March 21, 2018.
United States:
Yellen Says Gradual Fed Rate Hikes Are Needed to Prevent Overheating
Former Federal Reserve Chair Janet Yellen said higher interest rates will be needed to keep the U.S. economy from overheating, though the pace must be calibrated to allow inflation to rise to the central bank’s 2 percent goal. “I think the Fed should and has been gradually raising rates to try to stabilize the labour market, to bring down the pace of job growth to a sustainable level to avoid the economy overheating,” Yellen said Monday in Philadelphia. U.S. employers added a stronger-than-expected 313,000 new jobs in February. Yellen said that a monthly pace of 90,000 to 120,000 was probably sustainable. If it continues at that rate, the jobless level would slowly decline but “I still will not expect to see some dramatic pickup in inflation,” she said. Prices rose by 1.7 percent in the 12 months to January, according to the gauge favoured by the Fed. “There are risks on both sides,” Yellen told an audience at an event hosted by the University of Pennsylvania’s Wharton business school. “Tighten too slowly and the economy could overheat, and tighten too quickly and inflation may not move back to 2 percent,” possibly leading to a problematic fall in inflation expectations. Yellen left the U.S. central bank early last month after she was passed over for a second term as chair by President Donald Trump, who broke with past practice in appointing Republican Jerome Powell to the post. Powell is expected to continue her policy of gradually raising interest rates by delivering another hike at a meeting this week of the Federal Open Market Committee in Washington. Yellen has said she was disappointed at not being offered another four years despite overseeing a steady economic recovery. On Yellen’s watch, unemployment declined to 4.1 percent from 6.7 percent. She resisted calls from more hawkish policy makers and outside economists to begin raising rates earlier. That succeeded in driving unemployment to its lowest since 2000, and without provoking above-target inflation which many of her critics warned would result. Yellen’s popularity was on display Monday. Boarding Amtrak’s Acela train from Washington she was seen greeting well-wishers. In Philadelphia, a crowd of nearly a thousand, mostly students, packed into an auditorium to hear her discussion with Wharton Professor Jeremy Siegel.
Europe:
U.K. Wage Growth Accelerates, Signalling Squeeze Is Ending
U.K. wages are rising at their fastest pace since the end of 2016, signalling the yearlong squeeze on living standards is coming to an end. Basic wage growth accelerated to 2.6 percent in the three months through January, the Office for National Statistics said Wednesday, while faster increases may also lie ahead. Prime Minister Theresa May’s government is expected to announce later that more than a million National Health Service workers will get a 6.5 percent pay rise over the next three years — spelling an end of the longstanding cap on public-sector pay rises — while a 4.4 percent increase in the minimum wage is also due to come into effect in April. The brighter outlook is good news for households, whose spending power has been eroded by sterling-induced price increases since the 2016 Brexit referendum. With the inflation rate dropping to 2.7 percent in February and predicted to keep falling, economists say a return to real wage growth is in sight. Including bonuses, wage growth accelerated to 2.8 percent, the most since 2015. The report also showed the employment rate returned to a record high and the jobless rate fell to 4.3 percent to match the lowest since 1975. The figures underscore the tightness of the labour market, with surveys suggesting recruitment difficulties and past inflation are forcing firms to pay higher rates during the key period for wage bargaining.
Asia:
Asian Central Banks Unlikely to Follow Fed Rate Hike
Most Asian central banks will stand pat for now, even with the Federal Reserve poised to raise borrowing costs this week. While previous tightening cycles in the U.S. prompted many Asian nations to move in lockstep, things are different this time. Subdued inflation and healthy foreign reserves reduce the need to move quickly and the risk of a trade war gives policy makers another reason for pause. China, Japan and Australia anchor the region’s bias to staying on hold, but there are important exceptions. India remains hawkish and economists also expect South Korea and Indonesia to raise rates this year. Of course, the picture could change quickly if fund outflows from Asia jump, but right now this is how Asia’s major central banks are placed for another Fed rate hike. The People’s Bank of China is likely to refrain from raising the benchmark lending rate, though it has the option to increase borrowing costs it charges on the open market to head off any run on the yuan. If needed, China can also tighten through more financial oversight and debt containment. “I just don’t see any reason for China to hike,” said Zhou Hao, an economist at Commerzbank AG in Singapore. Domestic market rates are already quite high, and there’s no sign of the economy overheating or any risk for inflation to surge this year, he said.