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A dovish rate hike? The case that loose Fed policy could backfire on jobs

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A dovish rate hike? The case that loose Fed policy could backfire on jobs
© Reuters. FILE PHOTO: A restaurant advertising jobs looks to attract workers in Oceanside, California, U.S., May 10, 2021. REUTERS/Mike Blake/File Photo

By Howard Schneider

WASHINGTON (Reuters) – The U.S. Federal Reserve for the past 20 months has put its monetary policy arsenal behind the single-minded goal of restoring U.S. employment particularly for the less well off whose prospects suffered most during the pandemic.

Interest rates remain anchored near zero and central bank bond purchases are still underway even as inflation takes off and unemployment drops fast – a combination that has begun to rattle even supporters of the Fed’s jobs focus who worry the central bank as it stands may be doing more harm than good to the cause of full employment. Alternate inflation measures, https://graphics.reuters.com/USA-FED/INFLATION/znpnekxmdvl/chart.png

Calling for a quick Fed pivot towards tighter policy, prominent Democratic economist and former Council of Economic Advisers chair Jason Furman said Wednesday the Fed had fallen out of step with where the economy stands. Moreover, if it has to catch up with a more dramatic policy shift and faster interest rate increases down the road it will hurt those it is ostensibly aiming to help. Unemployed to job openings, https://graphics.reuters.com/USA-FED/JOBS/egvbkmeoepq/chart.png

“A hot economy helps vulnerable workers the most,” Furman, now a Harvard University professor, wrote in a presentation prepared for the Peterson Institute for International Economics. “But a recession hurts vulnerable workers the most…Slowing inflation a little now could help obviate the need for even more drastic and painful steps in the future — and reduce the chances of a future recession with the millions of jobs that could be lost.” Labor market progress, https://graphics.reuters.com/USA-ECONOMY/FEDPROGRESS/yzdvxmmmdpx/chart.png

His call for the Fed to speed the end of its bondbuying and set a “default” plan to start raising interest rates in the first half of next year is the latest salvo in a running debate among economists, investors, elected officials and Fed policymakers about the risks posed by inflation running at 30-year highs, and how the central bank should respond to it.

Investors currently expect the Fed to raise rates perhaps three times next year; the Fed is split on whether it will need to move at all in 2022, a view Furman said stemmed from “wishful thinking” about inflation by at least some Fed policymakers.

EYES ON BIDEN’S ‘FRAMING’ OF FED PICK

The fast pace of price increases was initially dismissed as a fleeting byproduct of reopening after the pandemic but is lasting longer and running higher than expected. It also has started hitting President Joe Biden’s popularity as he mulls whether to reappoint current Fed Chair Jerome Powell to a second four-year term or replace him with Governor Lael Brainard.

A decision is expected before the Thanksgiving holiday, the White House said on Wednesday, and Biden’s language around the announcement – his “framing” of the appointment as Furman put it – may signal how deeply he views inflation as a risk to the economic outlook and to his plans for major new social and infrastructure spending.

Some economists, such as Nela Richardson at payroll processor ADP, have made a similar case as Furman, arguing that inflation itself is hitting low-income families who have less ability to wait out “transitory” price increases that are now anticipated to last well into next year, at least.

Others have noted that dynamics that have dependably held down prices in recent years, such as the deep discounts available online, have reversed.

A monthly index of online prices from software maker Adobe (NASDAQ:) Inc notched its 17th consecutive increase in October, reversing years of steady decline, and is up 1.9% year over year.

“For consumers the place they used to expect increasing value is no longer headed in that direction,” said Taylor Schreiner, director of Adobe Digital Insights, with less discounting even heading into the holiday season.

‘CLOUDY DATA’

There’s little disagreement the economy still needs help as it moves beyond a health crisis that drove the unemployment rate to nearly 15%, if only briefly.

Even those Fed policymakers most concerned about inflation currently see the need to raise interest rates only twice next year, or by about half a percentage point. That’s a modest pace of “normalization” that means Fed policy would still be supporting economic growth.

That is likely to change somewhat when new policymaker forecasts are issued next month and officials incorporate recent unexpectedly strong price and wage increases.

Still, the difference revolves more around how long the Fed should wait before beginning to telegraph and then move forward with its first interest rate increases, and how strict it should be in sticking with its pledge to not raise rates until the economy returns to “maximum employment.”

That remains unresolved, and maximum employment undefined, with some policymakers arguing that the bigger mistake would be to raise rates prematurely and potentially slow job growth before it is clear inflation won’t change course on its own.

“We’ve got 4 million fewer jobs than we did have and if you take into account where we would have been without COVID it’s more like 6 million, and that’s not what I would consider full employment,” San Francisco Federal Reserve bank president Mary Daly said this week. “The data are cloudy right now, and if we react to cloudy data we could end up making a mistake that’s very challenging to unwind.”

Economy

Oil Prices Fall amid Protests in China

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Oil prices decline

Oil prices fell on Monday amid a general decline in investor appetite for risk amid information about the ongoing protests in China against vested restrictions.

The cost of January futures on Brent crude oil on London’s ICE Futures exchange was $81.31 per barrel on Monday, down $2.32 (2.77%) from the close of the previous session. At the close of trading on Friday, those contracts fell $1.71 per barrel to $83.63.

Oil prices decline – what’s going on in the market?

The price of WTI futures for January crude fell by $2.31 (3.03%) to $73.97 per barrel in electronic trading on the New York Mercantile Exchange (NYMEX). By closing of previous trades, the cost of these contracts decreased by $1.66 (2.1%) to $76.28 per barrel. Brent and WTI gained 4.6% and 4.8%, respectively, last week.

According to Bloomberg, protests were held in cities across the country, including the capital Beijing, as well as Shanghai, Xinjiang, and Wuhan, which was originally the epicenter of the COVID-19 spread.

That contributes to a stronger U.S. dollar, which reduces the attractiveness of investments in crude, and also raises the possibility of even more significant tightening of restrictions by Chinese authorities, the agency said.

“The outlook for the oil market remains unfavorable and the events of this weekend in China do not add to the positive,” notes Warren Patterson, who is in charge of commodities strategy at ING Groep NV in Singapore.

According to the forecast of analytical company Kpler, oil demand in China in the fourth quarter will decrease to 15.11 million barrels per day (bpd) compared to 15.82 million bpd a year earlier.

Earlier we reported that Russia will ban the sale of its oil to countries that have imposed a price ceiling.

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Oil Russia ban news: Russia will ban the sale of its oil to countries that have imposed a price ceiling

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oil Russia ban

Will Russia sell oil to Europe? The administration of President Vladimir Putin is preparing an order prohibiting Russian companies and any trader from buying Russian oil to sell raw materials to countries and companies that have imposed a price ceiling on Moscow. Bloomberg news agency wrote this, citing a report from sources.

“The Kremlin is preparing a presidential decree banning Russian companies and any traders buying national oil from selling it to anyone who participates in the price ceiling,” the publication wrote.

According to the newspaper’s interlocutors, this would prohibit any mention of the price ceiling in contracts for Russian crude, as well as transferring it to countries that have joined the price ceiling for the natural resource.

In the first half of September, the press service of the US Treasury Department said that the USA, together with its allies from G7 (Great Britain, Germany, Italy, Canada, France and Japan) and the European Union (EU) would impose a ban on marine transportation of Russian oil on December 5 and oil products – on February 5.

Earlier we reported that EU negotiations on limiting the prices of Russian oil reached a deadlock today.

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EU talks on restrictions on Russian crude oil prices today stalled

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russian crude oil price today

Negotiations between the European Union countries about the “ceiling” of Russian crude oil prices today reached an impasse; Bloomberg reported, according to its sources.

Representatives of the bloc cannot reach an agreement on the ceiling price of Russian oil. According to the agency, the proposed European Commission limit of $65-70 per barrel, Poland and the Baltic countries believe “too generous,” while Greece and Malta, which is actively engaged in transporting fuel, do not want the limit to fall below $ 70. Recall that the Russian response to the oil price cap was negative. The Russian government has officially said that it will only sell oil at market prices.

“We are looking for ways to make this solution work and we are trying to find a common ground to implement it in a perfectly pragmatic and efficient way, while avoiding that it may cause excessive inconvenience to the European Union,” said German Chancellor Olaf Scholz.

Earlier, we reported that the SEC fined Goldman Sachs $4 million for non-compliance with ESG fund principles.

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