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Fed Mulls Asset Purchases, Rate Guidance; Williams Doesn't See Inflation Surge; Harker Says Covid-19 Highlights Inequality
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Good day. Fed officials have indicated that they don’t feel hurried to announce details of their strategy after their policy meeting next month, but their deliberations will likely focus on asset purchases and forward guidance. New York Fed leader John Williams said yesterday that the Fed's actions to support the economy pose little risk of stoking a big rise in inflation Thursday. Meanwhile, Patrick Harker of the Philadelphia Fed said the coronavirus crisis has weighed most heavily on those least able to bear its costs and highlighted inequality. Fed Chairman Jerome Powell is due to speak on a webcast this morning.
Now on to today’s news and analysis.
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Fed Ramps Up Deliberations on Asset Purchases, Rate Guidance
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The extraordinary nature of the current downturn, stemming from the coronavirus and shutdowns, leaves the Fed with no playbook. XINHUA/ZUMA PRESS
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Federal Reserve officials head into their next policy meeting deliberating how to assist an economy in a deeper hole than it faced after the 2008 financial crisis at a time when their tools might have less zip. With rates unlikely to go lower, two elements of officials’ policy stance are taking center stage ahead of the June 9-10 meeting: how to manage the pace of bond purchases and how to communicate their long-run intentions. Officials also are set to release new economic and interest-rate projections at the June meeting after scrapping those quarterly projections in March.
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“It is hard for the Fed to proceed with the next round of potential [policy] escalations because they don’t really know how the pandemic will proceed and then how long the weakness in economic activity will prevail."
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— Former New York Fed President William Dudley
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Williams Doesn’t See Fed’s Support Causing Inflation Surge
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New York leader Fed John Williams sees little risk of an inflation surge despite a wave of central bank support for the economy and financial system prompted by the coronavirus crisis.
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Fed’s Harker Says Pandemic Has Highlighted Economic Inequality
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“As a health and an economic crisis, Covid-19 has the cruel effect of hurting those who were already most vulnerable,” Philadelphia Fed President Patrick Harker said in remarks prepared for a speech Thursday.
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Easing Jobless Claims Show Slower Pace of Virus-Related Layoffs
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The number of workers receiving unemployment benefits fell for the first time since February and new weekly claims continued to ease, offering evidence that layoffs related to the coronavirus pandemic are slowing. Initial claims declined to a seasonally adjusted 2.1 million last week from 2.4 million the prior week, the Labor Department said. The level of claims is still 10 times prepandemic levels but has fallen for eight straight weeks.
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U.S. Economy Contracted 5% in the First Quarter as Coronavirus Hit
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The revised number marked the largest quarterly rate of decline since the last recession. Most economists expect a bigger contraction in the second quarter, when lockdowns continued for weeks before states started slowly reopening their economies in May.
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Key Developments Around the World
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EU Took Big Step With Recovery Proposal—Now Comes the Hard Part
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If the European Commission gets deeper into the business of borrowing, and potentially also raises funds to support it, the shift would push the EU a large stride closer to a federal structure, rather than the looser political and trading alliance it primarily is now.
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Chinese Policy Makers Have Stimulus Measures Ready, Premier Says
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China’s premier said policy makers have more stimulus measures ready in case of a further deterioration in the economy, which he said would keep the world’s second largest economy “on a steady course.”
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Turkey Borrowed Foreign Currency as Lira Tumbled
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Turkey’s central bank ramped up foreign-currency borrowing from local banks in April as it moved to reverse a steep fall in the local currency, sending a key measure of the borrowing to its highest level ever.
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Quick Hits: BOE Official Says It’s ‘Safer to Err on the Side of Easing’
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Bank of England policy maker Michael Saunders said the “searing experience” of the new coronavirus is likely to cause lasting damage to the economy, and the Polish central bank cut its benchmark interest rate. Here is a roundup of central banking news and analysis from around the world from Dow Jones Newswires.
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Financial Regulation Roundup
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House Passes Bill Loosening Rules on PPP Small-Business Loans
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The bill reduces the level of Paycheck Protection Program funds that must be used for payroll to 60% from 75%, gives borrowers up to 24 weeks to use the funds, up from the eight set in the initial bill passed in March, and extends the deadline to rehire workers to Dec. 31.
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U.S. Charges North Korea Officials With Illegal Transfers
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U.S. authorities unsealed a sweeping indictment charging more than 30 people with helping North Korea illegally transfer $2.5 billion since 2013, as punishing U.S. sanctions have cut off its access to the global financial system.
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U.S. Threatens Sanctions to Deter Tankers Carrying Fuel to Venezuela
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U.S. authorities have threatened tankers carrying Iranian fuel to Venezuela with sanctions, aiming to thwart a burgeoning economic alliance between two of America’s biggest rivals.
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8:30 a.m.: U.S. Commerce Department releases April advance economic indicators report; U.S. Commerce Department releases April personal income and outlays
10 a.m.: University of Michigan releases final May U.S. consumer sentiment
11 a.m.: Fed’s Powell speaks in Princeton University Griswold Center for Economic Policy Studies webcast
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12:30 a.m.: Reserve Bank of Australia releases policy statement
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Monetary Policy Transmission: Borrowing Constraints Matter
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Interest-rate changes are most powerful when a higher proportion of borrowers are close to their borrowing limits, Fergus Cumming of the Bank of England's Monetary Policy Outlook Division and Paul Hubert, a researcher at OFCE Sciences Po, write on the BOE's Bank Underground blog. The researchers looked at loan-level data for 11 million U.K. mortgages to see how variation in the proportion of households that are close to banks' lending limits affects how the economy responds to monetary policy. They find that interest-rate changes have a bigger effect on consumption when more people are financially constrained, and say house-price behavior and household debt distribution
also affect the potency of monetary policy.
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How the U.S. Could Really Hurt China
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The determination that Hong Kong is no longer autonomous could mark the beginning of a squeeze on China’s international financial operations, for which Beijing has no equivalent ability to retaliate, Mike Bird writes at The Wall Street Journal.
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Early data show economies returning to life, but at different paces around the world and with varying degrees of damage to economies and societies.
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The National Association of Realtors’ pending home-sales index, a forward-looking indicator based on contract signings, fell 21.8% in April from March, bringing the index to its lowest level since it began in 2001.
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Economic activity in the central U.S. improved for manufacturers in May, but remained deep in negative territory, according to the Kansas City Fed. Its Tenth District Manufacturing Survey's composite index rose to minus 19 from minus 30 in April. (Dow Jones Newswires)
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The 30-year fixed-rate mortgage in the U.S. dropped to an average of 3.15% during the week ending May 28, down nine basis points from the previous week, the lowest level since Freddie Mac began tracking the data in 1971. (DJN)
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U.S. corporate profits fell 13.9% non-annualized to $1.84 trillion in the first quarter, the largest decline since the fourth quarter of 2008 during the Great Recession, the Commerce Department said. (DJN)
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Iran's economy is in crisis, but its main stock index has risen nearly 100% since mid-February. Tehran is using the market boom to sell off state assets, generate cash and shore up its deteriorating finances.
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U.K. car production plunged 99.7% in April to its lowest level since the Second World War, the Society of Motor Manufacturers and Traders said. (DJN)
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A gauge of consumer confidence in Mexico fell to 32.2 in April from 42.1 in March and 45.5 a year earlier, according to statistics agency Inegi. (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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