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As Central Banks Tighten, Some Worry They May Go Too Far; the Fed’s Record With 'Soft Landings'
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Good day. Central banks around the world are raising their key interest rates in the most widespread tightening of monetary policy on record. Some economists fear they may go too far if they don’t take into account their collective impact on global demand. However, history shows that, with skillful decisions and some good luck, central bankers can defeat inflation without causing a recession, former Fed Vice Chairman Alan S. Blinder writes in an essay.
Now on to today’s news and analysis.
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Central Banks May Stoke Risks by Raising Interest Rates Together
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According to the World Bank, the number of rate increases announced by central banks around the world was the highest in July since records began in the early 1970s. Moreover, the size of those rate rises is larger than usual. Those central banks are almost universally responding to high inflation. But some worry that central banks are effectively pursuing national responses to what is a global problem of excess demand and high prices. They warn that central banks as a group will thus go too far—and push the world economy into a downturn that is deeper than necessary.
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Essay: The Fed’s Surprising Record With ‘Soft Landings’
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Many economists believe that the Fed has managed a soft landing only once in 11 tries over the last 60 years, in 1994-95, Alan S. Blinder writes in WSJ's Saturday Essay. History, these critics argue, says that the Fed will either raise interest rates too little and fail to defeat inflation or go too far and precipitate a recession—a “hard landing.”
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A careful historical analysis suggests, however, that the Fed has a much more encouraging record. By my reckoning, it managed a soft landing or came close in six of the 11 cases. In the other five, it was either not trying to land the economy softly—because a hard landing was needed to crush high inflation—or its policy was overwhelmed by events out of the Fed’s control. To be sure, landing the economy softly is a tall order, but success is not unthinkable. The Fed has done it before.
Mr. Blinder, a professor of economics and public affairs at Princeton, served as vice chairman of the Federal Reserve in 1994-96. His new book, “A Monetary and Fiscal History of the United States, 1961-2021,” will be published on Oct. 11 by Princeton University Press.
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The U.S. Is Running Short of Land for Housing
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Land-use restrictions and lack of infrastructure have made it harder for developers to find sites to build homes; “almost across the board, you’re fighting for land.”
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Kansas City Fed Services Activity Index Rises in September
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Services activity in the middle of the U.S. continued to grow in September, and expectations for future activity remained positive, according to a monthly survey by the Kansas City Fed. The Tenth District Services Survey's composite index, a weighted average of indexes covering revenue/sales, employment and inventory, came in at 20 for September, up from readings of 14 in August and 2 in July. Readings above zero indicate expansion, while those below zero indicate contraction. The Kansas City Fed said September's improvement was driven by higher activity in restaurants, transportation, wholesale trade and professional services. (Dow Jones Newswires)
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Live With Larry Summers and Neel Kashkari
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WSJ's Nick Timiraos at 1 p.m. EDT Tuesday sits down with former Treasury Secretary Lawrence Summers and Neel Kashkari, president of the Minneapolis Fed, to discuss the central bank's September policy meeting and the steps it is taking to battle high inflation. How much higher will the Fed raise rates? What will be the economic consequences of its decisions? Submit your questions for the panel.
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Key Developments Around the World
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War in Ukraine to Cost Global Economy $2.8 Trillion, OECD Says
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Russia’s invasion of Ukraine will cost the global economy $2.8 trillion in lost output by the end of next year—more if a severe winter leads to energy rationing in Europe—the Organization for Economic Cooperation and Development said.
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Italian Right Is On Course to Win Elections
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Italians elected a right-wing coalition to lead the country, according to projected results, choosing an untested leader who will confront Europe’s gathering economic downturn and energy crisis resulting from Russia’s invasion of Ukraine.
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Germany Readies Electricity Price Cap as Economic Pain Mounts
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British Pound Hits Record Low Against Dollar
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The British pound hit its lowest-ever level against the U.S. dollar Monday, dropping heavily after the U.K. government announced a series of tax cuts on Friday, before later paring losses. The currency touched $1.0349 during Asian trading hours Monday, breaking through its previous record low in 1985. The pound was recently trading at $1.0776.
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World Bank’s David Malpass Says He Isn’t Resigning Amid Criticism
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World Bank President David Malpass said Friday he wasn’t resigning from his position amid calls from climate advocates for him to step down over his views on climate change.
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Pakistan Leads Push for Funding to Counter Climate Change Damage
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After suffering catastrophic floods, Pakistan is leading a push with other developing nations to establish international funding for natural disasters that they say are caused by climate change, in an effort to spur momentum around the issue ahead of climate talks later this year.
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Financial Regulation Roundup
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Short Sellers Upended a Small Farm Real-Estate Company
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Farmland Partners’ shares plummeted after a report said the company was in trouble. Prosecutors and regulators have been examining what happened.
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Binance Hires Compliance Chief From Crypto Rival Kraken
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Binance, the world’s largest cryptocurrency exchange by spot-trading volume, has snatched up the chief compliance officer from rival Kraken, as the industry continues to ramp up its compliance efforts.
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Glencore Wins Judge’s Approval of Market Manipulation Settlement
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A federal judge has accepted part of a $1.2 billion settlement that commodities giant Glencore entered to resolve criminal probes over its involvement in foreign corruption and market manipulation.
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Biden Administration Resists Call to Widen Russia Oil-Price Cap Plan
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The Biden administration is trying to stave off a bipartisan push on Capitol Hill to sharpen the enforcement of a proposed cap on the price of Russian oil, aiming to avoid an escalation that officials worry could upset the effort’s delicate diplomatic balancing act.
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8:30 a.m.: CFNAI Chicago Fed National Activity Index
9 a.m.: ECB’s Lagarde speaks at Committee on Economic and Monetary Affairs of the European Parliament hearing in Brussels
10 a.m.: Boston Fed’s Collins speaks to Greater Boston Chamber of Commerce
12 p.m.: Atlanta Fed’s Bostic in interview with Washington Post
12:30 p.m.: Dallas Fed's Logan speaks at Independent Bankers Association of Texas convention
4 p.m.: Cleveland Fed’s Mester speaks at Massachusetts Institute of Technology event
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Time N/A: Hungarian National Bank releases policy statement; Central Bank of Nigeria releases policy statement
6:15 a.m.: Chicago Fed’s Evans speaks at Official Monetary and Financial Institutions Forum in London
7:30 a.m.: ECB’s Lagarde speaks online at Bank of France conference on tokenization of finance
8:30 a.m.: U.S. durable goods report for August (advance)
9 a.m.: ECB’s de Guindos speaks at Barclays-CEPR International Monetary Policy Forum in London; S&P CoreLogic Case-Shiller Home Price Index for July
10 a.m.: U.S. new home sales for August; Conference Board Consumer Confidence Survey for September
7:50 p.m.: Bank of Japan releases July 20-21 meeting minutes
8:35 p.m.: San Francisco Fed’s Daly speaks at Symposium on Asian Banking and Finance
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Japan’s Yen Intervention Is a Rear-Guard Action
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Japan’s intervention may not prop up its currency for long, writes WSJ's Jacky Wong. That’s probably what the intervention is ultimately aimed at: slowing, rather than halting currency depreciation until the central bank feels comfortable raising rates. In other words, buying time for the recovery with targeted rear-guard actions to prevent a further free fall of the currency.
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Markets Are Right to Be Shocked by Britain’s Version of Reaganomics
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Reaganomics, voodoo economics, trickle-down theory; whatever you call it, 1980s political economy is back in Britain, and the markets hate it, writes James Mackintosh for WSJ. The new British government announced surprise tax cuts on Friday costing about 1.8% of GDP, with no explanation of how to pay for them other than some hand-waving at “growth.” Investors got the impression that the government either didn’t care or didn’t know about the impact on its finances of its retro 1980s policies. That showed up in what looks like a bigger risk premium for Britain, with the pound down 2.8% against the dollar even as two-year yields jumped 0.37 percentage points, a huge move that would usually
attract money to flow in. If markets lose confidence it will make it even harder for what was already a high-risk fiscal policy to succeed.
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New signs of slowing global growth rocked investments of all sorts Friday. The Dow Jones Industrial Average fell to its lowest level of the year, the dollar surged and short-term Treasury yields jumped.
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U.S. oil prices fell below $80 a barrel for the first time since January, dragged down by mounting fears of a global recession and a rapidly strengthening U.S. dollar.
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It is the worst year for buying the dip since the 1930s. Instead of rebounding after a tumble, stocks have continued to fall, denting a strategy that soared in popularity over the past decade.
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Public pension funds are already reporting big losses in 2022. Things are likely to get uglier. That is because the funds, which manage around $5 trillion in retirement savings for the nation’s teachers, firefighters and other public workers, haven’t yet factored in second-quarter returns on private equity and other illiquid investments.
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China's central bank took another step to shore up the yuan, making it more expensive for traders and institutions to bet against the currency after it weakened rapidly against the dollar. The People’s Bank of China said on Monday that financial institutions selling foreign-exchange forward contracts will be subject to a 20% risk-reserve ratio, up from zero currently. The change, which will kick in on Sept. 28, will make it costlier for banks—and correspondingly, their clients—to sell yuan to buy dollars in the derivatives markets. (DJN)
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Business confidence in Germany worsened considerably in September as companies turned more pessimistic due to the energy crisis. The Ifo business-climate index fell to 84.3 points in September from a revised figure of 88.6 points in August, data from the Ifo Institute showed Monday. This is its lowest value since May 2020. Economists polled by The Wall Street Journal had expected the index to come in at 87.1. (DJN)
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This newsletter was compiled by Michael Maloney in New York and Perry Cleveland-Peck in Barcelona.
Send us your tips, suggestions and feedback. Write to:
James Christie, Jon Hilsenrath, 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, @NickTimiraos, @PaulHannon29, @kimmackrael, @TomFairless, @megumifujikawa, @pkwsj, @JamesGlynnWSJ, @cleveland_peck
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