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Inflation in Focus at Fed Policy Meeting
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Good day. Fed officials could signal at their policy meeting this week that they anticipate raising interest rates sooner than previously expected following a spate of high inflation readings. Jon Hilsenrath compares the recent inflation pickup with the price rises that led to a wave of protests in 1966. Averting a similar long-term inflation problem might take some political courage from policy makers, he writes. And James Mackintosh says investors should consider the possibility that the Fed is wrong in its assessment that this burst of inflation will be transitory.
Now on to today’s news and analysis.
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Fed Officials Could Pencil In Earlier Rate Increase at Meeting
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Inflation has risen much faster than the Fed anticipated as recently as its April policy meeting.
PHOTO: LIU JIE/ZUMA PRESS
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Fed officials in March saw consumer prices rising 2.4% in the fourth quarter of 2021 from a year earlier. That pace, they said, would be consistent with their goal of 2% average annual inflation over the long run. Inflation has soared since then, as the economy has rebounded much faster than expected, businesses have struggled to hire workers, and shortages of key materials have wreaked havoc on supply chains. The Fed's quarterly economic forecasts are likely to project significantly higher inflation and growth than officials expected in March.
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When Americans Took to the Streets Over Inflation
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Today, after decades of nearly invisible inflation in the U.S., many Americans have little idea what it looks like. Nearly half of the U.S. population was born after 1981, the last year of double-digit consumer price increases. But America’s long inflation holiday shows signs of ending. Consumer prices are now rising again: The Labor Department’s consumer price index rose 5% in May from a year earlier, the biggest increase in more than a decade. History provides some useful lessons.
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Consumers in New York City protest for lower food prices, October 1966.
PHOTO: LOUIS LIOTTA/NEW YORK POST ARCHIVES
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Markets Are Leaving Little Room for the Fed to Be Wrong on Inflation
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Investors have faith in the Fed, James Mackintosh writes. Over the past three months consumer prices, excluding volatile food and energy, have risen 2%, equivalent to a shockingly high annual rate of 8.2%. Rather than panic and dump bonds, investors have piled into Treasurys and pushed 10-year yields back down to where they stood in late February. Confidence in the central bank is absolute.
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What Does the Bond Market Know About Inflation?
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Even if bond market signals are imperfect, investors predicting a damaging level of inflation are still clearly in the small minority, and what is priced in is, as it stands, almost precisely what the Fed is looking for, Mike Bird writes.
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Retiring Workers Alter Fed’s Calculus on Jobs Shortfall
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The Federal Reserves believes many factors holding back the labor force will fade later this year. But one might not: The 2.6 million people who retired since February 2020, according to estimates from the Dallas Fed.
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At $548 Billion, New York Fed Reverse Repos Hit Another Record
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Another day, another record for the Federal Reserve’s reverse repo facility. It pulled in $548 billion on Friday, at a zero percent return, as money funds, banks and other eligible firms find it easier to park cash safely with the central bank in a market running short on money market investments. The huge inflows don’t seem to alarm the Fed, but do worry many market participants, and the steady rise day after day from near zero levels a few months ago raises big questions about where this is going. The relative stability of the federal-funds rate in all of this has made it unclear whether the Fed will tweak any of its rate control toolkit settings to help guide money back to the private sector.
—Michael S. Derby
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Key Developments Around the World
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Europe Keeps Aiding Companies to Avoid Surge of Insolvencies
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In Europe, where vaccination has lagged behind other regions and economies have been slower to adapt, companies continue to struggle, so to prevent an avalanche of insolvencies, governments are extending support measures.
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At G-7 Summit, Boris Johnson Can’t Shake Off Brexit
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Wrangling over Brexit bled into the Group of Seven summit, coloring what appeared to be a broadly successful meeting that was a major opportunity to showcase the U.K.’s ambitions on the global stage.
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Financial Regulation Roundup
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Regulators Tell Banks It Is Time to Stop Using Libor
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The Commodity Futures Trading Commission last week told brokers that facilitate derivatives trading among large banks that they should stop using Libor, or the London interbank offered rate, as a reference rate by July 26.
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Hedge-Fund Founder Kamensky Gets Prison Sentence for Fraud Tied to Neiman Bankruptcy
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On a summer Friday afternoon last year, hedge-fund manager Dan Kamensky broke bankruptcy laws. That evening on a recorded line, he pleaded with a banker to say the whole thing was a misunderstanding.
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Bitcoin on the Balance Sheet Is an Accounting Headache for Tesla, Others
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Because bitcoin and other digital assets are considered “indefinite-lived intangible assets,” rather than currencies, any decrease in their value below what the company paid for them can force a company to write down the value and take an impairment charge.
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9 a.m.: Bank of England’s Bailey speaks at virtual Association of Corporate Treasurers conference and International Treasury Week event; European Central Bank’s Schnabel speaks at online symposium on climate change, finance and green growth
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Time N/A: U.S. Federal Reserve begins two-day policy meeting
6 a.m.: European Central Bank’s Enria speaks at AFME/OMFIF virtual conference on European financial integration
7 a.m.: European Central Banks Lane speaks at ECB conference on on forecasting techniques
8:15 a.m.: Bank of England’s Bailey speaks virtually at CityUK conference
8:30 a.m.: U.S. Commerce Department releases May retail sales; U.S. Labor Department releases May PPI
9:15 a.m.: Federal Reserve releases May U.S. industrial production
9:50 a.m.: European Central Bank’s Panetta gives prerecorded speech at Deutsche Bundesbank's International Cash Conference
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J.P. Morgan Moves Forward Expected Timing of Fed Rate Increase
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The Federal Reserve is likely to lift rates sooner than expected, J.P. Morgan economist Michael Feroli wrote in a note to clients Friday. Due to reduced risks from the coronavirus pandemic and rising inflation expectations, he wrote that “we are also bringing forward our expectations for liftoff to late 2023.” Mr. Feroli wrote that he also expects some “perfunctory” discussions at the Fed about slowing the pace of its asset buying, with Chairman Jerome Powell mentioning it at his June 16 press conference. “If we are correct that they talk about tapering, then our best guess is that we learn about that discussion in the Chair’s prepared remarks at the start of the press conference,” Mr. Feroli wrote. He added that “we would also expect Powell to quickly follow this up by observing that the economy is still some ways away from meeting the ‘substantial further progress’
goals” of the central bank.
—Michael S. Derby
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The world’s appetite for crude oil will return to its pre-pandemic highs by the end of next year but low coronavirus vaccination rates in emerging economies are pushing the pandemic’s end date further away, the International Energy Agency said Friday.
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U.S. consumer sentiment rose in early June, lifting the preliminary estimate of the University of Michigan’s index of consumer sentiment from 82.9 in May to 86.4. Economists polled by The Wall Street Journal had forecast an increase to 84.4. (Dow Jones Newswires)
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The U.K. economy expanded in April at its fastest monthly pace since July 2020 as public-health restrictions eased, growing 2.3% compared with March, the Office for National Statistics said. Growth was driven by services and offset a decline in industrial production caused by a decrease in manufacturing and planned shutdowns of North Sea oil and gas fields for maintenance. (DJN)
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Canada’s national net worth climbed 7.7% in the first quarter from the previous three-month period, to reach C$14.97 trillion, with most of the gain concentrated in the household sector, according to Statistics Canada. (DJN)
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Mexican industrial output slipped 0.2% in April from March in seasonally adjusted terms, its first decline in almost a year, with lower construction and manufacturing partially offset by an increase in mining activity, including a 0.4% rise in oil and gas output, the National Statistics Institute said. (DJN)
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Singapore's gross domestic product is expected to grow 6.5% in 2021, according to the median projection of external professional forecasters in the Monetary Authority of Singapore's June survey, compared with the March survey's forecast for a 5.8% expansion. (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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