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Powell says Fed will fix inflation, calls stable prices ‘bedrock’ of economy

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3/3

© Reuters. FILE PHOTO: A person pushes a shopping cart in a supermarket in Manhattan, New York City, U.S., March 28, 2022. REUTERS/Andrew Kelly

2/3

By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) – Calling stable prices the “bedrock” of the economy, Federal Reserve Chair Jerome Powell said on Thursday that the U.S. central bank’s battle to control inflation would “include some pain” as the impact of higher interest rates is felt, but that the worse outcome would be for prices to continue speeding ahead.

“We fully understand and appreciate how painful inflation is,” Powell said in an interview with the Marketplace national radio program, repeating his expectation that the Fed will raise interest rates by half a percentage point at each of its next two policy meetings while pledging that if data turn the wrong way “we’re prepared to do more.”

“Nothing in the economy works, the economy doesn’t work for anybody without price stability,” Powell said. “We went through periods in our history where inflation was quite high … The process of getting inflation down to 2% will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at high levels, and we know what that’s like. And that’s just people losing the value of their paycheck.”

The U.S. economy is facing its toughest inflation problem since the 1970s and early 1980s, when prices at one point rose at an annual rate of 14.5% and then-Fed chief Paul Volcker used punishing interest rates to twice throw the economy into recession. The unemployment rate climbed above 10%.

Powell, who was confirmed earlier on Thursday to a second four-year term as Fed chief on a bipartisan 80-19 vote in the U.S. Senate, has paid frequent homage to Volcker’s commitment to beating inflation, while also saying he believes the U.S. central bank this time can navigate the economy to a “soft landing” where inflation falls without a downturn or significant increase in joblessness.

Interest rates are rising sharply as a result of the policy steps engineered by Powell. While neither inflation nor borrowing costs are approaching Volcker-era levels, the quick run-up in the cost of food, gas, housing and other daily staples has become a politically explosive issue for President Joe Biden’s administration. Consumer prices in April were 8.3% higher than a year ago.

Biden now has filled the top two Fed jobs and seen two of his other appointees confirmed to the central bank’s seven-seat Board of Governors. The president made clear this week he was giving them full sway to try to lower inflation.

“Tackling inflation is my top domestic priority,” Biden said following Powell’s confirmation by the Senate. The Fed “will bring the skill and knowledge needed at this critical time for our economy and families across the country.”

Powell, who opened a news conference after last week’s policy meeting by saying he wanted to “restore price stability on behalf of American families,” used the radio interview on Thursday to amplify that broad message to the public.

 

 

Economy

Stocks pummeled by growth worries, U.S. dollar climbs

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2/2

© Reuters. A passerby wearing a protective face mask walks past an electric screen displaying a graph showing Japan’s Nikkei share average, amid the coronavirus disease (COVID-19) pandemic, in Tokyo, Japan February 24, 2022. REUTERS/Issei Kato/Files

2/2

By Herbert Lash and Chuck Mikolajczak

NEW YORK (Reuters) – Global stocks plunged and the dollar strengthened for the first time in four sessions on Wednesday as concerns about rising inflation on economic growth soured sentiment.

The mood was underscored by a 9% surge in British consumer prices and a faster-than-expected acceleration in inflation in Canada.

British inflation surged to its highest annual rate since 1982 as energy bills soared, while Canadian inflation rose to 6.8% last month, largely driven by rising food and shelter prices, Statistics Canada data showed.

British inflation is now the highest among major economies in Europe, but prices are rapidly rising worldwide, forcing central banks around the globe to hike interest rates and tamp down growth as suggested by a modest decline in U.S. homebuilding in April.

Soaring prices and material shortages have already hit homebuilding, the sector of the economy most sensitive to rates. But the U.S. Commerce Department report also showed a record backlog of houses to be built, indicating a decline in homebuilding potentially might be marginal.

Adding to the gloom caused by inflation were earnings results from Target Corp (NYSE:TGT), whose quarterly profit halved as it warned of a bigger margin hit this year due to rising fuel and freight costs.

Target shares plummeted 24.88%, its biggest one-day percentage drop since the “Black Monday” stock market crash on Oct. 19, 1987, a day after Walmart (NYSE:WMT) Inc warned of similar margin squeezes and saw its stock drop 11.4% for its biggest one-day percentage fall since Oct. 16, 1987.

“It was Walmart yesterday and everybody thought it was a one-off,” said Dennis Dick, head of markets structure and a proprietary trader at Bright Trading LLC in Las Vegas. “Now that Target misses earning a lot more than Walmart even did, they’re scared that consumer is not as strong as everybody think it is.”

MSCI’s gauge of stocks across the globe shed 2.74%, while in Europe, the pan-regional STOXX 600 index closed down 1.14%.

On Wall Street, the Dow Jones Industrial Average fell 3.56%, the S&P 500 lost 4.03% and the Nasdaq Composite dropped 4.73%.

The declines for the S&P 500 and Dow marked their biggest one-day percentage declines since June 11, 2020.

Few analysts are willing to predict the end to selling after a bruising first five months of the year for risk assets given the magnitude of macroeconomic uncertainty, with many anticipating market volatility will be the norm for some time.

The U.S. dollar gained ground as the sell-off in risk assets boosted the safe-haven appeal of the greenback, which was on pace to snap a three-session losing streak, a day after Fed Chair Jerome Powell pledged the U.S. central bank would ratchet up rates as high as needed to combat rising inflation.

The dollar index rose 0.581%, with the euro down 0.8% to $1.0463. The Japanese yen strengthened 0.92% to 128.23 per dollar.

Treasury yields fell, although a steep path for rates remained the prevailing market consensus as the benchmark 10-year note yield hit a one-week high of 3.015% after Powell’s hawkish comments.

The yield fell 8.1 basis points to 2.890% on Wednesday after a soft U.S. housing starts number.

The German two-year government bond yield shot to 0.444%, its highest since November 2011 after more hawkish central banker comments, and last was up 1.6 basis points at 0.386%. The European Central Bank’s Klaas Knot said on Tuesday that a 50-basis-point rate hike in July was possible if inflation broadens.

Gold prices were little changed despite the risk-off environment as looming U.S. interest rate hikes and a resurgent dollar dimmed the metal’s shine.

Spot gold was up 0.1% at $1,816.06 an ounce.

Oil prices dipped in volatile trade, reversing early gains as traders grew less worried about a supply crunch after government data showed U.S. refiners ramped up output.

U.S. crude settled down 2.5% at $109.59 per barrel and Brent settled at $109.11, down 2.52% on the day.

GRAPHIC: MSCI World equity index (https://fingfx.thomsonreuters.com/gfx/mkt/movanzkkopa/world%20stocks.PNG)

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Economy

Fed’s Harker: soft landing possible, not forecasting recession

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© Reuters. FILE PHOTO: A worker weighs meat at a butcher shop at Reading Terminal Market after the inflation rate hit a 40-year high in January, in Philadelphia, Pennsylvania, U.S., February 19, 2022. REUTERS/Hannah Beier

(Reuters) – Philadelphia Federal Reserve Bank President Patrick Harker on Wednesday said he believes the central bank can bring inflation down without sending the economy into a recession, in part because the labor market is currently strong.

“We may have a few quarters of negative growth, but again, that’s not what I’m estimating, what I’m forecasting right now,” Harker said in a virtual event with the Mid-Size Bank Coalition of America, adding the economy can withstand a “measured” and “methodical” tightening of financial conditions that would bring down demand. “We don’t want to overdo it, but we have to act.”

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Economy

Fed’s Harker sees 50 bps rate hikes in June, July, then ‘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

(Reuters) – Philadelphia Federal Reserve Bank President Patrick Harker on Wednesday said he expects the U.S. central bank to deliver two more half-point rate hikes before switching to quarter-point increments until the “scourge” of inflation is beaten back.

With inflation at a 40-year high, the Fed has intensified its efforts to curb demand for goods and labor and ultimately ease price pressures by making it more expensive to borrow.

Earlier this month the central bank raised its policy rate by a half percentage point, its first such move in more than two decades, and Fed Chair Jerome Powell said his fellow policymakers broadly backed two more such rates hikes at coming Fed meetings.

“Going forward, if there are no significant changes in the data in the coming weeks, I expect two additional 50 basis point rate hikes in June and July,” Harker said in remarks prepared for delivery to the Mid-Size Bank Coalition of America. “After that, 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.”

Under former Fed Chairman Ben Bernanke, the Fed used the term “measured” to refer to a series of quarter-point rate hikes in the mid-2000s.

Chicago Fed chief Charles Evans on Tuesday similarly signaled support for an initial burst of policy tightening and then a shallower rate hike path.

Powell, for his part, has not been as 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.

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.

Harker said he expects the U.S. economy to grow 3% this year, enough to keep labor markets tight through the end of the year despite interest rate increases.

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