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Why Fed Officials Keep Calling for Fiscal Boost; What to Expect from Fed Meeting
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Good day. There's a good chance we'll hear more calls for more aggressive fiscal policy at the Fed's policy meeting this week. The U.S. economy has rebounded and the ranks of temporarily laid-off workers have fallen by around 12 million since the spring, but officials are uneasy because more than two million Americans have permanently lost their jobs. Meanwhile, economists are divided on how much new information Fed officials are set to reveal about changes to their inflation-targeting framework.
Now on to today’s news and analysis.
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Why Fed Officials Are Begging for More Stimulus From Lawmakers
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Fed officials are eager for a fiscal booster shot for two reasons. The first reflects the limits of their tools that became apparent well before this downturn. The second stems from the unique nature of the current shock. Textbooks say when a downturn hits, central banks can stabilize the economy by lowering rates to offset declines in spending and demand. But new research from Columbia University economist Michael Woodford suggests this tool isn’t as effective when certain sectors of the economy can't operate for noneconomic reasons.
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Derby's Take: Economists Split on What Fed Will Do This Week
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Some economists at major banks believe the Federal Reserve soon will shift toward outright stimulus of the economy, but they aren’t sure whether it will happen at this week’s policy meeting, the first since the central bank announced a new approach to monetary policy that will explicitly allow inflation to go over its 2% target to make up for periods when it fell short of that goal. Read More.
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U.S. Consumer Prices Broadly Rebounded in August
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The consumer-price index—which measures what consumers pay for everyday items—climbed a seasonally adjusted 0.4% in August, marking the third straight month of gains for consumer prices after sharp declines at the pandemic’s onset.
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U.S. Budget Gap Nearly Tripled in First 11 Months of Fiscal 2020
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The annual deficit nearly tripled through the first 11 months of the fiscal year, to $3 trillion from $1 trillion during the same period a year earlier. Total debt held by the public has risen to $20.8 trillion as of Wednesday, from $17.4 trillion in early March.
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Key Developments Around the World
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Italy Seeks Economic Rebirth With EU Coronavirus Recovery Money
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Italy wants to spend EU money to boost the use of digital technology, spur technological innovation and increase the use of renewable energy. It also wants to invest in its education and health-care systems, revamp crumbling roads and bridges and reduce social inequality.
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Despite Coronavirus, Developed Economies Seek Immigrant Workers
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Through all the turmoil in the global economy, one pre-pandemic feature remains: Many of the largest developed economies rely on low-income immigrant workers. Those willing to work at around minimum wage in jobs such as elderly care are in high demand, recession or not.
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China Serves Up Pig-Backed Loans for Its Hogtied Farmers
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Last September, China’s banking regulator and its agriculture ministry urged banks and insurers to better support pig farmers, including by developing pilot programs using hogs as collateral.
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In Turkey, Weak Lira Powers Fresh Gold Rush
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Turks are piling into gold, long their favorite investment, as the country’s financial system unravels. The average daily volume of gold sold at Istanbul's Grand Bazaar shot up to 4,500 pounds from about 450 pounds, traders said.
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Virus-Ignited Gold Rush Helps South Africa’s Tarnished Mines to Shine
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Surging profits for gold sold abroad in U.S. dollars have helped producers defy the gravity of South Africa’s worst economic contraction in at least a century, including a five-week mining shutdown from late March to May.
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Financial Regulation Roundup
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NYSE Signals It Will Exit New Jersey if State Taxes Stock Trades
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The New York Stock Exchange plans to announce it will run one of its exchanges from a backup site in Chicago for a week as a demonstration of its readiness to quit New Jersey, according to an internal memo seen by The Wall Street Journal.
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Former Traders to Stand Trial in Test of Spoofing Crackdown
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A U.S. crackdown on traders accused of price manipulation faces one of its biggest tests this week, as a pair of former Deutsche Bank traders face trial on charges related to rigging precious-metals prices using a strategy known as spoofing.
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Deutsche’s Compliance Procedures Limit Damage of Settlement
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A U.S. unit of Deutsche Bank paid a fraction of the maximum penalty it could have faced to settle alleged sanctions violations, as the Treasury Department pointed to the bank’s compliance efforts and cooperation as mitigating factors.
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9:30 a.m.: European Central Bank’s Lane speaks at Suerf economists webinar
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3:15 a.m.: European Central Bank’s Panetta speaks by video at Economist Greek government roundtable
9:15 a.m.: Federal Reserve releases August U.S. industrial production
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Inflation Pops Up, But Will It Stick Around?
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The rebound in inflation is remarkable, Justin Lahart writes at Heard on the Street. In May, overall prices were up just 0.2% from a year ago and core prices were up 1.2%. "This marks a change from what happened following the financial crisis, when inflation kept falling long after the recession was over and the job market began to recover," he notes. "And the inflation many Americans are experiencing lately is undoubtedly higher than what Friday’s inflation report shows."
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How U.S. Consumers Use Their Stimulus Payments
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Disruption caused by the Covid-19 pandemic spurred the U.S. government to pass the Cares Act, allocating $1,200 to qualifying individuals. In a VoxEU blog post, Olivier Coibion, Yuriy Gorodnichenko and Michael Weber write that based on a survey they conducted, 15% of recipients spent or planned to spend the money, 33% saved it and 52% put it toward debt payments. They write that their survey also found that because of hoarding, a majority of the spending went to food, beauty and nondurable products. The percentage of recipients who chose to spend their checks was lower than the corresponding percentage during downturns in 2001 and 2008. “Given how large
the Covid-related stimulus payments were relative to those in 2001 or 2008, it is consistent with consumer theory that a larger fraction would be saved compared to previous experiences,” the authors write.
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The U.K. economy expanded by 6.6% on month in July, fueled by growth in the service sector as a reopening broadened after a nationwide lockdown to contain the spread of coronavirus, the Office for National Statistics said Friday. (Dow Jones Newswires)
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The U.K. and Japan said Friday they reached agreement on a trade deal, boosting Britain's hopes of striking similar agreements with other major economies once it has cut its ties with the European Union's single market. (DJN)
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New Zealand data due Thursday will likely show its economy contracted a record 12% in 2Q from 1Q, according to the median of seven estimates compiled by the Journal. (WSJ)
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German consumer prices fell in August for the second consecutive month, statistics agency Destatis said Friday, noting prices declined by 0.1% on month as measured by national standards and by 0.2% on EU-harmonized standards. Prices remained flat on year by national standards and declined by 0.1% on the year in EU-harmonized standards. (DJN)
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Canada's industrial capacity utilization rate fell sharply from 79.8% in the first quarter to 70.3% in the second quarter, reaching its lowest level in more than 30 years after the introduction of economic restrictions meant to reduce the spread of the new coronavirus, Statistics Canada said Friday. (DJN)
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Mexico's industrial production rose in July for a second consecutive month, posting a 6.9% increase from June in seasonally adjusted terms led by an 11% increase in factory output, the National Statistics Institute said Friday. (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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