Year-end view for Fed policy rate rises again as recession risks remain – Reuters poll

By Prerana Bhat and Indradip Ghosh

BENGALURU (Reuters) – The U.S. Federal Reserve will lift interest rates higher by the end of this year than anticipated just a month ago, keeping alive already-significant risks of a recession, a Reuters poll of economists found.

While U.S. inflation, running at a four-decade high, may have peaked in March, the Fed’s 2% target is still far out of reach as disruptions to global supply chains continue to keep price rises elevated.

The May 12-18 Reuters poll showed a near-unanimous set of forecasts for a 50-basis-point hike in the fed funds rate, currently set at 0.75%-1.00%, at the June policy meeting following a similar move earlier this month. One forecaster anticipated a hike of 75 basis points.

The Fed is expected to hike by another 50 basis points in July, according to 54 of 89 economists, before slowing to 25- basis-point hikes for the remaining meetings this year. But 18 respondents predicted another half-percentage-point rise in September too.

A majority of poll respondents now expect the fed funds rate to be at 2.50%-2.75% or higher by the end of 2022, six months earlier than predicted in the previous poll, and roughly in line with market expectations for a year-end rate of 2.75%-3.00%.

That would bring it above the “neutral” level that neither stimulates nor restricts activity, estimated at around 2.4%.

“The pressing goal is to bring policy rates to neutral, before stepping back to judge the impact,” Sal Guatieri, senior economist at BMO, wrote in a note.

“The Fed can only hope that inflation pressure stemming from high commodity prices and the pandemic’s impact on labor and material supplies will reverse soon.”

Graphic – Reuters Poll-US monetary policy outlook:

Fed Chair Jerome Powell on Tuesday reiterated that the U.S. central bank would ratchet up interest rates as high as needed, possibly above the neutral level.

Nearly 75% of respondents to an additional question in the poll – 29 of 40 – said the Fed’s rate hike path was more likely to be faster over the coming months than slower.

Inflation, as measured by the Consumer Price Index (CPI), was forecast to average 7.1% this year, and remain above the central bank’s target until 2024 at least.

The New York Fed’s latest global supply chain pressure gauge rose in April after four months of declines, suggesting those price pressures remain very much alive, as did a recent Reuters analysis.

Meanwhile the poll showed a median 40% probability of a U.S. recession over the next two years, with a one-in-four chance of that happening in the coming year. Those probabilities were steady compared with the last survey.

What hasn’t remained steady is sentiment in financial markets. The Standard & Poor’s 500 equities index appears to be on the cusp of a bear market, down close to 20% from its peak near the start of the year.

The U.S. economy, which contracted for the first time since 2020 in the January-March period, was expected to rebound to an annualized growth rate of 2.9% in the second quarter. But forecasts were in a significantly wide range of 1.0%-6.9%.

GDP growth was predicted to average 2.8% this year before moderating to only 2.1% and 1.9% in 2023 and 2024, respectively, down from the 3.3%, 2.2% and 2.0% predicted last month.

Graphic: Reuters Poll – U.S. economy and Federal Reserve rate outlook –

Forecasts for the unemployment rate remained optimistic, averaging 3.5% this year and next, before picking up to 3.7% in 2024.

But more than 80% of respondents to an additional question – 28 of 34 – said that over the coming two years it was more likely that unemployment would be higher than they currently expected than lower.

“The only realistic way to break the wage-price spiral is to push up the unemployment rate. If the Fed does not do this by accident, they will have to do it by design,” said Philip Marey, senior U.S. strategist at Rabobank.

“A recession is the inevitable outcome.”

(For other stories from the Reuters global economic poll:)

(Reporting by Prerana Bhat and Indradip Ghosh; Polling by Vijayalakshmi Srinivasan and Shrutee Sarkar; Editing by Ross Finley and Paul Simao)

IMF urges Asia to be mindful of spillover risks from tightening

TOKYO (Reuters) – Asian economies must be mindful of spillover risks as a decade of unconventional easing policies by major central banks is withdrawn faster than expected, International Monetary Fund(IMF) Deputy Managing Director Kenji Okamura said.

This risk applied particularly to the most vulnerable economies, said Okamura, without naming them.

Asian economies faced a choice between supporting growth with more stimulus and withdrawing it to stabilise debt and inflation, he said.

While Bank of Japan policy runs counter to a global shift towards monetary tightening, central banks in the United States, Britain and Australia raised interest rates recently.

Okamura, a former Japanese vice finance minister for international affairs, also said the COVID-19 pandemic, the war in Ukraine and tighter global financial conditions would make this year “challenging” for Asia.

The war was affecting Asia through higher commodity prices and slower growth in Europe, he said.

Speaking at his first media event since becoming one of four deputy managing directors at the global lender last year, Okamura warned on the prospect of even more forceful tightening if inflation expectations kept on “drifting”.

“There is a risk that drifting inflation expectations could require an even more forceful tightening,” he said.

Okamura called for calibrated policies and clear communication.

(Reporting by Tetsushi Kajimoto; Editing by Bradley Perrett)

Oil steady as economic worries offset possible China demand rise

By Scott DiSavino

(Reuters) – Oil prices were little changed on Friday as worries about weaker economic growth offset expectations that crude demand could rebound in China as Shanghai lifts some coronavirus lockdowns.

Brent futures for July delivery fell 36 cents, or 0.3%, to $111.68 a barrel by 0015 GMT, while U.S. West Texas Intermediate (WTI) crude fell 36 cents, or 0.3%, to $111.85 on its last day as the front-month.

WTI futures for July, which will soon be the front-month, were down about 0.6% to $109.20 a barrel.

That put WTI on track to rise for a fourth week in a row for the first time since mid-February. Brent was up less than 1% after falling less than 1% last week.

Crude gains have been limited this week, with the Brent and U.S. benchmarks mostly trading in a range due to the uncertain path of demand. Investors, worried about rising inflation and more aggressive action from central banks, have been reducing exposure to riskier assets.

Open interest in WTI futures, for example, fell to 1.722 million contracts on May 18, the lowest since July 2016.

“If U.S. growth data continues to sour, oil prices could get caught up in the negative stock market feedback loop,” SPI Asset Management managing director Stephen Innes said in a client note.

Wall Street ended lower after a volatile session on Thursday, while investors fretted about inflation and rising interest rates.

In China, however, oil demand could rebound as Shanghai authorities lifted some coronavirus lockdowns and residents were given the freedom to go out to shop for groceries for the first time in nearly two months. China is the world’s top crude importer.

In the United States, Americans were getting back behind the wheel, despite higher fuel prices, according to a report from the Federal Highway Administration on vehicle miles.

Automobile club AAA said gasoline and diesel prices at the pump hit record highs again on Thursday.

The U.S. House passed a bill that allows the president to issue an energy emergency declaration, making it unlawful for companies to excessively increase gasoline and home fuel prices.

The looming possibility of a European Union ban on Russian oil imports has helped support prices. This month the EU proposed a new package of sanctions against Russia over its invasion of Ukraine, which Moscow calls a “special military operation.”

Those sanctions would include a total ban on oil imports in six months’ time, but the measures have not yet been adopted, with Hungary among the most vocal critics of the plan.

Iran, meanwhile, is having a tougher time selling its crude now that more Russian barrels are available.

Iran’s crude exports to China have fallen sharply since the start of the Ukraine war as Beijing favoured heavily discounted Russian barrels, leaving almost 40 million barrels of Iranian oil stored on tankers at sea in Asia and seeking buyers.

(Reporting by Scott DiSavino; Editing by Cynthia Osterman)

Japan April consumer prices post biggest jump in over 7 years

By Daniel Leussink

TOKYO (Reuters) – Japan’s core consumer inflation in April rose above the central bank’s 2% target, hitting a more than seven-year high as increases in energy and commodity costs are causing broader price hikes that are pressuring households.

The rise in consumer prices is making it harder for the Bank of Japan (BOJ) to convince markets it will keep monetary policy ultra-loose and as the gains fuel public concerns about pushing up living costs.

The nationwide core consumer price index (CPI), which excludes volatile fresh food costs but includes those of energy, surged 2.1% in April from a year earlier, government data showed on Friday.

That marked the fastest rise in a single month since March 2015 and matched the median forecast in a Reuters poll.

The gain was much stronger than a 0.8% year-on-year rise in March, as the impact of mobile phone fee cuts from April last year that have pulled down overall CPI since then starts to fade from yearly comparisons.

The overall rate of price increases in Japan has remained modest compared with much sharper rises in the United States and other advanced economies, as sluggish wage growth in the world’s third-largest economy makes it harder for firms to raise prices.

The BOJ has retained its massive monetary stimulus as it seeks to have inflation stably reach 2% on the back of strong wage growth, even as a weaker yen pushes up food and energy prices and other major central banks are tightening policy.

(Reporting by Daniel Leussink; Editing by Sam Holmes and Stephen Coates)

UK consumer morale hits lowest since records began in 1974: GfK

By Andy Bruce

LONDON (Reuters) – Pessimism weighing on Britain’s households has hit unprecedented levels as the cost-of-living crisis pushed confidence in the economic outlook to its joint lowest, a survey showed.

Market research firm GfK said consumer morale gauge, dating back to 1974, touched an all-time low of -40 in May from -38 in April. Economists polled by Reuters had expected -39.

Past readings this low have presaged recessions and Friday’s survey will further pressure finance minister Rishi Sunak to give more help urgently to households facing the highest rates of inflation since the early 1980s.

GfK’s gauge of economic optimism for the coming 12 months matched a record low hit in April 2020 as the coronavirus pandemic swept the country.

While business surveys and jobs data show a healthier picture – one reason why the Bank of England has raised interest rates – this was also the case in 2008 when a severe downturn followed as the global financial crisis unfolded.

“Consumer confidence is now weaker than in the darkest days of the global banking crisis, the impact of Brexit on the economy, or the COVID shutdown,” said Joe Staton, client strategy director at GfK.

Even recessions in the early 1980s and early 1990s – a time of double-digit interest rates and high unemployment – produced less pessimism than the current crisis which is playing out against the backdrop of the war in Ukraine.

Britain’s budget forecasters have said households face the biggest cost-of-living squeeze since records began in the 1950s.

A Reuters analysis of international consumer confidence data suggested government action now might be warranted.

British consumers are gloomier than their French or German counterparts have ever been in records that stretch back to 1985, applying GfK’s methodology to comparable European Commission surveys.

Britain has the highest inflation of Europe’s big economies and in the Group of Seven.

Separate data published by Lloyds Bank showed spending on energy by its customers rose by an annual 28% in April.

The BoE forecasts inflation will top 10% later this year and investors expect more interest rate increases.

“Nothing on the economic horizon shows a reason for optimism any time soon,” Staton said.

(Writing by Andy Bruce; Editing by William Schomberg)

Strong household finances may mean Fed must to do more -Kashkari

(Reuters) – Minneapolis Federal Reserve Bank President Neel Kashkari on Thursday suggested that because household finances are in some cases in better shape than before the pandemic, the Fed may end up needing to raise rates further to bring inflation under control.

“Are these stronger balance sheets leading people to spend more, or be more confident, to just change their behavior, their spending patterns, and is that more sustainable – in which case maybe the Fed has to be even more aggressive,” Kashkari told the Urban Institute.

That could mean difficult tradeoffs for the Federal Reserve, which is already raising rates faster than it has in decades to cool inflation running at a 40-year high.

Fed policymakers expect to get the target range for short-term interest rates, now at 0.75%-1%, a full percentage point higher by July, with more though potentially smaller rate hikes to follow.

The “plausible” hope, Fed Chair Jerome Powell said this week, is that heavier borrowing costs will drag down demand for labor enough to slow wage gains that might otherwise fuel inflation, but not so much that businesses resort to mass layoffs that could trigger a recession.

Kashkari said that because so much is beyond the Fed’s control – supply chains, for instance, which in their currently tangled state are pushing upward in prices in ways that are only getting worse with China’s COVID-19 lockdowns and Russia’s invasion of Ukraine.

“We know we have to get inflation down; we are doing everything we can to achieve a ‘soft landing,’ but I’ll be honest with you: I don’t know the odds of us pulling that off,” Kashkari said.

A rout in equities including an 18% drop in the S&P 500 Index since its Jan. 3 record close may help the Fed out, by reducing spending and therefore demand.

“The wealth effect is a real thing…those who have stocks have higher 401Ks, they feel more confident, they go out and spend more, when those things come down, it may change their behavior,” Kashkari said. Though the Fed does not target stock prices, “we do pay attention to that feedback.”

(Reporting by Ann Saphir; Editing by Chris Reese and Chizu Nomiyama)

World stocks slide as growth fears persist, safe-havens gain

By Herbert Lash

NEW YORK (Reuters) – Global equities fell further on Thursday, unable to sustain a late rally on Wall Street, as investors dumped stocks on fears of sluggish growth and bought safe-haven assets such as government debt and the Swiss franc.

Supply chain woes continued to fuel inflation and growth concerns as Cisco Systems Inc warned of persistent component shortages, knocking its shares down 13.7%. The plunge made it the latest big name stock this week to post its largest decline in more than a decade.

Data showed factory output in the U.S. Mid-Atlantic region decelerated far more than expected in May with the business outlook for the six months ahead the weakest in more than 13 years, a regional Federal Reserve bank survey said.

Some megacap growth stocks that have underperformed this year posted gains but the rally fizzled. The Dow Jones Industrial Average fell 0.75%, the S&P 500 lost 0.58% and the Nasdaq Composite dropped 0.26%.

Big slides for Walmart on Tuesday and Target on Wednesday have demoralized investors who wonder about rising costs across the supply chain, said Michael James, managing director of equity trading at Wedbush Securities.

“You got a pretty severe shock to the system for portfolio managers with the combination of those two,” James said. “That type of damage is hard to repair, piled on top of the extremely challenging year that technology investors have had,” he said.

But James said there are those view market as being extremely oversold and “you’re due for some kind of a bounce.”

Traders are looking for a catalyst that will turn the market around as a near-term bottom approaches, said Rick Meckler, president of hedge fund LibertyView Capital Management LLC.

But, “there’s probably still enough fear among investors to see a few more downdrafts,” he said.

Cash hoarding has reached the highest level since September 2001, indicating strong bearish sentiment, according to Louise Dudley, a portfolio manager at Federated Hermes Ltd.

Goldman Sachs estimates a 35% probability of a U.S. recession in the next two years, while Morgan Stanley sees a 25% chance of one in the next 12 months.

U.S. spot power and natural gas prices soared to their highest in over a year in some U.S. regions as Americans cranked up air conditioners during a spring heatwave.

MSCI’s gauge of stocks across the globe fell 0.65% and the pan-European STOXX 600 index lost 1.37%.

The S&P 500 is down about 18% from its record close on Jan. 3, and MSCI’s index has fallen the same since peaking on Jan. 4.

GRAPHIC: S&P 500 bear markets (

Germany’s 10-year bond yield fell below 1% and U.S. Treasury yields fell as more soft U.S. economic data stirred worries the Federal Reserve’s aggressive monetary tightening could hurt the global economy.

The yield on 10-year Treasury notes fell 3.8 basis points to 2.846%, after hitting a three-week low of 2.772%.

The dollar fell across the board, pulling back further from a two-decade high, as most other major currencies drew buyers.

The dollar index fell 0.896%, with the euro up 1.11% to $1.0582. The Japanese yen strengthened 0.35% to 127.79 per dollar.

The Swiss franc gained after Swiss National Bank president Thomas Jordan signaled on Wednesday the SNB was ready to act if inflation pressures continued.

GRAPHIC: Worst start to a year for world stocks (

Central banks have been walking a tightrope, trying to regain control of decades-high inflation without causing painful recessions.

“We will have to discuss what we can do together in our respective areas of responsibility to avoid stagflation scenarios,” German finance minister Christian Lindner said as he arrived for a two-day meeting of top central bankers near Bonn.

Oil prices rebounded from two days of losses in a volatile session, bolstered by weakness in the dollar and expectations that China could ease some lockdown restrictions that could boost demand.

U.S. crude futures rose $2.62 to settle at $112.21 a barrel. Brent settled up $2.93 at $112.04 a barrel.

U.S. gold futures settled up 1.4% at $1,841.20 an ounce, as a weaker dollar and Treasury yields burnished bullion’s safe-haven appeal.

(Reporting by Herbert Lash, additional reporting by Marc Jones in London, Francesco Canepa in Koenigswinter, Germany, Stella Qiu in Beijing and Alun John in Hong Kong; Editing by Bernadette Baum, David Gregorio and Richard Pullin)

U.S. labor market in spotlight as weekly jobless claims hit 4-month high

(Corrects second paragraph to make clear the decline was in the index and not the level)

By Lucia Mutikani

WASHINGTON (Reuters) – The number of Americans filing new claims for unemployment benefits unexpectedly rose last week, reaching a four month-high and potentially hinting at some cooling in demand for workers amid tightening financial conditions.

Still, the labor market remains tight as the report from the Labor Department on Thursday also showed the ranks of the unemployed were the smallest in almost 52-1/2 years in early May. Signs of ebbing demand for labor were also evident in a survey from the Philadelphia Federal Reserve, showing a decline in the share of firms reporting higher employment levels and the average work at factories in the mid-Atlantic region this month.

The Federal Reserve’s aggressive monetary policy stance as it fights inflation has sparked a stock market sell-off and boosted U.S. Treasury yields and the dollar. Several retailers, including Walmart Inc, this week cut their full-year earnings forecasts, warning that inflation was squeezing profits.

“This will lead to slower job growth in the retail and e-commerce industries,” said Bill Adams, chief economist at Comerica Bank in Dallas, Texas. “The stock market sell-off could dampen business sentiment and make some businesses more cautious about hiring, especially those that are cash-flow negative and rely on investors’ money to fund operations like many startups.”

Initial claims for state unemployment benefits increased 21,000 to a seasonally adjusted 218,000 for the week ended May 14, the highest level since January. Economists polled by Reuters had forecast 200,000 applications for the latest week.

There was a jump of 6,728 in claims in Kentucky, while California reported an increase of 3,315. There were also notable gains in filings in Pennsylvania, Ohio and Illinois.

Claims have been largely treading water since hitting more than a 53-year low of 166,000 in March. They have dropped from an all-time high of 6.137 million in early April 2020.

Graphic – Jobless claims:

Some economists viewed the rising claims as the start of the normalizing process for the labor market after distortions caused by the COVID-19 pandemic. There were a record 11.5 million job openings as of the end of March and an all-time high of 4.5 million people quit their jobs.

The misalignment between supply and demand is generating strong wage gains that are helping to fan overall inflation in the economy. The Fed has raised its policy interest rate by 75 basis points since March. The U.S. central bank is expected to hike the overnight rate by half a percentage point at each of its next meetings in June and July.

“The tight labor market has likely caused employers to focus on employee retention, resulting in much lower-than-normal initial claims,” said Isfar Munir, an economist at Citigroup in New York. “The increase we are seeing now could just be a first step towards normalizing labor markets.”

Stocks on Wall Street were trading largely higher. The dollar fell against a basket of currencies, while U.S. Treasury prices rose.


Last week’s data covered the period during which the government surveyed employers for the nonfarm payrolls portion of May’s employment report. Claims rose between the April and May survey period.

While that would imply a moderation in the pace of job growth this month, data next week on the ranks of the unemployed in mid-May will shed more light on the state of job growth this month. Payrolls increased by 428,000 in April, the 12th straight month of employment gains in excess of 400,000.

The number of people receiving benefits after an initial week of aid fell 25,000 to 1.317 million during the week ending May 7. That was the lowest level for the so-called continuing claims since December 1969. Continuing claims have been trending lower even as initial applications for benefits have risen.

“One possible explanation for the recent combination of initial claims trending higher and continuing claims trending lower is that layoffs have picked up but people are still able to easily find other jobs,” said Daniel Silver, an economist at JPMorgan in New York.

In a separate report on Thursday, the Philadelphia Fed said its business conditions index dropped to a two-year low reading of 2.6 in May from 17.6 in April. A reading above zero indicates growth in manufacturing in the region that covers eastern Pennsylvania, southern New Jersey and Delaware.

The survey’s measure of factory employment dropped to 25.5 from 41.4 in April. Its gauge of the average workweek fell to 16.1 from 20.8 in the prior month. Nearly 27% of the firms surveyed reported increasing workers, the lowest in a year and down from 42% in April. Those reporting no change in head count reached 71%, the highest since December 2020.

Graphic: Philly Fed –

There was also disappointing news on the housing market.

Existing home sales fell 2.4% to a seasonally adjusted annual rate of 5.61 million units last month, the lowest level since June 2020 when sales were rebounding from the coronavirus lockdown slump, the National Association of Realtors said in a third report.

While monthly sales declined for a third straight month, the median existing house price shot up 14.8% from a year earlier to an all-time $391,200 amid a persistent lack of inventory. With the rate on a 30-year fixed-rate mortgage well above 5%, sales are likely to maintain their downward trend.

Graphic: Existing home sales –

(This story corrects second paragraph to make clear the decline was in the index and not the level.)

(Reporting by Lucia Mutikani; Editing by Paul Simao)

Wall Street ends lower as Cisco and Apple sink

By Devik Jain and Noel Randewich

(Reuters) – Wall Street ended lower after a volatile session on Thursday, with Cisco Systems slumping after giving a dismal outlook, while investors fretted about inflation and rising interest rates.

Shares of Cisco slumped 13.7% after the networking gear maker lowered its 2022 revenue growth outlook, taking a hit from its Russia exit and component shortages related to COVID-19 lockdowns in China.

Apple and chipmaker Broadcom declined 2.5% and 4.3%, respectively, and weighed on the S&P 500.

“The reality is that inflation is running hot and interest rates are rising,” said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis, Minnesota. “Until you get that inflation rate to start slowing, we’re going to have increased volatility, and in our view that continues through throughout most of the summer months.”

Twitter climbed 1.2% after Bloomberg reported that company executives told staff that Elon Musk’s $44-billion deal was proceeding as expected and they would not renegotiate the price.

The S&P consumer staples index fell 2% to its lowest level since December as retail firms face the brunt of rising prices hurting the purchasing power of U.S. consumers.

Kohl’s Corp became the latest retailer to flag a hit from four-decades high inflation as the department store chain cut its full-year profit forecast.

Its shares, however, rebounded over 4% after slumping 11% in the previous session due to dismal results from Target Corp.

The S&P 500 is down about 18% from its record close on Jan. 3 as investors adjust to strong inflation, geopolitical uncertainty stemming from the war in Ukraine and tightening financial conditions with the U.S. Federal Reserve raising rates.

A close of 20% or more below its January record high would confirm the S&P 500 has been in a bear market since hitting that peak, according to a widely used definition.

GRAPHIC: S&P 500 bear markets (

Goldman Sachs strategists predicted a 35% chance of the U.S. economy entering a recession in the next two years, while the Wells Fargo Investment Institute expects a mild U.S. recession at the end of 2022 and early 2023.

The S&P 500 declined 0.58% to end the session at 3,900.79 points.

The Nasdaq declined 0.26% to 11,388.50 points, while the Dow Jones Industrial Average declined 0.75% to 31,253.13 points.

GRAPHIC: S&P 500’s busiest trades (

Thursday’s mixed performance followed a drop of over 4% in the S&P 500 on Wednesday, the benchmark’s worst one-day loss since June 2020.

The CBOE volatility index, also known as Wall Street’s fear gauge, fell to 29.5 points on Thursday, after hitting its highest level since May 12 earlier in the session.

Canada Goose Holdings Inc jumped almost 10% after it forecast upbeat annual earnings, encouraged by strong demand for its luxury parkas and jackets.

Volume on U.S. exchanges was 12.7 billion shares, compared with a 13.4 billion average over the last 20 trading days.

Advancing issues outnumbered declining ones on the NYSE by a 1.15-to-1 ratio; on Nasdaq, a 1.31-to-1 ratio favored advancers.

The S&P 500 posted 1 new 52-week highs and 43 new lows; the Nasdaq Composite recorded 12 new highs and 326 new lows.

(Reporting by Devik Jain and Amruta Khandekar in Bengaluru, and by Noel Randewich in Oakland, Calif.; Editing by Arun Koyyur and Grant McCool)

Fed not gunning for stocks, but may need to for inflation to fall

WASHINGTON (Reuters) -The Federal Reserve is not targeting equity markets in its battle against inflation, but that is “one of the avenues” where the impact of tighter monetary policy will be felt, Kansas City Fed President Esther George said on Thursday.

“What we are looking for is the transmission of our policy through markets’ understanding that tightening should be expected,” George said in comments to CNBC, a day after weak quarterly earnings from major retailers contributed to a sell-off of stocks. “It is not aimed at the equity markets in particular, but it is one of the avenues through which tighter financial conditions would emerge.”

The rout on Wednesday marked one of the worst days for U.S. stocks since the onset of the coronavirus pandemic, with major indices down 4% or more. Equity markets have been volatile since the start of the year as investors absorbed the implications of higher inflation and the rising interest rates the Fed will use to fight it.

George’s comments reflect an emerging discussion over how the pain of adjusting to high inflation will be distributed across the economy, with some analysts conjecturing that the U.S. central bank will need – or want – more of a hit to household wealth through equity prices, which also influences household spending, and less of one to income and jobs.

Fed policymakers including Chair Jerome Powell have been explicit that they want to limit the impact on employment of rising interest rates.

With household and corporate balance sheets in strong shape, there’s financial wherewithal to pay the bills and cope with higher credit costs – a low-leverage environment that may keep the economy growing but make it harder for the Fed to curb spending. The housing market, often a main channel for monetary policy to clamp down on the economy, also remains strong, with prices expected to continue rising even with higher mortgage rates and slower sales.

That leaves equity prices as one of the quickest and clearest paths for the Fed’s impact to be felt. Economists have noted that the rising exposure of a broader range of U.S. households to stock markets, through 401k retirement savings and other investments, means likely more impact for monetary policy through that channel.

Along with changing household plans and perceptions as net worth diminishes, falling equity prices have a direct impact on consumption at a rate some economists estimate at about 2 to 3 cents on the dollar. Some $8 trillion of paper wealth has been wiped off of balance sheets so far this year.

“You could kind of read (the Fed’s) approach as almost endorsing the drop in equity prices and asset prices more broadly,” Jonas Goltermann of Capital Economics said on Thursday, adding that in past hiking cycles the Fed used a gradual approach to minimize the impact on financial conditions.


When it lifted rates beginning in 2015, the Fed moved in quarter-percentage-point increments, and sometimes only once a year. The S&P 500 index rose through much of that tightening cycle, and fell only as larger concerns about global economic growth took hold.

The situation is different now. Officials in 2015 were anticipating inflation that never arrived. Current prices, based on the Fed’s preferred personal consumption expenditures index measurement, are rising at more than triple the Fed’s 2% target.

That has touched off what amounts to a crisis response of half-percentage-point rate increases and a pledge this week by Powell to raise rates as high as needed to bring inflation down.

To do so means slowing the economy enough to trim the “excess” demand that Fed officials feel is driving prices higher, and, in the current situation, causing companies to eliminate hiring plans that have led to record levels of job openings and wage pressures as they compete for workers.

Some tech firms have announced hiring freezes as a result of their dimmed outlooks and falling stock prices, a sign the Fed’s hoped-for narrative has begun to play out.

In the best case, inflation will fall before firms reach the point of actual layoffs, but getting there still means a blow to corporate earnings – a key component of stock pricing – as companies reset sales and growth expectations.

“The sell-off in equity markets may ultimately be as important as the rise in interest rates in moderating demand,” Citi economists wrote on Thursday, arguing that higher interest rates may not on their own be enough, for example, to cool the housing market.

“Some of the work of tighter financial conditions will come through the now about 18% decline in equity prices. If the objective is to reduce job openings, it is easier to see a link between equity prices, corporate sentiment and hiring plans than it is between interest rates and job openings,” the Citi team wrote.

(Reporting by Howard SchneiderAdditional reporting by Ann SaphirEditing by Chizu Nomiyama and Paul Simao)

Yellen says G7 to give Ukraine funds it needs ‘to get through this’

By David Lawder

KOENIGSWINTER, Germany (Reuters) – U.S. Treasury Secretary Janet Yellen said the G7 finance leaders on Thursday agreed to provide Ukraine the financial resources it needs in its struggle against Russia’s invasion, and that policymakers are determined to meet their inflation targets.

Yellen, speaking to reporters after the first day of a G7 finance ministers and central bank governors’ meeting here, declined to confirm an $18.4 billion figure pledged in the group’s draft communique seen by Reuters.

The meeting wraps up on Friday.

Yellen said that funding pledges to Ukraine during the meeting exceeded the $15 billion that Kiev has estimated it needs over the next three months to make up for lost revenues as the war devastates its economy.

A $40 billion U.S. aid package under expected to be approved by the U.S. Senate this week would include $7.5 billion in new economic aid, while the European Commission pledged 9 billion euros for Ukraine, Yellen said. Other countries, including Canada and Germany, pledged additional amounts.

“The message was, ‘We stand behind Ukraine. We’re going to pull together with the resources that they need to get through this,'” Yellen said.

She said that high global inflation was a significant topic, but none of the policymakers had said they were considering raising their targeted inflation rates.

“What was discussed was the critical importance of central banks taking the actions that are needed to show they are committed to the inflation targets that they’ve set,” Yellen said.

Yellen said the officials felt that economic conditions had not changed ” so fundamentally, that it would be worth dislodging what we felt it become a stable anchored set of inflation expectations.”

She said that she still believed that the U.S. Federal Reserve could achieve a “soft landing” of the economy without causing a recession, but how Fed officials achieve this is up to them though it “requires both skill and luck.”

Discussions about mechanisms to reduce Russia’s revenues from oil exports to Europe were limited on Thursday, Yellen said, adding that there is a lot of interest in the concept.

U.S. officials have floated the idea of imposing tariffs on Russian oil to limit the amount of revenue that Moscow can collect while keeping Russian crude supplies on the market as EU officials pursue a phased embargo by year end.

Yellen said that a buyers’ cartel that would not buy oil above certain prices could be successful if it is large enough.

“Nothing is really crystallized as an obvious strategy,” she added.

(Reporting by David Lawder; Editing by Mark Porter and Chizu Nomiyama)

Dollar drops as yen, Swiss franc draw safe-haven flows

By Saqib Iqbal Ahmed

NEW YORK (Reuters) -The dollar slipped across the board on Thursday, falling to a 2-week low, extending its pullback from a two-decade high, as most major currencies battered by the greenback’s advance this year drew buyers.

With volatility on the rise in global financial markets, the dollar logged sharp declines against the Japanese yen and the Swiss franc, which tend to attract investors in times of market stress or risk.

But the dollar also fared poorly against riskier currencies, including the Australian and the New Zealand dollar, as deep year-to-dates losses for these currencies attracted some buyers.

“Investors have perhaps just had enough of the USD and are looking to diversify risk – especially as broader USD support from rising U.S. yields appears to have maxed out,” said Shaun Osborne, chief currency strategist at Scotia Bank.

The U.S. Dollar Currency Index, which tracks the greenback against six major currencies, was down 1.0% at 102.79, its lowest since May 5. That puts the index on pace for one of only six instances over the past five years when it logged a 1-day loss of 1% or more.

The index hit a near two-decade high last week as a hawkish Federal Reserve and growing worries about the state of the global economy helped lift the U.S. currency. The index is up 7.5% for the year.

On Thursday, the dollar slipped to a 3-week low against the yen and a 2-week low against the Swiss franc.

Analysts, however, warned against reading too much into the dollar’s retreat.

“Yes, the dollar is broadly lower today despite risk-off conditions in the cross-asset space, but does this mean the dollar’s haven status is starting to weaken? Most probably not,” said Simon Harvey, head of FX Analysis at Monex Europe.

The Swiss franc was supported against the dollar and the euro after Swiss National Bank president Thomas Jordan signaled on Wednesday the SNB was ready to act if inflation pressures continue.

The euro rose to a more than 1-week high against the dollar, as investors priced in the chance of an aggressive near-term tightening path by the European Central Bank.

Britain’s pound rose 1.2% against the dollar on Thursday, but remained close to the 2-year low touched last week as soaring inflation combined with a murky growth outlook capped gains.

Meanwhile, bitcoin rose 4.7% and was last trading at $30,039.31, continuing to try to shake off the weakness that has engulfed cryptocurrencies in recent days.

(Reporting by Saqib Iqbal Ahmed;Editing by Alison Williams and Will Dunham)

Analysis-‘Retail apocalypse’: Wall Street shaken by inflation-induced earnings hits

By Siddharth Cavale and Uday Sampath Kumar

NEW YORK (Reuters) – Walmart, Target and Kohl’s were among major retailers that reported earnings this week that missed Wall Street expectations by the widest margin in at least five years, underscoring the wallop four-decade-high inflation is bringing to U.S. shoppers’ wallets and retailers’ bottom lines.

Among 145 retailers that have reported first-quarter earnings so far, 127 mentioned inflation and 138 flagged supply chain issues, according to Refinitiv data.

Higher staffing costs, bloated inventories and more expensive fuel took a toll on retailer profits, contributing to a market rout that saw Wall Street post its worst day since mid-2020 on Wednesday.

Department store chain Kohl’s Corp on Thursday became the latest to cite soaring inflation in posting a 92% decline in adjusted profit.

Chief Executive Michelle Gass blamed higher freight and wage costs and lower clothing demand for adjusted earnings of 11 cents per share that was 59 cents short of analysts’ estimates, a gap of nearly 85%.

Walmart Inc, the nation’s largest retailer, posted a quarterly profit that fell 25%, marking its first miss in five quarters. The gap of 12.3% between Wall Street’s expectations and Walmart’s earnings per share figure was its widest since at least 2017.

For rival Target Corp, which saw its profits halve, that margin between expectation and reality was 29%, which was also its biggest in at least five years, according to Refinitiv.

“This is a little bit of a retail apocalypse. It was Walmart (on Tuesday) and everybody thought it was a one-off,” said Dennis Dick, a trader at Las Vegas-based Bright Trading LLC.

“Now that Target missed earnings (by) a lot more than Walmart even did, they’re scared that the consumer is not as strong as everybody thinks.”

While Wall Street brokerages were expecting profits to be pressured by soaring fuel costs, analysts said they were caught off guard by the rapid retrenchment among consumers and shifts toward buying lower-margin basics instead of more profitable general merchandise.

The extent of inventory buildup and heavy discounting by retailers was also a bit of a shock, they said.

“The biggest surprise was the inventory markdowns and rollbacks (in prices). I don’t think any analyst was expecting that,” CFRA analyst Arun Sundaram told Reuters.

AJ Bell Investment Director Russ Mould called the inventory figures “startling.”

Target’s inventories were up 43% in the first quarter, as unsold televisions and bulky kitchen appliances piled up, while Walmart’s rose 32% in the quarter.

In some ways, the retailers are victims of their own success after figuring out how to keep stores relatively well stocked in the midst of supply snarls, truck driver shortages and on-and-off lockdowns intended to curb the spread of COVID-19.

Sundaram said Target’s wider earnings miss was due partly to a greater emphasis on general merchandise sales compared to Walmart, which focuses more on selling groceries and other essentials.

Wall Street is also “angry” about the lack of warning from Walmart and Target, which gave upbeat outlooks for 2022 a little over two months ago, said Jane Hali, CEO of investment research firm Jane Hali & Associates.

The financial impacts of the war in Ukraine and prolonged COVID lockdowns in China likely played a part in the stark turnaround in companies’ predictions for the year, she added.

“Wall Street is panicked,” Hali said. “Target had an investment day not too long ago, where they made no mention of the issues they highlighted on Wednesday. So I can understand the Street being angry about that.”

(Additional reporting by Devik Jain in Bengaluru; Editing by Bill Berkrot)

G7 backs debt relief efforts for Sri Lanka – draft communique

KOENIGSWINTER, Germany (Reuters) -The Group of Seven economic powers support efforts to provide debt relief for Sri Lanka, G7 finance chiefs said on Thursday in a draft communique from a meeting in Germany after the country defaulted on its sovereign debt.

The once-booming island country has suspended debt payments as it grapples with its worst economic crisis since it won independence in 1948, facing shortages of essential goods that have triggered social unrest.

G7 countries said in their statement they were committed to finding long-term solutions for the Indian Ocean nation and urged it to “negotiate constructively” with the International Monetary Fund on a potential loan programme.

“The G7 stands ready to support the Paris Club’s efforts, in line with its principles, to address the need for a debt treatment for Sri Lanka,” they said, referring to the group of mostly rich creditor nations.

The draft statement, which is to be finalised before the end the G7 finance ministers’ meeting on Friday, also called on other big creditor nations not in the Paris Club to coordinate with the group and urged them to provide debt relief on comparable terms.

G7 finance chiefs also singled out China, which has become a major creditor to low-income countries, to actively contribute to debt relief for such countries.

Chad, Ethiopia and Zambia have so far sought debt relief under a new G20 common framework, but progress has so far been slow with some officials accusing China of dragging its feet.

(Reporting by Leigh Thomas, Editing by Angus MacSwan and Nick Zieminski)

Russian to ease restrictions on cash FX, apart from U.S dollars, euros

(Reuters) – Russia’s central bank said on Thursday banks would be allowed to sell citizens foreign currency without any restrictions from May 20, with the exception of U.S. dollars and euros.

Restrictions on dollars and euros, which allow citizens to buy only those dollars and euros that arrived in banks after April 9, will remain in place until Sept. 9, the central bank said.

(Reporting by Reuters; Editing by Angus MacSwan)

Barr, Biden’s pick for Fed regulation role, cruises through confirmation hearing

By Pete Schroeder

WASHINGTON (Reuters) – Michael Barr, the second person nominated by Democratic President Joe Biden to be the Federal Reserve’s Wall Street cop, looked to be on a path to confirmation after testifying before the Senate on Thursday.

Barr, who served as a senior Treasury Department official under Democratic President Barack Obama, received some skeptical questions from Republican lawmakers. But there was little indication of any concerted effort to sink his candidacy, and moderate Democrats appeared supportive of him.

Testifying before the Senate Banking Committee, Barr struck a measured tone on a wide range of issues, including financial risk from climate change and the proper regulation of cryptocurrencies, while vowing to take a holistic view on the overall state of bank regulation in the United States.

He emerged from the hearing in a stronger position than Sarah Bloom Raskin, Biden’s first nominee for Fed supervision vice chair, who withdrew her nomination after Democratic Senator Joe Manchin refused to back her.

Manchin opposed Raskin in large part due to her past comments suggesting financial regulators should play an aggressive role in helping transition the economy to using cleaner forms of energy. When pressed on the climate issue on Thursday, Barr insisted the Fed had “important but quite limited” powers, which are focused on assessing the risks banks might face from climate change, as it would any other looming concern.

“I think the Federal Reserve … should not be in the business of telling financial institutions to lend to a particular sector or not to lend to a particular sector,” he said.

Barr, currently a law professor at the University of Michigan, has already drawn support from moderate Democrats, as well as progressives anxious to ramp up scrutiny of Wall Street after what they say was regulatory easing under Republicans. At the Treasury, Barr was a central figure in the drafting of the 2010 Dodd-Frank financial reform law, which established a range of safeguards following the 2008 financial crisis.

Barr on Thursday faced some skepticism from Republicans, who repeatedly noted that he vocally opposed a 2018 bank deregulation measure that several moderate Democrats supported. Barr said he had concerns with some aspects of the law but supported one of its main principles: creating a tiered regulatory environment for banks, with the strictest rules reserved for the largest firms.

On cryptocurrency, Barr said the technology has “some potential for upside” but that stablecoins in particular could pose “financial stability risks” if customers believe they are more reliable than they are in reality. Barr previously advised and served on the boards of several crypto and fintech firms, but said at Thursday’s hearing that, if confirmed, he would not work in the financial sector for four years after leaving government.

Barr would fill the remaining vacancy on the Fed board and take on a broad agenda that is likely to include revisiting rules that were eased under his predecessor, Randal Quarles, and taking steps to address climate change risk, fintechs and cryptocurrencies.

Progressives, who previously opposed Barr for other Biden administration posts as too moderate, have changed their tune as the Fed’s top regulatory post has been vacant for months.

That wing of the party had seen several favored candidates including Raskin and Saule Omarova, a previous Biden pick for another bank regulator post, flop amid resistance from moderate Democrats.

If confirmed, Barr also will join the Fed as the central bank battles to bring down 40-year-high inflation. He reminded the panel that he is not an expert in macroeconomics but said inflation is far too high and that he would be “strongly committed” to bringing it down to the central bank’s 2% goal.

“If the Federal Reserve is getting its job done right, the economy is working for everybody,” Barr said as he noted that the task to bring inflation down will be hard to achieve.

(Reporting by Pete Schroeder and Lindsay Dunsmuir; Editing by Michelle Price, Leslie Adler, Bill Berkrot and Jonathan Oatis)

G7 agree on $18.4 billion to keep Ukraine running, ready with more

By Leigh Thomas and Francesco Canepa

KOENIGSWINTER, Germany (Reuters) -The Group of Seven’s financial leaders agreed on Thursday on $18.4 billion to help Ukraine pay its bills in coming months and said they were ready to stand by Kyiv throughout its war with Russia and do more if needed, a draft communique showed.

Finance ministers and central bank governors of the United States, Japan, Canada, Britain, Germany, France and Italy – the G7 – are holding talks as Ukraine, invaded by Russia on Feb. 24, is struggling to fend off the attack and is running out of cash.

“In 2022, we have mobilised $18.4 billion of budget support, including $9.2 billion of recent commitments,” the draft communique seen by Reuters said.

“We will continue to stand by Ukraine throughout this war and beyond and are prepared to do more as needed,” it said.

In the draft, the G7 welcomed the European Commission’s proposal on Wednesday to lend 9 billion euros to Ukraine and noted that the European Bank for Reconstruction and Development and the International Financial Corporation planned support worth $3.4 billion. But it was not clear if these funds were part of the $18.4 billion or separate.

Earlier on Thursday, German Finance Minister Christian Lindner said Germany would grant Ukraine 1 billion euros and Japan pledged to double its aid for Ukraine to $600 million to help it cover its near-term needs.

Ukraine estimates it needs some $5 billion a month to keep public employees’ salaries paid and the administration working despite the daily destruction wrought by Russia.

The war has been a game-changer for Western powers, forcing them to rethink decades-old relations with Russia not only in terms of security, but also in energy, food and global supply alliances from microchips to rare earths.

More broadly, the G7 policymakers are wrestling with the question of how to contain inflation and increase sanctions pressure on Russia without causing recession.

More and more officials have brought up the term “stagflation” – the dreaded 1970s combination of persistent price increases coupled with economic stagnation.

“G7 central banks are closely monitoring the impact of price pressures on inflation expectations and will continue to appropriately calibrate the pace of monetary policy tightening in a data-dependent and clearly communicated manner, ensuring that inflation expectations remain well anchored, while being mindful to safeguard the recovery and limit negative cross-country spillovers,” the draft said.


The European Commission proposed on Wednesday to set up a fund of unspecified size of grants and loans for Ukraine, possibly jointly borrowed by the EU, to pay for post-war reconstruction.

The G7 said they were supportive, but avoided any detail.

“We call on all partners to join us in supporting Ukraine´s long-term recovery and to ensure the massive joint effort for reconstruction is closely coordinated, including with the Ukrainian authorities and international financial institutions,” the draft said.

Economists’ estimates of the cost of rebuilding Ukraine vary widely between 500 billion euros and 2 trillion euros ($524 billion to $2.09 trillion), depending on the assumptions on the length of the conflict and the scope of destruction.

With sums of such magnitude, the EU is considering not only a new joint borrowing project, modelled on the pandemic recovery fund, but also seizing the now frozen Russian assets in the EU, as sources of financing.

Some countries like Germany, however, say that the idea, though politically interesting, would be on shaky legal grounds and the G7 draft communique did not mention the issue.

($1 = 0.9550 euro)

(Additional reporting by Paul Carrel, Chirstian Kraemer, Leigh Thomas, Francesco Canepa, Leika Kihara, David Lawder and Jan Strupczewski; Editing by Matthew Lewis, Tomasz Janowski and Hugh Lawson)

Moody’s sees ‘tough terrain’ ahead for emerging economies as Russia-Ukraine war extends

By Jorgelina do Rosario

LONDON (Reuters) – Emerging economies will face a “tough terrain” for the next few quarters due to the Russia-Ukraine war, Atsi Sheth, global head of strategy and research for Moody’s Investors Service, said on Thursday.

While the overall picture is gloomy, commodity exporters will face better outcomes than other countries or companies, she added.

The ratings agency forecasts in a report that nearly 30% of rated non-financial companies in emerging markets would face “heightened credit risks” in a worst-case scenario in which Russia’s invasion of Ukraine triggers a global recession and liquidity squeeze, including a suspension of energy trade between Europe and Russia.

“Companies that serve consumers are likely to suffer a little bit more because their wallets are going to be constrained by inflation,” Sheth said at a conference.

Asian firms are more highly exposed due to supply chain disruptions and limited access to funding while Latin American corporates are less exposed, the Moody’s research found.

In a less severe scenario, where commodity shocks, higher inflation and interest rates crimp global growth in 2023, some 8% of emerging market firms would face heightened credit risk, it found.

Automotive manufacturing is one sector that may continue to suffer from supply chain disruptions.

On the sovereign level, Sheth added that the credit agency was closely monitoring elections in emerging economies this year, as demand for change amid economic and financial hardship could lead to political change.

Colombia has first-round presidential elections on May 29, while Brazil heads to the polls in October.

Credit risk increases when a democratic government changes to an authoritarian one, and vice versa. Moody’s calculated that in 25% of such cases there are associated defaults on the country’s government bonds.

“That’s how social risk becomes a credit risk”, she said.

Countries that have stuck with credible monetary policy aimed at fighting inflation throughout the pandemic and the Russia-Ukraine war will face less financial risk in the medium-term, Sheth added.

“Take a look at Turkey – the markets are sort of punishing (it),” Sheth said.

(Reporting by Jorgelina do Rosario, editing by Karin Strohecker and Hugh Lawson)

Egypt’s central bank, citing inflation, hikes interest rates 200 bps

CAIRO (Reuters) -The Central Bank of Egypt (CBE) on Thursday raised its overnight interest rates by 200 basis points, seeking to contain inflation expectations after prices soared by their quickest in three years.

The bank’s Monetary Policy Committee (MPC) increased the deposit rate to 11.25% from 9.25% and the lending rate to 12.25% from 10.25%, it said in a statement accompanying the decision.

It cited an increase in annual urban inflation to 13.1 percent in April from 10.5 percent in March, its highest since May 2019.

Prices were pushed up in part by a currency depreciation and higher wheat prices after the Ukraine crisis, the statement added.

“The MPC decided that raising policy rates is necessary to contain inflationary pressures which is consistent with achieving price stability over the medium term,” it said.

“The elevated annual headline inflation rate will be temporarily tolerated relative to the CBE’s pre-announced target” of between 5% and 9% before declining after the fourth quarter, it said.

Eighteen analysts polled by Reuters had expected the bank to raise the median deposit rate to 11.00% and its lending rate to 12.25%.

At a surprise meeting on March 21, the bank raised rates by 100 bps, citing global inflationary pressures, after having kept them unchanged for nearly 18 months.

“Reining in inflation seems like the primary objective now, very much aligned with central banks elsewhere,” said Allen Sandeep of Naeem Research. “Elevated inflation seems like it’s here to stay for the near term.”

Thursday’s statement said global financial conditions had also tightened as major central banks tightened policy rates.

“Achieving low and stable inflation over the medium term is a prerequisite condition to achieve high and sustainable growth rates,” the MPC said.

The MPC also increased its discount and credit rates by 200 basis points to 11.75%.

(Reporting by Mahmoud Mourad, Yasmin Hussein and Lilian Wagdy; Writing by Mahmoud Mourad and Patrick Werr; Editing by Angus MacSwan)

G7 countries commit $18.4 billion in funds for Ukraine – draft

KOENIGSWINTER, Germany (Reuters) – The Group of Seven (G7) industrialised nations have committed $18.4 billion in transfers and loans to help Ukraine meet its immediate financing needs, according to a draft communique seen by Reuters on Thursday.

“We have mobilised 18.4 billion US dollars of budget support, including 9.2 billion US dollars of recent commitments in the lead up to the Petersberg meeting, to help Ukraine close its financing gap and continue ensuring the delivery of basic services to the Ukrainian people,” the G7 finance ministers and central bankers said in the draft document.

They were meeting near Bonn, Germany, on Thursday and Friday.

(Reporting By Jan Strupczewski and Francesco Canepa; Editing by Angus MacSwan)