Economy
U.S. economy can withstand Fed tightening, Omicron surge, Powell says
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Federal Reserve Chair Jerome Powell, in a congressional hearing that pointed to his likely confirmation for a second term as head of the U.S. central bank, said on Tuesday the economy should weather the current COVID-19 surge with only “short-lived” impacts and was ready for the start of tighter monetary policy.
Powell was openly endorsed by Republicans and Democrats on the Senate Banking Committee in a session which focused largely on how the Fed planned to address inflation running at multi-decade highs, why the central bank misdiagnosed the surge in price increases, and what stricter monetary policy would mean for job growth.
The Fed chief said the central bank was determined to ensure that high inflation did not become “entrenched,” and that far from diminishing job growth, a turn to higher policy interest rates and a runoff of its asset holdings was necessary to keep the current economic expansion underway.
If prices continue spiking, the Fed could be forced to push through a sharper rise in interest rates this year than the three quarter-percentage-point hikes https://www.reuters.com/markets/us/fed-prepares-stiffen-inflation-response-post-transitory-world-2021-12-15 its policymakers currently anticipate, risking a return to recession.
“Inflation is running very far above target. The economy no longer needs or wants the very accommodative policies we have had in place,” Powell said in his testimony.
Yet with the Fed’s benchmark overnight interest rate near zero and nearly $9 trillion in assets on its books, “it is a long road” to anything close to restrictive policy, Powell said. In the meantime, Fed actions “should not have negative effects on the employment market,” he added.
“You need to focus on getting inflation under control because you’re not going to have maximum employment without price stability.”
‘A BIT NIMBLE’
The hearing had the potential to be combative. Some Democrats have announced their opposition to the renomination of Powell, who was elevated to the top Fed job by former President Donald Trump, and criticized his oversight of Wall Street; a stock trading scandal and the resignation of several top officials has tarred the Fed’s image; and some Republicans have argued he is letting the central bank become partisan on issues like climate change and economic inequality.
But it was largely staid and focused on core economic issues, with Powell offering his fullest comments yet on how the unprecedented rise in coronavirus cases has affected his outlook.
Despite the disruptions to schooling, travel and even some core services, “what we are seeing is an economy that functions through these waves of COVID,” Powell said.
The dominant theme, if there was one, centered around inflation, the Fed’s misdiagnosis of it last year as “transitory,” and of the central bank’s plans to get in front of it now that it is running well above the 2% target.
Powell said he still felt that while the level of price increases required the Fed to act, some relief would come from beyond monetary policy as global supply chains start to catch up with demand. Mistakenly expecting that adjustment to happen fast, Powell said, is why the Fed at first dismissed rising inflation last year as likely to fade without a Fed response, only to see prices continue to surge to levels not seen since the inflation scares of the 1970s and 1980s.
He said he now thinks inflation will ease by the middle of this year, but that the Fed stood ready to tighten borrowing costs as needed to be sure it does.
“We are going to have to be humble but a bit nimble,” Powell said, in deciding when and how fast to raise interest rates and change the Fed’s asset holdings, which have ballooned as a result of its pandemic-related support for the economy.
Powell gave no fresh hint about the timing for the liftoff in interest rates, expected by many analysts to begin in March. He also said no decision had been made about when to let the size of the central bank’s asset holdings decline, but that it was likely to happen “sooner and faster” than it did following the 2007-2009 recession, when the Fed waited about two years after an initial rate increase to shrink its balance sheet.
U.S. stocks, which started the year on a weak note as the Omicron variant fueled a surge in COVID-19 cases and investors repositioned for a Fed more intent on containing inflation, rose during Powell’s testimony. Yields on shorter-dated Treasury securities fell from pandemic-era highs hit earlier in the day.
RATE HIKES
The hearing was a first step in Powell’s expected confirmation to a new four-year term. Lael Brainard, currently a Fed governor, will be questioned by the same panel on Thursday for promotion to a four-year term as Fed vice chair.
At the start of Tuesday’s session, Democratic Senator Sherrod Brown, the panel’s chair, and Senator Pat Toomey, its senior Republican, endorsed Powell’s management of the Fed’s response to the pandemic, even as they raised questions about its next steps.
“I believe you’ve shown the leadership” to lead the Fed through debates over inflation, regulation, and an ethics scandal over stock trading by senior officials, Brown said.
Toomey said he was concerned that the Fed’s robust response to the pandemic may now be stoking inflation and “could become the new normal,” and repeated his criticism of the central bank delving into what he regards as political issues like climate change and inequality.
In December, the Fed decided to end its purchases of Treasuries and mortgage-backed securities – a legacy of its nearly two-year battle with the economic fallout of the pandemic – by March, and signaled it could raise interest rates three times this year.
Financial markets are pricing a slightly more aggressive pace of four rate hikes this year.
(Reporting by Howard SchneiderEditing by Chris Reese and Paul Simao)
(Bloomberg) — German business sentiment improved to its highest level in a year — reinforcing recent signs that Europe’s largest economy is exiting two years of struggles.
An expectations gauge by the Ifo institute rose to 89.9. in April from a revised 87.7 the previous month. That exceeds the 88.9 median forecast in a Bloomberg survey. A measure of current conditions also advanced.
“Sentiment has improved at companies in Germany,” Ifo President Clemens Fuest said. “Companies were more satisfied with their current business. Their expectations also brightened. The economy is stabilizing, especially thanks to service providers.”
A stronger global economy and the prospect of looser monetary policy in the euro zone are helping drag Germany out of the malaise that set in following Russia’s attack on Ukraine. European Central Bank President Christine Lagarde said last week that the country may have “turned the corner,” while Chancellor Olaf Scholz has also expressed optimism, citing record employment and retreating inflation.
There’s been a particular shift in the data in recent weeks, with the Bundesbank now estimating that output rose in the first quarter, having only a month ago foreseen a contraction that would have ushered in a first recession since the pandemic.
Even so, the start of the year “didn’t go great,” according to Fuest.
“What we’re seeing at the moment confirms the forecasts, which are saying that growth will be weak in Germany, but at least it won’t be negative,” he told Bloomberg Television. “So this is the stabilization we expected. It’s not a complete recovery. But at least it’s a start.”
Monthly purchasing managers’ surveys for April brought more cheer this week as Germany returned to expansion for the first time since June 2023. Weak spots remain, however — notably in industry, which is still mired in a slump that’s being offset by a surge in services activity.
“We see an improving worldwide economy,” Fuest said. “But this doesn’t seem to reach German manufacturing, which is puzzling in a way.”
Germany, which was the only Group of Seven economy to shrink last year and has been weighing on the wider region, helped private-sector output in the 20-nation euro area strengthen this month, S&P Global said.
–With assistance from Joel Rinneby, Kristian Siedenburg and Francine Lacqua.
(Updates with more comments from Fuest starting in sixth paragraph.)
©2024 Bloomberg L.P.
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When Moscow resident Zoya, 62, was planning a trip to Italy to visit her daughter last August, she saw the perfect opportunity to buy the Apple Watch she had long dreamed of owning.
Officially, Apple does not sell its products in Russia.
The California-based tech giant was one of the first companies to announce it would exit the country in response to Russian President Vladimir Putin’s full-scale invasion of Ukraine on February 24, 2022.
But the week before her trip, Zoya made a surprise discovery while browsing Yandex.Market, one of several Russian answers to Amazon, where she regularly shops.
Not only was the Apple Watch available for sale on the website, it was cheaper than in Italy.
Zoya bought the watch without a moment’s delay.
The serial code on the watch that was delivered to her home confirmed that it was manufactured by Apple in 2022 and intended for sale in the United States.
“In the store, they explained to me that these are genuine Apple products entering Russia through parallel imports,” Zoya, who asked to be only referred to by her first name, told Al Jazeera.
“I thought it was much easier to buy online than searching for a store in an unfamiliar country.”
Nearly 1,400 companies, including many of the most internationally recognisable brands, have since February 2022 announced that they would cease or dial back their operations in Russia in protest of Moscow’s military aggression against Ukraine.
But two years after the invasion, many of these companies’ products are still widely sold in Russia, in many cases in violation of Western-led sanctions, a months-long investigation by Al Jazeera has found.
Aided by the Russian government’s legalisation of parallel imports, Russian businesses have established a network of alternative supply chains to import restricted goods through third countries.
The companies that make the products have been either unwilling or unable to clamp down on these unofficial distribution networks.
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