Jay Powell takes on the world

Federal Reserve Chair Jerome Powell is waging a relentless battle against inflation that threatens to leave a path of destruction on the global economy in its wake.

The Fed — carrying out its steepest interest rate hikes in three decades — has fueled market turmoil by boosting the value of the dollar and feeding higher borrowing costs from the U.K. to Japan to Latin America. But Powell’s No. 1 enemy is inflation at home, and he has signaled that the Fed will do what’s best for the U.S., no matter what.

“We are very aware of what’s going on in other economies around the world,” he said last week after the Fed raised rates for the fifth time this year. But, he added, “it’s hard to talk about collaboration in a world where people have very different levels of interest rates.”

Powell’s actions have caused a flood of money to flee the shores of other countries for safer American investments that offer a much more attractive payoff because the U.S. now has its highest interest rates since 2008. A stronger dollar means the cost for Europeans of heating their homes and powering their cities, already driven sky high by Russia’s invasion of Ukraine, is getting even greater. And smaller developing countries could begin to drown in ever-more-burdensome debt payments.

Fed officials are in regular communication with their counterparts in other countries, and Steven Kamin, who led the Fed board’s international finance division until 2020, said Powell and his fellow policymakers are going to hear a lot of anxiety from foreign officials about the fallout caused by the central bank’s policies.

“Will that stay the Fed’s hand? Probably not,” said Kamin, now a senior fellow at the American Enterprise Institute. “They’re pretty single-mindedly focused on inflation.”

Most central bankers, too, are locked in their own fights with inflation, so they understand the Fed’s resolve; indeed, price stability in the U.S. also benefits the rest of the world. But with the heightened threat of global recession, one of the largest risks looming from the Fed’s actions is that other central banks might soon feel pressure to cut rates as their economies contract. They’ll have a harder time doing so, however, because that would drive even more precious capital to American markets.

“We might enter a phase in which we run the risk, just because of the fear of financial volatility, of going against the Fed,” said Alejandro Werner, a former official of the Mexican government and of the International Monetary Fund. “Central banks in Latin America and other emerging markets could be much more cautious in loosening their monetary policy stance and inject some additional recessionary forces.”

Europe, like the U.S., has been facing decades-high price spikes. Preliminary German data showed annual inflation hit 10 percent in September. But the European Central Bank has been timid compared to the Fed.

That’s because the ECB, led by Christine Lagarde, is facing inflation pressures heavily driven by factors that monetary policy can hardly influence. Lagarde said Wednesday that 60 percent of the inflation surge in the eurozone can be ascribed to energy, an intense side effect of the Ukraine war. In contrast, prices are rising in the U.S. in part because government and consumer spending have been so strong.

And while the ECB has lately taken a significantly harder line on inflation, investors fear that a potential recession might stop the central bank in its tracks. The war in Ukraine is pushing up energy import prices, and it is also expected to leave deep marks on growth.

In the worst case, widespread blackouts could cripple the region’s industry. Dire economic prospects may hamper the need and readiness to raise borrowing costs much further. While Fed interest rates are seen peaking at 4.3 percent next year, markets are betting that those in the ECB won’t hit 3 percent.

The last two periods of dollar peaks ended with coordinated efforts by the U.S. and other countries to intervene in the currency’s value, leading to speculation that could become an option once again. But there is little evidence that such an agreement is in the offing.

“I don’t anticipate that that’s where we’re headed,” White House National Economic Council Director Brian Deese said at an event Tuesday evening.

Still, as global policymakers gather for the IMF/World Bank annual meetings next month in Washington, there will be a lot of focus on the extent to which the U.S. and its allies will affirm their commitment, most recently signed in May this year, to allowing the value of their currencies to be set by markets.

The Fed’s moves have already led the Bank of Japan to move on currency markets. BOJ Governor Haruhiko Kuroda and his fellow central bankers last week left interest rates in sub-zero territory and said they have no plans to raise them anytime soon. But Japanese authorities also took unexpected action, after the Fed raised rates by another three-quarters of a percentage point, to prop up the value of the yen — an action the U.S. Treasury Department made clear it is watching closely but stopped short of condemning.

“We understand Japan’s action,” a Treasury spokesperson said in a statement, adding that the U.S. did not participate in the move.

A key question is what type of pain abroad would be enough to lead U.S. policymakers to change course and pursue more concerted policies to lighten the burden on other countries, such as debt relief through the IMF.

“Certainly, if we get to the point where there are cascading defaults in emerging market countries that are contributing to global financial stress, that’s the thing that starts to get at least some attention,” said Tobin Marcus, a senior policy and politics strategist at Evercore ISI who previously advised then-Vice President Joe Biden. “But even so, things would have to be quite bad along that vector to see the kinds of spillovers that would unavoidably grab the attention of policymakers in the U.S.”

Rather than working together to steer foreign exchange markets, global central banks could also consider coordinating interest rate increases to avoid raising borrowing costs too high, argued Peterson Institute fellow Maurice Obstfeld in a recent paper.

Still, for the Fed, those decisions will primarily be driven by the extent to which they threaten the U.S. economy. The central bank is tasked with pursuing both price stability and maximum employment, noted Simon Johnson, a professor at MIT Sloan School of Management and former IMF chief economist.

“There’s nothing in their mandate about global anything,” he added.

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  • 4 недели, 1 день назад 02.11.2022Economy
    News The Buckshee

    The Federal Reserve on Wednesday announced another massive interest rate increase in its fight against inflation, tightening its grip on the economy less than a week before midterm elections that will determine control of Congress.

    The move brings the central bank’s main policy rate, which influences interest rates throughout the economy, near 4 percent just eight months after it sat near zero in the wake of the coronavirus pandemic. And the Fed’s rate-setting committee said they expect more increases will be needed to ensure that their policies have enough bite to bring inflation down from its four-decade high.

    Officials hinted that future rate hikes could be smaller than Wednesday’s three-quarters of a percentage point increase, given how much the Fed has already raised borrowing costs and the fact the central bank’s actions take time to feed through the economy. Some Fed watchers have warned that the central bank is raising rates too quickly, running the risk of going too far and realizing it too late.

    “In determining the pace of future increases … the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” Fed policymakers said in their statement after meetings this week.

    Inflation has cooled only slightly and job growth remains strong, but some sectors of the economy are already showing signs of strain from the Fed’s policy moves.

    Manufacturing barely grew in October, according to a survey from the Institute for Supply Management that’s considered a benchmark indicator. And the housing market has been hammered by the highest mortgage rates in two decades, leading home sales to decline rapidly and prices to drop in some areas.

    Still, the Fed said it remains “highly attentive to inflation risks,” the committee said.

  • 4 недели, 1 день назад 02.11.2022Economy
    News The Buckshee

    The U.S. economy is growing. Gas prices are lower and wages are rising. Voters, however, are still in a sour mood.

    Two-thirds of voters believe the economy is in a recession, despite new data released last week showing that the economy grew in the third quarter by a healthy annualized rate of 2.6 percent, according to the latest POLITICO/Morning Consult poll. It was the 16th consecutive week in the poll that more than 60 percent of voters said they believe the U.S. economy is already in a recession.

    The results suggest that voters’ dim view of the economy is locked in ahead of election day on Tuesday. That was underscored by other questions in the poll showing that voters were more likely to have heard about the country’s record-high inflation than they were about declining gas prices or recent increases in wages.

    The third quarter GDP increase followed two quarters of decline. Fifty-eight percent of voters said they hadn’t heard that GDP was up, according to the poll. Democratic men were the most likely to have heard the latest growth statistic, with 58 percent, and Republican women were the least likely, at 28 percent.

    A plurality of voters — 43 percent — said that economic issues are the top priority they will take into consideration in choosing candidates, ahead of abortion, health care and education.

    There were partisan differences between voters and their knowledge of recent economic indicators. Fifty-four percent said they hadn’t heard much or anything at all about declining gas prices, including 59 percent of independent voters and 60 percent of Republican voters. A full 70 percent of voters said they had not heard that wages have increased by an annual rate of 1.2 percent, including a majority of Democrats, Republicans and independents.

    Voters, however, were very aware of inflation. Sixty-five percent, with a majority of voters from both parties and independents, said they had heard about record-high inflation while only 18 percent said they hadn’t heard anything about it.

    The poll also found that 26 percent of voters have already cast their ballots, either by mail or by early in-person voting. Thirty-seven percent said they planned to vote in-person on election day.

    There was a partisan split in voters’ methods of casting their ballots, with twice as many Democrats as Republicans saying they had already voted by mail. Just 13 percent of Republicans said they had voted early by mail and 8 percent more have voted early in person. Twenty-three percent of independents have also already cast their ballots, 18 percent by mail and 5 percent in person. By contrast, 33 percent of Democrats have already voted early, 26 percent by mail and 7 percent in person.

    Republicans were more likely than Democrats or independents to say they plan to cast a ballot in-person on election day. Those waiting to vote on Nov. 8 include 48 percent of Republicans, 33 percent of independents and 28 percent of Democrats.

    Of the voters who ranked the economy as their top issue this election cycle, 41 percent also plan to wait until election day to cast their ballots in person. Twenty percent of this group have already voted.

    Voters also remain divided over how much trust to have in the election system. Thirty percent of voters said they have a lot of trust in the U.S. election system and 34 percent said they have strong trust in their state’s system. Democrats and independent voters were the most likely to have high trust in the election system.

    Voters are also braced for election challenges. About half of respondents said they believe former President Donald Trump and congressional Republicans will challenge the results of the midterm election in their state. An additional 32 percent think the Biden administration will challenge results, and 33 percent think congressional Democrats will. Democratic voters are more likely than Republicans or independents to believe that the election results will be challenged.

    The latest POLITICO/Morning Consult poll was conducted Oct. 28-30, surveying 2005 registered voters. The margin of error is plus or minus 2 percentage points.

  • 1 месяц назад 27.10.2022Economy
    News The Buckshee

    The U.S. economy grew at a better-than-expected 2.6 percent annual rate from July through September, snapping two straight quarters of economic contraction and overcoming punishingly high inflation and interest rates.

    Thursday’s estimate from the Commerce Department showed that the nation’s gross domestic product — the broadest gauge of economic output — grew in the third quarter after having shrunk in the first half of 2022. Stronger exports and steady consumer spending, backed by a healthy job market, helped restore growth to the world’s biggest economy.

    Consumer spending, which accounts for about 70 percent of U.S. economic activity, expanded at a 1.4 percent annual pace, down from a 2 percent rate from April through June. Last quarter’s growth also got a boost from exports, which shot up at an annual pace of 14.4 percent.

    Housing investment, though, plunged at a 26 percent annual pace, hammered by surging mortgage rates as the Federal Reserve raises borrowing costs to combat chronic inflation.

    The outlook for the overall economy has darkened. The Fed has raised interest rates five times this year and is set to do so again next week and in December. Chair Jerome Powell has warned that the Fed’s hikes will bring “pain” in the form of higher unemployment and possibly a recession.

    The government’s latest GDP report comes as Americans, worried about inflation and the risk of recession, have begun to vote in midterm elections that will determine whether President Joe Biden’s Democratic Party retains control of Congress. Inflation has become a signature issue for Republican attacks on the Democrats’ stewardship of the economy.

    With inflation still near a 40-year high, steady price spikes have been pressuring households across the country. At the same time, rising interest rates have derailed the housing market and are likely to inflict broader damage over time. The outlook for the world economy, too, grows bleaker the longer that Russia’s war against Ukraine drags on.

    Last quarter’s U.S. economic growth reversed annual declines of 1.6 percent from January through March and 0.6 percent from April through June. Consecutive quarters of declining economic output are one informal definition of a recession. But most economists have said they believe the economy skirted a recession, noting the still-resilient job market and steady spending by consumers. Most of them have expressed concern, though, that a recession is likely next year as the Fed steadily tightens credit.

    Preston Caldwell, head of U.S. economics for the financial services firm Morningstar, noted that the economy’s contraction in the first half of the year was caused largely by factors that don’t reflect its underlying health and so “very likely did not constitute a genuine economic slowdown.” He pointed, for example, to a drop in business inventories, a cyclical event that tends to reverse itself over time.

    Higher borrowing costs have weakened the home market, in particular. The average rate on a 30-year fixed-rate mortgage, just 3.09 percent a year ago, is approaching 7 percent. Sales of existing homes have fallen for eight straight months. Construction of new homes is down nearly 8 percent from a year ago.

    Still, the economy retains pockets of strength. One is the vitally important job market. Employers have added an average of 420,000 jobs a month this year, putting 2022 on track to be the second-best year for job creation (behind 2021) in Labor Department records going back to 1940. The unemployment rate was 3.5 percent last month, matching a half-century low.

    Hiring has been decelerating, though. In September, the economy added 263,000 jobs — solid but the lowest total since April 2021.

    International events are causing further concerns. Russia’s invasion of Ukraine has disrupted trade and raised prices of energy and food, creating a crisis for poor countries. The International Monetary Fund, citing the war, this month downgraded its outlook for the world economy in 2023.

  • 1 месяц, 1 неделя назад 23.10.2022Economy
    More voters trust Republicans on economy as interest in midterms hits high, polls say

    Voters trust Republicans more than Democrats on top issues including the economy, according to an ABC News/Ipsos poll conducted less than three weeks before the midterm elections. The findings underscore the uphill battle for the president’s party to rally enthusiasm as voters continue to perceive the economy as poor.

    On both the economy and gas prices, 36 percent of Americans trust Republicans more than Democrats —12 and 14 points higher than the percentage of people who trust Democrats on those issues, respectively.

    Democrats still lead in voter trust on abortion, climate change, Covid-19 and gun violence, according to the poll, which was conducted last week and released on Sunday on ABC’s “This Week.” However, the economy and inflation are the issues most on the minds of voters, according to a POLITICO/Morning Consult poll released last week, giving a late bump in political momentum to Republicans.

    House Speaker Nancy Pelosi said on Sunday on MSNBC that she didn’t “subscribe” to the idea that voters don’t trust Democrats on the economy.

    Republicans “don’t have a solution to inflation,” she said.

    Americans in both parties have shown record-high interest in this midterm election, according to an NBC News poll released on Sunday: 70 percent of registered voters expressed interest in the upcoming election as a “9” or “10” on a 10-point scale, the poll said — the highest NBC has recorded in a midterm survey at this time of year.

    Republicans showed more enthusiasm, with 78 percent showing a high interest, compared with 69 percent of Democrats.

    In the ABC poll, Republicans were within the margin of error on the issue of handling immigration, with 35 percent of Americans saying they trusted them more, compared with 32 percent favoring Democrats.

    The president’s party typically loses congressional seats in the midterm elections, though some polling showed Democrats closing in on Republicans’ lead earlier in the cycle, especially over the summer.

    The ABC News/Ipsos poll was conducted Oct. 21-22 in English and Spanish, among a random national sample of 686 adults. It had a margin of sampling error of plus or minus 4 percentage points.

    The NBC News poll was conducted among 1,000 registered voters Oct. 14-18. It had an overall margin of sampling error of 3.1 points, and a margin of sampling error among likely voters of plus or minus 3.47 points.

  • 1 месяц, 1 неделя назад 21.10.2022Economy
    Soaring tax revenue, spending plunge spark record drop in budget deficit

    The U.S. government posted a record decline in federal deficits in fiscal 2022, as surging tax revenue and waning pandemic spending helped cut the budget gap in half.

    The annual budget shortfall totaled $1.37 trillion, compared to $2.77 trillion in the previous fiscal year, the Treasury Department said Friday. That’s due in part to record high tax receipts, which jumped last year thanks to a strong economy that drew more people into the labor market, pushing up the amount the government collected in individual and corporate taxes. Federal spending also declined, as fewer people collected jobless benefits and other pandemic-related programs wound down.

    “Today’s joint budget statement provides further evidence of our historic economic recovery, driven by our vaccination effort and the American Rescue Plan,” Treasury Secretary Janet Yellen said in a statement.

    But the deficit wasn’t as small as the $1 trillion that White House officials had forecast in August, primarily because of higher spending on education that reflected President Joe Biden’s student debt-forgiveness program, which the Congressional Budget Office has estimated will cost $400 billion.

    The Biden administration for months has touted the sharp drop in budget deficits as evidence that the president’s economic policies are strengthening the economy and improving the fiscal outlook, and used it to push back against GOP criticism that the president is piling on government debt.

    Deficits as a share of the economy fell to 5.5 percent in the fiscal year that ended Sept. 30, down from 12.3 percent in fiscal 2021 but still higher than in 2019, before the pandemic.

    But critics say the administration is taking too much credit for the deficit drop. The Committee for a Responsible Federal Budget attributed the decline entirely to shrinking or expiring spending programs enacted during the pandemic.

    Federal spending fell by $550 billion, an 8 percent decline from the previous fiscal year, driven by lower spending by the Small Business Administration, the Labor Department and the Department of Housing and Urban Development. That’s a record decrease, and the first decline since 2013, when government spending fell by $84 billion, Treasury officials said.

    Tax receipts jumped by a whopping $850 billion to $4.9 trillion, a 21 percent increase from last year. Taxes withheld from people’s paychecks climbed 14 percent, thanks to increasing wages and employment.

    Non-withheld receipts rose 37 percent, reflecting in part last year’s run-up in the stock market. Corporate receipts climbed 14 percent, the agency said.

    Brian Faler contributed to this report.

  • 1 месяц, 1 неделя назад 21.10.2022Economy
    Yes, the Liz Truss debacle matters for Americans

    Queen Elizabeth II lasted more than seven decades in the job. The reign of Elizabeth Truss lasted less than seven weeks. Trussonomics — the idea that unfunded tax cuts could revive a nation — was dead within seven days.

    The so-called “special relationship” between the U.S. and the U.K. has survived wars, and it’s not fundamentally at risk, regardless of who occupies Downing Street.

    So is there any reason for Americans to care about chaos in Britain?

    Aside from gaining satisfaction from knowing there are other countries with messed-up democracy, here are four ways the departure of Liz Truss matters for Americans:

    The rallying cry of the U.K. Conservative Party’s base is Bring Back Boris.

    Johnson is not certain to return — but he’s the bookmaker’s second favorite, reflecting an extraordinary turn of events for a politician chased out of office in July. Back then, Johnson was derided as an unethical liar by many of his colleagues, senior civil servants and the broader public.

    Former Chancellor Rishi Sunak is Johnson’s top rival for the Downing Street keys. Given Johnson’s ability to dominate the media and charm his colleagues, his chances are likely to increase as the race wears on.

    But Johnson’s resurrection would leave the White House in an awkward position.

    President Joe Biden couldn’t bring himself to name check Johnson when he departed Downing Street. The sniffy send-off was the culmination of years of Biden frustration at Johnson.

    Johnson suggested former President Barack Obama’s part-Kenyan ancestry predisposed him to a “dislike of the British Empire,” he compared Hillary Clinton to “a sadistic nurse in a mental hospital,” and he not only supported Brexit, but appeared willing to risk Irish border arrangements — and therefore peace in in Ireland — as a political bargaining chip.

    But, Conservative MPs don’t have the White House top of mind when their own careers are at stake — and around 200 of the 357-strong caucus would lose their jobs if an election were called tomorrow.

    If the choice is unemployment or Boris Johnson, many MPs will likely choose Johnson.

    Getting there would require the request of more than 100 MPs. If more than two candidates reach that threshold, then Conservative Party members would pick their preferred prime minister. If only one reaches the threshold, they are crowned the winner. King Charles then asks the winner to form a government.

    Markets called many of the shots in this prime ministerial resignation.

    Have you been checking your 401k balance lately? You likely didn’t appreciate the balance you saw. That isn’t Liz Truss’ fault — but she certainly didn’t help.

    Beyond investor fears about recession, inflation, supply chains and nuclear war — markets simply didn’t trust the unfunded tax cuts that formed the basis of Trussonomics.

    The plans, announced Sept. 23, spooked financial markets: They punished the pound, drove up Britain’s cost of borrowing, and pushed the nation’s pension funds to the brink of collapse.

    The only thing that calmed markets was the Bank of England promising to buy up to $70 billion in government debt.

    Now, the end of Truss and short-lived Chancellor Kwasi Kwarteng’s control of Britain’s purse strings permanently removes a risk factor from investment strategies in financial centers from New York to Hong Kong.

    The Bank of England blew through nearly as much cash as Truss would have, if she’d had time to implement her tax cut plan. Unlike Truss, bank Governor Andrew Bailey still has his job.

    It took a monumental crisis, but the British Conservatives junked their traditional system for electing their leader to deal with the Truss crisis.

    The bad news is you’ll be stuck hearing about the race to replace Truss for the next two weeks.

    The good news is — if you are frustrated with the direction of America’s Democrats or Republicans — parties in major democracies can perform serious surgery on themselves to preserve their electoral viability.

    “The Tories could sink themselves for a generation,” the conservative magazine The Spectator editorialized today. “MPs have a choice: to fight each other to the death, or unite to salvage what they can.”

    After falling to parity with the U.S. dollar in late September, in the depths of the Trussonomic tax cut debacle, the pound has steadily increased in value over the past two weeks.

    The pound rose when Truss and Kwarteng backflipped on his policy to cut the top rate of income tax from 45 to 40 percent.

    The pound rose further when Kwarteng was fired and replaced by Jeremy Hunt, who proceeded to dump the rest of the tax plan, including corporate tax cuts.

    And finally the pound rose again as Truss was giving her resignation speech.

    For every $1,000 you would have spent on a holiday in Britain booked two weeks ago, you would spend $1,120 now.

    Bon voyage!

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More voters trust Republicans on economy as interest in midterms hits high, polls say
Voters trust Republicans more than Democrats on top issues including the economy, according to an ABC News/Ipsos poll conducted less…
Soaring tax revenue, spending plunge spark record drop in budget deficit
The U.S. government posted a record decline in federal deficits in fiscal 2022, as surging tax revenue and waning pandemic…

Economy Jay Powell takes on the world