chair Paul Volcker, whose battle with inflation in the early 1980s involved sharp and unexpected rate increases of as much as four percentage points at a time, and sent the economy into a sharp recession.Back then, Waller said, inflation had been building for years and the public and financial markets had little faith in the Fed’s ability to control it. The current bout of inflation has only been running too high for about a year, he said.”We are on it already, and there’s no backing off,” Waller said. “And the other advantage is the labor market, as I said, is so strong, the economy is doing so well, this is the time to hit it.” More

NEW YORK (Reuters) – The global economy is in recession and recent stock market volatility is a sign investors believe that the Federal Reserve’s plan to continue hiking interest rates is too aggressive, star stock picker Cathie Wood said in a webinar on Tuesday.Wood, whose ARK Innovation ETF outperformed all other U.S. equity funds during the pandemic rally in 2020, said slowing economic growth will likely benefit the type of innovative companies that the fund invests in. “There are a lot of indicators to us that we are in a bit of a bear market” because of the Fed’s expected plan to increase rates by 50 basis points at its June and July meetings, Wood said. “The markets are speaking pretty loudly right now and seem to be calling into question the Fed’s strategy.” The benchmark S&P 500 is down approximately 16% for the year to date, near the 20% decline that typically signifies a bear market.At the same time, “innovative” companies are being subject to “incredible” shorting activity, Wood suggested, pushing stock prices lower. “If we are right, then shorts will be forced to cover and we are certainly looking forward to that time,” Wood said. The $7.9 billion ARK Innovation Fund, which gained 2% in Tuesday trading, is down 57.6% for the year to date. Overall, the fund is now down nearly 75% from its record high in February 2021, and close to the low of $34.69 it touched in March 2020 at the start of the coronavirus pandemic. The fund added a position in General Motors Co (NYSE:GM), largely due to signs it is “serious” about its move into electric vehicles, the company said during the webinar Tuesday. Tesla (NASDAQ:TSLA) Inc remains its largest overall position. Despite its losses, ARK Innovation continues to draw the interest of investors. The fund has received positive inflows on net over the last 4 weeks, including $455.7 million in net inflows the week that ended May 4, according to Lipper data. More

US households added $266bn to their debt balances in the first quarter, led by mortgage loans, in the largest single-quarter increase since 2006, according to the Federal Reserve Bank of New York.The borrowing took US household debt to $15.84tn, or $1.7tn above pre-pandemic levels, researchers at the Fed branch said in a report on Tuesday. But consumers’ balance sheets are much stronger than they were before the onset of coronavirus in early 2020.Household credit card balances declined by $15bn in the quarter as borrowers paid down some of last year’s holiday spending. But the seasonal decline was more modest than normal and credit card balances were still $71bn higher than a year before.Bank executives touted credit card balance growth during earnings calls last month as a sign that the economy was headed back towards business as usual.“Households are in very good shape in terms of their net wealth,” New York Fed researchers told reporters on Tuesday. “The outstanding debt is of high quality, meaning most of the debt that was originated went to high credit score borrowers.” Mortgage balances jumped by $250bn in the first quarter compared with the end of last year, as stronger home sales at higher prices pushed homebuyers to take out larger loans. With US interest rates on the rise, people have been rushing to strike deals to avoid even higher financing costs later.Inflation has been eating away at Americans’ purchasing power, but consumer expectations for inflation over the next year fell slightly in April to 6.3 per cent. Households expect to increase spending by an all-time high of 8 per cent, according to a monthly New York Fed consumer survey that was released on Monday.Despite rapidly rising prices, the average US household feels better about their financial situation, the survey found. Low-income households drove a decline in the perceived probability of missing an upcoming debt payment in April. The average household is forecasting a 3.1 per cent increase in income this year.Consumer confidence had been bolstered by a cushion of pandemic-era savings that allowed households to better absorb higher prices and take on debt. But their resilience was likely a factor spooking investors who have bailed out of stock markets this year, said Diane Swonk, chief economist at Grant Thornton.“The good news is that consumers had a cushion to tap into. The bad news is that the more cushion they have, the more resilient the economy is and the more inflation is a problem,” she said. “That’s why you see the dissonance between consumers and financial markets.”Last week, the Fed increased its main interest rate by 0.5 percentage points and signalled that similar increases were imminent as it shifts its focus from propping up markets to reining in inflation. More

MILAN (Reuters) -Pirelli said on Tuesday it had sought alternative suppliers, increased stocks and shifted production since March to mitigate the impact of Russia’s invasion of Ukraine.Russia, where the Italian tyremaker operates two plants, accounts for around 3% of Pirelli’s revenues and around 11% of its total car tyre capacity, especially in the standard segment, with about half of that intended for export.Pirelli, which on Tuesday said its operating profit grew 35% in the first quarter, said previously it had halted investments in Russia, excluding those linked to security, and activities at its plants were being progressively limited and set just for the local market.Among the measures to counter the effects of sanctions over what Moscow describes as a “special military operation”, Pirelli said it had relocated production of standard tyres for European export to low cost plants in Romania and Turkey.Measures also included a new credit line with a local bank to ensure financial continuity for its operations in Russia and a diversification of logistic service providers.Despite an outlook darkened by geopolitical tensions, inflation and falling demand in China due to lockdown measures, Pirelli’s adjusted earnings before interest and tax (EBIT) were 228.5 million euros ($241 million) for January-March, exceeding a company-provided analyst consensus of 217 million euros.”Outlook for 2022 remains positive despite the war in Ukraine exacerbating raw material pressures,” Chief Executive Marco Tronchetti Provera told analysts.Pirelli said that increasing inflation and raw material costs were more than offset by price-mix and efficiencies, while a lockdown-led drop in Chinese demand was partly offset by a better business performance expected in North and South America.But the manufacturer of tyres for Formula One and high-end carmakers such as BMW and Audi, trimmed its forecast for this year’s margin on its adjusted EBIT to around 15%, after previously guiding between around 16%-16.5%. “Further actions are being planned to improve this profitability target,” it said.However Pirelli slightly raised its forecast for its full-year revenues, allowing it to confirm a target first given three months ago for adjusted EBIT of 890 million euros. ($1 = 0.9489 euros) More

Anti-government protesters angry over power blackouts, shortages of basic goods and rising prices demand that President Gotabaya Rajapaksa steps down, but the retired military officer has invoked emergency powers in an attempt to maintain control.The violence and political chaos gripping the island nation of 22 million comes 13 years after a brutal civil war ended in a bloody denouement in which tens of thousands of people were killed.India, Sri Lanka’s northern neighbour, has extended billions of dollars in loans to help the country pay for vital supplies.China, which has invested heavily in infrastructure projects in recent years in what analysts say is an attempt to extend its influence across Asia, has intervened less publicly but said it supported efforts for the island nation to restructure its debt.Sri Lanka’s vital negotiations with the International Monetary Fund (IMF) over a rescue plan, as well as plans to restructure its sovereign debt, could be thrown into disarray.HOW DID IT COME TO THIS?Analysts say that economic mismanagement by successive governments weakened Sri Lanka’s public finances, leaving national expenditure in excess of its income and the production of tradable goods and services at inadequate levels.The situation was exacerbated by deep tax cuts enacted by the Rajapaksa government soon after it took office in 2019. Months later, the COVID-19 pandemic struck.That wiped out much of Sri Lanka’s revenue base, most notably from the lucrative tourism industry, while remittances from nationals working abroad dropped and were further sapped by an inflexible foreign exchange rate.Rating agencies, concerned about government finances and its inability to repay large foreign debt, downgraded Sri Lanka’s credit ratings from 2020 onwards, eventually locking the country out of international financial markets.To keep the economy afloat, the government leaned heavily on its foreign exchange reserves, eroding them by more than 70% in two years.WHAT DID THE GOVERNMENT DO?Despite the rapidly deteriorating economic environment, the Rajapaksa government initially held off talks with the IMF.For months, opposition leaders and some financial experts urged the government to act, but it held its ground, hoping for tourism to bounce back and remittances to recover.Eventually, aware of the scale of the brewing crisis, the government did seek help from countries including India and China, regional superpowers who have traditionally jostled for influence over the strategically located island.In all, New Delhi says it has provided support worth over $3.5 billion this year.Earlier in 2022, President Rajapaksa asked China to restructure repayments on around $3.5 billion of debt owed to Beijing, which in late 2021 also provided Sri Lanka with a $1.5 billion yuan-denominated swap.Sri Lanka eventually opened talks with the IMF.Despite outside support, fuel shortages have caused long queues at filling stations as well as frequent blackouts, and some crucial medicines have run low.WHAT HAPPENS NEXT?President Rajapaksa has sought support from all political parties in parliament to form a unity government, an offer that many, including the ruling alliance’s allies, have declined.On Monday, Prime Minister Mahinda Rajapaksa, the president’s older brother, wrote in his resignation letter that he was quitting so that an interim, all-party government could be formed.The president plans to meet opposition politicians with the expectation of forming a new government within days, according to a cabinet spokesman.But thousands of protesters, some of whom have camped out on the streets for weeks to the chants of “Gota(baya) go home”, also want the president to step down.Pro- and anti-government demonstrators clashed on Monday in the commercial capital Colombo in an escalation of violence, and houses and cars have been torched in other parts of the country.Some Sri Lankan business groups are leaning on the country’s politicians to quickly find a solution.In a statement on Tuesday, the Joint Apparel Association Forum, which represents Sri Lanka’s vital apparel industry, said it was “critical” for a new government to take charge. More

“Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.” Thus did Jay Powell, chair of the Federal Reserve, open the press conference that followed the meeting of the Federal Open Market Committee last week. This was a grovelling apology. But it also sounded rather like Mario Draghi’s celebrated “whatever it takes” remark of July 2012.What does the Fed’s renewed commitment to low inflation signify for the future? Powell argued optimistically that “we have a good chance to have a soft or softish landing”. By this he meant that demand would be brought closer to supply, which could in turn “get wages down, and get inflation down without having to slow the economy and have a recession and have unemployment rise materially”. He also argued that “the economy is strong, and is well positioned to handle tighter monetary policy . . . but I’ll say I do expect that this will be very challenging”.The most puzzling thing about this line of argument is not the admission that the suggested path will be hard to achieve, but the belief that it will reach its destination. Is it even possible to lower inflation to target just by trimming overheating of the labour market?Some suggest it might be. Alan Blinder of Princeton University and former Fed vice-chair has recently noted that on at least seven of the last 11 occasions, Fed tightening did lead to “pretty soft” landings. The difficulty with these comparisons is that inflation is now at its highest level for 40 years. Even “core” annual consumer price inflation (without energy and food) was 6.5 per cent in the year to March 2022.If one believes this will just fade away after a modest tightening, one must still think inflation is mostly “transitory”. That is highly optimistic. Crucially, the US has enjoyed an exceptionally vigorous recovery. Output growth last year was far stronger than in other leading high-income countries. The recovery of the labour market has been robust, with high vacancy and quit rates and a swift return to low unemployment. Only employment ratios remain a little below previous peaks. Moreover, wage growth has also been strong, as Jason Furman, former chair of the Council of Economic Advisers, notes, though it has been slowing a little.

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The difficulty is that, contrary to Powell’s protestations, inflation does not usually just fade away in such a strong economy. Undoubtedly, a part of measured inflation is due to domestic and global supply constraints, discussed in detail in the Economic Report of the President last month. But this is also a way of saying that excess demand is now pressing on supply at home and abroad. If Powell is to prove correct, supply constraints must at least get no worse, while companies and workers adversely affected by them must take the reduced profits and real incomes on the chin. Yet why should they do so? As Furman notes: “The 8.5 per cent increase in the consumer price index in the 12 months through March is much faster than the pace of nominal wage growth, leading to the fastest declines in real wages over a year in at least 40 years.” Conditions for a cost-price spiral now exist. The hope must instead be that supply and labour market constraints reverse, generating falling prices and so eliminating almost all of the need to regain lost incomes.This view that a significant recession will not be needed to curb inflation is optimistic. But this is not the only form of optimism on display today. The other is the belief that such a recession can be avoided. The difficulty here is that fine-tuning a slowdown will be even harder than it normally is. One uncertainty is that reduced real incomes from high inflation are likely to curb demand, but how far they will do so depends on how willingly consumers spend savings built up during the Covid-induced recession.Another and probably more important uncertainty is over how tighter monetary policy affects financial conditions in the US and abroad. One must not forget that there are exceptionally high levels of dollar-denominated debt across the world. Moreover, asset prices have also reached extreme levels: US house prices (measured on the S&P/Case-Shiller National Home Price Index, deflated by the consumer price index) in February 2022 were 15 per cent higher than before the financial crisis; and the cyclically-adjusted price/earnings ratio on stocks was higher than in any period since 1881, except for the late 1990s and early 2000. Collapses in asset prices in response to monetary tightening would turbocharge Fed policy, but unpredictably. Even modest Fed action has had large impacts: expected interest rates have jumped and markets have hit turbulence. Is what we have seen the end of that upheaval or, as seems more likely, only its beginning?Except for historians, it may be idle to ask how we got into this pickle. Obviously, it is partly due to unpredictable shocks. But policymakers have been too optimistic about inflation. They should have started to normalise a monetary policy introduced in an extraordinary crisis once the worst had passed. The Fed is removing the punch bowl too late.It is, alas, quite likely that a recession will now be needed to keep inflationary expectations under control. Moreover, even if it turns out to be unnecessary, because inflation just fades away, a recession may still occur, simply because even a modestly tighter policy wreaks havoc in today’s fragile asset markets. But the Fed has to sustain its battered credibility on inflation. That is the heart of the central bank’s mandate. It must screw up its courage and do what it [email protected] Martin Wolf with myFT and on Twitter More

Germany’s central bank boss has called for eurozone interest rates to rise in July, warning that policymakers risk acting too late and being forced into a Paul Volcker-style “strong and abrupt” increase in borrowing costs.Joachim Nagel said in a speech in Eltville on Tuesday that there was “disturbing evidence that the increase in inflation is gaining momentum”. More consumers and companies expect prices to keep rising rapidly, which meant “the risk of acting too late is increasing notably”.The Bundesbank boss joins several fellow European Central Bank governing council members in calling for it to end net bond purchases at the end of June and raise its deposit rate in July. Inflation is running at almost quadruple the ECB’s 2 per cent target at 7.5 per cent, a record since the single currency was launched in 1999. In Germany prices are rising even faster, up 7.8 per cent, the most since 1981.Nagel, who took over as president of the Bundesbank in January, said Russia’s “horrific” invasion of Ukraine had “added to the pre-existing price pressures, both directly and indirectly” by driving up the price of energy and other commodities and worsening disruption to global supply chains.Nagel added that the war “may clearly accelerate pre-existing tendencies in both the short and the long run, as exemplified in energy markets and international trade”. Prominent monetary economists such as Charles Goodhart and Manoj Pradhan have warned that inflation could be kept higher than in recent years owing to structural changes in the economy, such as ageing populations, a retreat from globalisation and a shift away from fossil fuels. Nagel said the Bundesbank had found “concerning” results in two recent surveys. One showed German consumers’ expectations of where inflation would be in five years had risen to 4.5 per cent in February, up from 3.5 per cent a year ago. Another revealed companies’ equivalent expectations rose from 3.4 per cent in January to 4.5 per cent in April.“All this suggests that higher inflation rates will prevail in the near future and that inflation expectations could become less anchored,” he said.The Bundesbank warned last month that an immediate ban on Russian gas imports would knock 5 percentage points off German gross domestic product, potentially causing a recession in Europe’s largest economy this year.A sanctions-induced recession “could exert a degree of disinflationary pressure”, said Nagel, adding: “Nevertheless, on balance, the inflationary factors of sanctions such as an energy embargo would clearly prevail, at least in the short term.”“Delaying a monetary policy turnround is a risky strategy,” he said. “It is worth recalling the conditions under which the last, most prominent disinflation episode — the Volcker disinflation at the end of the 1970s — played out,” he said, pointing out that US interest rates rose higher than 20 per cent at that time.As US Federal Reserve chair, Volcker earned a venerated status among central bankers for his efforts to squeeze out inflation that sent the US economy into a steep recession in the early 1980s. Nagel said the situation in the late 1970s “was different in many respects” because public and private debt ratios were much lower then and inflation had already been high for more than a decade. 

Becoming the first ECB rate-setter to make the comparison between today’s situation and the Volcker era, he added: “There is one lesson I would draw from this: delaying a monetary policy turnround is a risky strategy. The more inflationary pressures spread, the greater the need for a very strong and abrupt interest rate hike.”He warned such a scenario would “place excessive strain on firms and households”, while creating vulnerabilities in the financial system and prompting heavily indebted governments to push back against rate rises, “putting the independence of central banks at risk”.Nagel, a former executive at the Bank for International Settlements, worked at the Bundesbank for 17 years before leaving in 2016 and was chosen by Germany’s new government last November to take over from Jens Weidmann who decided to quit after a decade in the job. More

LONDON (Reuters) -British Prime Minister Boris Johnson returned to his election pledges to tackle regional inequalities and maximise post-Brexit freedoms on Tuesday, hoping to win back voters in southern England who abandoned his party in local polls last week.In the traditional Queen’s Speech, read for the first time in 59 years by Prince Charles rather than Queen Elizabeth due to her mobility problems, Johnson said his Conservative government would “deliver on the promises we made” in the 2019 election.But there was little to comfort the millions of people struggling with higher fuel and food costs, with the government reiterating that it would “repair the public finances” rather than channel additional money to cushion the blow. “Her Majesty’s government’s priority is to grow and strengthen the economy and help ease the cost of living for families,” Charles said, reading a text written by the government that sets out its plans for the next parliamentary session.In a ceremony full of pomp and pageantry, Charles – who wore the uniform of an admiral of the fleet – read the speech in front of robed lords and lawmakers, who had walked from the House of Commons to the upper chamber, the House of Lords, led by Johnson and opposition Labour leader Keir Starmer.Charles, Queen Elizabeth’s heir, was drafted in after Buckingham Palace said on Monday the 96-year-old monarch was experiencing “episodic mobility problems” and had reluctantly decided she could not attend.The Queen’s Speech set out 38 bills, including measures to revitalise Britain’s high streets, crack down on illicit finance and make the City, London’s financial district, more attractive to global investors after the country left the European Union.In an introduction to the legislative programme, Johnson said: “This is a Queen’s Speech to get our country back on track and ensure that we deliver on the promises we made at the start of this parliament.””While we must keep our public finances on a sustainable footing – and we cannot completely shield people from the fallout from global events – where we can help, we will.”SHIFTING FOCUSThe raft of proposed laws the government wants to push through parliament was welcomed by Conservative lawmakers. David Jones, a former minister, told Reuters it showed “an ambitious government agenda, seizing the opportunities of Brexit”.Johnson’s government is keen to turn the page on scandals after months of reports of COVID-19 lockdown-busting gatherings at the prime minister’s Downing Street office and residence.After Johnson and his finance minister, Rishi Sunak, were both handed fines for one such gathering, opposition leader Starmer stepped up the pressure by pledging to resign if police found he had also broken lockdown rules.Downing Street is still awaiting the results of a police investigation into other gatherings.Johnson is also under pressure to tackle a growing cost-of-living crisis, but the Queen’s Speech offered no clues on any immediate action the government might take to help people struggling to pay their bills.The Bank of England said last week Britain risks a double-whammy of a recession and inflation above 10%.Johnson’s spokesman said the government had already put in 22 billion pounds to address immediate pressures and that focusing on boosting economic growth offered a more sustainable solution. “It’s an important point for the public to understand that our capacity to inject money is finite,” he said.Johnson was punished in last week’s local elections, when voters in southern England abandoned his party over the scandals and the cost of living. This prompted some lawmakers to urge a return to a more traditional Conservative agenda of tax cuts and preventing housing from encroaching on rural areas.With his critics falling short of the numbers needed within the Conservative Party to try to oust him, Johnson hopes that by refocusing on an agenda he believes won him a large majority in the 2019 election he can reboot his premiership. More