The Federal Reserve took a historic step Thursday by approving a new policy that aims to spur higher inflation and more aggressively push down unemployment, a strategy that will likely keep interest rates at rock bottom for years.
Traditionally, the Fed has taken a balanced approach, lowering interest rates to spur more borrowing and economic activity to create lots of jobs, and increasing rates when the economy ran so hot that it raised the prospect of excessive inflation.
Now, the Fed is effectively saying it will err on the side of more job creation and not worry as much about spikes in inflation. Instead of always aiming for 2% annual price increases, the central bank will target inflation that averages 2% over time. So, if price increases undershoot the Fed’s goal, as they have for most of the past decade, the Fed will let inflation run “moderately above 2% for some time,” as Fed Chair Jerome Powell put it.
USA TODAY economics reporter Paul Davidson breaks down the Fed’s landmark shift.
Why is the Fed taking this new approach?
Inflation has languished below the Fed’s 2% target even as unemployment reached a 50-year low of 3.5% last February. Normally, record low unemployment should spark higher inflation as businesses bid up wages to attract a smaller pool of workers, forcing firms to raise prices to maintain profits. After the COVID-19 pandemic triggered the nation’s steepest-ever recession this year, inflation has fallen even further while unemployment has shot up to 10.2%.
Although the Fed typically has tried to stave off surges in inflation, which burdens Americans with higher costs, Fed officials have become more worried about persistently low inflation. Meager inflation can lead to falling prices, or deflation, that prompts consumers to put off purchases as well as skimpy wage increases that especially hurt low- and middle-class Americans. Scant inflation also causes the Fed to keep interest rates historically low, giving it less room to cut rates in a downturn.
As a result, the Fed has little to lose right now by keeping its key rate near zero, which theoretically should help create more jobs, push down unemployment and allow inflation to heat up.
Fed makes historic change: Fed announces landmark policy shift to spur inflation, job growth, keeping rates low longer
Wasn’t the Fed already planning to keep rates near zero?
Yes, but the new policy likely ensures that rates will stay at that level even if the economy reaches full employment and inflation edges above the Fed’s 2% goal in a few years. In the past, the Fed probably would have raised rates in that scenario.
Who will benefit from the low rates?
Consumers and businesses already have gained from low rates that hold down borrowing costs for home and auto purchases, student loans, credit cards and factory construction, among other things. The new policy will mean Americans can enjoy very low borrowing costs for even longer, even after the economy recovers.
Job seekers will also be among the winners as low rates spark more economic activity and hiring.
What about the stock market?
Low interest rates already have led investors to move money from low-yielding bonds to stocks, helping lift the Standard & Poor’s 500 index to new records despite an economy that’s still trying to dig out of a brutal recession. The Fed’s vow to keep rates near zero longer has amplified that effect, says Chris Zaccarelli, chief investment officer of Independent Advisor Alliance.
Positive news on a COVID-19 vaccine or the economic recovery will further juice the market, Zaccarelli says. But with low rates now even more entrenched, negative news may hurt the market but probably won’t cause stocks to tank, he says.
“The Fed has put a floor under the market no matter what,” he says.
He adds, “Is there a risk the Fed is going to create a (market) bubble” that ultimately pops?
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Who’s going to be hurt by the Fed’s new strategy?
Savers, especially seniors, stand to lose. After keeping its key rate near zero for years after the Great Recession of 2007-09, the Fed gradually raised it the past few years, boosting bank savings rates, especially for seniors with fixed incomes and fewer stock holdings. But as the pandemic virtually shut down the US economy, the Fed abruptly slashed rates back near zero in March, again pushing down savings returns. Money market rates are averaging well under 1%.
Will Fed’s attempt to stoke inflation work?
That’s not clear. Rates already have been historically low but inflation has been held back by long-term forces, such as discounted online shopping and a more globally-connected economy. Throw in slower economic growth as a result of an aging population and sluggish productivity gains. Keeping rates lower longer won’t necessarily lead to more borrowing and economic activity.
“There is no guarantee that this will deliver the hoped-for inflation overshoot,” says Michael Feroli, chief U.S. economist at J.P. Morgan. “There’s only so much (the Fed) can do.”
India's Nobel laureate fears upsurge in child labour as pandemic shrivels economy – TheChronicleHerald.ca
By Sunil Kataria
NEW DELHI (Reuters) – For four decades Indian Nobel peace laureate Kailash Satyarthi rescued thousands of children from the scourge of slavery and trafficking but he fears all his efforts could reverse as the coronavirus pandemic forces children into labour.
“The biggest threat is that millions of children may fall back into slavery, trafficking, child labour, child marriage,” said Satyarthi who was awarded the Nobel Peace Prize in 2014 for his work to combat child labour and child trafficking in India.
As the pandemic pummels the Indian economy, pushing millions of people into poverty, families are under pressure to put their children to work to make ends meet.
While rates of child labour have declined over the last few years, about 10.1 million children are still in some form of servitude in India, according to the United Nations children’s agency UNICEF.
Across India child labourers can be found in a variety of industries such as brick kilns, carpet-weaving, garment-making, domestic service, agriculture, fisheries and mining.
Earlier this month, Satyarthi’s organisation backed by police rescued dozens of girls during a raid on a shrimp processing unit in western India.
“Once children fall into that trap they could be pulled into prostitution and could be trafficked easily … this is another danger which government have to address now,” he said, adding that he believed sexual abuse of children was also on the rise due to the pandemic.
“I cannot be satisfied even if one single child is enslaved … it means there is something wrong in our polity, in our economy, in our society, we have to ensure that not a single child is left out,” he told Reuters.
(Writing by Rupam Jain; Editing by Stephen Coates)
How our economy recovers: what Canadians need in a throne speech – The Globe and Mail
Mark Wiseman is chair of the Alberta Investment Management Corporation.
The economic crisis wrought by COVID-19 has been devastating, and the effects will linger long after a vaccine. In the early days of the pandemic our government quite rightly threw everything, including the kitchen sink, at the problem, to protect Canadians physically and economically. The government and the Bank of Canada worked quickly and deployed every fiscal and monetary tool available.
Now, a little more than six months into the crisis, we have racked up hundreds of billions of dollars of debt and monetary policy is quickly reaching its limits. Paying this debt back, especially with the medium-term threat of inflation, will be crippling for a generation of Canadians. To avoid this eventuality, we must embark today on a long-term growth and recovery plan.
There is no doubt that government must continue to spend aggressively. This path is not one that we chose; the pandemic has thrust it upon us. But now that we are here, it is crucial that dollars are spent efficiently and in ways that will stimulate long-term growth. A sustainable economic recovery needs to see Canada’s long-term GDP growth rate rise to approximately 3 per cent (from a prepandemic 2 per cent) to make certain that we can pay off the billions in necessary expenditures.
To begin, Ottawa should ensure spending on near-term relief programs are highly effective and efficient. Every dollar the government spends needs to be repaid, so it should be extra vigilant with every penny spent. Ottawa needs to quickly revisit existing programs to eliminate unintended consequences and disincentives – ensuring that Canadians get safely back to work as soon as possible.
In regards to the longer term, the private sector will lead the economic recovery. The government’s growth plan ought to be one where it invests aggressively in both physical and human capital to catalyze the private sector and create jobs. Government, labour and business must work together to achieve Canada’s economic growth goals.
Ottawa’s investment in physical and human capital should therefore focus on six priorities:
1. The first is long-term infrastructure that catalyzes economic growth, such as investments in transit, transport, pipelines, ports and communications infrastructure. These are projects that will create jobs today and pay dividends for decades to come.
2. Getting our natural resources, including energy, to market efficiently and safely is imperative. We must invest today to get our products to where the demand is globally. Time is of the essence and our natural resources sectors are imperilled. Wherever possible, Ottawa needs to partner with Indigenous communities to achieve this.
3. We must build resiliency into vital components of our supply chain – COVID-19 taught us the importance of this. We cannot allow ourselves to be at risk again. Both government and the private sector must invest more in our supply chains, especially in critical areas such as agriculture and medical needs.
4. The government should support start-ups and innovative small- and medium-sized enterprises through tax incentives, specifically encouraging equity investment and ownership in a small number of key areas where we have demonstrated capabilities, including information technology and agribusiness
5. We need more people – a lot more. We need skilled and unskilled labour from all over the world. The government ought to double down on our immigration advantage, especially for getting talent that traditionally has gone to the United States. In the near term, we must increase our immigration target to 500,000 a year and provide guaranteed permanent residency to any foreigner who completes a postsecondary degree or diploma in Canada. Almost all our economic growth since the Second World War is attributable to population growth. Given current birth rates, accelerated growth requires accelerated immigration.
6. As it has done with health care transfers, Ottawa should work aggressively with provincial governments to create a national child-care/early childhood education program that will be in place within 24 months. This program is conceived as an economic initiative, not a social program. It is required in order to a) achieve higher work force participation by making it easier for caregivers, most often women, to work, b) make it easier for Canadians to have children if they choose to do so, and c) focus on the next generation, since it has been proven that early learning is one of the most important components of human success.
Finally, all the above growth initiatives can and should be done through a green lens, even though a green recovery in and of itself is not a recovery plan. Achieving this growth objective will not be easy. But the government can develop a clear and cogent plan and work with partners in business and labour to execute.
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Cuba’s Economy Was Hurting. The Pandemic Brought a Food Crisis. – The New York Times
HAVANA — It was a lucky day for the unemployed tourism guide in Havana.
The line to get into the government-run supermarket, which can mean a wait of eight or 10 hours, was short, just two hours long. And better yet, the guide, Rainer Companioni Sánchez, scored toothpaste — a rare find — and splurged $3 on canned meat.
“It’s the first time we have seen toothpaste in a long time,” he said, sharing the victory with his girlfriend. “The meat in that can is very, very expensive, but we each bought one simply because sometimes in an emergency there is no meat anywhere.”
Cuba, a police state with a strong public health care system, was able to quickly control the coronavirus, even as the pandemic threw wealthier nations into crisis. But its economy, already hurting from crippling U.S. sanctions and mismanagement, was particularly vulnerable to the economic devastation that followed.
As nations closed airports and locked down borders to combat the spread of the virus, tourist travel to Cuba plummeted and the island lost an important source of hard currency, plunging it into one of the worst food shortages in nearly 25 years.
What food is available is often found only in government-run stores that are stocked with imports and charge in dollars. The strategy, also used in the 1990s, during the economic depression known as the “special period,” is used by the government to gather hard currency from Cubans who have savings or get money from friends or relatives abroad.
Even in these stores, goods are scarce and prices can be exorbitant: That day, Mr. Companioni couldn’t find chicken or cooking oil, but there was 17-pound ham going for $230 and a seven-pound block of manchego cheese with a $149 price tag.
And the reliance on dollar stores, a move intended to prop up the socialist revolution in a country that prides itself on egalitarianism, has exacerbated economic inequality, some Cubans say.
“This is a store that charges in a currency Cubans do not earn,” said Lazaro Manuel Domínguez Hernández, 31, a doctor who gets cash from a friend in the United States to spend at one of the 72 new dollar stores. “It kind of marks the difference in classes, because not everyone can buy here.”
He left the Puntilla supermarket with a cart full of fruit cocktail, cheese and chocolate biscuits that he loaded into a 1950s Dodge taxi.
Cuba’s economy was struggling before the coronavirus. The Trump administration has worked hard to strengthen the decades-old trade embargo, going after Cuba’s sources of currency. It also imposed sanctions on tanker companies that delivered petroleum to Cuba from Venezuela and cut back on the commercial flights from the United States to the island.
Last month, Secretary of State Mike Pompeo announced an end to charter flights, too. After the Cuban state energy company Corporación Panamericana faced sanctions, even cooking gas rations had to be reduced.
Then Covid-19 put a stop to tourism. Remittances sent by Cubans who live abroad began to dry up as the illness led to huge job losses in the United States.
That left the Cuban government with far fewer sources of revenue to buy the products it sells in state-run stores, leading to shortages of basic goods throughout the island. Earlier this year, the government warned that personal hygiene products would be hard to come by.
Cuba is facing “the triple threat of Trump, Venezuela and then Covid,” said Ted A. Henken, a professor at Baruch College and a co-author of the book “Entrepreneurial Cuba.” “Covid was the thing that pushed them over the edge.”
The pandemic, and the recession that followed, pushed the government to announce that, after years of promises, it would make good on a series of economic reforms intended to stimulate the private sector.
The Communist Party said in 2016 that it would legalize small and medium-size private businesses, but no mechanism was ever set up to do so, thus business owners are still unable to get financing, sign contracts as a legal entity or import goods. Now, that is expected to change, and more lines of work are expected to be legalized, although details have not been announced.
Cuba also has a history of offering reforms only to rescind them months or years later, entrepreneurs said.
“They go back, go forward, then back again,” said Marta Deus, the co-founder of a business magazine who owns a delivery company. “They need to trust the private sector for all its capacity to provide for the future of the economy. We have big ideas.”
The government puts the blame for the current situation squarely on Washington.
“Why can’t we export what we want? Because every time we export to someone, they try to cut off that export,” President Miguel Díaz-Canel said of the United States in a speech this summer. “Every time we are trying to manage a credit, they try to take away our credit. They try to prevent fuel from reaching Cuba. And then we have to buy in third markets, at higher prices. Why is it not talked about?”
Mr. Díaz-Canel stressed that despite the hardships, Cuba still managed a successful battle against the coronavirus: The health system did not collapse, and, he said, no children or medical professionals died of the disease.
With 11.2 million people, Cuba had just over 5,000 coronavirus cases and 115 deaths by Friday, one of the lowest mortality rates in the world. By comparison, Puerto Rico, with 3.2 million people, had five times as many deaths.
People who tested positive in Cuba were whisked away to the hospital for two weeks — even if they were asymptomatic — and their exposed contacts were sent to isolation for two weeks. Apartment buildings, and even entire city blocks, that saw clusters were closed to visitors.
Anyone flying in after March also had to isolate in quarantine centers, and medical students went door to door to screen millions of people daily. Masks are mandatory, and the fines for being caught without one are stiff.
With international flights at a virtual standstill, immigration officers are now assigned to stand guard outside quarantined apartment buildings, making sure no one goes in or out 24 hours a day.
At a quarantined building in Boyeros, a neighborhood near the Havana airport, an immigration officer sat in the shade while messengers and family members of those inside dropped off food. Daniela Llanes López, 21, left vegetables for her grandfather, who was stuck inside because five people in his building had tested positive.
“In Cuba, I don’t know anyone who knows anyone who got the coronavirus,” said Ms. Llanes, who studies German at the University of Havana, noting that she does know people in Germany who contracted the illness.
The strategies worked, although when the authorities started lifting restrictions in July, opening beaches, bars and public transportation, the nation’s capital saw an uptick in cases and a curfew was imposed there.
“Cuba is good in crisis and good in preventive health care,” said Katrin Hansing, a professor at Baruch College who spent the peak of the pandemic in lockdown in Cuba. Support for the government was notable, she said; even if the store lines were long, people felt safe from the virus.
Many Cubans are now hoping the economic reforms will stimulate the private sector and allow independent business operators to kick-start the economy.
Camilo Condis, an electrical contractor who has been out of work for months, said the changes must come quickly, and must allow Cuba to function, whether the United States is under a second Trump presidency, or under Joe Biden.
“Like we private business owners say here: ‘All I want is for them to let me work,’” he said.
Ed Augustín reported from Havana, and Frances Robles from New York.
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