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Feeling the Effects of Fed Rate Rises; For a 'Pivot,' Look South; OECD Call For ECB to Narrow Gap
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Good day. With inflation running hot this year, the Federal Reserve decided it needed to raise interest rates at the fastest pace in four decades. The pace is appropriate “given the persistence and strength in inflation and the low level from which we started,” Chairman Jerome Powell says. Aziz Sunderji of The Wall Street Journal takes a look at how the timing from the effects of the Fed’s tightening campaign could play out across the U.S. economy. Meanwhile, the Journal’s Jon Sindreu writes that when it comes to an anticipated “pivot” in which the Fed stops raising rates, developing nations could be the ones leading the central bank. He notes Brazil, Chile and Colombia stand out because their tightening cycles started at least 150 days before the Fed, and have gone much farther than their peers. This gives them more scope to cut rates. And in Europe today, the
Organization for Economic Cooperation and Development warned that the European Central Bank will have to raise its key interest rate much further if it is to bring down persistently high inflation.
Now on to today’s news and analysis.
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Fed’s Aggressive Rate Hikes Are a Game Changer
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As the Federal Reserve raises interest rates to cool the economy and slow inflation, it is contending with the imprecise and inconsistent effect of monetary policy.
Economist Milton Friedman famously argued “monetary actions affect economic conditions only after a lag that is both long and variable.” Since it can take years before the full effects of tightening become apparent, the Fed tends to move incrementally, adjusting policy gradually while scrutinizing economic data for signs of its effects. That hasn’t been the case this year. Read more.
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Fed’s Daly Says Markets Acting Like Interest Rates Are Much Higher
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Financial markets conditions seem much tighter than suggested by the actual level of the Federal Reserve’s benchmark interest rate, San Francisco Fed President Mary Daly said Monday in a speech. Citing new research from the regional Fed bank, Ms. Daly said the tightness is more akin to a benchmark rate of around 6%, or well above the actual level of 3.75%-4% she said should only be “modestly” slowing the U.S. economy. (MarketWatch)
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ECB Must Narrow Interest-Rate Gap With Fed, OECD Says
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The Organization for Economic Cooperation and Development said the eurozone’s central bank should raise its key interest rate from 1.5% to between 4% and 4.25% by the middle of next year, a higher peak than that widely anticipated.
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Railroad Unions Split Over Labor Contract
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One of two of the largest U.S. railroad unions said Monday members voted to reject a new wage deal brokered by the White House, moving closer to a labor strike that could disrupt some supply chains as soon as early December.
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GOP House Majority Could Shield Industries From Taxes, Regulations
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Republican wins at the ballot box have long translated into gains for the business lobby in Washington, and this election is likely to be no exception, despite the party’s increasingly populist slant.
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Investor Home Purchases Drop 30% Amid Rising Rates, High Prices
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Investor buying of homes tumbled 30% in the third quarter, a sign that the rise in borrowing rates and high home prices that pushed traditional buyers to the sidelines are causing these firms to pull back, too.
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Thanksgiving Travel Roars Back, Testing Airlines
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Key Developments Around the World
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U.S. Presses Allies to Tighten Up Sanctions Enforcement on Russia
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U.S. officials are in a quiet diplomatic push to get Russia’s major trading partners to enforce sanctions and trade controls, as exports to the country pick up after diving in the weeks following Moscow’s invasion of Ukraine.
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Germany Debates Naming Businesses With Large China Exposure
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Germany is considering rules that could require firms with large exposure to China to disclose their reliance to reduce the potential economic fallout from a deterioration in the relationship between the West and the Asian giant.
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Saudi Arabia Eyes OPEC+ Output Increase
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Saudi Arabia and other OPEC oil producers are discussing an output increase, a move that could help heal a rift with the Biden administration and keep energy flowing amid new attempts to blunt Russia’s oil industry.
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Financial Regulation Roundup
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Anti-Woke Bank GloriFi to Shut Down
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GloriFi, the Texas startup that sought to build a conservative banking alternative, is shutting down, laying off most of its employees and telling them that it is closing up shop, according to people familiar with the matter.
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FTX Crypto Customers Worry They Will Never See Their Money Again
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Customers of beleaguered and bankrupt crypto exchange FTX are losing hope that they will ever see their money again, and where the money could be—and whether it will ever arrive—is anyone’s guess.
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Treasury Warns Crypto Industry of Money-Laundering Risks in ‘Mixers’
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The cryptocurrency industry must follow the Treasury Department’s anti-money-laundering and sanctions regulations to prevent bad actors from abusing platforms known as “mixers” to launder illicit funds, a senior official said.
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10 a.m.: EU Flash Consumer Confidence Indicator for November
11 a.m.: Cleveland Fed’s Mester speaks at Cleveland Fed Conversations on Central Banking: Wages and Inflation
12 p.m.: Bank of Canada’s Rogers in fireside chat on risks to stability of Canadian financial system
2:45 p.m.: St. Louis Fed’s Bullard and George speak at Central Bank of Chile's annual conference
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3:30 a.m.: ECB’s de Guindos gives speech in Madrid
4 a.m.: S&P Global Flash Eurozone Composite PMI
8:30 a.m.: U.S. durable goods report for October; U.S. weekly jobless claims
9:45 a.m.: S&P Global Flash U.S. Composite PMI
10 a.m.: University of Michigan consumer survey for November (final); U.S. new-home sales for October
10:30 a.m.: Bank of England’s Pill gives speech on returning inflation to target
4:30 p.m.: Bank of Canada’s Macklem, Rogers at House of Commons Standing Committee on Finance
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‘Dynastic’ Home Equity Affects U.S. Homeownership Levels
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U.S. home buyers have an advantage in getting a foothold in the housing market if their parents are homeowners, and that can lead to an increase in the persistence in homeownership across generations, according to a report from the Federal Reserve Bank of San Francisco. The report says young adults are more likely to own a home if their parents are homeowners than if their parents rent. “Specifically, homeowner parents are often able to extract the equity value from their home to help their children purchase a home,” the report says. “This ‘dynastic’ home equity enables children of homeowner parents who extract equity to accumulate approximately one third more housing wealth by age 30 than children of
renters.”
—James Christie
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Hoping for a Central-Bank Pivot? Forget the Fed and Look South
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Wall Street is obsessed with guessing when the Fed will stop raising interest rates, but rather than waiting for this much-discussed “pivot,” investors may be better served by scouting out emerging markets first, Jon Sindreu writes.
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Economic growth in the U.S. slowed in October, according to data from the Federal Reserve Bank of Chicago, adding to signs of weakening activity amid high inflation and rising interest rates. The Chicago Fed National Activity Index decreased to minus 0.05 in October from 0.17 in September, suggesting economic activity grew slightly below its average historical trend over the month. (Dow Jones Newswires)
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Reserve Bank of Australia Gov. Philip Lowe said containing inflation within a desired target band is becoming a much more complicated job. In a speech Tuesday, he warned that supply shocks, climate change, aging workforces and the retreat of globalization will increasingly fuel inflation volatility worldwide. (DJN)
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The Bank of Korea is tipped to raise its base rate by 25 basis points to 3.25% at its policy meeting Thursday, returning to its usual pace of tightening after an outsize 50bp rise in October. Of 20 analysts surveyed by The Wall Street Journal, 18 forecast a quarter-percentage-point rate increase in November, while two expect a back-to-back 50bp rise. Most analysts predict the BOK will slow the pace of rate increases and pay more attention to signs of a possible recession and the country's inflation that may have peaked. They expect the BOK to end its tightening in 2023. (DJN)
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Jefferies’ European consumer survey found consumer confidence is low, with 70% of consumers not expecting their incomes to keep up with rising prices. (DJN)
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Default rates for high-yield and leveraged loans in Europe are set to rise to 3% and 4% respectively in 2023, from 0.3% and 0.4% currently, due to a weak economy and high inflation, Barclays European high-yield strategist Craig Nicol wrote in a note. (DJN)
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Producer prices in Germany fell on month in October for the first time in almost one and a half years, Commerzbank’s senior economist Ralph Solveen wrote in a report, noting the on-year rate declined from 45.8% in September to 34.5% in October, giving cause for hope the inflation rate for consumer prices will also soon peak. (DJN)
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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
Follow us on Twitter:
@WSJCentralBanks, @NHendersonWSJ, @michaelsderby, @NickTimiraos, @PaulHannon29, @kimmackrael, @TomFairless, @megumifujikawa, @pkwsj, @JamesGlynnWSJ, @cleveland_peck
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