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As U.S. Economy Improves, Fed Eyes Inflation and Hints at Tapering Asset Purchases
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Good day. The Federal Reserve modestly upgraded its assessment of the U.S. economy, saying sectors most adversely affected by the pandemic have shown improvement. Meanwhile, supply-chain bottlenecks have driven inflation to higher levels than many economists expected this year, and those readings have raised “the possibility that inflation could turn out to be higher and more persistent than we expect,” Fed Chairman Jerome Powell said. The meeting also offered a hint that Fed officials could begin to reduce their $120 billion a month in asset purchases later this year. Looking ahead, today's data on economic growth and the labor market are expected to provide insight into the state of the
recovery.
Now on to today’s news and analysis.
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Fed Says Economy Progressing to Its Goals, Teeing Up Bond Taper
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Federal Reserve Chairman Jerome Powell cited ‘the possibility that inflation could turn out to be higher and more persistent than we expect.’
PHOTO: NICHOLAS KAMM/AGENCE FRANCE-PRESSE/GETTY IMAGES
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The Federal Reserve indicated that the economy has made progress toward the central bank’s employment and inflation goals, and officials offered a hint they could begin to reduce their asset purchases later this year.
The Fed since the end of last year has said its monthly purchases of $120 billion in bonds would continue until the economy achieves “substantial further progress” toward the Fed’s goals of low unemployment and inflation reaching 2%. On Wednesday, the Fed said that “since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings.”
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Fed Launches Standing Repo Facility to Boost Market Liquidity
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The Federal Reserve is launching new facilities designed to provide liquidity to big Wall Street banks and foreign institutions like central banks, which could help ensure market stability at times of stress.
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Derby's Take: Powell Pushes Back on Tapering Mortgage Buying More Aggressively
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Federal Reserve Chairman Jerome Powell on Wednesday addressed a fractious debate among policy makers about whether the central bank should pare its $40 billion a month in mortgage purchases faster than its $80 billion a month in Treasury bond buying. He indicated simplicity may be the best way forward when the economy has recovered enough to act. Read more.
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Covid-19 Fueled a Treasury Market Meltdown in 2020
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A new report from a group including former central bankers warns that failing to address key market fragilities revealed by that episode could weaken confidence in the market for U.S. Treasurys, a widely assumed risk-free asset.
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‘Real’ Government-Bond Yields Tumble to Record Lows
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Yields on government bonds in the U.S. and Europe have dropped to record lows when adjusted for inflation, a sign of investors’ waning optimism about the global economic recovery and that they are paring bets on a rapid rebound.
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Key Developments Around the World
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Covid-19 Keeps Resurging, but Western Economies Are Adapting
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Governments across the U.S. and Europe have avoided imposing the drastic lockdowns that were a feature of the first surge of the pandemic, believing they could be more selective in their choice of restrictions and just as effective.
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China Prepares New Anti-Sanction Laws for Hong Kong and Macau
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China’s government is planning to introduce new laws in Hong Kong and Macau that could bar foreign entities and individuals there from complying with sanctions against China, according to people familiar with the matter.
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Financial Regulation Roundup
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SEC Weighs Making Companies Liable for Climate Disclosures
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Public companies could be required to disclose climate-change related risks to investors in regulatory filings under a proposal being formulated by the SEC, a step that could expose them to new litigation threats.
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Robinhood's IPO to Test Loyalty of Retail Trading Legion
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Robinhood Markets Inc. has spent the better part of a decade trying to entice nonprofessional investors to fall in love with markets. This week, the company will face its first public test of whether those traders love Robinhood back.
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8:30 a.m.: U.S. Commerce Department releases first estimate of second-quarter GDP
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8:30 a.m.: U.S. Commerce Department releases June personal income and outlays
9 a.m.: St. Louis Fed’s Bullard speaks at a European Economics and Financial Centre Virtual Event
10 a.m.: University of Michigan releases final July U.S. consumer sentiment
1 p.m.: European Central Bank releases stress test results for ECB-supervised banks
8:30 p.m.: Fed’s Brainard speaks during annual meeting of the Aspen Economic Strategy Group
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Fed’s Reverse Repo Tool Still Under Construction
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The Federal Reserve’s new standing repo facility appears to be a work in progress. There are many moving parts and what will kick in on July 29 will be available to primary dealers under the same terms as normal repo operations, with a sister facility for foreign central banks. This tool has been in discussion for years and it appears the tumult of the spring of 2020 and the Treasury market meltdown helped push officials over the finish line. At the same time, the Fed said Wednesday that more firms will get access to the standing repo tool in the future. The Fed has capped the facility at $500 billion, perhaps mindful of the massive numbers being booked at the central bank’s reverse repo facility, which regularly flirt with the $1 trillion mark.
─Michael S. Derby
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Europe’s Lenders Want to Grow Their Investment Banks Again
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Keeping busy in capital markets has helped Barclays and Deutsche Bank deliver steady performances through the pandemic, but plans to expand their investment banks still seem risky, Rochelle Toplensky writes.
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Canada’s consumer-price index rose 3.1% on a year-over-year basis in June, Statistics Canada said Wednesday, slowing from a 3.6% increase in the previous month as the effects of last year’s economic reopening contributed to smaller year-over-year price increases compared with prior months. Market expectations were for a 3.2% rise, according to economists at TD Securities. (Dow Jones Newswires)
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Import prices in Germany rose 12.9% in June compared with the same month last year, marking the highest year-on-year increase since October 1981 largely due to a jump in the cost of energy imports, which were 88.5% more expensive than in June 2020, German statistics office Destatis said. (DJN)
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German consumer sentiment in August is expected to remain unchanged, according to market research group GfK, whose forward-looking consumer sentiment index is set to stay at minus 0.3 points, same as this month, when it reached the highest level since August 2020. (DJN)
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Prices at U.K. stores dropped 1.2% year-on-year between July 1 and July 7, compared with a decline of 0.7% in June, due to fierce competition between supermarkets and a steeper drop in nonfood prices, according to a report by Nielsen IQ and the British Retail Consortium. (DJN)
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A total of 650,000 U.K. businesses faced significant financial distress in the second quarter, a 10% decline from the first quarter, according to data published by corporate-restructuring specialist Begbies Traynor Group PLC on Wednesday. (DJN)
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This newsletter is compiled by James Christie in San Francisco and Ed Ballard in London.
Send us your tips, suggestions and feedback. Write to:
Jon Hilsenrath, Michael Derby, Nell Henderson, Nick Timiraos, Jason Douglas, Paul Hannon, Harriet Torry, Kate Davidson, David Harrison, Kim Mackrael, Tom Fairless, Megumi Fujikawa, Michael Maloney, Paul Kiernan, James Glynn
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