Powell May Accept Inflation Overshoot to Extend U.S. Expansion
Federal Reserve Chairman Jerome Powell and his colleagues may be willing to accept inflation rising as high as 2.5 percent as they seek to extend the almost nine-year economic expansion. So say a number of veteran Fed watchers who argue that the central bank’s Federal Open Market Committee would tolerate a moderate rise in inflation above its 2 percent goal after years of falling below that objective. Powell delivers his first testimony to Congress as Fed chief on Feb. 27 and March 1. “I’ve had some hawks on the committee surprise me and say they wouldn’t be worried about a modest overshoot” as long as it’s below 2.5 percent, former Fed governor Laurence Meyer said, without identifying who those anti-inflation stalwarts were. Inflation currently is 1.7 percent. That suggests investors’ fears that U.S. central bankers will react aggressively to signs of stirring price pressures are misplaced. Meyer, who now heads consultants Monetary Policy Analytics in Washington, does see the Fed raising interest rates four times this year — one more than policy makers projected in December — but said that’s likely the limit. “Two and a quarter percent inflation isn’t going to scare anybody” at the Fed, said Roberto Perli, a partner at Cornerstone Macro LLC in Washington, who sees three rate hikes this year. “Two and a half percent is kind of the boundary,” the former Fed economist added. Powell appears before the House Financial Services Committee at 10 a.m. on Feb. 27, with his prepared remarks scheduled for release at 8:30 a.m., and the Senate banking panel on March 1. At his formal swearing-in ceremony on Feb. 13, the central bank’s new chief said policy makers had made “great progress” toward achieving their twin goals of full employment and stable prices. Some Fed officials have already voiced a willingness to see inflation rise above their objective. “Let me be clear: A small and transitory overshoot of 2 percent inflation would not be a problem,” William Dudley, president of the Federal Reserve Bank of New York, said in a Jan. 11 speech. “Were it to occur, it would demonstrate that our inflation target is symmetric, and it would help keep inflation expectations well-anchored around our longer-run objective.” Speaking at Bloomberg Business event on Feb. 21, Minneapolis Fed President Neel Kashkari suggested that the central bank should tolerate above-target price rises for a while. “We’ve been around 1.5 percent inflation for the last five or six years,” he told Bloomberg Television’s Michael McKee after the event.
Investors React as Russia Emerges From 3 Years at Junk
Russia shed its junk status on Friday after S&P Global Ratings boosted the credit score of the world’s biggest energy exporter to investment grade. Finance Minister Anton Siluanov touted the decision as proof the economy had adapted to lower oil prices and international sanctions. Now that Russia has a non-speculative ranking from two international agencies, more conservative investors such as pension funds and insurance companies will be able to invest in the country’s foreign debt, he said. Russia Gets First S&P Upgrade in Over Decade. Here’s what investors and economists are saying about the impact on Russian markets. Tom Levinson, Chief FX & Rates Strategist at Sberbank CIB: “This will likely trigger benchmark re-weighting demand for Russian external debt and also result in fresh demand from more conservative investors. The amount though is unclear, given that Russian paper has been trading at investment grade levels for some time” Russia’s “hugely popular” local-currency state debt was already at investment grade “so nothing has technically changed in this respect” “While S&P’s upgrade confirms the credibility of Russia’s macro and fiscal policies and should boost sentiment surrounding Russia assets, we do not expect it to trigger major fresh inflows into ruble-denominated assets” Levinson says ratings decision is “supportive” for Sberbank’s 55 rubles-per-dollar target. The Russian currency strengthened 1.1 percent to 55.9175 against the greenback as of 1:42 p.m. in Moscow on Monday.
U.S. Downturn Seen as Risk for Taiwan’s New Monetary Chief
Uncertainty over the medium-term U.S. economic outlook looms large over Taiwan’s first new central bank governor in 20 years. Although the U.S. is forecast to grow through at least 2020, as Yang Chin-long began a five-year term as monetary chief of Asia’s bellwether economy on Monday, a downturn across the Pacific is seen by economists as the external risk with the biggest chance of materializing in that time. “We are already pretty much at the tail end of the U.S. recovery,” said Angela Hsieh, an economist at Barclays Bank Plc in Singapore. “There’s a good chance there will be a recession during Yang’s time in office.” Right now, the outlook is good for the island’s economy, which is very different to the situation Yang’s predecessor Perng Fai-nan faced when he took over in the midst of the 1998 Asian financial crisis. Taiwanese officials have raised their forecast for economic growth to 2.4 percent for this year, and economists expect the central bank to raise its benchmark interest rate to 1.5 percent in the fourth quarter. At a ceremony marking his appointment Monday, Yang pointed to capital flows as one of the major challenges to Taiwan’s growth. “The central bank will prioritize price and financial stability to actively help economic growth,” he said. “But foreign exchange policy cannot and should not shoulder the duty of promoting economic development on its own. It must work together with fiscal and economic policy.” Hsieh said the central bank has room to raise borrowing costs from the current near record-low of 1.375 percent, especially as counterparts in other countries are moving toward normalization of monetary policy. But as exports account for around two thirds of Taiwan’s output, exchange rates can have a much bigger impact on Taiwan than interest rates. Currency traders see the Taiwan dollar gaining little over the first half of 2018 after surging 8.1 percent against the U.S. dollar last year.