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Markets tumble following Governor Powell’s “We must keep at it” speech

With every financial ear listening in, and millions of pairs of eyes glued to their screens, market watchers from around the globe tuned in, as Governor…

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With every financial ear listening in, and millions of pairs of eyes glued to their screens, market watchers from around the globe tuned in, as Governor Powell spoke at the first session of the Jackson Hole Economic Policy Symposium.

Naturally, high inflation has got everyone’s attention. Equally, the Fed’s accelerated front-loading of hikes has been a bit of a surprise to markets, with rates surging 225 bps in a matter of 4 meetings.

The Governor’s speech summed up in one sentence, you ask? “We must keep at it.”

That’s right. Chair Powell has firmly reiterated the Federal Reserve’s resolve to prioritize price stability and bring inflation closer to its 2% target.

This was despite plenty of mixed economic data. For instance, GDP contracted for the second quarter in a row and PMI crashed earlier in the week. However, unemployment stayed low, business sentiment improved and 1-year ahead inflation expectations were meaningfully lower.

Given the moderation in CPI and stable consumption data, some market watchers believed that Powell and Co. may choose to slow the pace of rate hikes, having already equalled the peak of the 2019 cycle.

However, it was clear that the Governor wanted to decisively quash any speculation around a “quick pivot to rate cuts.”

Labour market considerations

A crucial driver for Powell’s hawkishness was the jobs situation. Unemployment currently stands at a half-century low of 3.5%. Interest rate sensitive sectors such as housing and technology have faced the brunt of losses, while other areas have been relatively immune.

However, policymakers fear that without a return to price stability, labour market conditions are destined to deteriorate.

Powell added that the 2% target would require “sustained below trend growth” and “very likely be some softening of labour market conditions.”

If the Fed fails to act decisively, higher inflation expectations could get cemented, making the task of monetary authorities even more challenging.

Despite the hardship this would cause, “a failure to restore price stability would mean far greater pain.”

Powell conceded that in the past, “a lengthy period of very restrictive monetary policy was ultimately needed to stem high inflation,” but insisted “our aim is to avoid that outcome by acting with resolve now.”

Central bank speak

Central bank communication remains a mystery wrapped in a riddle. Gauging the pulse of the crowd, balancing this with what should be done with an allowance for what may come is a delicate balancing act. As an immensely subtle art far from being mastered, monetary authorities have accumulated battle scars far more routinely than resounding successes delivered with pinpoint precision.

The world’s foremost central bank has been struggling to maintain its sway over the markets too.

Today, was an opportunity for Powell to exorcise many of its demons including the 2019 reversal, insistence on ‘transitory’, the ill-timed Average Inflation Targeting policy and near limitless stimulus amid the pandemic.

He chose to talk tough on inflation with a view to restoring the Fed’s credibility, a central piece in conducting effective monetary policy and managing public expectations.

Despite being largely in line with expectations in spirit, the market appears to have focused on the expected hardship for homeowners and small businesses over the coming year, and Powell’s comments on imminent slowing growth. Following this, the Dow plunged more than 1000 points. Other major stock indexes also fell between 3% and 4% today

But the Fed is credible

Optimistically, one could argue that the Fed’s restrictive policy has already begun to bear fruit, with July inflation dipping to the mid-8s.

However, one better month does not a successful policy make, and the FOMC would need to see much more evidence of a continued decline in prices before even considering any easing. In addition, it usually takes at least a few quarters for monetary policy to be transmitted throughout the economy.

Citi economist Andrew Hollenhorst noted that the softer reading may merely be a reaction to cuts in the Medicare program or falling equity prices, which may prove temporary at best.

Although the Governor spoke a tough game, this narrative was largely anticipated. It is yet to be seen if the FOMC can follow through once a deeper slowdown takes hold.

According to the CME FedWatch Tool, the latest data shows that after Jay Powell’s remarks there was a 58.5% probability of a third 75-bps hike, while a 41.5% chance of a 50-bps increase.

Interestingly, CME data also shows that there is a 100% chance of rate hikes continuing without pause until the July meeting in 2023, with a staggering 95.6% probability that the FOMC will hike to the 400 – 425 bps range between December 2023 and July 2023.  

In this regard, it would appear that the Fed’s messaging has been largely successful in restoring the Fed’s credibility by convincing the market of its steadfast intentions.

Source: CME

However, not everyone seems to be a believer in the robust portrayal of the Fed, with well-known commentators such as Peter Schiff anticipating a reversal at some point within the next few months.

Personal consumption expenditures

In its latest round of PCE data released by the Bureau of Economic Analysis earlier today, consumer spending edged 0.1% higher, although June data was revised slightly downwards.

The marginal improvement in spending was driven by external factors, specifically the end of the summer vacation driving season which likely freed up household budgets in response to easing gasoline prices.

Annual PCE rose to 6.3%, while the annual core PCE (minus food and energy), the Fed’s favoured inflation gauge, rose 4.6% YoY, easing slightly from the 4.8% recorded in June.

Monthly core PCE dropped sharply from 0.6% in June to 0.1% in the latest release.

Source: Investing.com

Despite the moderation in consumption, which makes up 70% of US economic activity, Q2 GDP stayed negative. It contracted 0.6% but improved substantially over the decline of 1.6% in Q1.

Although two consecutive quarters of economic contraction is a terrible sign, it must be noted that much of the fall in output was driven by supply-side shocks that saw inventories balloon. The higher stocks compressed intermediate goods production, subtracting an estimated 1.3% from overall GDP. (Intermediate goods are not counted as a part of GDP.)

Arguably, once supply chain disruptions are resolved, inventory flow should improve considerably. However, given the persistence of bottlenecks thus far, it is to be seen how quickly these can be untangled.

Consumer sentiment

The University of Michigan’s sentiment index for August was recorded at 58.2, above both preliminary estimates of 55.1 and considerably better than July data of 51.5.

Public estimates of 1-year ahead inflation were recorded at 4.8% versus 5.2% during the previous month, a welcome sign for the Fed.

Despite the improvement in outlook, Powell made it abundantly clear that this is not the time to pause rate hikes while invoking former Chairman Volcker, that the central bank must “break the grip of inflationary expectations.”

Supply-side

It is also worth noting that the Governor himself admitted that central bank policy is demand focused. With much of today’s inflation stemming from pandemic-era bottlenecks, and broken international supply chains, the Fed would likely need to hike rates substantially higher to bring down inflation meaningfully, with investors like Schiff feeling that the current efforts have been “wholly insufficient.” 

A recent study by the Federal Reserve Bank of New York estimated that 40% of prevailing inflation was supply-led.

Yet, contrary to suggestions of Stiglitz and Baker, the overarching emphasis appears to remain on the demand side interventions and perhaps not enough on easing supply side blockages.

The post Markets tumble following Governor Powell’s “We must keep at it” speech appeared first on Invezz.

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What Is Helicopter Money? Definition, Examples & Applications

What Is Helicopter Money?What’s a surefire way to encourage spending, and thus, spur growth? How about dropping money from the sky? As far-stretched…

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Former Fed Chair Ben Bernanke describes helicopter money as a “money-financed tax cut.”

Public DomainPictures from Pexels; Canva

What Is Helicopter Money?

What’s a surefire way to encourage spending, and thus, spur growth? How about dropping money from the sky?

As far-stretched as this idea seems, it actually has credence in schools of economic thought, particularly during times of recession or supply shocks. Helicopter money policies inject large sums into the monetary supply either through increased spending, direct cash stimulus, or a tax cut.

This policy has two goals in mind:

1. Expand the supply of money, which improves liquidity

2. Spur economic growth

Economists consider helicopter money to be an option oflast resort, after other measures, such as lowering interest rates or quantitative easing, have either failed to lift an economy out of recession or because interest rates are already as low as they can get. This conundrum is known as a liquidity trap, when the economy is at a standstill because people are hoarding their savings instead of spending.

Since the practice of helicopter money also tends to foster inflation, it typically works best during periods of deflation, when prices, along with overall monetary supply, contract without a corresponding decrease in economic output. One relevant example is the Great Depression. Bank runs resulted in a reduction in both the monetary supply as well as in the overall prices of goods and services.

It takes a whole lot to lift an economy from such dire straits, and in such cases, helicopter money can be a viable option.

Example of Helicopter Money: The COVID-19 Recession

At the onset of the COVID-19 pandemic, the stock market crashed, and GDP nosedived, thrusting the economy into recession. While the Federal Reserve slashed interest rates and instituted a new round of quantitative easing measures, the U.S. government responded with helicopter money.

  • Under the Coronavirus Aid, Relief, and Economic Security Act (CARES), the Trump administration authorized two rounds of direct-to-taxpayer stimulus payments, of $1200 and $600 per person, in 2020.
  • In addition, as part of the Paycheck Protection Program (PPP), payroll loans were offered to thousands of small businesses—and many were quickly forgiven. The Federal Reserve also provided increased liquidity to banks so that they could offer loans to businesses to help them stay afloat.

Who Coined the Term Helicopter Money?

In a 1969 paper entitled “The Optimum Quantity of Money,” economist Milton Friedman coined the term “helicopter drop” as a method to increase monetary policy during times of economic stress. He wrote:

“Let us suppose now that one day a helicopter flies over [the] community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”

The point was that the easiest way to lift an economy out of troubled times would be to give its population a direct injection of money. This would both expand the monetary supply and as well as increase the disposable income of the populace, resulting in greater consumer spending and increased economic output.

Who Made the Concept of Helicopter Money Popular?

In the 1990s, Japan was facing a deflationary crisis. Its central bank had implemented crippling rate hikes to calm its housing bubble—to disastrous economic effects.

In a 2002 speech to the National Economists Club, then-Fed Governor Ben Bernanke proposed that Japan’s central bank could have re-started the country’s economy through fiscal programs:

“A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money”

However, critics interpreted Bernanke’s words as his way of authorizing indiscriminate money printing, and the moniker “Helicopter Ben” took hold.

Bernanke would go on to chair the Federal Reserve from 2006–2014, and many of his theories were put into practice during the Financial Crisis of 2007–2008 and subsequent Great Recession. In fact, President Barack Obama credited Bernanke’s leadership during the crisis with averting a second Great Depression.

Helicopter Money vs. Quantitative Easing

While helicopter money and quantitative easing are both monetary policy tools, and both increase the monetary supply, they actually have different effects on a central bank’s balance sheet.

Through quantitative easing, a central bank buys trillions of dollars’ worth of long-term securities, such as Treasury securities, corporate bonds, mortgage-backed securities, or even stocks. This increases its reserves and expands its balance sheet. These purchases are also reversible, meaning the central bank can swap out its assets if it chooses.

Helicopter money, on the other hand, involves fiscal stimulus: distributing money to the public. It has no impact on a central bank’s balance sheet. The practice of helicopter money is irreversible, which means it is permanent—and cannot be undone.

In effect, helicopter money is less a long-term economic solution than it is a “one-time” or short-term operation.

Pros of Helicopter Money

In a 2016 blog post written for the think-tank Brookings Institution, Bernanke admitted that his helicopter money reference gave him some bad PR. In fact, he said that their media relations officer, Dave Skidmore, had warned Bernanke against using the term, saying “It’s just not the sort of thing a central banker says.”

But Bernanke insisted, and the moniker stuck.

To this day, Bernanke continues to believe in the practice of helicopter money as a tool the Fed could use in response to a slowdown in the economy. His successor at the Federal Reserve, Janet Yellen, agreed, stating that helicopter money “is something that one might legitimately consider.”

Other central bankers support the concept, particularly in Europe, which suffered from debt crises that mired its economy throughout the 2000s, igniting deflationary pressures like low demand and weak lending, and made recovery exceedingly difficult.

Cons of Helicopter Money

The biggest drawback of helicopter money is the inflation it tends to ignite. And since inflation is notoriously difficult to manage, once the inflationary fires have been stoked, what’s to prevent them from growing out of control—and fostering hyperinflation? That’s what happened in countries like Argentina and Venezuela, when their central banks printed money and gave it to their governments, who in turn gave it to the people. Inflation surged.

Helicopter money also leads to weakened currencies, because as more and more money is printed, its value decreases significantly. It could also deter currency traders from making long-term investments if the practice is prolonged.

Clearly, helicopter money is not a practice a central bank should undertake lightly.

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Arsenal’s $55.9M Loss An Improvement Over Previous Fiscal Year

Arsenal took a heavy loss but saw reasons for optimism.
The post Arsenal’s $55.9M Loss An Improvement Over Previous Fiscal Year appeared first on Front…

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As a team in transition, Arsenal saw some losses in its last`fiscal year — but also saw signs of hope.

The Premier League team took an operating loss of $55.9 million in the fiscal year ending May 2022.

  • That figure was a significant improvement on last year’s $131.9 million loss.
  • The team saved around $39 million in wages compared to the previous year.
  • But broadcasting revenue dropped from $225 million to $178 million.

Arsenal benefitted from the lifting of pandemic restrictions, with matchday revenue rising by around $51.6 million to $453.7 million.

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Streak Snapped

The club failed to qualify for any European competitions in the 2020-21 season for the first time since 1994-95, which led to heavy spending on player contracts. 

“This investment recognises that the Club has not been where it wanted to be in terms of on-field competitiveness and that, as a minimum, qualification for UEFA competition needed to be regained, as a prerequisite to re-establishing a self-sufficient financial base,” the club wrote.

Arsenal credited owners Kroenke Sports & Entertainment for its willingness to invest in the team.

The move has borne fruit this season with Arsenal’s return to the Europa League, the second-tier competition to the UEFA Champions League. The team has already earned $8.4 million for its appearance there, with total potential earnings up to $22.1 million.

The post Arsenal’s $55.9M Loss An Improvement Over Previous Fiscal Year appeared first on Front Office Sports.

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FDA’s drug shortages leader wants companies to start reporting increases in demand

It is no secret that drug shortages have been prevalent in 2022. Several major drug products, such as amoxicillin and Adderall, have been in short supply…

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It is no secret that drug shortages have been prevalent in 2022. Several major drug products, such as amoxicillin and Adderall, have been in short supply for several months and have led to members of Congress applying pressure on the FDA and HHS to resolve the situation.

Valerie Jensen

Speaking at a webinar hosted by the Alliance for a Stronger FDA, Valerie Jensen, the associate director of the FDA’s Drug Shortage Staff, noted both the rise in quality-related issues and increased demand for some products. She called on companies to report such demand increases, even though they are not currently required to do so.

During the Covid-19 pandemic, she said, the agency has seen new challenges mainly related to these increases in demand.

“During the pandemic as well, we had competition on manufacturing lines and that’s still occurring due to vaccine production and other Covid products,” Jensen said. “So, the same products are being made on those lines that are making the vaccines and Covid-related products, and then that creates a competition situation.”

Jensen added that an increase in demand for manufacturing commodities due to large-scale vaccine production is also leading to shortages. Items such as glass, filters and vial hoppers are in short supply. And now the increased demand is centered around the increase in drugs to counter respiratory illnesses.

She said the physical number of drug shortages currently sits at 123, which is “a little above normal,” but there have been around 100 shortages at any given time over the past seven years. Some of those can be chalked up to companies not producing the volumes required to meet market demand. She also added that there were 38 new shortages in 2021, but the FDA is still dealing with them this year.

For some temporary solutions, Jensen said that she has been coordinating with international regulatory authorities more often, to find out what is being marketed and to see if they can import a drug in short supply in the US. She is also coordinating experts to try to mitigate the situation, providing the public with widely available information as well as expediting the review of anything that manufacturers need to boost supplies.

However, Jensen said that the increase in the demand for drugs is not something that will be going away anytime soon.

“One thing that we really see going forward are these demand increases, this is something that is fairly new to us. It’s something that we’re looking at closely,” she said. “We would really want companies to inform us if they’re seeing spikes in demand because that’s currently not required.”

While producers do need to let the FDA know of supply disruption, companies do not need to let the FDA know of spikes in demand, and Jensen would like to see this changed. Also, she would like to apply different uses for supply chain data to look for signals or patterns and ultimately predict shortages.

Jensen added that in some cases it is impossible to prevent a shortage, but she stresses that better notification of when companies are seeing a spike in demand can be a key solution:

In those cases, when we can prevent (a shortage), we are using those same tools to prevent it. So, we’re expediting review, we’re looking at potential ways that we can use flexibility to allow a product to be on the market while the company fixes a problem. All of those tools are really the same for prevention and mitigation. But I think that really the key is early notification. The earlier companies let us know about an issue the earlier we can deal with it.

With the uptick in respiratory illnesses and shortages of drugs such as amoxicillin, Jensen noted that it’s a matter of reaching out and monitoring the market to see what manufacturers are contending with. Also, Jensen will look to work with pharmacy associations and other trade groups to see what is occurring at the pharmacy level and then “put all of those pieces together” to try and help end the shortage.

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