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Fed to keep policy easy, stay patient as U.S. economy revives – Reuters

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WASHINGTON (Reuters) – Amid market expectations the Fed may be forced to tighten monetary policy sooner than expected, top U.S. central bankers delivered a simple message to investors fixated on rising U.S. bond yields and price risks: Do not expect any changes until the economy is clearly improving.

FILE PHOTO: U.S. Federal Reserve Chairman Jerome Powell arrives to speak to reporters after the Federal Reserve cut interest rates in an emergency move designed to shield the world’s largest economy from the impact of the coronavirus, during a news conference in Washington, U.S., March 3, 2020. REUTERS/Kevin Lamarque/File Photo

Testifying on Wednesday before the House of Representatives Financial Services Committee, Fed Chair Jerome Powell emphasized the U.S. central bank’s promise to get the economy back to full employment, with little worry about inflation unless prices begin rising in a persistent and troubling way.

“We are just being honest about the challenge,” Powell told lawmakers when asked about Fed projections that inflation will remain at or below the central bank’s 2% target through 2023.

The Fed has said it will not raise interest rates until inflation has exceeded 2% and “we believe we can do it, we believe we will do it. It may take more than three years,” Powell said. The current inflation rate by the Fed’s preferred measure is about 1.3%.

An expected jump in prices this spring, he said, may reflect post-pandemic supply bottlenecks, or a jump in demand as the economy reopens, but nothing to warrant a policy response.

Powell’s remarks led a broad central bank effort to convince the public and particularly bond market investors that it is not going to tighten monetary policy until it is clear people are getting back to work.

Yields on U.S. Treasury bonds have risen recently, with the risk of a potential spike in inflation in focus as the United States expands its coronavirus vaccination program, plans further fiscal spending and moves toward a post-pandemic reopening of the economy.

Financial markets are pricing in a better outlook for the U.S. economy, and “that’s appropriate,” Fed Vice Chair Richard Clarida told the American Chamber of Commerce in Australia, adding he had become more bullish himself in recent months.

What that does not mean, he said, is any imminent change to the Fed’s near-zero setting for short-term interest rates, or its bond-buying program.

“We to a person are going to be patient, we are going to be very careful, and we are going to be very, very transparent of our intentions well in advance of any decision we might make in the future,” Clarida said.

Clarida said he sees inflation rising above 2% in the spring but coming back down to about that level by year’s end.

Talk about a possible market “taper tantrum” in response to a change in the Fed’s bond-buying program is “premature,” Clarida said. A taper tantrum refers to a rapid run-up in bond yields based on changes in market expectations for Fed policy.

“We have a deep hole, there’s still a ways to go, and I think that settings of monetary policy are entirely appropriate not only now but, given my outlook for the economy, for the rest of the year,” he said.

‘FRONT-RUNNING THE FED’

While some observers believe the Fed may need to remove crisis-era policies sooner than expected, that argument ignores the Fed’s new jobs-first framework, said Tim Duy, chief U.S. economist with SGH Macro Advisors.

“If we try to force the Fed into the old framework, we will be front-running the Fed. The Fed will not validate such front-running,” Duy wrote of Powell’s appearances this week before House and Senate committees. “The Fed intends to maintain easy policy until the data pushes it in another direction and the Fed does not expect that to happen for a long, long time.”

The Fed has said it plans to keep buying $120 billion a month in U.S. government and government-backed securities “until substantial further progress has been made” toward the Fed’s maximum employment and inflation goals.

With the inflation target a long way off, Fed officials have focused on what they see as a major gap in the labor market as well – a scar that goes well beyond the 6.3% headline unemployment rate to include concerns about disproportionate joblessness among minorities and the exodus of women from the labor force.

In recent weeks, Powell, Clarida and others have used an alternate measure of around 10% that includes, for example, those who have left the labor force in recent months, and even that may fall short of the damage to workers the Fed hopes to repair.

Powell, who testified in Congress as part of his mandated twice-a-year appearances on Capitol Hill to provide updates on the economy, said the Fed needed to see tangible progress before shifting gears, not just anticipated improvement, and not premature bets from the bond market.

“We are not acting on forecasts,” Powell said. The policy “is what it sounds like – incoming actual data that sees us moving closer to our goals.”

Reporting by Howard Schneider and Ann Saphir; Editing by Peter Cooney

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Toronto Stock Exchange rises 0.64% to 19,310.74

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tsx

* The Toronto Stock Exchange’s TSX rises 0.64 percent to 19,310.74

* Leading the index were Ero Copper Corp <ERO.TO​>, up 13.6%, Nexgen Energy Ltd​, up 12.6%, and Denison Mines Corp​, higher by 10.5%.

* Lagging shares were Kinaxis Inc​​, down 5.2%, Ballard Power Systems Inc​, down 3.9%, and Cominar REIT​, lower by 3.5%.

* On the TSX 132 issues rose and 93 fell as a 1.4-to-1 ratio favored advancers. There were 30 new highs and 1 new low, with total volume of 246.0 million shares.

* The most heavily traded shares by volume were Enbridge Inc, Suncor Energy Inc and Manulife Financial Corp.

* The TSX’s energy group rose 3.28 points, or 2.7%, while the financials sector climbed 2.69 points, or 0.8%.

* West Texas Intermediate crude futures fell 0.58%, or $0.38, to $65.31 a barrel. Brent crude  fell 0.29%, or $0.2, to $68.68.

* The TSX is up 10.8% for the year.

This summary was machine generated May 5 at 21:03 GMT.

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Merkel wants Europe, United States to aim for new trade deal

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BERLIN (Reuters) – A trade agreement between the United States and the European Union would “make a lot of sense”, German Chancellor Angela Merkel said in a speech in which she welcomed the United States’ return to the multilateral fold under President Joe Biden.

German enthusiasm for a trade deal and stronger transatlantic ties may have to contend with a more cautious approach in France, where President Emmanuel Macron has made a priority of reducing European reliance on rival superpowers.

Merkel said that while Germany had no interest in a world divided into camps as it was in the Cold War, it was good that the United States, Europe’s “most important ally”, stood alongside Europe in rivalries with China and Russia.

“I have always supported a trade agreement between the United States of America and the European Union,” she told a Berlin conference on the future of transatlantic ties.

“We have trade agreements with so many of the world’s regions. It would make a lot of sense to develop such a trade agreement here, similar to what we have done with Canada,” she added.

Merkel’s transatlantic coordinator Peter Beyer told Reuters in February that Germany and the new U.S. administration should “think big” and aim for an ambitious agenda including a trade deal to abolish industrial tariffs and a WTO reform to increase pressure on China.

The European Union has put reform of the World Trade Organization at the heart of its trade strategy for the next decade, saying global rules on commerce must be greener, take more account of state subsidies and be enforced.

The EU itself feels bruised by trade wars, Brexit and what it sees as unfair competition from China, which it perceives as a “systemic rival”, and is taking more assertive measures to enforce global trade rules and ensure a level playing field.

Merkel said that despite issues with its ratification in the EU, the bloc’s planned investment agreement with China, the comprehensive agreement on investment (CAI), is a “very important undertaking, because it gives us more reciprocity in market access”.

At the same time, it was necessary to address “the whole range of issues” with China, including its human rights record, she added.

The EU executive has hailed the CAI, struck at the very end of 2020, as a means to secure better access for European companies to Chinese markets and redress unbalanced economic ties.

But concerns over China’s human and labour rights record and scepticism from the United States had already cast doubt on the deal’s approval process even before Chinese blacklisting of five members of the European Parliament in tit-for-tat sanctions.

 

(Reporting by Thomas Escritt, Paul Carrel and Michael Nienaber; EDiting by Giles Elgood)

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Canadian dollar posts three-year high as risk appetite climbs

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By Fergal Smith

TORONTO (Reuters) – The Canadian dollar strengthened to its highest level in more than three years against its U.S. counterpart on Wednesday, supported by improved investor sentiment and the Bank of Canada‘s recent shift to more hawkish guidance.

The Dow Jones Industrial Average hit a record high as the market recovered from a steep tech sell-off, after investors were encouraged by U.S. Treasury Secretary Janet Yellen’s new comments on interest rates and a positive private jobs report.

“Risk-on conditions” and the recent move higher in commodity prices bolstered the Canadian dollar,” Ronald Simpson, managing director, global currency analysis at Action Economics, said in a note. “In addition, the BoC’s tapering of its QE program appears to have shifted USD-CAD’s trading range down a notch.”

Last month, the Bank of Canada cut the pace of its bond purchases and signaled it could hike interest rates in late 2022.

Further clues to the central bank’s policy outlook could come from Canada‘s April employment report, due for release on Friday.

The Canadian dollar was trading 0.2% higher at 1.2280 to the greenback, or 81.43 U.S. cents, having touched its strongest intraday level since February 2018 at 1.2252.

U.S. crude oil futures settled 0.1% lower at $65.63 a barrel as traders used weekly inventory figures as an excuse to pull back from the recent rally. Oil is one of Canada‘s major exports.

Home sales in Toronto, Canada‘s most populous city, fell nearly 13% in April from March. That bucked the regular spring trend, as demand began to ease after months of blistering growth.

Canadian government bond yields were mixed across the curve, with the 10-year little changed at 1.521%.

 

(Reporting by Fergal Smith; Editing by Kirsten Donovan and Nick Zieminski)

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