Good day. During his confirmation hearing yesterday, Federal Reserve Chairman Jerome Powell said he felt positive supply-chain problems would ease this year and help lower inflation, but he added that if prices stay high, the Fed would raise rates in due course. He also said the central bank could begin to shrink its $8.8 trillion portfolio of bonds and other assets later this year, which would be another tool for tightening financial conditions. Separately, two regional Fed bank presidents, Esther George of the Kansas City Fed and Loretta Mester of the Cleveland Fed, said they support the central bank paring its economic stimulus in light of high inflation and a solid outlook for growth and hiring. Today, Ms. Mester will discuss the economic and policy outlook at the WSJ CFO Network Summit. Please see details below for how to follow her presentation.

 Now on to today’s news and analysis.

Federal Reserve Chairman Jerome Powell called high inflation a “severe threat” to a full economic recovery and said Tuesday that the central bank was preparing to raise interest rates because the economy no longer needed emergency support.

Mr. Powell said he was optimistic that supply-chain bottlenecks would ease this year to help bring down inflation as the Fed takes its foot off the gas pedal. But he told lawmakers at his Senate confirmation hearing that if inflation stayed elevated, the Fed would be ready to step on the brakes. “If we have to raise interest rates more over time, we will,” he said.

• Bank of America to Cut Overdraft Fees to $10 From $35

8:30 a.m.: U.S. Labor Department releases December CPI
10:30 a.m.: European Central Bank’s Enria speaks at exchange of views with European Affairs Committee of French Senate
11:10 a.m.: Cleveland Fed’s Mester speaks on economy and monetary policy in online Wall Street Journal interview
1 p.m.: Minneapolis Fed’s Kashkari speaks at St. Paul Area Chamber virtual town hall

4:30 a.m.: Bank of England releases credit conditions survey for the fourth quarter of 2021
8:30 a.m.: U.S. Labor Department releases December producer price index
10 a.m.: U.S. Senate Banking Committee holds nomination hearing for Fed’s Brainard
12 p.m.: Chicago Fed’s Evans speaks at Milwaukee Business Journal Economic Forecast 2022; Richmond Fed’s Barkin speaks to Virginia Bankers Association and Virginia Chamber of Commerce
 

The Federal Reserve Bank of New York said in a research note Tuesday that its reverse repo facility is working well even as cash keeps piling into it. The tool takes in cash mostly from money market firms and is designed to set a floor under short-term rates and has seen massive inflows, hitting nearly $2 trillion on the final day of 2021. The research note said the reverse repo facility helps balance liquidity in the financial system, and is particularly valuable during times of stimulus via central bank bond purchases, because the tool in part helps banks hold lower levels of reserves. As reverse repo use grows, it reduces market pressures “by offering liabilities that can be held by a broader set of financial market participants, supporting the [Federal Open Market Committee’s] efforts to stimulate the economy through asset purchases,” the research note said.

—Michael S. Derby

In one way, this year so far looks very like last year: the benchmark 10-year Treasury yield has risen by almost exactly the same amount, a little over 0.2 percentage points, writes James Mackintosh in the Journal's Streetwise column. In most ways, though, it looks completely different: rather than rewarding rampant speculation, the stock market has been punishing those who bet on fashionable stocks.

• U.S. household debt is on the rise, with families holding onto more than $15.2 trillion in debt, NerdWallet said. The average indebted household owes some $155,622, the personal finance app added. (Dow Jones Newswires)
• The dollar's DXY index fell to its lowest since late November at 95.5340 in the wake of Monday's testimony by Federal Reserve Chair Jerome Powell, and it may take a "material upside inflation surprise" in U.S. inflation data at 1330 GMT to avoid further falls, says MUFG.
• Among U.S. mortgages in October, 3.8% were in some stage of delinquency, compared with 6.1% a year earlier, CoreLogic said. (DJN)
• Housing experts and economists are split on whether U.S. home sales will rise or fall this year as concerns over worsening affordability collide with expectations for rising inventory, according to a Zillow survey. It found 41% of respondents expect sales will grow, 41% predict a slowdown and 18% believe sales will remain roughly the same. (DJN)
• Improving confidence among  U.S. small business owners lifted the NFIB Small Business Optimism Index to 98.9 in December from 98.4 in November, slightly ahead of the 98.7 consensus forecast from economists polled by The Wall Street Journal. (DJN)
• Consumer prices in Brazil increased by  0.73% in December from November, the Brazilian Institute of Geography and Statistics said, and rose by 10.06% from a year earlier, the first time since May 2020 that the 12-month rate declined. (DJN)
• Mexico’s industrial production slipped by 0.1% in November from October in seasonally adjusted terms, the National Statistics Institute said. (DJN)
• Energy prices in the OECD area soared by a 41-year-high of 28% in the 12 months through November, pushing overall inflation to 5.8%, the highest rate since 1996. (DJN)
• China’s factory-gate prices and consumer inflation in December both eased more than expected compared with the previous month, thanks to the plunge in oil prices, as well as Beijing’s efforts to ensure commodity and food supply, which gives more room for policy easing in 2022, official data showed. (DJN)
• The Philippine central bank may tolerate PHP weakness beyond current levels, based on Governor Benjamin Diokno's comments on Tuesday in media reports, MUFG Bank says. On foreign exchange, Diokno reportedly said that the central bank is "very comfortable" with a USD/PHP range of 48-53 and that it is "very unlikely" for PHP to weaken beyond 53.00 against USD. (DJN)
• Norwegian mainland GDP growth rose 0.7% month-on-month in November, above consensus expectations for 0.5% and Norges Bank's forecast of 0.6%, says SEB. The upside surprise was mainly due to a rebound in cyclical and volatile industries such as fishing, aquaculture, and electricity production and excluding these sectors mainland GDP growth was 0.3% month-on-month, says SEB.
• The number of U.K. shoppers buying from overseas has declined 71% since July 2020 amid coronavirus and Brexit-related issues, including new import checks introduced earlier this month, according to a survey by payment service Adyen, ParcelHero said. (DJN)

This newsletter is compiled by James Christie in San Francisco.

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