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The Fed Is Winging It: A 75 Basis Point Hike “Seemed like the Right Thing”

The Federal Reserve’s Federal Open Market Committee (FOMC) today announced an increase of 75 basis points to the target federal funds rate, raising the…

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The Federal Reserve's Federal Open Market Committee (FOMC) today announced an increase of 75 basis points to the target federal funds rate, raising the rate to 1.75 percent from 1 percent. June's meeting today was the third meeting this year at which the FOMC has raised rates. Coming into the March meeting this year, however, the FOMC had not raised the target rate since March 2020, even though price inflation began to accelerate during the second half of 2021.

Today's 75 basis point increase is the largest increase since late 1994, when the FOMC raised the target rate from 4.75 percent to 5.5 percent.

Notably, however, this increase comes mere weeks after the Fed chair Jerome Powell slapped down the idea of a 75 basis point increase in June. As Reuters reported on May 4, Powell had insisted "a 75 basis point increase is not something that the committee is actively considering."

That didn't last long.

The fact that the Fed was forced to hike the target rate by more than it had suggested was even possible earlier in the year is a reminder that the Fed and its economists are simply in a reactionary mode when it comes to the US economy's problem with mounting price inflation.

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As even Powell admitted during today's press conference, the Fed was surprised by how high price inflation has grown. The Fed then had to pivot in order to answer calls that the central bank "do something" about price inflation.

But when it comes to the Fed's decisions about where to set target rates, it is increasingly obvious there is no model. The "plan," to the extent one exists at all, amounts to "let's see how bad inflation is, and then we'll pick a target rate and hope that solves the problem."

How the Fed Is Framing Its Response to High Inflation

One should never expect a frank assessment of economic conditions from the Fed. It will always lean toward boosterism rather than accuracy or honesty. But conditions have apparently worsened to such a degree that even the Fed was forced to take a more pessimistic view in its new statement—compared to last month. Specifically, the Fed did not repeat an assessment from last month that household spending and investment "remained strong." Moreover, the FOMC's release begins with a statement that economic activity "appears" to have improved since the first quarter:

Overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low.

Note that the Fed continues to cling to jobs data as its primary evidence that the economy is robust. This, however, comes in spite of the fact that GDP growth was negative during the first quarter of the year and that the Atlanta Fed now predicts GDP will grow 0 percent in the second quarter. Apparently, at Powell's Fed, an economy with negative to zero growth is a "strong" economy. Moreover, numerous indicators point to recession. The yield curve is flattening, retails sales are down, the S&P 500 is in bear territory, and home sales are falling off as mortgage rates rise. Consumer credit is rising to historic highs as the savings rate collapses. But at the Fed, they showcase an economic indicator that trails most others: employment. In other words, the Fed is keeping its eye fixed on the rearview mirror in order to sing the praises of the Biden economy. 

credit

The Fed's release then goes on to blame the pandemic, Russia, and China for price inflation. Needless to say, there is no mention of the massive monetary inflation created by the Fed over the past decade.

Nonetheless, after last week's announcement of inflation rising near a forty-one-year high—with year-over-year growth at 8.6 percent—the Fed clearly believed it had to do something. That "something" was raising the target rate by 75 basis points rather than the 50 basis points that Powell had long insisted would be sufficient.

But why 75? When asked during the press conference to quantify how 75 basis points is better than 50, Powell had no answer beyond saying the committee simply decided to speed up the time frame of rate increases. The standard employed for coming to this conclusion, according to Powell himself, came down to "75 [basis points] seemed like the right thing at this meeting." Needless to say, this didn't answer the question of what we are to expect from that additional 25 basis points.

Moreover, although many Fed watchers are now framing Fed policy as exceptionally hawkish, Powell himself stated that in his opinion, "right now our policy rate is well below neutral" and that a target rate of 1.75 percent is only "moderately restrictive."

If a forty-year high in inflation calls for only moderately restrictive policy that remains below neutral, it's difficult to imagine how much inflation will be necessary before the Fed regards truly restrictive policy as actually necessary.

On this last question, the Fed itself offers no real plan or guidance. According to the so-called dot plot, Fed members have suggested that the target rate may reach 3.8 percent next year. But will that be "enough" to truly rein in price inflation? When asked about this, Powell responded, "We'll know when we get there."

Low Interest Rates Are Still Needed to Suppress Interest on the Debt

In practice, however, it is very unlikely the Fed will allow the target rate to rise much above 3.5 percent, no matter what. With federal debt still exploding, allowing rates to double from today's rate would drive up interest on Treasurys and place an enormous burden on federal budgets in terms of debt service. This would require very large budget cuts to popular programs. So far, it's hard to believe the Fed will abandon its current de facto policy of supporting federal deficit spending through suppressing interest rate growth.

The Fed also continues to take an ultrasafe approach when it comes to Wall Street and employment. Powell at today's meeting explicitly claimed the Fed is still trying to avoid a recession. In other words, inflation is still preferable to recession. That suggests we should continue to expect inflation rates well in excess of the Fed's arbitrary 2 percent target.

If the Fed continues as it's going, we'll need to get used to declining real wages and near-zero real growth for a while. 

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China Shortens Travel Quarantine In COVID Zero Shift

China Shortens Travel Quarantine In COVID Zero Shift

China unexpectedly slashed quarantine times for international travelers, to just one…

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China Shortens Travel Quarantine In COVID Zero Shift

China unexpectedly slashed quarantine times for international travelers, to just one week, which suggests Beijing is easing COVID zero policies. The nationwide relaxation of pandemic restrictions led investors to buy Chinese stocks.

Inbound travelers will only quarantine for ten days, down from three weeks, which shows local authorities are easing draconian curbs on travel and economic activity as they worry about slumping economic growth sparked by restrictive COVID zero policies earlier this year that locked down Beijing and Shanghai for months (Shanghai finally lifted its lockdown measures on May 31). 

"This relaxation sends the signal that the economy comes first ... It is a sign of importance of the economy at this point," Li Changmin, Managing Director at Snowball Wealth in Guangzhou, told Bloomberg

At the peak of the COVID outbreak, many residents in China's largest city, Shanghai, were quarantined in their homes for two months, while international travelers were under "hard quarantines" for three weeks. The strict curbs appear to have suppressed the outbreak, but the tradeoff came at the cost of faltering economic growth. 

The announcement of the shorter quarantine period suggests a potentially more optimistic outlook for the Chinese economy. Bullish price action lifted CSI 300 Index by 1%, led by tourism-related stocks (LVMH shares rose as much as 2.5%, Richemont +3.1%, Kering +3%, Moncler +3%). 

"The reduction of travel restrictions will be positive for the luxury sector, and may boost consumer sentiment and confidence following months of lockdowns in China's biggest cities," Barclays analysts Carole Madjo wrote in a note. 

CSI 300 is up 19% from April's low, nearing bull market territory. 

Jane Foley, a strategist at Rabobank in London, commented that "this news suggests that perhaps the authorities will not be as stringent with Covid controls as has been expected." 

"The news also coincides with reports that the PBOC is pledging to keep monetary policy supportive," Foley pointed out, referring to Governor Yi Gang's latest comment. 

She said, "this suggests a potentially more optimistic outlook for the Chinese economy, which is good news generally for commodity exporters such as Australia and all of China's trading partners." 

Even though the move is the right step in the right direction, Joerg Wuttke, head of the European Chamber of Commerce in China, said, "the country cannot open its borders completely due to relatively low vaccination rates ... This, in conjunction with a slow introduction of mRNA vaccines, means that China may have to maintain a restricted immigration policy beyond the summer of 2023." 

Alvin Tan, head of Asia currency strategy in Singapore for RBC Markets, also said shortening quarantine time for inbound visitors shouldn't be a gamechanger, and "there's nothing to say that it won't be raised tomorrow." 

Tyler Durden Tue, 06/28/2022 - 07:38

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Economics

Energy Stocks Are Down, But Remain Top Sector Performer

High-flying energy shares have hit turbulence in recent weeks but remain, by far, the leading performer for US equity sectors so far in 2022, as of yesterday’s…

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High-flying energy shares have hit turbulence in recent weeks but remain, by far, the leading performer for US equity sectors so far in 2022, as of yesterday’s close (June 27), based on a set of ETFs. But with global growth slowing, and recession risk rising, analysts are debating if it’s time to cut and run.

The broad-based correction in stocks has weighed on energy shares lately. Energy Sector SPDR (XLE) has fallen sharply after reaching a record high on June 8. Despite the slide, XLE remains the best-performing sector by a wide margin year to date via a near-36% gain in 2022.

By contrast, the overall US stock market is still in the red via SPDR S&P 500 (SPY), which is down nearly 18% year to date. The worst-performing US sector: Consumer Discretionary Sector SPDR (XLY), which is in the hole by almost 29% this year.

The case for, and against, seeing energy’s recent weakness as a buying opportunity can be filtered through two competing narratives. The bullish view is that the Ukraine war continues to disrupt energy exports from Russia, a major source of oil and gas. As a result, pinched supply will continue to exert upward pressure on prices in a world that struggles to quickly find replacements for lost energy sources. The question is whether growing headwinds from inflation, rising interest rates and other factors will take a toll on global economic growth to the point the energy demand tumbles, driving prices down.

The market seems to be entertaining both possibilities at the moment and is still processing the odds that one or the other scenario prevails, or not. Meanwhile, energy bulls predict that the pullback in oil and gas prices is only a temporary run of weakness in an ongoing bull market for energy.

Goldman Sachs, in particular, remains bullish on energy and advises that the potential for more prices gains in crude oil and other products “is tremendously high right now,” according to Jeffrey Currie, the bank’s global head of commodities research. “The bottom line is the situation across the energy space is incredibly bullish right now. The pullback in prices we would view as a buying opportunity,” he says. “At the core of our bullish view of energy is the underinvestment thesis. And that applies more today than it did two weeks, three weeks ago, because we’ve just seen exodus of money from the space… investment continues to run from the space at a time it should be coming to the space.”

Meanwhile, a bit of historical perspective on momentum for all the sector ETFs listed above reminds that the trend direction remains bearish overall. But contrarians take note: the downside bias is close to the lowest levels since the pandemic first took a hefty bite out of market action back in March 2020 (see chart below). This may or may not be a long-term buying opportunity, but the odds for a bounce, however, temporary, look relatively strong at the moment.


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Economics

Five things you can do to help you have a more positive birth experience

Becoming a parent can be nerve-wracking – but there are many things you can do to feel more in control.

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Don't be afraid to make your preferences clear to your care provider. Syda Productions/ Shutterstock

Whether you’re a first time parent or have had children before, you’re probably willing to try anything to ensure you have the most positive birth experience you can. After all, the kind of birth experience you have can not only affect your own mental health, but can have an affect on parent-child bonding, as well as partner-to-partner relationships for years after giving birth.

It can be confusing to know what to expect or where to turn to for advice, especially as maternity services have changed due to falling staff numbers and the continued impact of COVID-19. But here are a few things you can do yourself as you navigate your maternity care, which may help you have a more positive birth experience:

1. Get educated

Studies have shown that signing up for antenatal classes can help reduce fear, depression and anxiety – both during pregnancy and after birth.

Typically, antenatal classes will help you understand what’s happening to your body during pregnancy and explain the birth process. They may also teach you coping strategies to help relax during labour, alongside guidance on caring for your new baby. Antenatal classes can also be a great way of meeting other parents going through the same thing as you.

Another option is creating a personalised care and support plan, which is offered by most NHS trusts in the UK. This is a tool you can use with your care providers to explore what’s important to you – and discuss what your range of options are, such as your preferred place of birth, or whether you prefer skin-to-skin contact with your baby immediately after birth.

Understanding what your body’s going through, and making a personalised plan for your birth, may help you feel more prepared and less anxious about what to expect.

2. Know your carers

Being cared for by one nominated midwife, or being assigned to a team of familiar midwives, is shown to be associated with better outcomes for you and your baby – including decreased chance of having a premature labour and lower likelihood of needing interventions (such as birth with the help of forceps). You’re also more likely to be satisfied with your overall experience.

When an allocated midwife is not an option this makes choosing the right birth partners crucial. They can not only offer you reassurance, encouragement and support but can be your advocate, help you try different positions in labour and help provide you with snacks and drinks. Most typically these would be trusted loved ones. But be aware that research shows birth partners may also feel anxious or overwhelmed at taking on this role, and may struggle with seeing a loved one in pain – so it’s important to be realistic about your expectations, and choose the right person. It may be the best birth partner for you is a close friend or relative.

3. Challenge care recommendations if you aren’t happy

There are likely to be many other options available to you – such as where you might give birth, or how you want to be cared for during labour.

During antenatal appointments be sure to pause, think and ask about benefits, risks and alternatives to the care being proposed. Research shows how important choice and personalised care are for expectant parents who want their voices and preferences to be acknowledged, and to receive consistent advice.

Expectant couple speak with female doctor in doctor's office.
Bringing a loved one or partner with you can make it easier to voice any concerns you may have. wavebreakmedia/ Shutterstock

If you have concerns over a suggestion your care providers have made or have questions, don’t be afraid to ask. Take your birth partner with you if you prefer, who can empower you to ensure your voice is heard. After all, care providers are duty bound to ensure you make fully informed choices.

4. Don’t always listen to your friends and family

Once people hear you have a baby on the way it seems everyone feels the need, without asking, to tell you the full (and often graphic) details of their own children’s birth.

But it’s perfectly acceptable to politely change the subject if you don’t want to listen, or if hearing these stories makes you nervous or worry. It’s also worth remembering that each person has a different labour and birth, even with their own children – so what was true for someone else is likely not to be the same for you. While it can be helpful for some people to debrief after the birth, it’s okay to avoid hearing this yourself if it makes your nervous, and maybe suggest they speak with a professional about their experience instead of telling you.

5. Visit your preferred place of birth

Many maternity units are now opening up their doors again to tours and informal visits – and those that aren’t are doing this virtually.

Becoming familiar with where you might give birth – even down to where you might park on the day – can help you feel more confident about giving birth. It may also remove some of the unknown, helping you regain a sense of control – which in itself is linked to a more positive birth experience.

For those planning a homebirth, speak to your midwife about how you can improve your space to facilitate the most safe and positive experience. For one of the most important days of your life, visualising where this will take place ahead of time can help you feel more confident and in control.

Ultimately, it’s important to remember that no one can predict exactly how your labour and birth journey will go. Even after heeding the above steps – there’s always a chance you may need to consider a plan B, C or even D. But no matter what, remember you’ve done your very best, and you’re not likely to repeat this exact experience the next time.

Claire Parker does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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