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Fed chief Powell looks set to get Senate nod for second term

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© Reuters. FILE PHOTO: Federal Reserve Chair Jerome Powell testifies before the Senate Banking Committee in Washington, U.S., March 3, 2022. Tom Williams/Pool via REUTERS

WASHINGTON (Reuters) – The U.S. Senate on Thursday appeared poised to confirm Jerome Powell to a second term as head of the Federal Reserve, paving the way for him to continue leading the central bank as it confronts the highest inflation in 40 years.

Powell, nominated for a second four-year term by U.S. President Joe Biden, drew enough bipartisan backing to ensure his confirmation in the divided Senate, where at least 56 senators had voted to support him and at least 10 were opposed as the voting continued.

The vote is an endorsement of Powell’s handling of the crisis triggered by the COVID-19 pandemic and the short but historically deep 2020 recession that marked his first term. It’s also a mandate for him to proceed with what may be the sharpest set of interest rate hikes since the early 1980s when Paul Volcker led the Fed.

The Fed began lifting its benchmark overnight lending rate in March and last week raised it again, by half a percentage point – the largest rate increase in 22 years.

Powell signaled at a news conference after that announcement that more increases of that size are likely at the next couple of Fed policy meetings.

The central bank also announced that next month it will start culling its $9 trillion portfolio of Treasury bonds and other assets accumulated to smooth markets and augment the impact of rate cuts made during the pandemic.

Deutsche Bank (ETR:DBKGn) analysts say Powell’s pivot, from a super-easy crisis policy to bigger-than-usual rate hikes that are lifting longer-term borrowing costs, already amounts to the quickest monetary policy tightening since the Volcker Fed in 1981.

Powell, who has been on the Fed’s Board of Governors since 2012, was first appointed to head the central bank by Donald Trump, who soon soured on him for a series of rate hikes that irked the former Republican president. Trump even contemplated trying to oust Powell, but both Republicans and Democrats rallied to his defense and the Fed chief won wide praise for defending the central bank’s independence through the tumult.

Biden has been more hands off with the Fed, but the Democratic president has seen his approval ratings slide on the back of the rise in inflation, which is still running above an 8% annual rate. Biden recently reminded Americans that it is primarily the Fed’s job to tackle inflation, though he has stopped short of agitating for any particular action by the central bank.

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Powell’s confirmation, roughly six months after his renomination, is the fourth recently won by a slate of Biden appointees to the Fed’s seven-member board, though the path has not been easy for all of them.

On Wednesday, the Senate confirmed Davidson College economist Philip Jefferson by a wide margin, but on Tuesday a tie-breaking vote cast by Vice President Kamala Harris was required to confirm Michigan State University economist Lisa Cook, who becomes the first Black woman to sit on the Fed board.

Jefferson is the fourth Black man to be a member of the board, and two Black Fed governors have never before served simultaneously.

Fed Governor Lael Brainard was confirmed several weeks ago as the central bank’s new vice chair, Powell’s top lieutenant.

One key vacancy remains: the vice chair for supervision, open since the departure of Randal Quarles around the end of last year.

Biden’s pick for that post, former Treasury official Michael Barr, will face questioning from the Senate Banking Committee on May 19, a first step in the confirmation process for the country’s top banking regulator.

Biden’s initial pick for the job, Sarah Bloom Raskin, withdrew her name after opposition from Republicans and one Democrat denied her a path to confirmation.

Economy

Australia’s Ruling Coalition Pledges Improved Budget in Costings

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© Reuters. Australia’s Ruling Coalition Pledges Improved Budget in Costings

(Bloomberg) — Australia’s ruling Liberal-National coalition said it will narrow the budget deficit by about A$1 billion ($700 million) via cuts to the bureaucracy as it announced costings for its election policies.

Treasurer Josh Frydenberg said Tuesday the government planned to increase an efficiency dividend for public service agencies to 2% from 1.5% over the next three years if re-elected on May 21. The measure will cover the costs of all the coalition’s election announcements while leaving the budget better off.

“It’s a responsible approach,” Frydenberg told reporters in Melbourne. “It ensures our budget bottom line actually improves over time.”

The opposition Labor party is due to release its policy commitment costings on Thursday ahead of Saturday’s ballot.

Australia’s books will remain deep in the red over the four-year horizon set out in this year’s budget, reflecting the hit to growth and vast fiscal spending deployed to support the economy through the pandemic. The center-right government, which is trailing in opinion polls, maintains Labor will increase taxes to pay for higher spending. 

©2022 Bloomberg L.P.

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ECB to hike deposit rate 25 bps in July, ditch negative rates by end-September: Reuters poll

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© Reuters. FILE PHOTO: European Central Bank (ECB) headquarters building is seen in Frankfurt, Germany, March 7, 2018. REUTERS/Ralph Orlowski

By Swathi Nair

BENGALURU (Reuters) – The European Central Bank is expected to raise the deposit rate for the first time in over a decade in July and bring it out of negative territory at its following meeting in September, despite a 30% chance of recession within a year, a Reuters poll of economists showed.

With inflation hitting a multi-decade high of 7.5% in April and almost every other major central bank having already raised interest rates, ECB President Christine Lagarde backed calls for an early rate hike by policymakers last week.

The bank is now expected to end its bond purchases programme in July and follow that with a 25 basis-point deposit rate hike a few weeks later, according to a majority of economists polled from May 10 to 16.

Until recently, forecasters were expecting the ECB to wait until the final quarter of the year to raise the deposit rate, currently at -0.50%.

Of the 46 of 48 economists who expect the deposit rate to rise in the third quarter, 26 said rates would rise by 50 basis points by the end of the period, implying quarter-point moves at both the July and September meetings.

Another 18 respondents said the deposit rate would only rise 25 basis points in Q3 and two said it would only climb 10 basis points to -0.40% by the end of the quarter.

An even clearer majority expect rates to no longer be negative by the end of the year. About 90% of economists, or 43 of 48, said the deposit rate would be 0% or higher by then, with 44%, or 21 of 48, saying it would be at 0.25% by then and 8%, or 4 of 48, saying it would be at 0.50%.

“There is widespread support for ending negative interest rate policy at the ECB, but they will take a very cautious approach to policy normalisation, in light of substantial macro uncertainty and concerns about a growth slowdown,” said Jens Eisenschmidt, chief European economist at Morgan Stanley (NYSE:MS).

“This will be the first time in over a decade that the ECB is lifting rates – with no support from asset purchases – so taking smaller steps would allow the ECB to observe the reaction in markets, with a possible fragmentation of financing conditions in the euro area likely a key concern”.

The latest poll results are still lagging rate futures, which are pricing in a cumulative 90 basis points of rate increases for the rest of the year or between three and four 25 basis-point moves.

Even that would leave the ECB well behind the U.S. Federal Reserve, which is currently expected to have its federal funds rate around 2.00-2.25% by the end of this year. [ECILT/US]

However, the poll also found the time window to raise rates is closing for the ECB, with a steady median 30% probability of a recession in the next 12 months, as the war in Ukraine pushes energy prices higher and saps consumer spending power.

The bloc’s economy was expected to grow 0.3%, 0.5% and 0.6%, in the second, third and fourth quarters. This is a downgrade from 0.4%, 0.6% and 0.6% predicted last month.

On an annual basis, it was expected to grow 2.7% this year, down from 2.9% and 2.3% next, the same as predicted last month.

The European Commission cut its growth forecast for the euro zone this year to 2.7% from 4.0% projected in February, and upgraded its inflation forecasts to 6.0% this year from 3.5%.

Rising inflationary pressures, driven by a persistent surge in food and energy prices, have deepened the cost of living crisis in the euro zone.

Prices are set to rise 7.7% this quarter, over three times the ECB’s 2.0% target and higher than the 7.3% prediction given last month. It will ease gradually over coming quarters but medians did not show it at target through next year, the forecast horizon.

Asked what impact the cost of living crisis would have on growth, 19 of 25 economists said it would be severe and two said very severe. Only four said it would be mild.

It will be over six months before the crisis eases significantly according to 90% of the respondents to another question.

Despite recession risks, unemployment in the single currency bloc is expected to remain near record low levels at 6.9% and 6.8% this year and next.

Meanwhile, average wage growth was expected to be 3.0% this year, the poll median showed.

“While current dynamics are triggering higher wage demands, companies are still being cautious due to the weakening outlook,” said Bas van Geffen of Rabobank.

“Anecdotal evidence is therefore also pointing to shorter wage agreements so that there’s flexibility to adjust next year, either higher or lower, depending on inflation. So, so far it still seems to be mostly catch-up wage growth rather than forward-looking”.

(For other stories from the Reuters global economic poll:)

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Japan’s Nomura targets up to 90% jump in core pretax income in 3 years

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© Reuters. FILE PHOTO: A logo of Nomura Holdings is pictured in Tokyo, Japan, December 1, 2015. REUTERS/Toru Hanai

TOKYO (Reuters) -Nomura Holdings Inc, Japan’s biggest brokerage and investment bank, said on Tuesday it is targetting an up to 90% jump in pretax income in three years as it plans to beef up digital and advisory services.

Setting out guidance in a mid-term presentation, Nomura said it would target annual pretax income of between 350 billion yen and 390 billion yen ($2.7 billion and $3.0 billion) for its three core divisions in the year to end-March 2025.

That compared to 205.2 billion yen it posted for the year ended in March 2022.

Nomura also said it will create a new digital asset company later this year that will allow institutional investors to trade products linked to cryptocurrencies, stablecoins, decentralized finance and non-fungible tokens.

($1 = 128.9100 yen)

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