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Biden bets Fed’s Powell can usher in full U.S. economic recovery

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U.S. President Joe Biden on Monday nominated Federal Reserve Chair Jerome Powell for a second four-year term, positioning the former investment banker to continue the most consequential revamp of monetary policy since the 1970s and finish guiding the economy out of the pandemic crisis.

Lael Brainard, the Federal Reserve board member who was the other top candidate for the job, will be vice chair, the White House said.

Combined, the nominations pair two monetary policy veterans and collaborators on a recent overhaul of Fed policy, which shifted the emphasis to jobs from the preeminent focus on inflation established some four decades ago. Their challenge will be to keep U.S. job growth underway while also ensuring recent strong inflation doesn’t become entrenched.

“We’ve gone from an economy that was shut down to an economy that’s leading the world in economic growth,” Biden said in remarks at the White House with the nominees.

Citing Powell’s “steady leadership” that calmed panicked markets, and his belief in monetary policies that support maximum employment, Biden said “I believe Jay is the right person to see us through.”

The United States is still dealing with the impacts of the pandemic, including inflation, he said but the country has made “enormous progress” including adding nearly 6 million jobs since he was sworn in and increasing wages – positive signs that are a testament to the Federal Reserve.

“I respect Jay’s independence,” Biden said, directly addressing critics from his own Democratic party who wanted him to bump Powell, a Republican, for a Democrat. “At this moment of both enormous potential and enormous uncertainty for our economy, we need stability and independence at the Federal Reserve.”

Powell, 68, and Brainard, 59, will both need to be confirmed in their Fed leadership roles by the Senate, currently controlled by Biden’s Democratic party but closely divided. The president has for now left open several other Fed positions, including that of vice chair for supervision, that he may fill as soon as next month and that could be used to toughen bank regulation, improve diversity, and make other changes his supporters have urged for the Fed.

But for the Fed’s core monetary policy – managing inflation and setting interest rates as the economy reopens from the pandemic – Biden opted for continuity.

“They are veterans and mature public servants and there has been very little difference between them” on monetary policy said Adam Posen, president of the Peterson Institute for International Economics.

Together Powell, a moderate Republican elevated by former President Donald Trump, and Brainard, who served in prior Democratic administrations, “gives potentially non-partisan credibility to a more realistic assessment of inflation risks” the United States faces.

That reassessment could mean interest rate increases coming sooner than later if inflation, which both promised to fight, proves more persistent than expected.

“We know that high inflation takes a toll on families,” Powell said in brief remarks at the White House event where Biden announced the nominations.

Brainard also pledged to support a growing economy “that includes everyone,” and a Fed that “serves all Americans in every community.”

U.S. stocks hit record highs after the news. Treasury bond yields also rose and the dollar strengthened.

Powell’s reappointment had been encouraged by a cross-section of investors and economists with both conservative and liberal leanings, and was welcomed by Congress members of both parties.

The Fed’s aggressive actions at the start of the coronavirus pandemic in early 2020 were hailed as staving off a potential Depression. Later, some lauded his focus on jobs in the new policy framework launched just over a year ago, and others argued it would be too risky to oust the Fed chair during a sensitive transition from the emergency measures taken during the health crisis.

CHANCE TO CEMENT A LEGACY

Powell’s second term would begin in early February, and the coming months will be crucial in determining whether his legacy will be as the Fed chair who elevated employment to the center of Fed policy, or as the one who let inflation surge and reestablish itself as a chronic problem.

Powell, who joined the Fed as a governor in 2012, did not anticipate being named chair when Trump was elected. With a pre-Fed career that had included eight years as a partner at The Carlyle Group, one of the world’s largest private equity firms, and no formal economics training, he had instead eyed the vice chair for supervision position eventually filled by Randal Quarles.

He was confirmed as Fed chair on an 84-13 vote, with Kamala Harris, now Biden’s vice president, among those opposing him.

He soon ran afoul of Trump, who hurled unprecedented public broadsides against Powell over Twitter and in frequent media appearances. At one point Trump labeled Powell an “enemy” of the United States for raising interest rates and explored whether he could fire him.

Powell not only survived but arguably grew in the job.

Initially hawkish as a governor, upon assuming the helm for U.S. monetary policy he considered himself a student at first, paying particular attention to arguments over whether the Fed’s focus on inflation had disadvantaged workers. The years since the 2007 to 2009 financial crisis had convinced many that was the case.

In November 2018, Powell launched a policy review that culminated in August 2020 with the adoption of an approach allowing economic expansions to run longer and “hotter,” with temporarily higher rates of inflation. Ideally that would lead to job gains that reach broadly into society and narrow the gaps in unemployment among different demographic groups.

It was an approach that conformed to what seemed then to be the changing nature of the U.S. economy, with embedded low inflation and low interest rates, and adapted as well to the demands of a pandemic crisis that threatened a permanent hole in the U.S. job market.

Just over a year into that new approach, however, inflation is running at levels not seen in decades as resurgent demand for goods and services outstrips the supply of materials and labor in an economy still shaking off the rust of pandemic shutdowns.

“The new leadership team faces some very tough calls in the period ahead,” wrote Evercore ISI vice chair Krishna Guha.

 

(Reporting by Howard Schneider and Jeff Mason; Editing by Dan Burns, Heather Timmons and Andrea Ricci)

Economy

What Olaf Scholz means for the world economy – BBC News

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Olaf Scholz

EPA

It is an important moment for Europe. A new German chancellor. And what happens in the German economy affects us all.

It also happens to be the elevation of an incumbent finance minister to the most powerful position in European politics.

I did the last lengthy English-language interview with Olaf Scholz, when he was visiting London in summer to seal a deal on global multinational taxation, before he became favourite for the German chancellorship.

He was almost tearful with joy at the G7 agreement, on a topic he had suggested years before. The agreement “will really change the world”, he told me, of a move impossible a year before with President Trump.

A political rival once likened his grin to that of the Smurf cartoon characters. He retorted that they are “small, crafty and always win”.

Signature policies

There are three signature economic policies he has been associated with that are of ongoing significance.

For one, he told me of his pride that the short-time working schemes, whose use was promoted in Germany by his ministry in the aftermath of the global financial crisis, were now being used around Europe, including the UK, in the guise of the furlough scheme.

“It was right that we gave very strong fiscal answers to fight against the pandemic,” he told me.

“We supported the health of our people with the money we spent, but also the economy and many jobs.

“Short-term allowances, Kurzarbeit – the method which I used when I was the minister of labour in Germany 10 years ago with the last crisis – are now something that is used, not just in Germany, but all over the EU and many other countries of the world. And this shows that it is right to do something against a crisis like this.”

He was also responsible for the Agenda 2010 reforms of the last centre-left Chancellor Gerhard Schröder. Those reforms saw significant reductions in labour costs in Germany, the establishment of low-paid “mini jobs” and also a rapid rise in German export competitiveness, as well as the revival of its economy.

The inability of southern Europe to compete helped lead to the profound eurozone crisis. The view in Germany, that the rest of Europe had to go through the same “internal devaluation” before Germany would sign off on bailouts of bankrupt eurozone nations, prolonged that crisis.

Amid that fearful moment, he also signed off on the “debt brake” policy that meant in normal times, Germany would not invest. It has been suspended during the Covid pandemic for obvious reasons.

The brake will return under the coalition agreement just struck with the Greens and Liberals, but not before a splurge in investment spending. The challenge is how to square ongoing spending plans with no tax rises and controls on borrowing.

Germany’s long history of state-backed investment lending institutions such as KfW will help bridge this gap. But this will be a source of tension in this untested three-party coalition.

But lessons have been learnt from the eurozone crisis. Mr Scholz now backs non “mini-jobs”, but a €12 minimum wage. As finance minister, he helped Brussels sign off its own centralised capacity to borrow money to help growth and deal with crises.

Climate club

Chancellor Scholz is very focused on climate change, in the home of the European automotive industry. His concept is massive investment to further green Germany’s industrial base. And internationally, the establishment of a “climate club” of like-minded nations to manage frictions over trade.

“Success in fighting against climate change will only be feasible if we include all the nations and if everyone understands why it’s good for himself and for his people. We are now discussing the question of co-operation,” he told me.

How German industry deals with, for example, the EU-proposed border tax on carbon emissions will be a crunch point on the path to net-zero.

All this comes at a time when inflation has spiked up to 6% in the famously inflation-averse nation. And German industry has been hit for six by the supply chain constraints on microchips and other parts in the post pandemic rebound.

Pre-Omicron, most forecasts suggest the German economy will avoid the feared “bottleneck recession”, but the situation is definitely more challenging than at the time of the election in September.

And then there is Brexit and fears over a trade war. Will the famous German carmakers force a new chancellor to fold over Article 16 to protect their exports to the UK? It is not a priority in the Bundeskanzleramt, the washing-machine-like version of the White House in Berlin.

There will be continuity with the policies of the Merkel administration. When I asked about frictions with the UK, Olaf Scholz was diplomatic but pointed.

“I’m always optimistic and happy that we got a deal in the end on the relationship between the European Union and the UK, and I hope that everyone will follow the deal and that everything will be exactly to what we have just written down,” he told me.

“And if this is the case, I think we can be assured that we will have good trade relations also in the future, which would be good for the people of the UK as well as for the European Union.”

So some reason for optimism, as long as the deal is followed. For now, Chancellor Scholz has his own economic challenges closer to home.

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French Economy Shows Little Sign of Succumbing to Omicron Angst – BNN

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(Bloomberg) — French economic activity will continue to rise in December, despite another wave of the Covid-19 pandemic and fresh uncertainty over the omicron variant, according the Bank of France.

Completed at the end of last week, the central bank’s monthly survey of 8,500 firms is the first indicator of how businesses in the euro area’s second-largest economy are faring since the new coronavirus strain emerged.

Based on their responses, the bank estimates economic activity was 0.5% above pre-crisis levels in November and will be 0.75% higher this month. That means output for the whole fourth quarter will also expand by almost 0.75%.

The report provides some reassurance on the capacity of European economies to weather the latest virus surge. It follows bullish remarks last week by Bank of France Governor Francois Villeroy de Galhau, who said omicron wouldn’t change the outlook “too much.”

While France late Monday introduced further restrictions — including closing nightclubs — to slow the spread of the disease, the moves are designed to have limited economic impact and the government has pledged to compensate those affected.  

Even so, the central bank’s survey found that some companies “indicated difficulties in giving a short-term outlook” because of the uncertainties — particularly in industries like hospitality and air travel.

In addition, hiring difficulties and supply disruptions persist. About half of firms polled said they’re struggling to find staff and 57% of industrial companies said supply snarls have dented activity, according to the Bank of France.

©2021 Bloomberg L.P.

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Japan economy contracts 3.6% in Q3 on weaker consumer spending, trade – Business Standard

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Japan’s contracted at a 3.6% annual rate in July-September, according to a revised estimate released Wednesday.

The downgraded growth estimate for the last quarter, down from an earlier report of a 3.0% contraction, reflected weaker consumer spending and trade, the government said.

The world’s third-largest has been mired in recession and struggling to recover from the impact of waves of coronavirus infections.

The latest outbreak, in the late summer, has receded for now with a sharp drop in cases. But it hit during the usually busy summer travel season, with calls for restricted business activity and travel hurting restaurants, hotels and other service sector industries.

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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