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Omicron could pose 'significant' threat to global economy, Yellen says – Financial Post

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The Omicron variant of COVID-19 could slow global economic growth by exacerbating supply chain problems and depressing demand, U.S. Treasury Secretary Janet Yellen told the Reuters Next conference on Thursday.

Yellen cited a great deal of uncertainty about the impact of the highly contagious variant, first detected in South Africa, given the severe U.S. economic slowdown caused by the emergence of the Delta variant of COVID-19 earlier this year.

“Hopefully it’s not something that’s going to slow economic growth significantly,” Yellen said, adding, “There’s a lot of uncertainty, but it could cause significant problems. We’re still evaluating that.”

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Yellen said the new strain of the coronavirus could exacerbate supply chain problems and boost inflation, but it could also depress demand and cause slower growth, which would ease some of the inflationary pressures.

The spread of Omicron has roiled financial markets and prompted governments around the world to tighten travel and workplace restrictions. The United States reported its first https://www.reuters.com/world/us-tightens-covid-19-travel-rules-countries-race-quell-omicron-threat-2021-12-01 case of community transmission of the new variant on Thursday.

Yellen, the former head of the Federal Reserve, also told the virtual global conference that she is ready to retire the word “transitory” to describe the current state of inflation plaguing the U.S. recovery from the COVID-19 pandemic, echoing comments https://www.reuters.com/markets/us/powell-yellen-head-congress-inflation-variant-risks-rise-2021-11-30 from Fed Chair Jerome Powell earlier this week.

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“I’m ready to retire the word transitory. I can agree that that hasn’t been an apt description of what we’re dealing with,” Yellen said.

Powell told lawmakers this week the word meant different things to different people, sowing some confusion, and it was a good time to explain more clearly what was meant.

STRONG ECONOMY

Yellen insisted that stimulus spending by the Biden administration early this year was not the major driver boosting consumer prices, which hit 31-year highs in October and are running at more than twice the Fed’s flexible inflation target of 2% annually. She blamed the surging prices mainly on supply chain issues and a mismatch between supply and demand.

Yellen said the $1.9 trillion American Rescue Plan passed by Congress earlier this year had helped vulnerable Americans get through the worst of the pandemic and fueled the strong U.S. economy.

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While it may have contributed to inflation “somewhat,” she said the surge was largely due to the pandemic and the massive shift in consumption towards goods and away from services.

She said the Fed should keep a close eye on rising wages to avoid the kind of damaging and long-lasting “wage-price spiral” seen in the 1970s.

Yellen, who led the Fed from 2014 to 2018, said it was up to the U.S. central bank to decide what to do about interest rates, but noted that a strong U.S. economy, which would likely prompt rate hikes, is generally a good thing for the rest of the world.

President Joe Biden’s administration is working closely with the private sector to curb price increases, Yellen said, citing efforts to accelerate the loading of containers at ports and encourage domestic production of semiconductors.

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She said lowering Trump-era tariffs on imported goods from China through a revived exclusion process could help ease some inflationary pressures https://www.reuters.com/markets/rates-bonds/yellen-says-cutting-some-tariffs-chinese-goods-could-ease-price-pressures-2021-12-02, but would not be a “game-changer.”

While she is “open” to a visit to China to meet with government officials there on economic issues, Yellen said a trip is not currently on her agenda. But she said she would continue to engage with her Chinese counterpart, Vice Premier Liu He, on issues such as technology practices, securities markets and exchange rate practices as well as efforts to rebalance China’s economy toward consumer spending.

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Yellen also told the Reuters Next audience that her mind is not yet made up https://www.reuters.com/markets/us/yellen-says-mind-not-made-up-us-central-bank-digital-currency-2021-12-02 on whether the Fed should create a digital dollar, following China and some other countries in developing central bank digital currencies.

She said the advantages and disadvantages of such a move needed to be weighed, including possible negative effects on the banking system, and that consensus among the Fed, the Biden administration and Congress was needed to proceed. (Reporting by Alessandra Galloni, additional reporting by David Lawder, Andrea Shalal and Daniel Burns; Editing by Paul Simao)

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Canadian dollar steadies near 2-month low as Omicron risk weighs

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The Canadian dollar strengthened slightly against the greenback on Thursday but held near its lowest level in over two months, as investors assessed the global economic impact of the Omicron coronavirus variant and looked ahead to domestic data.

The Canadian dollar was trading 0.1% higher at 1.2807 to the greenback, or 78.08 U.S. cents, after touching intraday 1.2837, which was the 10-week low it hit on Tuesday.

“We’ve got ongoing uncertainty from the Omicron scare, uncertainty related to U.S. politics heating up as we get close to deadlines on all kinds of stuff,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets. “That uncertainty tends to lift USD-CAD.”

“But at the same time resistance (at 1.2850) … seems reasonably solid for now,” Anderson added.

The U.S. federal government is approaching its $28.9 trillion borrowing limit, which the Treasury Department has estimated it could reach by Dec. 15. Failure to extend or lift the limit in time could trigger an economically catastrophic default.

Global equity markets remained volatile as countries ramped up restrictions to curb the variant’s spread.

The price of oil, one of Canada‘s major exports, clawed back some recent losses as OPEC+ stuck to its policy of incrementally boosting output. U.S. crude oil futures settled 1.4% higher at $66.50 a barrel.

The Canadian employment report for November is due on Friday, which could offer clues on the strength of the domestic economy.

Canadian Prime Minister Justin Trudeau’s government will outline limited new spending in a fiscal update to be released later this month, a source said, as inflation soars and some business groups and opposition politicians call for restraint.

Canadian 10-year touched its lowest intraday level since Oct. 4 at 1.472% before recovering to 1.499%, up about half a basis point on the day.

 

(Reporting by Fergal Smith; editing by Barbara Lewis and Richard Chang)

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Exclusive-Trudeau to limit new spending in fiscal update – source

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Canadian Prime Minister Justin Trudeau‘s government will outline limited new spending in a fiscal update expected later this month, a source said on Thursday, as inflation soars and some business groups and opposition politicians call for restraint.

Fresh investments in the so-called fall fiscal update will be “limited in scope”, a source familiar with the drafting of the document told Reuters.

This fiscal update will be similar to those released following the 2015 and 2019 elections, the source said. Other years when elections were not held, the fiscal update has been more substantial, like a mini-budget.

After COVID-19 supports for businesses and individuals produced the highest deficit since World War Two last year, Trudeau during his campaign pledged C$78 billion ($60.9 billion)in new spending over five years to foster Canada‘s economic rebound.

“This will be an update on where the nation’s finances are right now,” the source said of the document. “We certainly have an ambitious plan that we will continue to move forward on. That’s why you have a budget.”

The government is expected to release its 2022-23 fiscal-year budget during the first part of next year. Inflation is at an 18-year high and is being driven mainly by supply chain problems and energy price gains, but some fear more government spending will make it worse.

This year’s budget included C$101 billion investments over three years.

“There’s a major concern that people have about the level of government spending, and whether or not it is fueling inflation and fueling demand,” said Perrin Beatty, president and CEO of the Canadian Chamber of Commerce.

The prospect of rising interest rates next year, as signaled by the Bank of Canada, will increase the servicing costs on the country’s debt, Beatty said.

‘JUSTIN-FLATION’

Pierre Poilievre, the finance critic for the opposition Conservative Party, blames Trudeau for stoking inflation, which he calls “Justin-flation”, with excessive government spending.

“We’re going to be prudent,” a second source familiar with the government’s plans said.

“The prudent thing is to wait and just see how the next couple of months unfold and you always reserve the option in the winter budget to do more,” said Rebekah Young, director, fiscal and provincial economics at Scotiabank. “It’s harder to roll back than it is to roll out more programs in the winter.”

Already in October, Finance Minister Chrystia Freeland indicated Canada would significantly scale back spending on pandemic support programs now that more than 85% of the eligible population was vaccinated against COVID-19.

Fitch Ratings was the only ratings agency to strip Canada of a triple-A credit rating during the pandemic.

“A combination of strong revenue recovery and fiscal restraint would put the federal debt and broader general government debt each on a faster reduction course,” Kelli Bissett-Tom, Fitch’s director of Americas sovereign ratings, said on Thursday.

In April, Freeland said debt as a percentage of output would progressively decline, providing a fiscal anchor going forward. In the budget, debt was forecast to be 51.2% of gross domestic product this fiscal year, falling to 50.7% the following year.

Revenues were up C$47.0 billion, or 36.5%, in the April-September period, according to the Department of Finance.

There was no immediate comment from the prime minister’s office. The finance ministry declined to comment.

($1 = 1.2811 Canadian dollars)

 

(Reporting by Steve Scherer in Ottawa and Fergal Smith in Toronto,; Editing by Chizu Nomiyama and Alistair Bell)

 

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