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Economy

Fed’s Mester: Need “several months” of inflation moving down to call the peak

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© Reuters. FILE PHOTO: Cleveland Federal Reserve President and CEO Loretta Mester gives her keynote address at the 2014 Financial Stability Conference in Washington December 5, 2014. REUTERS/Gary Cameron

WASHINGTON (Reuters) – Inflation will need to move lower for “several months” before the Federal Reserve officials can safely conclude it has peaked, Cleveland Fed president Loretta Mester said Friday, adding she would be ready to consider faster rates hike by the September Fed meeting if the data do not show improvement.

“Risks to inflation remain strongly on the upside, especially in the midst of the continuing war in Ukraine and the potential that the zero-COVID policy in China will further disrupt supply chains. I will need to see several months of sustained downward monthly readings of inflation before I conclude that inflation has peaked,” Mester said in remarks to a monetary policy forum.

With broad support for half-point rate increases at the Fed’s June and July meetings, Mester said this fall will be a pivotal time to take stock of whether price increases are slowing from their current 40-year high or not – adjusting the pace of rate hikes accordingly.

“If by the September (Fed) meeting, the monthly readings on inflation provide compelling evidence that inflation is moving down, then the pace of rate increases could slow, but if inflation has failed to moderate, then a faster pace of rate increases may be necessary,” Mester said.

“With some luck, supply chain disruptions will begin to abate and labor market participation will continue to rise, helping to ease supply constraints and allowing supply in product and labor markets to come into better balance with demand.  But we cannot rely on luck.”

Economy

New Zealand government forecasts narrower deficit for 2021/22

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© Reuters. FILE PHOTO – Cranes located on construction sites are seen in central Auckland, New Zealand, June 25, 2017. REUTERS/David Gray

By Lucy Craymer

WELLINGTON (Reuters) – New Zealand’s government on Thursday increased income support and promised significant investment in the health sector while forecasting that returning the budget to surplus would take longer than previously forecast.

The deficit for the current financial year, ending on June 30, will be narrower than previously forecast.

Heavy spending was targeted towards infrastructure, including new schools, and defence, while funds were also allocated to ease the impact of global inflation on New Zealanders.

The highlight was billions of New Zealand dollars in new funding for the country’s health system, which will, among other things, see more funding for drugs and infrastructure.

“As the pandemic subsides, other challenges both long-term and more immediate, have come to the fore. This Budget responds to those challenges,” Prime Minister Jacinda Ardern said in a statement.

“COVID-19, climate change and the war in Ukraine have taught us we need to build a more secure economy that protects New Zealand households from the external shocks we know are coming,” she added. Ardern was not at the release of the budget as she currently has COVID.

THE BOOKS

The government predicted a budget deficit of NZ$18.978 billion ($11.97 billion) for 2021/22, narrower than a deficit of NZ$20.844 billion forecast in a half-year fiscal update in December. However, the government now expects the budget to surplus in 2024/25, a year later that previously forecast.

Net debt under an old method of calculation was forecast to peak at 41.2% of gross domestic product (GDP) in 2023/24, compared with the December forecast for a peak in 2022/23 at 40.1% of GDP.

Under a new calculation method, introduced to bring the measure more in line with international norms, net debt for 2022/23 will be 31.8% of GDP.

INFLATION

With New Zealand facing its fastest inflation in three decades, the government moved to provide support for households. It has extended subsidies on petrol and public transport and will extend supplementary payments to middle-income families not already receiving support.

“While we know the current storm will pass, it’s important we do what we can to take the hard edges of it,” said Ardern.

Along with the funding, Robertson announced new legislation that would remove land covenants that currently allow existing supermarkets to prevent competitors from building nearby. It is hoped this will make the sector – currently dominated by two companies – more competitive.

SECURITY

Defence spending will rise over the next five years. Government documents show the defence establishment will spend NZ$5.9 billion on new equipment in the five years beginning 2021/22, up more than 40% on an earlier outlook.

Minister of Defence Peeni Henare said in a statement that the defence force would receive an additional NZ$662.5 million to maintain existing defence capabilities and more money to boost salaries of lower-paid staff in the defence force.

“What we are funding today is the regeneration and strengthening of our Defence Force,” said Henare.

($1 = 1.5858 New Zealand dollars)

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Economy

Safe-haven dollar eases after Wednesday’s jump, but risk sentiment remains fragile

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© Reuters. FILE PHOTO: U.S. one dollar banknotes are seen in this illustration taken February 8, 2021. REUTERS/Dado Ruvic/Illustration//File Photo

By Kevin Buckland

TOKYO (Reuters) – Safe-haven currencies, including the dollar, eased on Thursday, pausing for breath after big gains the previous session as Wall Street stocks tumbled amid mounting concerns that aggressive tightening by the Federal Reserve and other global central banks could choke growth.

The dollar index, which tracks the greenback against six major peers, edged 0.05% lower to 103.74, after a 0.55% jump overnight that ended a three-day losing streak.

The yen slipped, with the dollar adding 0.21% to 128.495 yen after a 0.86% tumble on Wednesday.

The Swiss franc continued to strengthen, with the dollar losing a further 0.13% to 0.9869 franc, following a 0.6% slide.

The benchmark 10-year U.S. Treasury yield was steady around 2.89% in Tokyo trading after dropping from as high as 3.015% in the prior session.

Despite the pause in the safe haven rally, sentiment remained fragile with Asian stocks sliding and U.S. futures pointing lower, a day after a 4% drop for the S&P 500 and a 5% plunge for the Nasdaq.

Poor U.S. housing data on Wednesday added to slowdown concerns, and Fed Chair Jerome Powell had ratcheted up the hawkish rhetoric the previous day by saying the U.S. monetary authority would push interest rates as high as needed to stem a surge in inflation that he said threatened the foundation of the economy.

Powell’s stance “makes it hard to achieve a ‘soft landing’ for the U.S. economy given the long lags between changes in monetary policy and changes in inflation,” Joseph Capurso, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY) in Sydney, wrote in a client note. “The darkening outlook for the U.S. economy supports the USD and safe-haven currencies.”

The euro recovered some ground, adding 0.25% to $1.0489 after Wednesday’s 0.84% slump.

The Aussie rose 0.14% to $0.6965 – shaking off a smaller-than-forecast increase in jobs for last month – but the currency had slumped 1.05% on Wednesday.

Sterling remained under pressure, trading little changed at $1.2343 after dropping 1.2% overnight as a surge in U.K. inflation to a 40-year record fostered worries for a sharp economic slowdown.

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Economy

Fed policymakers map out shift to ‘measured’ hikes

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© Reuters. FILE PHOTO: Shoppers are seen wearing masks while shopping at a Walmart store, in North Brunswick, New Jersey, U.S. July 20, 2020. REUTERS/Eduardo Munoz

By Ann Saphir

(Reuters) -Two U.S. central bankers say they expect the Federal Reserve to downshift to a more measured pace of policy tightening after July as it seeks to quell inflation without lifting borrowing costs so high that they send the economy into recession.

It’s not clear if that view – mapped out on Tuesday by Chicago Federal Reserve Bank President Charles Evans and on Wednesday by Philadelphia Fed chief Patrick Harker – marks a consensus at the Fed for how to bring down the highest inflation in 40 years.

But it does suggest that while policymakers broadly back using half-point rate hikes to get short-term borrowing costs to a range of 1.75%-2% over the next two months, support for sticking to that pace beyond July may be limited.

Evans on Tuesday told an audience in New York City that he expects to transition to “measured” rate hikes after an initial burst of policy tightening. In the Fed lexicon, “measured” means quarter-point rate hikes.

On Wednesday Harker gave a similar assessment, telling the Mid-Size Bank Coalition of America that after July, “I anticipate a sequence of increases in the funds rate at a measured pace until we are confident that inflation is moving toward the Committee’s inflation target.”

As he spoke, the S&P 500 and the Dow Jones Industrial Average were tumbling and ended with the sharpest one-day loss in nearly two years.

“I still am in the camp that we can have, if not a soft landing, a safe landing,” Harker said, noting the strength of the labor market, with nearly two jobs open for every American jobseeker, and an unemployment rate of 3.6%.

The U.S. economy will likely grow between 2% and 3% this year, he said, adding, “this economy can withstand a measured, methodical approach to tightening financial conditions.”

Fed policymakers say the current bout of high inflation — running at more than three times the Fed’s 2% target — is the product of outsized demand bumping up against constrained supply.

Fed Chair Jerome Powell has not been specific about his expectations for the policy path beyond July. On Tuesday he said the Fed will keep pushing on rate hikes until it sees clear and convincing evidence that inflation is cooling.

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