Fed stresses its commitment to low rates as economy stumbles - North Shore News

Economy

Fed stresses its commitment to low rates as economy stumbles – North Shore News

Published

3 years ago

January 27, 2021

Harry Miller

WASHINGTON — Chair Jerome Powell said Wednesday that the Federal Reserve will keep pursuing its low-interest rate policies until an economic recovery is well underway, acknowledging that the economy has faltered in recent months.

The Fed said in a statement after its latest policy meeting that hiring and economic growth had slowed, particularly in industries affected by the raging pandemic, notably restaurants, bars, hotels and others involving face-to-face public contact. The officials kept their benchmark short-term rate pegged near zero and said they would keep buying Treasury and mortgage bonds to restrain longer-term borrowing rates and support the economy.

Speaking at a news conference, Powell made clear his belief that the economy will struggle in the coming weeks and months, until widespread vaccinations and government rescue aid eventually fuel a sustained rebound.

“We’re a long way from full recovery,” he said. “Something like 9 million people remain unemployed as a consequence of the pandemic. That’s as many people as lost their jobs at the peak of the global financial crisis and the Great Recession.”

The Fed statement warned that the virus is posing risks to the economy. But the officials removed phrases from their previous statement in December that had said the pandemic was pressuring the economy in the “near term” and posed risks “over the medium term.”

Powell said that language was removed because the Fed policymakers see the pandemic increasingly as a short-term risk that will likely fade as vaccines are distributed more widely. But he also cautioned that the threat remains a serious one, particularly because of the potential harm from new strains of the virus.

“We have not won this yet,” Powell said. “There’s nothing more important to the economy now than people getting vaccinated.”

As Powell spoke, a broad sell-off on Wall Street knocked more than 600 points off the Dow Jones Industrial Average, handing the stock market its worst day in nearly three months. The drop, which followed a recent record-setting run, came as investors focused on the uncertain outlook for the economy and corporate profits amid a still-raging coronavirus pandemic. Traders were also focused on the eye-popping surge in shares of GameStop, a money-losing video game seller that became the focus of a battle between small investors bidding it higher and big hedge funds betting it would fall.

For now, the job market is faltering, with 9.8 million jobs still lost to the pandemic, which erupted 10 months ago. Hiring has slowed for six straight months, and employers shed jobs in December for the first time since April. The job market has sputtered as the pandemic and colder weather have discouraged Americans from travelling, shopping, dining out or visiting entertainment venues. Retail sales have declined for three straight months.

Yet the Fed still envisions a sharp rebound in the second half of the year as the virus is brought under control by vaccines and government-enacted rescue money spreads through the economy. Americans fortunate enough to have kept their jobs have stockpiled massive savings that suggest pent-up demand that could be unleashed, with a big lift to the economy, once consumers increasingly feel safe about resuming their old spending patterns.

Powell was pressed during the news conference on whether the Fed should respond to the recent speculative surge in the prices of some individual stocks, notably shares of GameStop, and whether that buying frenzy suggested a dangerous bubble in overall stock prices. Powell deflected the questions by saying the Fed’s interest rate policies aren’t well-suited to address speculation in the stock market.

In addition, he said, “if you look at what’s really been driving asset prices in the last couple of months, it isn’t monetary policy. It’s expectations about vaccines and also fiscal policy. Those are the news items that have been driving asset values in recent months.”

Powell also noted that the Fed is keeping rates low and buying bonds to support economic growth. Reversing those policies to offset potential bubbles in the stock market, he said, could harm the economy.

“We don’t actually understand the trade-off,” he said. “Will it actually cause more damage, or will it help? I think that’s unresolved.”

The Fed has signalled that it expects to keep its key short-term rate at a record low between zero and 0.25% through at least 2023. Earlier this month, Vice Chair Richard Clarida said he expects the Fed’s bond purchases to extend through the end of this year, which would mean continued downward pressure on long-term loan rates.

The central bank said it will continue its bond purchases until it makes “substantial further progress” toward its goals of maximum employment and stable 2% inflation. Powell said “it is likely to take some time” for that progress to be achieved.

The Fed’s drive to keep long-term rates low have helped hold down mortgage rates and fueled home sales and price increases. Home prices, for example, surged 9% in November compared with a year earlier, its fastest increase in more than six years.

The prospect of significant more government rescue aid and ongoing vaccinations has raised some concern that as Americans eventually release pent-up demand for airline tickets, hotel rooms, new clothes and other goods and services, the economy might accelerate and annual inflation could surge above the Fed’s 2% target.

If many companies don’t initially have the capacity to meet that demand, prices would pick up. Powell, however, dismissed those concerns, pointing to several long-run factors that have restrained inflation for more than a decade, such as an aging population that tends to spend less and save more, technological developments that improve efficiency, and overseas competition.

“Frankly, we welcome somewhat higher inflation,” Powell said. The Fed believes that inflation sustainably at 2% guards against deflation, a drop in prices and wages. And since interest rates include expected levels of inflation, that gives the Fed more room to cut interest rates. “The kind of troubling inflation that people like me grew up with seems far away and unlikely.”

The Fed adopted a framework last year that calls for inflation to average 2% over time. Given that inflation has mostly languished below that level since the Fed adopted it as a target in 2012, policymakers would have to let inflation run above 2% for some time to make up for the years of below-target price increases.

Christopher Rugaber And Martin Crutsinger, The Associated Press

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Economy

What to read about India's economy – The Economist

Published

5 hours ago

April 22, 2024

Harry Miller

AS INDIA GOES to the polls, Narendra Modi, the prime minister, can boast that the world’s largest election is taking place in its fastest-growing major economy. India’s GDP, at $3.5trn, is now the fifth biggest in the world—larger than that of Britain, its former colonial ruler. The government is investing heavily in roads, railways, ports, energy and digital infrastructure. Many multinational companies, pursuing a “China plus one” strategy to diversify their supply chains, are eyeing India as the unnamed “one”. This economic momentum will surely help Mr Modi win a third term. By the time he finishes it in another five years or so, India’s GDP might reach $6trn, according to some independent forecasts, making it the third-biggest economy in the world.

But India is prone to premature triumphalism. It has enjoyed such moments of optimism in the past and squandered them. Its economic record, like many of its roads, is marked by potholes. Its people remain woefully underemployed. Although its population recently overtook China’s, its labour force is only 76% the size. (The percentage of women taking part in the workforce is about the same as in Saudi Arabia.) Investment by private firms is still a smaller share of GDP than it was before the global financial crisis of 2008. When Mr Modi took office, India’s income per person was only a fifth of China’s (at market exchange rates). It remains the same fraction today. These six books help to chart India’s circuitous economic journey and assess Mr Modi’s mixed economic record.

Breaking the Mould: Reimagining India’s Economic Future. By Raghuram Rajan and Rohit Lamba. Penguin Business; 336 pages; $49.99

Before Mr Modi came to office, India was an unhappy member of the “fragile five” group of emerging markets. Its escape from this club owes a lot to Raghuram Rajan, who led the country’s central bank from 2013 to 2016. In this book he and Mr Lamba of Pennsylvania State University express impatience with warring narratives of “unmitigated” optimism and pessimism about India’s economy. They make the provocative argument that India should not aspire to be a manufacturing powerhouse like China (a “faux China” as they put it), both because India is inherently different and because the world has changed. India’s land is harder to expropriate and its labour harder to exploit. Technological advances have also made services easier to export and manufacturing a less plentiful source of jobs. Their book is sprinkled with pen portraits of the kind of industries they believe can prosper in India, including chip design, remote education—and well-packaged idli batter. Both authors regret India’s turn towards tub-thumping majoritarianism, which they think will ultimately inhibit its creativity and hence its economic prospects. Nonetheless this is a work of mitigated optimism.

New India: Reclaiming the Lost Glory. By Arvind Panagariya. Oxford University Press; 288 pages

This book provides a useful foil for “Breaking the Mould”. Arvind Panagariya took leave from Columbia University to serve as the head of a government think-tank set up by Mr Modi to replace the old Planning Commission. The author is ungrudging in his praise for the prime minister and unsparing in his disdain for the Congress-led government he swept aside. Mr Panagariya also retains faith in the potential of labour-intensive manufacturing to create the jobs India so desperately needs. The country, he argues in a phrase borrowed from Mao’s China, must walk on two legs—manufacturing and services. To do that, it should streamline its labour laws, keep the rupee competitive and rationalise tariffs at 7% or so. The book adds a “miscellany” of other reforms (including raising the inflation target, auctioning unused government land and removing price floors for crops) that would keep Mr Modi busy no matter how long he stays in office.

The Lost Decade 2008-18: How India’s Growth Story Devolved into Growth without a Story. By Puja Mehra. Ebury Press; 360 pages; $21

Both Mr Rajan and Mr Panagariya make an appearance in this well-reported account of India’s economic policymaking from 2008 to 2018. Ms Mehra, a financial journalist, describes the corruption and misjudgments of the previous government and the disappointments of Mr Modi’s first term. The prime minister was exquisitely attentive to political threats but complacent about more imminent economic dangers. His government was, for example, slow to stump up the money required by India’s public-sector banks after Mr Rajan and others exposed the true scale of their bad loans to India’s corporate titans. One civil servant recounts long, dull meetings in which Mr Modi monitored his piecemeal welfare schemes, even as deeper reforms languished. “The only thing to do was to polish off all the peanuts and chana.”

The Billionaire Raj: A Journey Through India’s New Gilded Age. By James Crabtree. Oneworld Publications; 416 pages; $7.97

For a closer look at those corporate titans, turn to the “Billionaire Raj” by James Crabtree, formerly of the Financial Times. The prologue describes the mysterious late-night crash of an Aston Martin supercar, registered to a subsidiary of Reliance, a conglomerate owned by Mukesh Ambani, India’s richest man. Rumours swirl about who was behind the wheel, even after an employee turns himself in. The police tell Mr Crabtree that the car has been impounded for tests. But he spots it abandoned on the kerb outside the police station, hidden under a plastic sheet. It was still there months later. Mr Crabtree goes on to lift the covers on the achievements, follies and influence of India’s other “Bollygarchs”. They include Vijay Mallya, the former owner of Kingfisher beer and airlines. Once known as the King of Good Times, he moved to Britain from where he faces extradition for financial crimes. Mr Crabtree meets him in drizzly London, where the chastened hedonist is only “modestly late” for the interview. Only once do the author’s journalistic instincts fail him. He receives an invitation to the wedding of the son of Gautam Adani. The controversial billionaire is known for his close proximity to Mr Modi and his equally close acquaintance with jaw-dropping levels of debt. The bash might have warranted its own chapter in this book. But Mr Crabtree, unaccustomed to wedding invitations from strangers, declines to attend.

Unequal: Why India Lags Behind its Neighbours. By Swati Narayan. Context; 370 pages; $35.99

Far from the bling of the Bollygarchs or the ministries of Delhi, Swati Narayan’s book draw son her sociological fieldwork in the villages of India’s south and its borderlands with Bangladesh and Nepal. She tackles “the South Asian enigma”: why have some of India’s poorer neighbours (and some of its southern states) surpassed India’s heartland on so many social indicators, including health, education, nutrition and sanitation. Girls in Bangladesh have a longer life expectancy than in India, and fewer of them will be underweight for their age. Her argument is illustrated with a grab-bag of statistics and compelling vignettes: from abandoned clinics in Bihar, birthing centres in Nepal, and well-appointed child-care centres in the southern state of Kerala. In a Bangladeshi border village, farmers laugh at their Indian neighbours who still defecate in the fields. She details the cruel divisions of caste, class, religion and gender that still oppress so many people in India and undermine the common purpose that social progress requires.

How British Rule Changed India’s Economy: The Paradox of the Raj. By Tirthankar Roy. Springer International; 159 pages; $69.99

Many commentators describe the British Empire as a relentless machine for draining India’s wealth. But that may give it too much credit. The Raj was surprisingly small, makeshift and often ineffectual. It relied too heavily on land for its revenues, which rarely exceeded 7% of GDP, points out Tirthankar Roy of the London School of Economics. It spent more on infrastructure and less on luxuries than the Mughal empire that preceded it. But it neglected health care and education. India’s GDP per person barely grew from 1914 to 1947. Mr Roy reveals the great divergence within India that is masked by that damning average. Britain’s “merchant Empire”, committed to globalisation, was good for coastal commerce, but left the countryside poor and stagnant. Unfortunately, for the rural masses, moving from rural areas to the city was never easy. Indeed, some of the social barriers to mobility that Mr Roy lists in this book about India’s economic past still loom large in books about its future.

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Economy

The Fed's Forecasting Method Looks Increasingly Outdated as Bernanke Pitches an Alternative – Bloomberg

Published

7 hours ago

April 22, 2024

Harry Miller

The Federal Reserve is stuck in a mode of forecasting and public communication that looks increasingly limited, especially as the economy keeps delivering surprises.

The issue is not the forecasts themselves, though they’ve frequently been wrong. Rather, it’s that the focus on a central projection — such as three interest-rate cuts in 2024 — in an economy still undergoing post-pandemic tremors fails to communicate much about the plausible range of outcomes. The outlook for rates presented just last month now appears outdated amid a fresh wave of inflation.

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Economy

Slump in Coal Production Drags Down Poland’s Economic Recovery

Published

16 hours ago

April 22, 2024

Harry Miller

A 26% plunge in coal mining weighed on Poland’s industrial output in March 2024, casting a shadow over the expectations that the biggest emerging-market economy in Europe would grow by the expected 3% this year.

Coal mining output slumped by 25.9% year-over-year in March, contributing to a 6% decline in Poland’s industrial production last month, government data showed on Monday. This was the steepest decline in Poland’s industrial output since April 2023, per Bloomberg’s estimates. It was also much worse than expectations of a 2.2% drop in industrial production.

The steep drop in the Polish industry last month raises questions about whether the EU’s most coal-dependent economy would manage to see a 3% rebound in its economy this year, as the central bank and the finance ministry expect.

Still, it’s too early into the year to raise flags about Poland’s economy, Grzegorz Maliszewski, chief economist at Bank Millennium, told Reuters.

“I wouldn’t radically change my expectations here, because there are many reasons to expect a continuation of economic recovery, as domestic demand will increase and the economic situation in Germany is also improving,” Maliszewski said.

Meanwhile, Poland’s new government has signaled it would be looking to set an end date for using coal for power generation, a senior government official said.

“Only with an end date we can plan and only with an end date industry can plan, people can plan. So yes, absolutely, we will be looking to set an end date,” Urszula Zielinska, the Secretary of State at the Ministry of Climate and Environment, said in Brussels earlier this year.

Last year, renewables led by onshore wind generated a record share of Poland’s electricity—26%, but coal continued to dominate the power generating mix, per the German research organization Fraunhofer Society.

Poland’s power grid operator said last month that it would spend $16 billion on upgrading and expanding its power grid to accommodate additional renewable and nuclear capacity.