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Dissenting Fed Votes Point to Guidance Challenges; Powell's 'Powerful' Words
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Good day. The Federal Reserve’s rate-setting committee signaled that rates will stay near zero at least through 2023 to help support the economy recovery. But dissenting votes from two officials pointed to challenges ahead for the central bank's new forward guidance system, and the power of the Fed's words may be tested in the months and years ahead. Elsewhere, Brazil’s central bank left its benchmark Selic rate unchanged—the first time in 10 meetings it didn’t cut the rate—and a Bank of England policy update is due this morning.
Now on to today’s news and analysis.
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Fed Sets Higher Hurdles for Rate Increase
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‘These changes clarify our strong commitment over a longer time horizon,’ Fed Chairman Jerome Powell said Wednesday. PHOTO: DANIEL ACKER/BLOOMBERG NEWS
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The Fed set a higher bar to raise interest rates and signaled it expected to hold rates near zero for at least three more years. In new projections released after a two-day policy meeting, all 17 officials who participated said they expect to keep rates near zero at least through next year, and 13 projected rates would stay there through 2023. The Fed’s rate-setting committee also revised its postmeeting statement to specify it would maintain rates near zero until it sees evidence of a tight labor market and inflation reaches 2% “and is on track to moderately exceed 2% for some time.”
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Lacking Tools, Fed Pins Hopes on Powerful Words
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Can words take the place of actions? The Federal Reserve hopes so, Greg Ip writes. Fed Chairman Jerome Powell used the word "powerful" 10 times in a press conference, as the central bank sought to underscore its commitment to keeping rates low. Mr. Powell also once again pleaded for more fiscal aid.
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Dissenting Fed Votes Hint at Rate Guidance Challenges
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Jerome Powell said the Fed's new way of conveying guidance about the future of interest rate policy is powerful. But right out of the gate, two of his colleagues were somewhat at odds with the central bank's consensus, Michael S. Derby writes.
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Is the Fed Just Seeing Shadows—Or Should We Really Be Worried?
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The dour take on the economy of Fed policy makers and the dovish shift in their statement might reflect the likelihood that, from here on out, gains in the economy will be harder-fought and there remains a risk of the economy slumping anew, Justin Lahart writes. The danger is that, for all its dovishness, what the economy does next is out of the Fed’s hands.
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A Million Mortgage Borrowers Fall Through Covid-19 Safety Net
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About one million homeowners have fallen through the safety net Congress set up to protect borrowers from losing their homes, according to industry data, potentially leaving them vulnerable to foreclosure and eviction. Homeowners with federally guaranteed mortgages can skip monthly payments for up to a year without penalty and make them up later. They must call their mortgage company to ask for forbearance. Many have instead fallen behind on their payments.
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U.S. Retail Spending Grew at Slower Pace in August
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Retail sales—reflecting what households spent at service stations, stores, restaurants and online—rose by a seasonally adjusted 0.6% in August from July. August marked the third month that retail spending was above prepandemic levels.
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Manufacturing Recovery Stymied as Workers Juggle Child Care
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Nearly half of manufacturers said child-care constraints made it difficult to recall furloughed workers or hire new ones in August, according to a Federal Reserve Bank of Philadelphia survey of companies in its region.
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Key Developments Around the World
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Brazil’s Central Bank Leaves Selic Rate Unchanged at 2%
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The Central Bank of Brazil left its benchmark Selic rate unchanged at a record low amid concern about the government’s fiscal situation and as the economy recovers more quickly than expected from the coronavirus crisis.
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Indonesia Central Bank Holds Rates to Safeguard Rupiah’s Stability
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Bank Indonesia held its seven-day reverse repo rate at 4% Thursday, as expected, to safeguard the stability of the rupiah. The central bank is continuing to purchase government bonds from the primary market, Gov. Perry Warjiyo said.
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BOJ's Kuroda Doesn't See Stock Bubble
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The U.S. and Japanese stock markets have recovered to roughly where they started the year despite the coronavirus pandemic. That isn't a bubble caused by monetary easing, the Bank of Japan's governor said. Haruhiko Kuroda says he finds current stock valuations justified, and that the central bank intends to continue its policy of buying tens of billions of dollars worth of stocks in exchange-traded funds to encourage more risk-taking. (Dow Jones Newswires)
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Rich Economies to Recover More Quickly From Covid-19 Contractions
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China and rich countries will suffer less economic damage from the pandemic than previously feared, according to the Organization for Economic Cooperation and Development, but the global public-health emergency will exact a higher toll on the economies of poor countries. The Paris-based research body also said the global economy will contract less sharply this year than it thought likely in June, but warned the recovery is set to slow from this month and remains vulnerable to fresh outbreaks.
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As Coronavirus Rebounds, Europe Rejects New Lockdowns
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Authorities are enacting localized measures to combat outbreaks, while exhorting citizens to protect themselves and others by behaving prudently, a contrast with the broad shutdowns imposed when Covid-19 first hit.
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Mark Carney Joins Pimco Advisory Panel
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Mark Carney, the former head of the Bank of England and before that the Bank of Canada, has joined an advisory panel for bond fund Pimco. The panel is chaired by former Fed Chair Ben Bernanke and includes former European Central Bank President Jean-Claude Trichet. (Dow Jones Newswires)
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Financial Regulation Roundup
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SEC Bolsters Safeguards Against Penny-Stock Fraud
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The Securities and Exchange Commission approved a change to its rules that would largely prevent brokers from quoting prices for OTC stocks unless the companies issuing such shares released up-to-date financial information to the public.
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Julius Baer Close to FIFA Issue Resolution
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Julius Baer Gruppe AG said Wednesday it is in advanced discussions to reach a resolution with the U.S. Department of Justice related to its investigation into the FIFA soccer federation. The Swiss private-banking group said the investigation concerned “alleged money laundering and corruption involving officials and affiliates of FIFA and associated sports media and marketing companies,” and a possible resolution could lead to the bank paying an amount in double-digit millions of U.S. dollars. (Dow Jones Newswires)
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Time N/A: Bank of Japan releases policy statement
Time N/A: South African Reserve Bank releases policy statement
Time N/A: Bank Indonesia releases policy statement
7 a.m.: Bank of England releases monetary policy summary and minutes
8 a.m.: Bank of England’s Bailey gives opening remarks at online Sovereign Bond Markets Conference
8:30 a.m.: Bank of England’s Bailey gives opening remarks at online Sovereign Bond Markets Conference
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5:15 a.m.: European Central Bank’s de Guindos speaks during online panel discussion
6:30 a.m.: Bank of Russia releases interest-rate decision
10 a.m.: University of Michigan releases preliminary September U.S. consumer sentiment
10 a.m.: European Central Bank’s Schnabel speaks during online panel discussion
10 a.m.: St. Louis Fed’s Bullard speaks online on industrial innovation and economic recovery from Covid-19
12 p.m.: Atlanta Fed’s Bostic speaks at virtual conference on racial justice and finance with Princeton University’s Bendheim Center for Finance
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CFR Research Claims Inflation Could Return Faster Than Fed Thinks
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Federal Reserve forecasts released Wednesday show officials have no worry inflation will take off at any point over the next few years despite hoping price pressures will rise from low levels. But new research from the Council on Foreign Relations warns that data on bank reserves points to higher inflation. "We know that when our balance-sheet-to-reserves gap measure began rising in 2010 it took eight months for inflation to rise one percentage point from the time it subsequently bottomed out," Benn Steil and Benjamin Della Rocca write. "If inflation should rebound at the same pace now, we are looking at 2% Core PCE inflation, the Fed’s preferred measure, in February
2021." Their forecast does not square with the Fed’s outlook, which doesn't see 2% core inflation until 2023.
—Michael S. Derby
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U.S. coal output and consumption are on pace to decline at faster annual rates, on average, under President Trump than under President Obama.
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The collapse of bond yields in Europe and the U.S. is driving investors back into battered emerging markets, fueling gains despite a series of high-profile defaults and concerns about the pandemic’s blow to fragile economies.
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Annual inflation in the U.K. slowed sharply in August following the introduction of a government program to pick up part of the tab for eating out, with consumer prices up 0.2% on the year, compared with a rise of 1% in July, official statistics showed. (Dow Jones Newswires)
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Eurozone exports and imports rose for a third straight month in July, the European Union’s statistics agency said, noting that adjusted for seasonal variations exports rose by 6.5% from June while imports rose by 4.2%. (DJN)
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New Zealand's GDP shrank by 12.2% in the April-June quarter from the previous quarter and by 12.4% from the same period a year earlier, Statistics New Zealand said. (DJN)
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European Commission President Ursula von der Leyen said around 225 billion euros ($267.04 billion) in green bonds should be issued to raise money for 30% of the bloc’s EUR750 billion NextGenerationEU coronavirus recovery fund. (DJN)
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Moody's raised its global manufacturing outlook to stable from negative, saying the sector appears to have overcome the worst of the coronavirus-induced recession and is on a path to recovery, assuming there isn't a second wave of infections and renewed lockdowns. (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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