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Fed tries to thread the needle in forecasting a ‘softish’ landing

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© Reuters. FILE PHOTO: U.S. President Joe Biden meets with Federal Reserve Chair Jerome Powell and U.S. Treasury Secretary Janet Yellen to talk about the economy in the Oval Office at the White House in Washington, D.C., U.S., May 31, 2022. REUTERS/Leah Millis/File

By Lindsay (NYSE:LNN) Dunsmuir

(Reuters) – U.S. Federal Reserve officials, beset by ongoing high inflation and amid a weakening growth picture, will lay out on Wednesday how they think their increasingly difficult goal of cooling the economy without sending it into a tailspin may play out in the months ahead.

That thorny predicament will be on display as Fed policymakers, in tandem with delivering their second half-percentage-point interest rate hike in a row, reveal their latest projections through 2024 and beyond for economic growth, unemployment and inflation. As critically, they will signal the speed and scale of rate rises policymakers believe are needed to quash inflation at a 40-year-high.

What is certain is their forecasts are likely to bear little resemblance to those issued in March, which showed inflation going down without unemployment going up or policy being particularly restrictive.

The meeting comes two weeks after Fed Chair Jerome Powell and U.S. President Joe Biden met amid rising anxiety at the White House that a plentiful jobs picture is being drowned out by soaring costs for everything from rent and food to gasoline and airline tickets.

Powell has previously said the central bank, which in March lifted interest rates for the first time in three years, will keep raising them until price increases come down in a “clear and convincing” way. Policymakers already signaled they plan to match this week’s expected increase with another half-point hike at their following meeting in July, bringing borrowing costs to between 1.75% and 2.0% – right where just three months back they thought they would be at year-end.

A hotter-than-expected inflation reading last Friday has even thrown some doubt on those expectations with economists at Barclays (LON:BARC) calling for a three-quarter-point move either this week or in July.

“It’s going to be a tricky meeting messaging-wise,” said Julia Coronado, a former Fed economist and president of MacroPolicy Perspectives. “It’s not a rosy outlook. They don’t have any easy choices to make.”

NEW FORECASTS, NEW QUESTIONS

U.S. consumer price growth accelerated in May to 1.0% as gasoline prices hit a record high and the cost of services rose further, while core prices climbed 0.6% after advancing by the same margin in April, the Labor Department reported on Friday, underscoring the need for the Fed to keep its foot on the brakes. In the 12 months through May, headline inflation increased 8.6%.

The new set of policymaker projections is set to reflect a faster pace of hikes, slower growth, higher inflation and a higher unemployment rate. The key will be how much for each.

All policymakers are now agreed the Fed needs to get its policy rate up to neutral – the level that neither stimulates nor constrains economic growth – by the end of this year. That rate is seen roughly between 2.4% and 3%.

The median dot for the end of 2022 could easily rise enough to signal at least another half-point increase in September given Friday’s worse-than-expected inflation reading. How far the Fed will have to raise rates overall will also move up, with most economists seeing them topping out between 3% and 3.5%.

For the unemployment rate over the next two years, the key is whether policymakers raise it by just a notch or two or show a material rise in layoffs, which would be at odds with their contention that inflation can be tamed without excessive joblessness.

Fed Governor Christopher Waller recently said if the Fed could bring down inflation near its 2% goal while keeping the unemployment rate, currently at 3.6%, from rising above 4.25%, it would be a “masterful” performance.

“I don’t think it will change a lot but if it does … that’s a sign they’re worried about the possibility of a serious slowdown or recession,” said Roberto Perli, also a former Fed economist and head of global policy at Piper Sandler.

HOW MUCH PAIN THE FED’S WILLING TO SWALLOW

Some of the factors keeping inflation so elevated, in particular supply shocks outside the Fed’s control due to Russia’s invasion of Ukraine that have caused a jump in food and oil prices, show no sign of abating. Overall the central bank still faces tremendous uncertainty on the outlook from that and other supply-chain disruptions caused by the COVID-19 pandemic.

Nor are officials getting much help yet on the demand side with the healthy finances of U.S. banks, companies and households a possible obstacle to curbing inflation as they raise rates in an economy able so far to pay the price.

The longer the Fed struggles to stifle demand and the longer inflation persists, the more likely the rate of price increases becomes embedded and the Fed needs to ramp up its action.

Newly sworn-in Fed governors Philip Jefferson and Lisa Cook, who take their place among the 18-strong policymaking body for the first time, are unlikely to diverge from their colleagues’ resolve to lower inflation.

“While Cook and Jefferson are expected to be dovish additions to the Fed, that won’t matter much while inflation is 8%, and we doubt they will push back on the Fed’s tightening plans any time soon,” said Andrew Hunter, senior U.S. economist at Capital Economics.

If the committee consensus does not align with Powell’s view of what is needed, he has shown by his recent inter-meeting guidance that he is prepared to lead from the front to make sure inflation is decisively dented.

David Wilcox, a former Fed research director now director of U.S. economic research at Bloomberg Economics and a senior fellow at the Peterson Institute for International Economics, expects Powell to maintain a razor-sharp focus on the inflation side of the Fed’s mandate like Paul Volcker, the towering Fed chief who tamed inflation in the 1980s.

“Powell has every intention of going down in history, if necessary, as Paul Volcker version 2.0,” said Wilcox.

Economy

South Korean exports dropped 14% in November, the highest in 2.5 years

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exports South Korea

South Korea’s exports fell 14 percent year-on-year to $51.91 billion in November, preliminary data from the Ministry of Commerce, Industry and Energy showed. The November drop was the biggest in 2.5 years since May 2020 and was caused both by the deteriorating global economy, which even a Google price chart showed, and a truckers’ strike in the country.

South Korea exports 2022 – reasons for the drop

Exports fell for the second month in a row. Analysts on average expected an 11% decline, according to Trading Economics. Respondents to MarketWatch predicted a 10.5% decline.

Shipments of semiconductor products overseas, the country’s top export item, fell 29.8%; petrochemicals fell 26.5% and steel exports fell 10.6%. Meanwhile, exports of automobiles jumped 31% and petroleum products 26%.

Exports to China, South Korea’s largest trading partner, fell by 25.5%, and to Asian countries – by 13.9%. Below, supplies to the USA grew by 8% and to the European Union – by 0.1%.

In January-November exports rose by 7.8% on the same period last year and reached a record $629.1 billion.

South Korean imports rose 2.7% to $59.2 billion in November, marking the 23rd consecutive month of gains, but the current rate of growth is the lowest since November 2020. Experts had predicted an increase of only 0.2%.

South Korea’s trade deficit last month was $7.01 billion, compared with a surplus of $2,973 billion a year earlier.

The negative balance was recorded for the eighth month in a row. As a result, by the end of 2022, the country may record a foreign trade deficit for the first time since the financial crisis in 2008.

Earlier we reported that the UN estimates the cost of humanitarian aid in 2023 at a record $51 billion.

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The UN estimates humanitarian aid costs in 2023 at a record $51 billion because of an impending humanitarian crisis

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a humanitarian crisis

Joint humanitarian operations will require a record $51.5 billion in 2023 to address urgent problems.

The UN Office for the OCHA estimates that 339 million people will need urgent aid in 2023. At the same time, OCHA called on donor countries to provide funds for assistance in 2023 to the 230 million people most in need, living in 68 countries.

Griffiths explained that aid is needed not only for people experiencing conflicts and disease outbreaks. but also for those suffering the effects of climate change, such as people in peninsular Somalia facing drought and those in Pakistan experiencing severe flooding. For the first time, the growing humanitarian crisis has brought the number of displaced people worldwide to the 100 million mark. Also worsening an already bad situation is the worldwide coronavirus pandemic, which affects the poor. Note that the general economic crisis has begun to negatively affect even the Netflix price chart.

Earlier we reported that house prices in the UK fell by 1.4% in November.

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Economy

Average house prices in the UK fell 1.4% in November

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average house prices in the uk

Average house prices in the UK fell 1.4% in the previous month in November to 263,788 thousand pounds (about $319,000), according to the British mortgage company Nationwide Building Society.

The decline was recorded at the end of the second consecutive month and was the most significant in almost 2.5 years – since June 2020. Analysts on average had forecast a decline of only 0.3%, according to Trading Economics.

Are house prices in the UK going to fall even more?

Residential real estate prices in November compared to the same month last year increased by 4.4%. At the same time, experts expected a larger increase of 5.8%. The growth rate slowed down significantly compared with 7.2% in October. Because of the difficult economic situation, British investors are investing in other instruments. The Microsoft price chart, for example, is showing potential for growth, so many are interested in the U.S. stock market. 

“The market looks set to remain under pressure in the coming quarters. Inflation will remain high for some time, and interest rates are likely to continue to rise,” believes Nationwide Senior Economist Robert Gardner. – The outlook is unclear, and much will depend on how the overall economy behaves, but a relatively soft landing is still possible.”

Earlier we reported that Sanctions Circumvention was included in the EU’s list of criminal offenses.

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