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Officials' Economic Forecasts in Focus at Fed Meeting
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Good day. Fed policy makers’ updated quarterly economic projections, to be released today, could show officials are expecting to raise interest rates sooner than they anticipated in March. They are also likely to begin discussing when and how to start scaling back bond purchases. Officials went into the meeting under pressure both on the employment side and the inflation side of their mandate. Publicly, they have dwelt on the full-employment part, perhaps leaving the wrong impression they care less about the low-inflation part, Greg Ip writes, saying they are likely to correct that misimpression. Meanwhile, any signal that the Fed will tighten policy could ripple across emerging markets that are dependent on the U.S. dollar.
Now on to today’s news and analysis.
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Fed Meeting Likely to Signal Possible Policy Shifts
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Chairman Jerome Powell has said the Fed would give advance notice before it begins withdrawing the bond-buying program rolled out early in the pandemic. PHOTO: ERIC BARADAT/AGENCE FRANCE-PRESSE/GETTY IMAGES
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Federal Reserve officials are set to provide updated details on their plans for eventually scaling back easy-money policies as they conclude a two-day policy meeting amid signs of accelerating economic growth and inflation.
The Fed is likely to say after the meeting that it will maintain short-term interest rates near zero and keep buying at least $120 billion a month of Treasury and mortgage bonds. The central bank will also release individual policy makers’ updated quarterly economic projections.
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Risks Rise to Both the Fed’s Inflation and Employment Goals
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For the first time in years, the Fed faces two-sided risks: Tighten monetary policy too soon and tank the economy, or tighten too late and watch inflation ratchet higher, Greg Ip writes. The Fed won’t know for months whether the rise in inflation is more than transitory; meanwhile, the bond markets aren’t acting worried, which argues against abandoning its plan now. Yet the landscape is clearly different, and more perilous, than the central bank anticipated just six months ago.
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Derby's Take: Rules-Based Redux Unlikely for Fed Communicating Bond Buying Taper
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One of the Federal Reserve’s most consequential challenges over the next few months will be communicating how it will pull back on its torrid pace of bond buying stimulus without unsettling financial markets.
As Fed officials approach this challenge, at least two appear to have taken off the table a strategy used with some success just under a decade ago. Then, the central bank set out employment and inflation thresholds that once crossed would open the door to increasing short-term rates, without mechanically promising action. Read more.
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Key Developments Around the World
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Turkey’s Troubles Point to Emerging-Market Risks
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The Turkish lira has come under pressure in recent weeks as investors try to assess whether the country’s central bank will heed the demands of its president to cut interest rates. But a rate cut could drag the lira down further at the same time that the country’s high inflation rate is already diminishing the currency’s buying power. Turkey’s economy is among the most vulnerable to signs the Fed is going to raise rates, since a stronger dollar makes it harder for Turkey to pay its foreign-currency debts.
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China to Release Metal Reserves in Effort to Tame Commodities Rally
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China plans to release national reserves of major industrial metals in an effort to rein in surging commodities prices fueled by a resumption of global economic activity.
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U.S. Retail Sales Dipped in May as Pandemic Shopping Habits Shifted
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Consumers cut spending by 1.3% last month, trimming expenditures on autos, furniture, electronics, building materials and other items, the Commerce Department reported Tuesday.
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U.S. and EU Agree to Suspend Airbus-Boeing Trade Fight
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The U.S. and the European Union agreed to suspend their trade dispute over subsidies to Boeing Co. and Airbus SE, significantly easing trade tensions amid a broader effort to improve trans-Atlantic relations.
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Financial Regulation Roundup
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Banks Required to Fill Board Seats With Women Under ECB Proposal
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The European Central Bank wants to include gender diversity as a criterion to approve bank board members and executives, a step that would further pressure a sector where the vast majority of senior posts are still held by men.
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Critic of Large Tech Firms to Lead Federal Trade Commission
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The Senate confirmed Lina Khan for a seat on the Federal Trade Commission, and the White House plans to tap her to lead the agency, allowing her to pursue aggressive enforcement of U.S. antitrust and consumer-protection laws.
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Major U.S. Banks Excluded From Landmark European Bond Program
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The European Union excluded some of the world’s largest banks from working on a huge new debt-issuance program, citing recent cases in which regulators punished them for forming cartels in the bond and currency markets.
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8:30 a.m.: U.S. Commerce Department releases May housing starts
2 p.m.: U.S. Federal Reserve releases policy statement and economic projections
2:30 p.m.: Fed’s Powell holds press conference
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Time N/A: Central Bank of Egypt releases policy statement; Bank Indonesia releases policy statement; Central Bank of the Republic of Turkey releases policy statement
3:30 a.m.: Swiss National Bank releases policy statement
6 a.m.: Norges Bank releases interest-rate decision and monetary policy report
8:30 a.m.: European Central Bank’s Lane speaks on panel at online Barcelona GSE Summer Forum
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America’s Post-Covid-19 Shopping Spree Will Be Bumpy
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If you were looking for a reliable signal on where U.S. consumer spending is heading in the May retail sales report, well, good luck, Justin Lahart writes. He notes that spending likely will push higher as the economy continues to emerge from the pandemic, and Americans make up for what they have been missing out on. But with so many moving parts, he adds, relying on a single report to tell the story of what is happening with consumers is no easy task.
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Construction of new housing in the U.S. in the past 20 years fell 5.5 million units short of long-term historical levels, according to a new National Association of Realtors report, which is calling for a “once-in-a-generation” policy response.
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Prices suppliers charge businesses and other customers increased again in May in the U.S., adding to inflation pressures bubbling through the economy, as the Labor Department said Tuesday its producer-price index rose 0.8% from the prior month, up from the 0.6% increase in April from March. The average rise between 2017 and 2019 was 0.2%.
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Copper prices fell Tuesday to their lowest level in eight weeks on concerns that China may tamp down on rising commodity prices and that the metal’s red-hot rally has gone too far.
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U.S. home-builder confidence declined in June to its lowest level since August 2020 amid rising material prices and supply-chain strains, according to the National Association of Home Builders. Its housing market index, which gauges the single-family housing market, decreased from 83 in May to 81. A number above 50 indicates more builders view conditions as good than poor. (Dow Jones Newswires)
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Sales of vacation homes in the U.S. increased 16.4% in 2020, compared with a 5.6% growth rate in total existing home sales, the National Association of Realtors said. (DJN)
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Home sales across Canada decreased 7.4% month-over-month in May, following a roughly 11% drop in April, the Canadian Real Estate Association said, adding that its house-price index, which is unadjusted, climbed 24.4% from a year earlier, marking another record. (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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