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Rebound, Inflation Prompt Fed to Revise Interest-Rate Outlook; Brazil Central Bank Raises Key Rate
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Good day. The Federal Reserve revised its interest-rate outlook yesterday, signaling it expects to raise interest rates by late 2023, sooner than it anticipated in March. Prompting the policy shift is a much stronger economic rebound and hotter inflation than the Fed anticipated just a few months ago. The Fed also raised the level of two key rates it uses to control the setting of the federal-funds rate, its chief lever for influencing the economy to reach its job and inflation goals. Elsewhere, Brazil’s central bank lifted the Selic benchmark lending rate to 4.25% and indicated more rate increases are likely to combat rising inflation. Brazil’s 12-month inflation rate surpassed 8% in May, compared with the central bank’s 3.75% target for inflation this year.
Now on to today’s news and analysis.
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Fed Pencils In Earlier Interest-Rate Increase
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Federal Reserve Chairman Jerome Powell described the outlook for inflation in the U.S. economy and said there are signs that prices that have moved up quickly should cease rising and retreat. Credit: Al Drago/Associated Press
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Federal Reserve officials signaled they expect to raise interest rates by late 2023, sooner than they anticipated in March, as the economy recovers rapidly from the effects of the pandemic and inflation heats up.
Their median projection showed they see lifting their benchmark rate to 0.6% from near zero by the end of 2023. In March they had expected to hold it steady through that year.
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Behind Fed Confidence on Inflation, Some Anxiety Creeps In
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If supply shocks push up public expectations of inflation, which tend to be self-fulfilling, the Federal Reserve has a problem, because it could no longer stick to its plan of waiting for full employment to return before tightening monetary policy, Greg Ip writes.
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Fed’s Shift More About Covid-19 Than Inflation
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Maybe the more important takeaway from the Federal Reserve meeting isn’t that the central bank is starting to seriously worry about inflation but that it is pleased that the fight against Covid has gone as well as it has in recent months, Justin Lahart writes.
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Derby's Take: Yet Again, Powell Cautions on Dot Plot Message
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Federal Reserve Chairman Jerome Powell tried once more on Wednesday to wave Fed observers off from making too much of a central bank chart that lays out where policy makers expect short-term rates to move over the next few years. Read more.
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Key Developments Around the World
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Biden Policies Would Help Unwind Forces of Inequality, Yellen Says
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The U.S. needs ambitious fiscal policy to help unwind destructive forces, such as racial inequality and climate change, that have kept prosperity out of reach for millions of Americans, Treasury Secretary Janet Yellen said.
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Brazil’s Central Bank Raises Rates as Others Hold Steady
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Brazil’s central bank, the first among major economies to raise interest rates since the start of the Covid-19 pandemic, increased them again on Wednesday, as rising inflation and a slow pace of vaccinations threaten economic recovery.
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Norway’s central bank kept its key interest rate at zero, as expected. It had previously suggested a rate rise would come in the latter half of 2021, and said economic activity is rebounding faster than projected.
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Bank Indonesia kept its seven-day reverse repo rate unchanged at a record low of 3.50%. Nine economists polled by The Wall Street Journal had unanimously expected the bank to stand pat.
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Taiwan’s central bank left its benchmark rate unchanged, citing loose monetary policies globally and economic risks amid a resurgence of the coronavirus pandemic at home.
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Norges Bank Expects to Raise Policy Rate in September
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Norway’s central bank kept its key interest rate at zero, as expected. It had previously suggested a rate rise would come in the latter half of 2021, and said Thursday economic activity is rebounding faster than projected.
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China’s Economic Growth Moderates as Consumers Stay Cautious
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Factory output, a key growth pillar in China’s pandemic recovery for more than a year, remained resilient last month, but investment and domestic consumption fell short of expectations despite a boost from a long holiday.
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Financial Regulation Roundup
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Global Tax Deal Holdouts Face Squeeze Under Biden Plan
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The Stopping Harmful Inversions and Ending Low-Tax Developments rule is the Biden administration’s tax threat to the rest of the world, the flip side of Treasury Secretary Janet Yellen’s cooperative diplomacy.
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Wall Street Banks Warn Their Trading Boom Is Over
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JPMorgan Chase & Co. Chief Executive Jamie Dimon said this week his firm’s trading revenue, both fixed-income and equities, would be north of $6 billion in the second quarter. That would be down some 38% from the year-ago period.
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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
8:30 a.m.: European Central Bank’s Lane speaks on panel at online Barcelona GSE Summer Forum
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Time N/A: Bank of Japan releases policy statement
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Meet the New Chinese Economy, Same as the Old Chinese Economy
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The moving parts in China’s latest growth figures are very similar to those in place before the pandemic, as firing up the old industrial model helped the country return to 2019 levels of output, but it also shows off long-festering fragilities, Mike Bird writes. He notes that if a recovery led by investment in real estate and industrial production, with consumption lagging behind, sounds familiar, it may be because the same could be said of the makeup of China’s growth before Covid-19.
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Annual inflation in the U.K. exceeded the Bank of England’s target in May with consumer prices up 2.1% on the year, the fastest pace of growth since July 2019, the Office for National Statistics said Wednesday. (Dow Jones Newswires)
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Oxford Economics’s eurozone recovery tracker points to growth taking off as summer sets in, after it rose 1.7 points to 80.2 in the last week of May, driven by another strong week for consumer activity and mobility. (DJN)
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The Ifo Institute lowered its forecast for economic growth for Germany this year to 3.3% from 3.7% forecast in March, because of bottlenecks in the supply of intermediate products, and raised its forecast for 2022 to 4.3% growth from 3.2%. (DJN)
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Typical U.S. rents rose in May, accelerating from 1.3% monthly growth in April to 2.3%, real estate data provider Zillow said, noting it was the largest monthly appreciation since 2015. (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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