Fed Minutes May Show Battle Lines Hardening Over Soft Inflation
Federal Reserve watchers may get a better feel Wednesday for how many policy makers remain resolved to raise interest rates again this year, and how many are wavering amid a five-month stretch of soft inflation reports. Economists and investors are also keen for more details about when the central bank will begin to run down its $4.5 trillion balance sheet when the Fed releases minutes of the Federal Open Market Committee’s July 25-26 meeting at 2 p.m. in Washington. Analysts expect the start of a gradual unwind of the balance sheet to be announced in September, with the next rate hike delayed until the final month of the year. “The most likely market-moving discussion will be around inflation,” said Michael Hanson, chief U.S. macro strategist at TD Securities in New York and a former Fed economist. “It will be interesting to see whether there’s a little more ground given in the middle of the committee” acknowledging worries over low inflation.
U.K. Wage Growth Beats Forecasts But Still Lags Inflation
The squeeze on U.K. consumers continued in the second quarter, when the fastest inflation in four years ate into workers’ income. Basic wages rose an annual 2.1 percent in the three months, lagging behind a surge in price growth driven by the pound’s decline in the wake of the Brexit vote. That left real incomes down 0.5 percent year-on-year, the Office for National Statistics said on Wednesday. While households are still being pinched, the unexpected acceleration in wage growth and drop in unemployment pushed the pound higher. The currency climbed from the weakest level since October against the euro, and investors moved forward their expectations for a Bank of England rate hike by the end of 2018 to 89 percent, from 80 percent on Tuesday, according to short sterling. Still, it’s a headache for BOE policy makers that wage growth has failed to sustainably pick up even with unemployment at the lowest in more than 40 years. Officials cut their forecasts for pay growth at this month’s Inflation Report, with Governor Mark Carney suggesting that “an element of Brexit uncertainty” was preventing firms from awarding bigger wage increases.
China regains spot as largest foreign U.S. creditor
China purchased the most Treasuries in six years in June, vaulting past Japan as the largest overseas lender to the U.S. government, according to data released by the U.S. Treasury Department on Tuesday. The world’s second biggest economy has steadily ratcheted up its accumulation of U.S. government debt as it has seen a sharp reduction in capital outflows. In 2016, China spent nearly $320 billion of foreign exchange reserves in an effort to stem the yuan’s depreciation against the U.S. dollar. In the wake of tighter capital controls and a weaker dollar so far this year, China’s forex reserves, the world’s biggest, have grown in line with its Treasuries holdings. In June, its reserves increased by $3.2 billion to $3.057 trillion, an eight-month high, while its Treasuries holdings rose to $1.147 trillion, which was the highest level since September when it was $1.157 trillion. In July, China’s currency reserves reached a nine-month peak at $3.081 trillion.