Fed officials tussle over practical meaning of new inflation policy

By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) – Federal Reserve policymakers on Friday began fleshing out what their new tolerance for inflation will mean in practice, an issue critical to how investors and households reshape their own outlooks even if it may not be relevant to any immediate decisions by the U.S. central bank.

The new policy, laid out in a strategic document last month and incorporated into a policy statement issued on Wednesday, pledges to keep interest rates near zero until inflation has hit the Fed’s 2% target and is on track “to moderately exceed” it “for some time.”

As it stands, with the coronavirus pandemic sapping demand, leaving millions of Americans unemployed, and threatening the survival of entire industries, inflation is not seen as the core risk. Economic projections released by the Fed this week show inflation only reaching 2% by the end of 2023, with any shift towards tighter monetary policy likely years down the road.

But how the Fed’s new language is interpreted by the central bank’s five current Washington-based governors and 12 regional bank presidents will be central to whether bond markets, stock investors and even consumers see the new approach as likely to be effective, and start behaving in a way that actually helps push inflation higher.

After years of weak inflation, that is the Fed’s hope. It is based on fears of a Japanese-style low inflation rut that can have its own damaging effects over time, and Fed officials on Friday started to outline their views of how to proceed.

Atlanta Fed President Raphael Bostic said, for example, that he’d be paying closer attention to how fast inflation rises rather than to its quarter-to-quarter level in implementing the new approach.

In an interview on Bloomberg Television, Bostic said if inflation went up to 2.3% but appeared stable “that would be fine … By contrast if we were at 2.2 and the next quarter at 2.4 and then at 2.6, that trajectory would give me concern” and perhaps require efforts to cool the economy.

‘GHOST STORIES’

Minneapolis Fed President Neel Kashkari, in contrast, laid out a more open-ended view in written comments describing why he dissented against the rate-setting Federal Open Market Committee’s policy statement on Wednesday.

The Fed, he felt, was setting itself up to make the same mistake it has in the past of reacting too quickly to inflation “ghost stories” and risked nipping off job growth too soon.

He said the Fed instead should switch its focus to core inflation, a slower moving variable that excludes volatile commodity prices, and ensure that it reached 2% on a “sustained basis.”

“I would have preferred the Committee make a stronger commitment to not raising rates until we were certain to have achieved our dual mandate objectives,” of maximum employment consistent with stable prices, Kashkari said in an essay.

A second dissent from Dallas Fed President Robert Kaplan argued the central bank should keep its options open to raise rates sooner if needed – a sign of the broad debate now taking place over just what the new framework will mean in practice.

Critics say they feel the Fed’s new approach rings hollow without strong measures to back it up and produce the higher inflation they seek, such as more aggressive bond-buying.

But St. Louis Fed President James Bullard said inflation may move higher on its own if, as he suspects, the economic recovery gains traction at a time when global supply chains are being reorganized, monetary policy is loose, and governments are issuing record levels of debt to finance pandemic-related spending.

“A lot of people on Wall Street are saying ‘you could not hit 2%, how are you going to have inflation above 2%?,'” Bullard said in webcast remarks to a Washington University in St. Louis forum.

“I think we are at a moment where you may see some inflation … You have got more relaxed central banks … You have got huge fiscal deficits which historically have been a catalyst for inflation. And you have possibly bottleneck-type pressures.”

(Reporting by Howard Schneider and Ann Saphir; Editing by Paul Simao)

U.S. weekly jobless claims remain perched at higher levels; housing marches on

By Lucia Mutikani

WASHINGTON (Reuters) – The number of Americans filing new claims for unemployment benefits fell less than expected last week and applications for the prior period were revised up, suggesting the labor market recovery had shifted into low gear amid fading fiscal stimulus.

The weekly jobless claims report from the Labor Department on Thursday, the most timely data on the economy’s health, also showed nearly 30 million people were on unemployment benefits at the end of August.

Signs the labor market was stalling came a day after the Federal Reserve vowed to kept interest rates near zero for a long time. The U.S. central bank noted that the COVID-19 pandemic “will continue to weigh on economic activity” in the near term and “poses considerable risks to the economic outlook over the medium term.” Fed Chair Jerome Powell said more fiscal support was likely to be needed for the economy.

Initial claims for state unemployment benefits fell 33,000 to a seasonally adjusted 860,000 for the week ended Sept. 12. Data for the prior week was revised to show 9,000 more applications received than previously reported. Economists polled by Reuters had forecast 850,000 applications in the latest week.

Un-adjusted claims dropped 75,974 to 790,021 last week. Economists prefer the un-adjusted claims number given earlier difficulties adjusting the claims data for seasonal fluctuations because of the economic shock inflected by the coronavirus crisis. Despite last week’s big drop in un-adjusted claims, they remain extraordinarily high.

A total 658,737 applications were received for the government-funded pandemic unemployment assistance last week. The PUA is for the self-employed, gig workers and others who do not qualify for the regular state unemployment programs. Altogether, 1.45 million people filed claims last week.

The claims data added to reports this week showing a slowdown in retail sales and production at factories in August.

U.S. stocks opened lower. The dollar was steady against a basket of currencies. U.S. Treasury prices were higher.

STALL SPEED

After declining from a record 6.867 million at the end of March as businesses reopened after being shuttered to stem the spread of the coronavirus, claims have flattened, with layoffs spilling over to industries that were not initially impacted by the mandated closures.

A program to help businesses with wages expired in August, while $25 billion in government assistance for airlines’ payroll expires this month. Last week’s claims covered the period during which the government surveyed businesses for the non-farm payrolls component of September’s employment report.

The economy created 1.371 million jobs in August after adding 1.734 million in July. About 10.6 million of the 22.2 million jobs lost at the depth of the coronavirus crisis have been recovered.

While other sectors of the economy are losing steam, the housing market continues to power ahead, thanks to record-low interest rates and a migration to suburbs and low-density areas, spawned by the pandemic. Unemployment has disproportionately affected low-wage workers, who are typically renters.

A separate report from the Commerce Department on Thursday showed singe-family home building, which accounts for the largest share of the housing market, increased 4.1% to a seasonally adjusted annual rate of 1.021 million units in August.

Further gains are likely, with building permits for single-family housing units accelerating 6.0% to a rate of 1.036 million units. A 22.7% tumble in starts for the volatile multi-family housing segment, however, led to a 5.1% drop in overall home building to a rate of 1.416 million units last month.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

U.S. regulator calls climate change a systemic risk

(Reuters) – Climate change poses a “slow motion” systemic threat to the stability of the U.S. financial system requiring urgent action from financial regulators, including the Federal Reserve and the Securities Exchange Commission.

That is one of the findings of a landmark report commissioned by the U.S. Commodity Futures Trading Commission and put together by a panel convened about 10 months ago by Rostin Behnam, one of two Democrats on the five-member CFTC.

The panel’s 35 members, including representatives of Goldman Sachs Group Inc., the Dairy Farmers of America, and The Nature Conservancy among others, approved the report on Tuesday.

“The physical impacts of climate change are already affecting the United States, and … the transition to net-zero emissions may also impact many segments of the economy,” the 196-page report said.

“Both physical and transition risks could give rise to systemic and sub-systemic financial shocks, potentially causing unprecedented disruption in the proper functioning of financial markets and institutions.”

A sudden shift in perceptions of the risks from frequent wildfires and intense hurricanes could bring a sudden drop in asset prices, for instance, that cascades through a community and spill more broadly into markets, the report said.

And because the COVID-19 pandemic has depleted household wealth, government budgets and business balance sheets, the economy is more vulnerable than before, it added, “increasing the probability of an overall shock with systemic implications.”

The report’s release comes less than two months ahead of a national election that pits Republican President Donald Trump, who says climate change is a hoax, against Democratic challenger Joe Biden, who calls climate change an “existential threat.”

Its first recommendation is to “establish a price on carbon” that is hefty enough to push businesses and markets to cut use of carbon dioxide-producing fuels such as oil and gas. Taxing carbon would require action by Congress.

But the report’s dozens of other recommendations amount to a call for a sweeping rewrite of financial market rules and norms that could go forward without any new laws and no matter who wins the presidency.

Among the proposals: requiring banks to address climate-related financial risks and listed companies to disclose emissions, and to stress test community banks for their resilience to climate change.

Regulators in Europe have worked for years on efforts to calibrate and mitigate climate risks to financial markets.

Regulators in the United States, where politicians regularly cast doubt on the fact that burning fossil fuels is affecting the earth’s climate, have lagged far behind on such work.

Only recently has the Federal Reserve begun to acknowledge the potential for climate change to destabilize the financial system, and to think about possible responses.

The report urges financial authorities to integrate climate risk “into their balance sheet management and asset purchases, particularly relating to corporate and municipal debt.”

It also calls for them to do research into the financial implications of climate change and join international climate-focused groups, such as the Network for Greening the Financial System, all of which appear to specifically apply to the Fed.

(Reporting by Ann Saphir in Berkeley, Calif.; Editing by Clarence Fernandez)

Powell: Jobs recovery faces ‘long tail’ of a couple of years

(Reuters) – Despite “a lot of strength in the economy,” millions of U.S. workers displaced from restaurant, travel, and similar jobs will struggle to find new employment and need steady support from the government, Federal Reserve Chair Jerome Powell said on Thursday, warning a full jobs recovery could take years.

“There is a particular part of the economy which involves getting people together and feeding them, flying them around the country, having them sleep in hotels, entertaining them,” Powell said in online remarks to the Fed’s annual economic symposium. “That part of the economy will find it very difficult to recover…That is millions of people who are going to struggle to find work. We need to stay with those people….We are looking at long tail of probably a couple of years at least.”

(Reporting by Howard Schneider; Editing by Chizu Nomiyama)

U.S. unfreezing Venezualan assets to help opposition fight COVID-19: Guaido

CARACAS (Reuters) – Venezuela’s opposition said on Thursday the United States has granted it access to millions of dollars of frozen Venezuelan government funds to support efforts to combat the spread of COVID-19 in the country.

The U.S. Treasury Department had approved the release of the funds, the opposition said in a statement without specifying the total amount.

The statement said part of the released funds would go to pay some 62,000 health workers $300. During a live appearance on Twitter on Thursday night, opposition leader Juan Guaido said health workers could register accounts to receive payments of $100 a month starting Monday.

Healthcare workers in Venezuela can earn as little as $5 a month.

Guaido first announced the additional support for healthcare workers four months ago, but distribution required a permit from the Office of Foreign Assets Control (OFAC), as the frozen funds were held by the New York Federal Reserve.

The opposition plans to distribute the funds using AirTM, a digital payment platform, but on Thursday, the website was blocked in Venezuela.

“You have to be very bad to block an account for men and women who are giving everything with conviction to protect our people when they are going to receive a bonus,” said Guaido.

The opposition leader added healthcare workers would be sent a manual with the steps to download a virtual private network (VPN) so they could circumvent the restrictions. AirTM also tweeted instructions how to use a VPN.

Guaido has been recognized by more than 50 countries as Venezuela’s rightful president after assuming an interim presidency in 2019 on the grounds that Maduro’s 2018 re-election was fraudulent.

In July, the opposition obtained permission to distribute $17 million in funds frozen in the United States that would be channeled through international health organizations to purchase supplies for medical workers.

The license also approves another $4.5 million to support Venezuelans at risk of death, an opposition press release said.

Venezuela is suffering economic collapse and its crumbling health system has so far registered 37,567 cases of COVID-19 and 311 deaths, although experts say the number is likely to be higher due to widespread insufficient testing.

(Reporting by Sarah Kinosian; Editing by Simon Cameron-Moore)

Federal Reserve announces post-stress test capital ratios for large banks

By Pete Schroeder

WASHINGTON (Reuters) – The U.S. Federal Reserve announced on Monday how much each large bank that underwent its 2020 stress tests will have to hold in additional capital.

The results mark the first time the Fed has given out custom capital requirements for each bank under its new “stress capital buffer,” and takes effect on Oct. 1. Goldman Sachs and Morgan Stanley were ordered to hold the most capital of the 34 firms tested, with ratios of 13.7% and 13.4% respectively.

The custom capital requirements follow stress test results released in June, which found that banks would weather heavy capital losses should the economic fallout from the coronavirus pandemic drag on or worsen. The Fed ordered banks to cap dividend payments and bar share repurchases until at least the fourth quarter to ensure they have sufficient cushions.

The new capital ratio combines the minimum capital requirements of 4.5% and the new “stress capital buffer,” which is determined by how each bank fared under a hypothetical severe economic downturn. That buffer is at least 2.5%, but was highest for Deutsche Bank’s U.S. operations at 7.8%.

The nation’s largest banks also face an additional capital surcharge for their predominant role in the financial system, ranging from 1% to 3.5% for JP Morgan Chase, the nation’s biggest bank.

The Fed also announced that it had reaffirmed the stress test results for five banks that requested reconsideration: BMO Financial Corp., Capital One Financial Corp, Citizens Financial Group Inc, Goldman Sachs and Regions Financial Corp. The Fed said the additional review found its stress test models worked as intended and there were no errors.

(Reporting by Pete Schroeder; Editing by Chizu Nomiyama and Jonathan Oatis)

Trump signs coronavirus relief orders after talks with Congress break down

By Jeff Mason

BEDMINSTER, N.J. (Reuters) – President Donald Trump signed executive orders on Saturday partly restoring enhanced unemployment payments to the tens of millions of Americans who lost jobs in the coronavirus pandemic, as the United States marked a grim milestone of 5 million cases.

Negotiations broke down this week between the White House and top Democrats in Congress over how best to help Americans cope with the heavy human and economic toll of the crisis, which has killed more than 160,000 people across the country.

Trump said the orders would provide an extra $400 per week in unemployment payments, less than the $600 per week passed earlier in the crisis. Some of the measures were likely to face legal challenges, as the U.S. Constitution gives Congress authority over federal spending.

“This is the money they need, this is the money they want, this gives them an incentive to go back to work,” the Republican president said of the lower payments. He said 25% of it would be paid by states, whose budgets have been hard hit by the crisis.

Republicans have argued that higher payments were a disincentive for unemployed Americans to try to return to work, though economists, including Federal Reserve officials, disputed that assertion.

Trump’s move to take relief measures out of the hands of Congress drew immediate criticism from some Democrats.

“Donald Trump is trying to distract from his failure to extend the $600 federal boost for 30 million unemployed workers by issuing illegal executive orders,” said Senator Ron Wyden, the top Democrat on the Senate Finance Committee. “This scheme is a classic Donald Trump con: playacting at leadership while robbing people of the support they desperately need.”

The Democratic-majority House of Representatives passed a coronavirus support package in May which the Republican-led Senate ignored.

Democratic presidential candidate Joe Biden called the orders a “series of half-baked measures” and accused Trump of putting Social Security “at grave risk” by delaying the collection of payroll taxes that pay for the program.

Trump also said he was suspending collection of payroll taxes, which pay for Social Security and other federal programs, an idea that he has repeatedly raised but has been rejected by both parties in Congress. He said the suspension would apply to people making less than $100,000 per year.

His orders would also stop evictions from rental housing that has federal financial backing and extend zero percent interest on federally financed student loans.

Trump initially played down the disease’s threat and has drawn criticism for inconsistent messages on public health steps such as social distancing and masks.

He spoke to reporters on Saturday at his New Jersey golf club, in a room that featured a crowd of cheering supporters.

FAR APART

Nearly two weeks of talks between White House officials and congressional Democrats ended on Friday with the two sides still about $2 trillion apart.

House Speaker Nancy Pelosi had pushed to extend the enhanced unemployment payments, which expired at the end of July, at the previous rate of $600 as well as to provide more financial support for city and state governments battered by the crisis.

Pelosi and Senate Minority Leader Chuck Schumer on Friday offered to reduce the $3.4 trillion coronavirus aid package that the House passed in May by nearly a third if Republicans would agree to more than double their $1 trillion counteroffer.

White House negotiators Treasury Secretary Steven Mnuchin and Chief of Staff Mark Meadows rejected the offer.

The $1 trillion package that Senate Majority Leader Mitch McConnell unveiled late last month ran into immediate opposition from his own party, with as many as 20 of the Senate’s 53 Republicans expected to oppose it.

Trump did not rule out a return to negotiations with Congress.

“I’m not saying they’re not going to come back and negotiate,” he said on Saturday. “Hopefully, we can do something with them at a later date.”

Democrats have already warned that such executive orders are legally dubious and would likely be challenged in court, but a court fight could take months.

Trump has managed to sidestep Congress on spending before, declaring a national emergency on the U.S.-Mexico border to shift billions of dollars from the defense budget to pay for a wall he promised during his 2016 election campaign.

Congress passed legislation to stop him, but there were too few votes in the Republican-controlled Senate to override his veto – a scenario that would likely play out again with less than 90 days to go before the Nov. 3 presidential election.

(Reporting by Jeff Mason, additional reporting by Raphael Satter, Brad Brooks, and Rich McKay; Writing by Scott Malone; Editing by Diane Craft, Daniel Wallis, Jonathan Oatis and Sonya Hepinstall)

What you need to know about the coronavirus right now 5-19-20

(Reuters) – Here’s what you need to know about the coronavirus right now:

On the economy, “medical metrics” rule for now

U.S. Treasury Secretary Steven Mnuchin and Federal Reserve Chair Jerome Powell will testify on Tuesday before the Senate Banking Committee and face questions about their plans keep the world’s largest economy afloat and missteps in rolling out some $3 trillion in aid so far.

Two months into the pandemic, many analysts have concluded that U.S. policy has at best fought back worst-case outcomes on both the health and economic front.

Powell has said he sees the likely need for up to six more months of government financial help for firms and families. With regular data on the economy at best volatile and at worst outdated when it comes out, he said “medical metrics” were the most important signs to watch right now.

The presidential pill

Donald Trump surprised many on Monday by revealing that he is taking hydroxychloroquine as a preventative medicine against the coronavirus – despite warnings about the malaria drug.

“I’ve been taking it for the last week and a half. A pill every day,” he told reporters. “All I can tell you is so far I seem to be OK.”

Weeks ago Trump had promoted the drug as a potential treatment based on a positive report about its use against the virus, but subsequent studies found it was not helpful. The Food and Drug Administration issued a warning about it.

Glimmer of hope

That overshadowed news that an experimental COVID-19 vaccine made by Moderna Inc produced protective antibodies in a small group of healthy volunteers, according to very early data released by the biotech company on Monday.

The vaccine has the green light to start the second stage of human testing. In this Phase II trial to test effectiveness and find the optimal dose, Moderna said it will drop plans to test a 250 mcg dose and test a 50 mcg dose instead.

Reducing the dose required to produce immunity could help spare the amount of vaccine required in each shot, meaning the company could produce more of the vaccine.

Eating with your mask on

Israeli inventors have developed a mask with a remote control mouth that lets diners eat without taking it off, which they say could make a visit to a restaurant less risky.

A squeeze of a lever opens a slot in the front of the mask so food can pass through.

The process could get messy with ice cream or sauces, but more solid morsels can be gobbled up a la Pac-Man in the arcade game.

(Compiled by Karishma Singh and Mark John; Editing by Giles Elgood)

Seven weeks into coronavirus lockdowns, Fed has a new, darker message

By Heather Timmons

(Reuters) – One Thursday morning seven weeks ago, Federal Reserve Chair Jerome Powell made a rare appearance on NBC’s “Today Show” to offer a reassuring message to Americans dealing with economic fallout from measures to contain the coronavirus outbreak.

There is “nothing fundamentally wrong with our economy,” Powell told viewers while pointing out the U.S. central bank’s outsized ability to take on lending risk and provide a financial “bridge” over the temporary economic weakness the country was experiencing.

Speaking after the Fed cut interest rates to near zero and rolled out a plan to backstop credit for small- and mid-sized companies, Powell emphasized the first order of business was to get the virus under control.

“The sooner we get through this period and get the virus under control, the sooner the recovery can come,” said Powell, echoing remarks made the day before by Anthony Fauci, a top U.S. health official helping to coordinate the federal government’s response to the coronavirus crisis.

At the time, Powell said he expected economic activity would resume in the second half of the year, and maybe even enjoy a “good rebound.”

But on Wednesday, he offered a much more sober outlook.

In an interview webcast by the Peterson Institute for International Economics, Powell warned  of an “extended period” of weak economic growth, tied to uncertainty about how well the virus could be controlled in the United States. “There is a sense, growing sense I think, that the recovery may come more slowly than we would like,” he said.

Fauci, the director of the National Institute of Allergy and Infectious Diseases, was similarly somber when he told lawmakers earlier this week that the country was by no means in “total control” of the outbreak.

“There is a real risk that you will trigger an outbreak that you may not be able to control and, in fact, paradoxically, will set you back, not only leading to some suffering and death that could be avoided, but could even set you back on the road to try to get economic recovery,” Fauci said.

The pandemic has killed more than 83,000 people in the United States so far , and many epidemiological models now point to a death toll that will surpass 100,000 in a matter of weeks.

Overall new cases of the virus continue to climb as well, as states end lockdowns and reopen local economies without the widespread, uniform testing and contact tracing policies that helped stamp out initial outbreaks in South Korea and Germany.

UNCERTAIN FUTURE

Powell’s remarks on Wednesday mirrored warnings this week from a clutch of regional Fed presidents who outlined the country’s uncertain future.

U.S. central bank officials, and especially the Fed chief, historically choose their words carefully, to avoid alarming or exciting investors or causing swings in financial markets, making their universally dour outlook more remarkable.

St. Louis Fed President James Bullard said the situation could lead to a new Great Depression, with millions of so-far temporary job losses becoming permanent, and businesses failing “on a grand scale.”

“We have to get better at this and get more risk-based with our health policy,” Bullard said.

The U.S. economy can return to growth in the second half of the year, Cleveland Fed President Loretta Mester said on Tuesday, with more testing and contact tracing. If that happens, she said, “as some of the stay-at-home restrictions are lifted, the economy will begin to grow again in the second half of this year and unemployment will begin to move down.”

However, a more pessimistic scenario, in which a surge in infections requires businesses to shut down again or the crisis leads to more bankruptcies or instability in the banking sector, is “almost as likely,” she said.

(Reporting by Howard Schneider, Ann Saphir, Jonnelle Marte, and Heather Timmons; Writing by Heather Timmons; Editing by Dan Burns and Paul Simao)

Fed says backstop for small business loans fully operational

WASHINGTON (Reuters) – The Federal Reserve’s program to back emergency government loans to small businesses is “fully operational,” the U.S. central bank said on Thursday, a boost to banks as they await a possible expansion to the total amount of funds they will be allowed to disburse to help companies through the coronavirus crisis.

The Fed’s program is designed to make it easier for banks to offer loans under the $350 billion Paycheck Protection Program run by the Small Business Administration (SBA) by extending credit to financial institutions that make them, using the loans as collateral.

There are no fees for using the facility but the Fed said it will charge banks a 0.35% interest rate.

“Supplying financial institutions with additional liquidity will help increase their capacity to make PPP loans,” the Fed said.

The SBA has already allocated more than 1.6 million loans, which have the potential to be forgiven, to small businesses in all 50 states. These account for more than $338 billion of the initial $350 billion, since the initial program passed by Congress was launched less than two weeks ago.

With funds set to be exhausted shortly, U.S. Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza on Wednesday urged Congress to approve an additional $250 billion in funds. Democrats have said they are in favor, but only if there are additional safeguards to ensure that credit is reaching businesses in underserved communities that don’t have strong pre-existing relationships with banks.

Data released on Tuesday showed that the construction, professional services and manufacturing sectors so far are among those topping the list of recipients, although the program has been hampered by slow disbursement of the actual funds and criticism that it shows preference to those who are existing business customers of participating lenders.

The Fed’s own program does not expand the amount available but it does allow banks to move loans off their balance sheets more quickly, freeing up capital to lend further if Congress adds more to the pot.

(Reporting by Lindsay Dunsmuir and Ann Saphir; Editing by Chizu Nomiyama, Jonathan Oatis and Bernadette Baum)