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Fed Mulls More Relaxed Inflation Stance; Wells Fargo Sold Assets to Stay Under Asset Cap; Jobs Data to Shed Light on U.S. Recovery
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Good day. The Fed is preparing to effectively abandon its strategy of pre-emptively lifting interest rates to head off higher inflation, a practice it has followed for more than three decades. On the regulatory side, Wells Fargo unloaded hundreds of millions of dollars of assets during this spring’s market collapse to stay out of trouble with the Fed. Looking ahead, July jobs figures due Friday will shed light on the progress of the U.S. economic recovery.
Now on to today’s news and analysis.
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Fed Weighs Policy Shift Abandoning Preemptive Rate Increases
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Fed Chairman Jerome Powell hinted at the move last week, saying the central bank would soon conclude a comprehensive review of its policy making. PHOTO: BILL O'LEARY/CNP/ZUMA PRESS
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Instead of pre-emptively lifting rates to head off higher inflation, Fed officials are weighing taking a more relaxed view by allowing for periods in which inflation would run slightly above the central bank’s 2% target, to make up for past episodes in which inflation ran below the target. The change being contemplated now is a way of essentially telling markets that rates will stay low for a very long time. Markets have likely already picked up on this change, given the continued declines in long-term interest rates.
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Derby's Take: Heat Over Fed Corporate Bond Buying Is No Surprise
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Criticism the Federal Reserve is facing over its purchases of corporate bonds issued by energy firms, and calls to stop buying them, was pretty much inevitable Read more.
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Key Developments Around the World
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July Jobs Data Will Provide Clues on Strength of the Recovery
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The July report will show whether the healing continued or sputtered amid rising Covid-19 cases and deaths, as some jurisdictions halted or rolled back reopening plans. The information could influence policy makers’ next steps, businesses’ hiring strategies, consumers’ confidence and voters’ moods. If job creation in July continued anywhere near the May and June pace, and the unemployment rate extends a steep descent, it would send a bright message about the economy.
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Jobless Aid Expires as Talks Continue on Coronavirus Package
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A $600 weekly supplement to unemployment benefits that has provided a lifeline for millions of Americans ended Friday, with the White House pushing for an interim deal on jobless aid while Democrats remained focused on a broader coronavirus relief agreement.
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Canada’s Economy Rebounded in May
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After a sharp pandemic-induced plunge, Canadian economic output surged 4.5% in May from April on the strength of retail spending and the resumption of construction activity. Canada’s official data-gathering agency expects another stellar month of growth in June.
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Financial Regulation Roundup
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Wells Fargo Sold Assets to Stay Under Fed Asset Cap
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The Fed put limits on Wells Fargo’s size as punishment for its 2016 fake-account scandal. Loans the bank made to customers drawing on credit lines in the pandemic’s early days increased its size, and the bank scrambled to sell assets to get back in line, according to people familiar with the matter.
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Fintech Varo Money Gets Green Light to Become Bank
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Startup Varo Money Inc. said Friday it had received a national bank charter, clearing the final hurdle in its quest to become a bank and marking one of the first charters granted to a financial technology company.
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Bausch Health Agrees to Pay $45 Million to Settle SEC Dispute
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Bausch Health Cos. agreed Friday to pay $45 million to resolve regulatory claims that it improperly booked some revenue and misled investors about the impact of a significant price increase on a single drug.
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China Moves to Punish Luckin Coffee for Fabricating Sales
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In vowing to penalize the once-hot startup for fabricating hundreds of millions of dollars in sales, China’s Ministry of Finance and commerce regulator are moving ahead of any U.S. regulatory measures, although Luckin’s U.S.-traded stock has been delisted.
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12:30 p.m.: Virtual discussion with St. Louis Fed's Bullard on the U.S. economy and monetary policy
1 p.m.: Richmond Fed's Barkin joins Northern Virginia Chamber of Commerce virtual event
2 p.m.: Chicago Fed's Evans joins virtual roundtable for news media regarding the economy and monetary policy
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12:30 a.m.: Reserve Bank of Australia releases policy statement
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NY Fed Eyes Who Gets Hurt Most in Cyber Attacks on Companies
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Cyber attacks hit companies hardest when they have limited supply chains or depend on hard-to-substitute items for broader production efforts, according to a research report from the Federal Reserve Bank of New York. The report released Friday said increasing cyber attacks are a concern for companies and costs the average large company that suffers an attack about 3% of its annual revenue to deal with the trouble. "Those with greater supply chain vulnerabilities suffered larger losses," the report said. "To cope with the shock without undermining investment and employment, affected customers used their liquidity buffers and increased their reliance on external finance, drawing down their credit lines at
banks which, in turn, charged higher rates to compensate for the increased risk," the report added.
—Michael S. Derby
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Europe Turns America Into a Bad Example on Fiscal Policy
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European integrationists are going for broke in emulating what they think is the U.S. model, Joseph C. Sternberg writes at The Wall Street Journal. But there’s a problem, he says: "America’s fiscal system works nothing like the way the Europeans seem to think it does."
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Coronavirus Is the Crisis Some Bank Investors Have Been Waiting For
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The economic response to the pandemic looks like a laboratory-designed exercise to test bank survivability, David Benoit writes at The Wall Street Journal, in part because the Fed expects to keep interest rates at low levels for the next two years, which will hurt lending margins.
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The dollar has made a sharp U-turn this summer following a long rally, confounding many traders but potentially adding fuel to this year’s surprising stock-market rebound.
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Only 29% of Latino immigrant small-business owners applied for assistance from the government when the pandemic hit, compared with nearly 80% of small businesses overall that have applied for aid.
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Business activity in the Chicago area swung to expansion and pre-pandemic levels in July, with the MNI Indicators Chicago Business Barometer rising to 51.9 from June's 36.6. Economists polled by The Wall Street Journal expected a gain to 43.5. (Dow Jones Newswires)
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The cost of employing the average U.S. worker rose 0.5% in the second quarter, according to the government's employment cost index, while in the 12 months ended in June employment costs increased at a 2.7% rate based on unadjusted data. (DJN)
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Canada's budget deficit ballooned in the first two months of the current fiscal year, April and May, to 86.8 billion Canadian dollars ($64.6 billion), versus a C$1.41 billion deficit in the year-earlier period. (DJN)
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North Korea’s economy grew by 0.4% in 2019, the first time Pyongyang posted positive growth in three years, South Korea’s central bank said, helped by increased construction activity and expanded agricultural output.
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Canadian producer and raw material prices climbed in June for a second straight month, raising the country’s industrial product price index 0.4% from May, Statistics Canada said. (DJN)
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Bitcoin rose as high as $11,868 on Saturday from around $9,100 in early July, extending its gain for 2020 to 65%.
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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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