Latest news with #economicPolicy
Reuters
12 hours ago
- Business
- Reuters
Slow rate hikes could cause wage-price spiral, BOJ paper says
TOKYO, June 20 (Reuters) - Hiking interest rates only gradually as raw material costs rise could heighten the risk of an upward spiral in wages and consumer prices, the Bank of Japan said in a research paper released this week. The paper's publication on Thursday comes as the central bank faces an increasingly complicated policy environment, with inflation at a more than two-year high and U.S. tariffs fanning economic uncertainty. While the staff papers do not represent the BOJ's official view on monetary policy, they provide hints on key topics of attention within the central bank in setting interest rates. The BOJ staff paper, using data from 2002 to 2024, analysed trends in Japan and Europe - which both rely heavily on imported commodities - to study the extent to which rising material costs led to second-round effects on inflation. In Japan, the pass-through of prices from rising raw materials was more moderate than in Europe, the paper said. The second-round effects were moderate but sustained in both Japan and Europe, it said. "Both in Japan and Europe, the initial effects of high raw material costs were the main cause of inflationary trends since 2020. The second-round effects may have heightened the sustainability of price rises," the paper said. Central banks typically raise interest rates to avoid second-round effects on inflation, or a state in which initial price shocks like higher energy costs trigger a spiral of rising wages and inflation that could lead to a broad-based, persistent inflationary environment. A closer look at Japan's data suggested the BOJ's slow pace of interest rate hikes could be enhancing the second-round effects on inflation, the paper said. Structural changes in Japan's labour market could also be making wages less rigid - or more likely to move flexibly reflecting a tight job market - and enhancing the second-round effects on inflation than in the past, the paper said. The analysis comes amid heightening attention within the BOJ board on how persistent rises in food and raw material costs could affect underlying inflation, and households' perception of future price moves. While uncertainty over U.S. tariff policy has put the BOJ on hold in raising interest rates, Governor Kazuo Ueda has signaled the bank's resolve to keep pushing up borrowing costs if Japan stays on course to durably hit the bank's 2% inflation target. Japan's core inflation hit a more than two-year high in May and exceeded the central bank's 2% target for well over three years, keeping it under pressure to resume rate hikes despite economic headwinds from U.S. tariffs.
CNA
13 hours ago
- Business
- CNA
Slow rate hikes could cause wage-price spiral, BOJ paper says
TOKYO :Hiking interest rates only gradually as raw material costs rise could heighten the risk of an upward spiral in wages and consumer prices, the Bank of Japan said in a research paper released this week. The paper's publication on Thursday comes as the central bank faces an increasingly complicated policy environment, with inflation at a more than two-year high and U.S. tariffs fanning economic uncertainty. While the staff papers do not represent the BOJ's official view on monetary policy, they provide hints on key topics of attention within the central bank in setting interest rates. The BOJ staff paper, using data from 2002 to 2024, analysed trends in Japan and Europe - which both rely heavily on imported commodities - to study the extent to which rising material costs led to second-round effects on inflation. In Japan, the pass-through of prices from rising raw materials was more moderate than in Europe, the paper said. The second-round effects were moderate but sustained in both Japan and Europe, it said. "Both in Japan and Europe, the initial effects of high raw material costs were the main cause of inflationary trends since 2020. The second-round effects may have heightened the sustainability of price rises," the paper said. Central banks typically raise interest rates to avoid second-round effects on inflation, or a state in which initial price shocks like higher energy costs trigger a spiral of rising wages and inflation that could lead to a broad-based, persistent inflationary environment. A closer look at Japan's data suggested the BOJ's slow pace of interest rate hikes could be enhancing the second-round effects on inflation, the paper said. Structural changes in Japan's labour market could also be making wages less rigid - or more likely to move flexibly reflecting a tight job market - and enhancing the second-round effects on inflation than in the past, the paper said. The analysis comes amid heightening attention within the BOJ board on how persistent rises in food and raw material costs could affect underlying inflation, and households' perception of future price moves. While uncertainty over U.S. tariff policy has put the BOJ on hold in raising interest rates, Governor Kazuo Ueda has signaled the bank's resolve to keep pushing up borrowing costs if Japan stays on course to durably hit the bank's 2 per cent inflation target. Japan's core inflation hit a more than two-year high in May and exceeded the central bank's 2 per cent target for well over three years, keeping it under pressure to resume rate hikes despite economic headwinds from U.S. tariffs.
Zawya
2 days ago
- Business
- Zawya
Fed keeps rates steady but pencils in two cuts by end of 2025; Powell sees 'meaningful' inflation ahead
WASHINGTON: The U.S. central bank held interest rates steady on Wednesday and policymakers signaled borrowing costs are still likely to fall in 2025, but Federal Reserve Chair Jerome Powell cautioned against putting too much weight on that view, and said he expects "meaningful" inflation ahead as consumers pay more for goods due to the Trump administration's planned import tariffs. "No one holds these ... rate paths with a great deal of conviction, and everyone would agree that they're all going to be data-dependent," Powell said in a press conference after the end of a two-day U.S. central bank meeting where policymakers slowed their overall outlook for rate cuts in response to a more challenging outlook of weaker economic growth, rising joblessness, and faster price increases. If not for tariffs, Powell said, rate cuts might actually be in order, given that recent inflation readings have been favorably low. But a cost shock is coming, he insisted, with producers, manufacturers and retailers still involved in a complicated struggle over who will pay the levies imposed so far, and President Donald Trump still contemplating an aggressive set of import duties that could go into effect early next month. "Everyone that I know is forecasting a meaningful increase in inflation in coming months from tariffs, because someone has to pay for the tariffs ... between the manufacturer, the exporter, the importer, the retailer," Powell said. "People will be trying not to be the ones who can pick up the cost. Ultimately, the cost of the tariff has to be paid, and some of it will fall on the end consumer." "We'll make smarter and better decisions if we just wait a couple of months or however long it takes to get a sense of really what is going to be the pass-through of inflation" from the higher import taxes, Powell said. In new economic projections released alongside the Fed's statement, policymakers sketched a modestly stagflationary picture of the economy, with growth in 2025 slowing to 1.4%, unemployment rising to 4.5%, and inflation ending the year at 3%, well above the current level. While policymakers still anticipate cutting rates by half a percentage point this year, as they projected in March and December, they slightly slowed the pace from there to a single quarter-percentage-point cut in each of 2026 and 2027 in a protracted fight to return inflation to their 2% target. And there was a split among the 19 policymakers, with seven of them feeling no rate cuts will be needed. That diversity of views reflects that while uncertainty over Trump's tariff policy is down from its peak in April, it's still "a very foggy time," Powell said, adding that policymakers may have divergent assessments of the risk that inflation could stay persistently higher, or that the labor market could weaken. Under the new projections, inflation will remain elevated at 2.4% through 2026 before falling to 2.1% in 2027 amid largely stable unemployment. The projected 1.4% GDP growth this year compares to the 1.7% rate seen in the last round of projections in March, and the 4.5% unemployment rate expected at the end of the year is up from the 4.4% projected in March. The rate in May was 4.2% So far, however, "the unemployment rate remains low, and labor market conditions remain solid," the Fed said in a policy statement that kept its benchmark overnight interest rate in the 4.25%-4.50% range. The decision was approved unanimously. "There's still bias towards some version of stagnation, lower growth with rising sticky inflation," said Jack McIntyre, portfolio manager for global fixed income at Brandywine Global. "It feels like it's a Fed that's still being very patient, and they're still biased towards cutting rates in the near future." TRUMP LASHES OUT The Fed's statement did not mention the sudden outbreak of hostilities between Israel and Iran and the risk that conflict posed to global oil or other markets. Powell said the Fed is watching the conflict "like everybody else" and that while it's possible energy prices could rise, such price spikes generally fade and don't have lasting effects on inflation. "For the time being we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance," Powell said. The Fed, he added, is set up to "react" to incoming information in a timely way. U.S. stock indexes closely largely flat on the day, while the 10-year Treasury yield was mostly unchanged. Interest rate future prices continued to suggest the Fed's September 16-17 meeting was the most likely point for the next rate cut, with another reduction in borrowing costs likely by the end of 2025. The central bank's latest action again ignored Trump's call for immediate rate cuts, a move Fed officials feel would be counter to their effort to ensure inflation returns to the 2% target until key tariff changes are finalized and their effects are better understood. As Fed officials were meeting on Wednesday, Trump called Powell "stupid" and said the policy rate should be slashed in half, the type of move usually reserved for severe economic emergencies. The president also mused about installing himself as Fed chief. The Fed cut rates three times last year, with the last move coming in December. Policymakers, however, have been reluctant to commit to a timeline for further cuts given the volatility of U.S. trade policy, and the difficulty of estimating how the burden of higher import taxes will be spread among consumers, importers, and producing nations.
Daily Mail
2 days ago
- Business
- Daily Mail
Fed risks Trump's wrath by holding rates steady
The Federal Reserve voted to hold interest rates steady again, in line with analysts expectations. Although the central bank is holding the benchmark rate steady - at between 4.25 and 4.5 percent - officials said they expect to cut rates twice before the end of the year. Powell said economic 'uncertainty is unusually elevated' and although tariffs have been scaled back from their peak in April they will still raise prices. 'Increases in tariffs this year are likely to push up prices and weigh on economic activity,' Powell said on Wednesday. Stocks rose slightly following the decision, with the S&P 500 up 0.4 percent and the Nasdaq rising 0.5 percent. The Federal Reserve's decision will likely provoke the president's ire as he has lashed out at Powell for not cutting rates sooner. Trump previously threatened to fire Powell from his post and replace him with a more compliant chair. While the president has since reneged on that threat, he has continued to heap pressure on Powell to cut rates. The decision to hold interest rates steady is part of the Fed's 'wait and see' strategy as the full impact of President Trump's economic policies including tariffs are yet to become clear. 'The wait-and-see approach has served them well up until this point,' Brett Ryan senior US economist at Deutsche Bank said of Wednesday's decision. 'Why deviate from it now when there's no pressing reason to do so and with still upside risk to the inflation outlook?' While the Fed rate does not directly affect rates for loans, credit cards and mortgages, it strongly influences them. The Fed's dual mandate is to keep prices from rising too quickly while maintaining a healthy labor market. Recent inflation and job reports have been muted but better than expected leaving the central bank in a tricky position. Hiring slowed less than expected last month , the latest jobs report from the Bureau of Labor Statistics revealed. The unemployment rate also remained steady at 4.2 percent. But despite the better than expected numbers, it was still a retreat in job growth from April, signaling remaining uncertainty about where the US economy is headed. Prices also rose less than expected last month , according to the most recent inflation data.
Reuters
2 days ago
- Business
- Reuters
Fed decision live: Powell to speak after holding rates steady
What's happening? Fed kept rates at 4.25 to 4.5% Chair Jerome Powell press conference at 2:30 p.m. Middle East crisis, tariffs weigh on decision US President Donald Trump wants rate cuts He called Powell a 'stupid person' Just joining us? Here's what the Fed said 19 minutes ago 14:11 EDT Howard Schneider, Federal Reserve Correspondent The Federal Reserve held interest rates steady and policymakers signaled borrowing costs are still likely to fall this year. But it slowed the overall pace of expected future rate cuts in the face of estimated higher inflation flowing from the Trump administration's tariff plans. In new economic projections, policymakers sketched a modestly stagflationary picture of the U.S. economy, with economic growth slowing to 1.4% this year, unemployment rising to 4.5% by the end of this year, and inflation finishing 2025 at 3%, well above the current level. "Uncertainty about the economic outlook has diminished but remains elevated," the Fed said in its latest policy statement. SLOWER PACE OF FUTURE CUTS While policymakers still anticipate cutting rates by half a percentage point this year, as they projected in March and December, they slightly slowed the pace from there to a single quarter-percentage-point cut in each of 2026 and 2027 in a protracted fight to return inflation to the central bank's 2% target. Under the new projections, inflation remains elevated at 2.4% through 2026 before falling to 2.1% in 2027 amid largely stable unemployment. Those outcomes were both embedded in the new projections, the Fed's latest thinking about how Trump's suite of economic policies is expected to shape the economy this year. Fed sees unemployment at 4.5% by year-end 21 minutes ago 14:08 EDT That's up from March's unemployment rate forecast of 4.4%. Fed sees inflation rising to 3% at end of 2025 23 minutes ago 14:07 EDT That's up from a forecast of 2.7% in March. Fed policymakers see 1.4% GDP growth in 2025 24 minutes ago 14:06 EDT That's down from a prediction of 1.7% in March Highlights from the Fed's rate decision 26 minutes ago 14:04 EDT Economic activity has continued to expand at a solid pace. The unemployment rate remains low Labor market conditions remain solid. Inflation remains somewhat elevated. Uncertainty about the economic outlook has diminished but remains elevated 27 minutes ago 14:03 EDT Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook has diminished but remains elevated. The Committee is attentive to the risks to both sides of its dual mandate. In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. 30 minutes ago 14:00 EDT The Federal Reserve said Wednesday it will keep the federal funds rate target range at 4.25 to 4.50% 36 minutes ago 13:54 EDT Mike Dolan, Markets Editor-at-Large Even if the Federal Reserve thought a window had opened for it to resume its interest rate cutting campaign, there's a risk it may now hold back, precisely because of the relentless political pressure President Donald Trump has put on it to ease policy. And that's not just Fed Chair Jerome Powell being stubborn. One of its key concerns at this stage of its monetary policy cycle is that markets, businesses and households will not believe it has the staying power or political support to wring out the last vestiges of excess inflation and bring inflation expectations back durably to its 2% target. A rate cut as soon as this week - especially with futures markets not pricing in another one until September - would stoke suspicion that the move was forced by the White House. Where major central banks stand on rate cuts 44 minutes ago 13:46 EDT In March, Reuters reported that big developed market central banks started turning cautious after a series of interest rate cuts and as uncertainty in global economics and politics grows. Here's a look at where 10 big central banks now stand: Early Fed chair nomination could rattle markets 13:41 EDT Lewis Krauskopf Trump has said that he would soon nominate Jerome Powell's successor, with nearly a year left before the Federal Reserve chair's term ends. Investors said that could present a risky proposition for markets. While Trump has backed off from comments that he could fire Powell, and a recent U.S. Supreme Court ruling eased worries that he could do so, he said earlier this month that a decision on the next Fed chair would be coming soon. Any choice deemed as being under Trump's thumb would alarm Wall Street, given the broad sentiment that an independent Fed is critical to its ability to function properly. Markets will want a Fed chair who is "laser focused" on economic balance and its dual mandate, said Callie Cox, chief market strategist at Ritholtz Wealth Management. "Any Wall Street manager would tell you that Fed independence is the golden rule of markets," Cox said. "To move away from that can introduce a whole host of issues."
