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With bond-buying ‘taper’ on track, Fed turns wary eye to inflation

By Howard Schneider

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With bond-buying 'taper' in the bag, Fed turns a wary eye to inflation
© Reuters. FILE PHOTO: The Federal Reserve building is pictured in Washington, D.C., U.S., August 22, 2018. REUTERS/Chris Wattie

By Howard Schneider

WASHINGTON (Reuters) – The Federal Reserve on Wednesday is expected to detail plans to end its pandemic-era bond purchases by mid-2022 as policymakers shift their focus towards what, if anything, to do about a surge in inflation that is lasting longer than anticipated.

U.S. central bankers, in the minutes of their Sept. 21-22 meeting, signaled that a “taper” of the $120 billion in monthly asset purchases would be approved at this week’s gathering of the policy-setting Federal Open Market Committee.

What the minutes described as an “illustrative tapering path” would trim the purchases by $15 billion per month beginning in November or December, a pace and starting point that would end the program by June or July.

(For graphic on Fed balance sheet by era – https://graphics.reuters.com/USA-FED/TAPER/xmpjolmanvr/chart.png)

Of more note now is how the Fed changes other parts of its policy statement, and particularly its description of inflation as “largely reflecting transitory factors.”

Fed officials still largely hold that view. By some time in 2022 they anticipate that global supply bottlenecks will have eased, pandemic-fueled demand for goods among U.S. consumers will cool after massive spending on cars, motorcycles and appliances, and enough people will be pushing to return to jobs that the pace of wage and benefit increases will also subside.

But in recent weeks Fed officials have acknowledged the risks to that outlook. The jump in inflation this year has already lasted longer than anticipated; headline rates are running at twice the Fed’s 2% target; and rising rents, low business inventories, and large numbers of workers still waiting on the sidelines may mean the high pace of price increases will continue for now.

(For graphic on “Broad-based” or not? “Broad-based” or not? – https://graphics.reuters.com/USA-FED/INFLATION/klpykzrowpg/chart.png)

The dilemma facing the U.S. central bank is whether inflation eases before policymakers feel compelled to step in with interest rate increases to curb it. Investors are acting as if the Fed’s patience will run out soon.

The Fed cut its overnight benchmark federal funds interest rate to the near-zero level last year in a bid to stem the economic fallout of the pandemic. Trading in federal funds futures currently show investors expecting up to three quarter-percentage-point rate increases in 2022; Fed officials as of September were split over whether there would even be one.

“Will they hold on to the transitory description of inflation? My best guess is they will,” in order to keep their commitment to support the economic recovery until the economy is closer to full employment, said Aneta Markowska, an economist at Jefferies (NYSE:). “If they were being intellectually honest they would probably drop it, but given what is happening in the market the Fed has to tread carefully.”

Push back too hard on the current market expectations, by emphasizing the 5 million U.S. jobs still missing from before the pandemic, and it could “unhinge” the market outlook for inflation, she noted. Lean too hard on inflation risks, and it could push rate hike expectations even higher, begin to restrict credit and borrowing, and slow the recovery.

EYES ON POWELL

The Fed is due to release its policy statement at 2 p.m. EDT (1800 GMT). It will not issue new economic forecasts, so beyond the statement it will be up to Fed Chair Jerome Powell in his news conference half an hour later to strike a balance between the two sides of the central bank’s mandated goals of achieving maximum employment and stable prices.

This will be a critical communications moment for Powell whose term as Fed chief ends in February 2022. The White House has yet to announce whether the former investment banker will be reappointed to a second term.

Through much of the pandemic, Powell’s bias – and that of most other Fed policymakers – has been in favor of the job market, in line with the central bank’s new strategic approach to allow more risks with higher inflation in order to push job growth as high as possible.

The Fed currently says it will not raise rates until inflation has not just risen to its 2% target, but is on track to exceed it “for some time,” so that the 2% level is maintained on average following years in which it ran low.

That phrase has not been quantified in terms of how much or how long an overshoot of inflation is intended. While Fed policymakers have generally described achievement of the inflation benchmark as still “a ways off,” a few have noted that the averages are creeping higher already.

(For graphic on Inflation, on average Inflation, on average – https://graphics.reuters.com/USA-FED/FRAMEWORK/byvrjjmbkve/chart.png)

The labor market rebound has also taken on a different course than Fed officials expected. Despite near-record numbers of job openings, labor force participation is improving only slowly – with workers by choice or family necessity taking more time to return to jobs, and using savings elevated by pandemic benefit payments to cover the bills in the meantime.

The employment-to-population ratio is still 2.4 percentage points below where it was at the outset of the pandemic in February 2020, less than half the ground needed to be covered to return to the previous level.

(For graphic on The jobs hole facing Biden and the Fed – https://graphics.reuters.com/USA-ECONOMY/JOBS/jbyprzlrqpe/chart.png)

The discussion over the taper of the Fed’s purchases of U.S. Treasuries and mortgage-backed securities will likely end on Wednesday with the central bank declaring that the economy has made “substantial further progress” in healing from the pandemic.

(For graphic on “Substantial further progress” for the Fed? – https://graphics.reuters.com/USA-ECONOMY/FEDPROGRESS/yzdvxmmmdpx/chart.png)

The debate will then turn to how much more the job market can improve, how fast it can be done, and whether COVID-19 has changed the economy in ways that mean higher inflation with fewer people working.

“If the Fed projects that inflation will not revert to target within a reasonable amount of time, then the Fed could step up the tightening schedule even if employment is short of the mandate,” Tim Duy, chief U.S. economist at SGH Macro Advisors, wrote ahead of the policy decision. “The Fed could tell this story after this week’s meeting. In practice, the Fed has made pretty clear it is waiting for more inflation data” to see if the “transitory” narrative holds.

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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Economy

With bond-buying ‘taper’ on track, Fed turns wary eye to inflation

By Howard Schneider

Published

on

With bond-buying 'taper' on track, Fed turns wary eye to inflation
© Reuters. FILE PHOTO: The Federal Reserve building is pictured in Washington, D.C., U.S., August 22, 2018. REUTERS/Chris Wattie

By Howard Schneider

WASHINGTON (Reuters) – The Federal Reserve on Wednesday is expected to detail plans to end its pandemic-era bond purchases by mid-2022 as policymakers shift their focus towards what, if anything, to do about a surge in inflation that is lasting longer than anticipated.

Investors in recent weeks increased bets that inflation will force the U.S. central bank to increase interest rates sooner rather than later, and Fed officials increasingly have acknowledged those risks.

The economic environment, however, is also fluid as central banks around the world plot their exits from loose pandemic-era policies. European Central Bank President Christine Lagarde, however, said on Wednesday the ECB was “very unlikely” https://www.reuters.com/business/finance/ecb-very-unlikely-raise-rates-next-year-lagarde-says-2021-11-03 to raise rates in 2022 despite high inflation – undercutting market bets it might lift borrowing costs as soon as October.

Lagarde’s comments may have eased some of the pressure on Fed Chair Jerome Powell. Yields on 2-year U.S. Treasuries fell, and trading in federal funds futures, according to the CME Group (NASDAQ:), shifted to reflect expectations the Fed would only raise rates twice next year instead of three times as was expected earlier this week.

The announcement of a bond-buying “taper” may be the central policy step taken by the Fed on Wednesday. U.S. central bankers, in the minutes of their Sept. 21-22 meeting, signaled they would in November or December begin reducing their current $120 billion in monthly asset purchases by $15 billion per month, ending the program altogether in June or July.

(For graphic on Fed balance sheet by era – https://graphics.reuters.com/USA-FED/TAPER/xmpjolmanvr/chart.png)

Of more note now is whether the Fed changes other parts of its policy statement to take more account of inflation risks, and particularly whether it alters the description of inflation as “largely reflecting transitory factors.”

Fed officials still largely hold the view that through 2022 global supply bottlenecks will ease, pandemic-fueled demand for goods among U.S. consumers will cool, and enough people will want to return to jobs that wage and benefit increases will also subside.

But a jump in inflation this year has already lasted longer than anticipated; headline rates are twice the Fed’s 2% target; and rising rents, low business inventories, and large numbers of workers on the sidelines may mean the high pace of price increases will continue for now.

(For graphic on “Broad-based” or not? “Broad-based” or not? – https://graphics.reuters.com/USA-FED/INFLATION/klpykzrowpg/chart.png)

The dilemma facing the U.S. central bank is whether inflation eases before policymakers feel compelled to step in with rate increases to curb it. Fed officials as of September were split over whether there would need to be a rate increase in 2022 even as markets have priced in multiple hikes.

The Fed cut its overnight benchmark federal funds interest rate to the near-zero level last year in a bid to stem the economic fallout of the pandemic.

“Will they hold on to the transitory description of inflation? My best guess is they will,” in order to keep their commitment to push the U.S. economy back to full employment, said Aneta Markowska, an economist at Jefferies (NYSE:). “If they were being intellectually honest they would probably drop it, but given what is happening in the market the Fed has to tread carefully.”

Push back too hard on the current market expectations, by emphasizing the 5 million U.S. jobs still missing from before the pandemic, and it could “unhinge” the market outlook for inflation, she noted. Lean too hard on inflation risks, and it could push rate hike expectations higher, possibly restricting credit and slowing the economy.

EYES ON POWELL

The Fed is due to release its policy statement at 2 p.m. EDT (1800 GMT). It will not issue new economic forecasts, so beyond the statement it will be up to Powell in his news conference half an hour later to balance the central bank’s mandated goals of achieving maximum employment and stable prices.

It will be a critical communications moment for Powell, whose term as Fed chief ends in February 2022. The White House has yet to announce whether the former investment banker will be reappointed to a second term, though President Joe Biden said on Tuesday an announcement of his nominations to fill top Fed positions would be made “fairly quickly.”

Through much of the pandemic, Powell’s bias – and that of most other Fed policymakers – has been in favor of the job market, in line with a new central bank strategic approach emphasizing employment and allowing higher inflation.

The Fed currently says it will not raise rates until inflation has both risen to its 2% target, and is on track to exceed it “for some time.”

The policy has not been quantified in terms of how much or how long an overshoot of inflation is intended. While Fed officials have described achievement of the inflation benchmark as still “a ways off,” some note the averages are creeping higher already.

(For graphic on Inflation, on average Inflation, on average – https://graphics.reuters.com/USA-FED/FRAMEWORK/byvrjjmbkve/chart.png)

Inflation is not the only surprise. The labor market is also behaving in unexpected ways. Despite near-record job openings, labor force participation is improving only slowly – with workers by choice or family necessity taking more time to return to jobs, and using savings elevated by pandemic benefit payments to cover the bills.

The employment-to-population ratio is still 2.4 percentage points below where it was at the outset of the pandemic in February 2020, with less than half the ground covered to return to that level.

(For graphic on The jobs hole facing Biden and the Fed – https://graphics.reuters.com/USA-ECONOMY/JOBS/jbyprzlrqpe/chart.png)

Still, in announcing the eventual end of purchases of U.S. Treasuries and mortgage-backed securities on Wednesday, the Fed will also declare the economy has made “substantial further progress” in healing from the pandemic.

(For graphic on “Substantial further progress” for the Fed? – https://graphics.reuters.com/USA-ECONOMY/FEDPROGRESS/yzdvxmmmdpx/chart.png)

Debate will then turn to how much more the job market can improve, and whether COVID-19 has changed the economy in ways that mean higher inflation with fewer people working.

“If the Fed projects that inflation will not revert to target within a reasonable amount of time, then the Fed could step up the tightening schedule even if employment is short of the mandate,” Tim Duy, chief U.S. economist at SGH Macro Advisors, wrote ahead of the policy decision. “The Fed could tell this story after this week’s meeting. In practice, the Fed has made pretty clear it is waiting for more inflation data” to see if the “transitory” narrative holds.

Economy

Oil Prices Fall amid Protests in China

Published

on

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.

Continue Reading

Economy

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

Published

on

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.

Continue Reading

Economy

EU talks on restrictions on Russian crude oil prices today stalled

Published

on

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.

Continue Reading

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