Fed May Shed Clues on Debate Over Rate Cut: Minutes Preview
Federal Reserve Chairman Jerome Powell has cautioned against the need for an interest-rate cut. A record of the U.S. central bank’s most recent meeting could reveal if policy makers in fact discussed that option. Minutes of the Federal Open Market Committee’s April 30-May 1 gathering will be released at 2 p.m. Wednesday in Washington. Officials held rates steady at the meeting and maintained their pledge to be patient as they weigh future rate moves. “It will be interesting to see if there was any discussion of what it would take for them to get to lower rates, whether as an insurance cut or because of the inflation-being-too-low story,’’ said Roberto Perli, a partner at Cornerstone Macro LLC in Washington. “Of course, they will not be crystal clear. Reading between the lines could be interesting.’’ James Bullard, president of the St. Louis Fed and one of the most dovish policy makers at the U.S. central bank, said Wednesday in Hong Kong that a rate reduction “may become a more attractive option if inflation data continue to disappoint.” Investors, who’re pricing in a rate cut by the end of the year, have other grounds to expect some debate on the question. Fed Vice Chairman Richard Clarida told CNBC in an interview on April 11 that the central bank has sometimes taken out “insurance cuts’’ to protect an economic expansion, as Alan Greenspan did in 1995 and 1998. Chicago Fed chief Charles Evans, speaking several days later, said that a decline to 1.5% core inflation could call for lower rates. The Fed’s preferred gauge of core inflation, excluding food and energy, slowed to 1.6% in the 12 months through March. Powell, in his press conference following the meeting, said he didn’t favor an insurance cut and today’s situation is “quite different’’ from 1995. “We don’t see a strong case for moving in either direction,’’ he said. James Bullard, president of the St. Louis Fed and one of the most dovish policy makers at the U.S. central bank, said Wednesday in Hong Kong that a rate reduction “may become a more attractive option if inflation data continue to disappoint.” Investors, who’re pricing in a rate cut by the end of the year, have other grounds to expect some debate on the question. Fed Vice Chairman Richard Clarida told CNBC in an interview on April 11 that the central bank has sometimes taken out “insurance cuts’’ to protect an economic expansion, as Alan Greenspan did in 1995 and 1998. Chicago Fed chief Charles Evans, speaking several days later, said that a decline to 1.5% core inflation could call for lower rates.
Wow Air Collapse Decimates Iceland’s Economy
It’s not often that an entire economy is thrown off course by a single corporate event. But that’s what appears to have happened in Iceland. The recent bankruptcy of budget airline Wow Air has delivered such a blow to the Icelandic tourist industry, and the wider economy, that the central bank on Wednesday cut its main interest rate by half a point to 4%. It also said that the economy is now set to contract 0.4%, compared with a previous estimate for growth of 1.8%. The announcement makes clear how badly Wow Air’s failure has hurt Iceland, which has also suffered from a disastrous fishing season. The airline had helped turn tourism into Iceland’s biggest cash cow, fueling a boom that dragged the nation out of its financial collapse more than a decade ago. Its demise in March spelled an abrupt end to that boom. Like other failed European carriers, Wow had been struggling to cope with fluctuating fuel costs and over-capacity in the industry. Multiple rounds of talks with potential investors failed in the end to lead to a rescue. The central bank said that the “deterioration in the economic outlook has caused the inflation outlook to change markedly in a short period of time.” The bank on Tuesday revised up its unemployment forecast for this year to 3.9% from 3.1%, while predicting inflation will peak at 3.4% in 2019 before it slows toward the 2.5% target over the next two years. The krona slid 0.6% to 138.7 per euro as of 10:57 a.m. in Reykjavik. The currency is down 3.7% this year. The government has signaled it may step in to help the economy. It has spent the past few years reducing debt to help build up its buffers, while the central bank has been adding to its foreign currency reserves. “Although the economic contraction will be challenging for households and businesses, the economy is much more resilient than before,” the bank said. “Furthermore, monetary policy has considerable scope to respond to the contraction, particularly if inflation and inflation expectations remain close to the target, as is currently envisioned.”
U.K. Inflation Climbs Above Target on Energy Costs, Air Fares
Energy and transport costs pushed U.K. inflation back above target last month. Consumer prices rose 2.1% from a year earlier, ending a three-month spell of inflation below the Bank of England’s 2 percent goal, Office for National Statistics data published Wednesday show. The figure was slightly below the 2.2% forecast by economists. The pickup, from 1.9% in March, was driven by the lifting of the government cap on default energy tariffs. Electricity prices jumped 10.9% and gas increased 9.3%, dwarfing increases seen a year earlier. There was also upward pressure from higher auto-fuel prices, while the timing of Easter boosted transport costs, with air fares surging more than 26% on the month. The four-day vacation began on April 19, three weeks later than it did last year. The largest offsetting factor came from cheaper computer games. The widely-anticipated spike is expected to prove temporary, however, with the BOE predicting a return to target this month and inflation well below 2% by August. Core inflation stayed at 1.8%, giving officials breathing space to keep interest rates on hold amid the continuing Brexit deadlock.
Fading Election Uncertainty Is Reviving India’s Animal Spirits
India’s economy showed nascent signs of a recovery in April as a general election got underway, possibly helping to lift the political uncertainty holding back investments. Overall activity from eight high-frequency indicators compiled by Bloomberg News suggest the economy picked up slightly last month, with the dot moving one notch to the right. The dashboard is a measure of “animal spirits,” a term coined by British economist John Maynard Keynes to refer to investors’ confidence in taking action. While the monthly PMI numbers and other indicators suggested a weakening in growth, the three-month weighted average — to smooth out volatility in the single-month readings — was positive. The results support a view that growth will rebound from here on after probably cooling for a fourth consecutive quarter to 6.5% in the three months to March, the weakest pace since mid-2017. Investors are already breathing a sigh of relief after exit polls suggested a second term for Prime Minister Narendra Modi. The Reserve Bank of India, having lowered interest rates by 50 basis points so far this year, may ease again at its next policy meeting in June to support growth. Although the Nikkei India Composite PMI Index fell to a seven-month low of 51.7 in April, big gains in previous months kept the three-month weighted average at 52.4. A reading above 50 indicates expansion in manufacturing and services activity. The monthly drop was linked to disruptions related to the elections, said Pollyanna De Lima, principal economist at IHS Markit and author of the PMI report, adding that “companies generally foresee improvements once the government is formed.” The survey showed price inflation in India’s services sector moderated to the second-slowest rate recorded in almost two years. Both the manufacturing and services sectors also witnessed negligible increases in output charges in April, indicating subdued price pressures. Exports grew just 0.6% in April from a year ago, while contracting almost a fifth compared with the previous month, as shipments of gems and jewelry, engineering goods, and leather products declined. On a month-on-month basis, imports fell nearly 5%, which Upasna Bhardwaj of Kotak Mahindra Bank Ltd. said was consistent with the slowdown in the economy. Companies from Unilever NV’s local unit to homegrown firms like Dabur India Ltd. and Godrej Consumer Products Ltd. are reporting slowing growth of corner-store staples like toothpaste and shampoos.
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