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Fed Tightening to Continue, Says Minneapolis Fed Chief; Bank of England to Buy Bonds to Stop Spread of Crisis
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Good day. The Federal Reserve should continue to tighten policy until price pressures decline, Minneapolis Fed President Neel Kashkari said yesterday during an online event hosted by The Wall Street Journal. Mr. Kashkari acknowledged there is a “risk of overdoing it” but said he thinks the Fed is “moving at an appropriately aggressive pace” to tame inflation. This morning, the yield on 10-year U.S. government bonds hit 4% for the first time in more than a decade–lifted by increasing expectations for how high the Fed will go. Elsewhere today, the Bank of England said it will buy U.K. government bonds with long maturities "on whatever scale is necessary" in an effort to restore order to the market for gilts. This came after the U.K government and the BoE found themselves pulling in different directions on the economy, a dynamic that has alarmed investors.
And in China, the offshore yuan fell to a record low earlier today of below 7.2 to the U.S. dollar despite repeated attempts by the country's central bank to support the currency.
Now on to today’s news and analysis.
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Kashkari Says Fed Needs to Keep Tightening
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Minneapolis Fed President Neel Kashkari says the Fed must avoid repeating monetary policy mistakes it made in the 1970s. PHOTO: ANN SAPHIR/REUTERS
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Federal Reserve Bank of Minneapolis President Neel Kashkari said the U.S. central bank needs to tighten monetary policy until underlying inflation is declining, and then wait to see whether it has done enough.
“The one mistake that I’m acutely aware of—that I want to avoid repeating from the 1970s—is when policy makers saw the economy weakening, saw inflation start to tick down, and then they cut rates, thinking they had done the job. And then inflation flared back up again—that, I believe, is a mistake we cannot make and will not make,” Mr. Kashkari said Tuesday during an online event hosted by The Wall Street Journal.
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Bullard Rejects Idea of Raising Fed Inflation Target Above 2%
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Federal Reserve Bank of St. Louis President James Bullard said Tuesday during a virtual appearance that raising the Fed’s inflation target would damage the central bank’s credibility while injecting fresh uncertainty into global markets. “This is a way to squander your credibility and make the [19]70s magically reappear, and The Bee Gees will be back on tour,” Mr. Bullard said in response to an audience question about raising the inflation target. “To have a major central bank deviate from the international standard, I think would set up chaos around the world on inflation.” (Barron’s)
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Powell Eyes Oversight of Stablecoin Issuers
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Federal Reserve Chairman Jerome Powell said in a speech Tuesday that the central bank should play a leading role in regulating the issuers of U.S. dollar stablecoins, and floated wider crypto regulation that could impact digital asset wallets. “We think that if there is private money created across the country, really there needs to be a federal role,” Mr. Powell said. “In the case of [stablecoins], which is money creation, we think it really should be the Fed that plays that role.” (Barron’s)
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Bank of England to Buy Bonds to Stop Spread of Crisis
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Bank of England Governor Andrew Bailey has signaled that a further increase in interest rates may be needed to tame inflation. PHOTO: YUI MOK/AGENCE FRANCE-PRESSE/GETTY IMAGES
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The Bank of England on Wednesday said it would buy U.K. government bonds with long maturities “on whatever scale is necessary” in an effort to restore order to the market for gilts, whose prices have plummeted and yields have soared since the government announced a large set of tax cuts.
The move caused an immediate reaction, with bond prices both in the U.K. and other markets rallying, sending yields lower. The U.K.’s benchmark 10-year government bond yields fell to 4.004% after the announcement, from 4.552% before, an outsize move for what is normally a stayed corner of the market. The pound rallied at first against the dollar but then slid further to trade down around 0.6% to $1.066.
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10-Year Treasury Yield Hits 4%
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Consumer Moods Improved in September as Gasoline Prices Fell
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Consumers’ moods about the U.S. economy improved in September while a jump in new-home sales and a decline in orders for long-lasting goods offered a mixed picture of demand at the end of the summer.
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Home Prices Suffer First Monthly Decline in Years
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The S&P CoreLogic Case-Shiller National Home Price Index, which measures the average change in home prices across the U.S., fell 0.3% in July from June, the first month-over-month decline since January 2019.
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IRS Failed to Send Child Tax Credit Payments to Millions
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The Internal Revenue Service sent $1.1 billion in advanced child tax credit payments during 2021 to people who shouldn’t have gotten them, and failed to send $3.7 billion to eligible households, an inspector general’s audit found.
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Key Developments Around the World
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China’s Offshore Currency Hits Record Low Against Dollar
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China’s currency hit its weakest ever offshore trading level against the dollar, with the yuan falling below 7.2 to the dollar for the first time since a system for trading the currency outside mainland China was launched over 10 years ago.
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U.S., Europe Prepare New Sanctions on Russia After Nuclear Threats
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The U.S. and the European Commission, the European Union’s executive body, are poised to adopt new sanctions on Russia, though some EU members are questioning existing restrictions and the economic pain in Europe is growing.
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Thailand’s Central Bank Raises Rate to Help Tame Inflation
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Thailand’s central bank raised its policy rate in a bid to curb high inflation. The Bank of Thailand said that its policy committee voted unanimously to increase its one-day repurchase rate by 25 basis points to 1.00%, effective immediately.
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Financial Regulation Roundup
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Wall Street to Pay $1.8 Billion Over Use of Banned Messaging Apps
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Eleven of the world’s largest banks and brokerages will collectively pay $1.8 billion in fines to resolve regulatory investigations over their employees’ use of messaging applications that broke record-keeping rules, regulators said.
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Businesses Race for U.S. Climate Incentives
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Businesses and financiers are scrambling to tap billions of dollars in U.S. clean-energy incentives, spurring what executives and government officials say is a deal making frenzy in the renewable-power sector.
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Forced Labor a ‘Top-Tier’ Compliance Issue, Says U.S. Official
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Under the Uyghur Forced Labor Prevention Act, goods from Xinjiang, China are presumed to be made with forced labor, a legal shift that has forced companies to examine their supply chains and compliance efforts.
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8:35 a.m.: Atlanta Fed’s Bostic speaks at Banking and the Economy: A Forum for Minorities in Banking
10:15 a.m.: Fed’s Powell gives prerecorded remarks at Community Banking Research Conference in St. Louis
11 a.m.: Fed’s Bowman speaks on banking competition at Community Banking Research Conference in St. Louis; ECB’s Elderson speaks online at event on European monetary policy for the planet and for the people
2 p.m.: Chicago Fed’s Evans in moderated Q&A with London School of Economics
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3 a.m.: ECB’s Panetta speaks at European Parliament hearing in Brussels
4 a.m.: ECB’s de Guindos speaks at conference organized by BIS and Bank of Lithuania
4:15 a.m.: ECB’s Elderson speaks at De Nederlandsche Bank and OMFIF Sustainable Policy Institute conference
5:30 a.m.: ECB’s de Guindos speaks at ECB stress-testing research workshop in Frankfurt
7:30 a.m.: Text of speech by BOE’s Ramsden to Bank of Lithuania-Bank for International Settlements conference
8:30 a.m.: U.S. second-quarter GDP, third estimate; U.S. weekly jobless claims; Czech National Bank releases policy statement
1 p.m.: ECB’s Lane speaks on panel at inflation conference sponsored by Cleveland Fed and ECB
2 p.m.: Bank of Mexico releases policy statement
3:45 p.m.: San Francisco Fed’s Daly gives keynote speech at Boise State University
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Brazil’s Central Bank Sending Tough Message
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Brazil’s central bank reinforced its hawkish stance when it published the minutes from its most recent monetary policy committee meeting, XP Investimentos Chief Economist Caio Megale wrote in a research note. The bank last Wednesday left its benchmark lending rate unchanged at 13.75% but said in the statement announcing that decision that it won’t hesitate to raise the rate again if necessary. The bank’s message in the minutes was that it will be keeping a close eye on the strength of Brazil’s economy, on service sector inflation and on inflation expectations for 2024, Mr. Megale wrote.
—Jeffrey T. Lewis
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China’s Yuan Has Further to Fall
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China’s yuan is already at its weakest level against the dollar in over two years, but it might be poised to fall further still as two major factors holding it up so far in 2022 look likely to reverse, Nathaniel Taplin writes.
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Factory activity in the U.S. central Atlantic region improved but remained relatively flat in September, according to a survey by the Federal Reserve Bank of Richmond. The Fifth District Survey of Manufacturing Activity’s index rose to 0 this month from minus 8 in August. Economists polled by The Wall Street Journal expected the indicator to come in at minus 7.5. (Dow Jones Newswires)
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U.S. new home sales surged 28.8% to a seasonally-adjusted annual rate of 685,000 in August, from a revised 532,000 in the prior month, the Commerce Department reported. That was the second-biggest jump on record for new home sales and a sharp reversal of a drop of 8.6% in July. (MarketWatch)
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The price of the cryptocurrency ether has fallen 19% over the past two weeks as Ethereum miners sell their holdings in the wake of a much-hyped software upgrade dubbed “the merge.”
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Brazil’s consumer prices declined in the month through mid-September as fuel prices continued to fall. Consumer prices fell 0.37% from Aug. 16 through Sept. 15 and rose 7.96% from a year earlier, Brazil’s Institute of Geography and Statistics said. Consumer prices fell 0.73% in the month through mid-August and increased 9.60% in the 12 months through mid-August. (DJN)
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Mexico ran up its fifth consecutive monthly trade deficit in August, led by a wide deficit in the exchange of petroleum goods. Exports rose 25.2% from the year-earlier month to $50.67 billion, while imports grew 27% to $56.17 billion, for a trade deficit of $5.5 billion, the National Statistics Institute said. (DJN)
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European Central Bank President Christine Lagarde said borrowing costs will be raised at the next “several meetings” to ensure inflation expectations remain anchored and price gains return to the target. (Blooomberg)
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This newsletter is compiled by James Christie in San Francisco.
Send us your tips, suggestions and feedback. Write to:
James Christie, Jon Hilsenrath, Michael S. Derby, Nell Henderson, Nick Timiraos, Paul Hannon, Kim Mackrael, Tom Fairless, Megumi Fujikawa, Perry Cleveland-Peck, Michael Maloney, Paul Kiernan, James Glynn
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