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Fed’s ‘transitory’ inflation plot thickens again with rate at 30-year high

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November 11, 2021

By Howard Schneider

WASHINGTON (Reuters) – Inflation pushed more broadly through the economy in October again challenging the Federal Reserve’s outlook for only “transitory” price increases, offsetting recent wage hikes in a blow to consumers, and prompting investors to boost bets the central bank will raise interest rates sooner than expected.

Yields on two-year Treasury notes, a proxy for the outlook for the overnight interest rate set by the Fed, jumped 6 basis points, the most in three weeks and among the largest daily increases in the last year and a half, to 0.485% on Wednesday after the release of data showing consumer prices rose by 6.2% in October versus the year before.

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That was the largest one-year jump in prices in 30 years and applied across staples like food, energy and rent, as well as to items like automobiles where the Fed has expected the pace of price increases to ease alongside pandemic-driven “bottlenecks” in global supply chains.

But those “bottlenecks” remain overrun by strong U.S. consumer demand, and inflation measures meant to diminish the impact of one-time spikes in goods and services are also rising.

Both a Cleveland Fed “trimmed mean” index of consumer prices and one that tracks the median level of price increases surged in a sign that price pressures were rising across a more extensive set of goods and services.

(GRAPHIC: Alternate inflation measures – https://graphics.reuters.com/USA-FED/INFLATION/znpnekxmdvl/chart.png)

Still, one Fed policymaker on Wednesday said the central bank should still remain patient.

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“We need to wait to see how this percolates through the economy,” before changing monetary policy in response to it, San Francisco Fed president Mary Daly said on Bloomberg TV.

Markets had a shorter leash. Pricing in futures contracts tied to the target federal funds rate showed investors boosting odds the Fed will by September raise rates twice by a cumulative 0.50 percentage point. Expectations for a third quarter-point rate increase in December increased to nearly 50% compared to less than 30% on Tuesday.

“The risks stemming from inflation have become increasingly top of mind to Federal Reserve policymakers, since excessive accommodation for too long, or essentially running the economy hot, could well hold unintended market consequences that further erode confidence and eventually impair the recovery,” said Rick Rieder, chief investment officer for global fixed income at investment giant Blackrock.

With demand, supply and wage pressures expected to continue, “near-term inflation readings may be intimidating to ‘inflation fighters’…which could press central bankers to at least discuss a faster reaction-function.”

NOT ‘LINEAR’

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For both the Fed and the Biden administration, what was an adamant faith in transitory inflation has been tempered.

“We know that the recovery from the pandemic will not be linear,” Biden’s Council of Economic Advisers said on Twitter in a nod to prices rising still faster than anticipated. The CEA “will continue to monitor the data as they come in,” the office said.

The price rises also have had the disconcerting effect of outpacing wage increases that the Fed and White House hoped would flow to lower-paid workers in the hotel, restaurant and other industries hardest hit during the pandemic shutdowns last year and the cautious return to in-person services since then.

On a month-to-month basis inflation almost fully offset the strong wage increases seen in the leisure and hospitality industry in October, noted Nick Bunker, research director for North America at job site Indeed.

Overall, real hourly wages fell 1.2% in October compared with the year before, with the nearly 5% wage gain of the past 12 months more than offset by the 6.2% rise in prices.

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That continues reversing what had been a steady rise in workers’ purchasing power since around 2013, with the benefits of low inflation boosting “real” wages after several years of stagnation following the 2007-2009 financial crisis and recession.

(GRAPHIC: Wages vs. prices – https://graphics.reuters.com/USA-ECONOMY/INFLATION/lbpgnblmjvq/chart.png)

The Fed has said it is reluctant to raise interest rates until more people have returned to jobs after being sidelined during the pandemic, even if inflation runs above its formal 2% target “for some time.”

The jobs-first strategy is a change from the previous approach which tried to use higher unemployment as a way to keep prices under control – in effect imposing the cost of inflation-fighting onto those rendered jobless during economic slowdowns.

The Fed still hopes inflation will ease, over time, without the need to ratchet interest rates higher to cool the economy, and risk slowing or reversing job growth in the process.

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But the longer inflation data run beyond expectations, the tougher that will be.

“With annual inflation now topping 6%, is this sufficient to force the Fed’s hand? This long, long transitory period has to heap pressure on the Fed,” said Seema Shah, chief strategist at Principal Global Investors.

(Reporting by Howard Schneider; Additional reporting by Ann Saphir in San Francisco and Shreyashi Sanyal in Bengaluru; Editing by Dan Burns and Andrea Ricci)

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Yen shines, Aussie sags as Powell turns hawk despite Omicron uncertainty

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December 1, 2021

By Kevin Buckland

(Reuters) – The safe-haven yen held steady on Wednesday, while the risk-sensitive Australian dollar languished near a one-year low after Federal Reserve Chair Jerome Powell signalled a faster taper of stimulus despite the risks around the Omicron COVID-19 variant.

Investors fear that hasty monetary tightening could choke off the nascent economic recovery, with little still known about Omicron’s potential to evade current vaccine protection or how deadly it might be.

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“Investors are staying cautious,” said Shusuke Yamada, chief Japan FX strategist at Bank of America-Merrill Lynch.

“It’s very difficult to make a judgement about the impact of Omicron when we don’t have a lot of information.”

Global markets fell sharply on Tuesday after the head of drugmaker Moderna said existing COVID-19 vaccines would be less effective against the new variant, although BioNTech’s chief executive struck a cautiously positive note, saying the vaccine it makes with Pfizer would likely offer strong protection against severe disease from Omicron.

The Aussie weakened 0.12% to $0.71245 after dipping as low as $0.7063 of Tuesday for the first time since Nov. 3, 2020. The New Zealand dollar was largely flat at $0.68195 after also touching the lowest since early November of last year at $0.6773 in the previous session.

The greenback ticked 0.09% higher to 113.26 yen, but still within sight of an overnight low of 112.535, a level not seen since Oct. 11.

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Powell said in testimony to Congress on Tuesday that Fed officials will discuss at their Dec. 14-15 policy meeting whether to end bond purchases a few months earlier than had been anticipated. The Fed chief finally did an about face on a long-held contention that inflation would be “transitory.”

Powell expressed confidence that the impact from Omicron will be far less than in the spring of 2020, when the pandemic erupted.

In response, traders wound up interest rate hike expectations, with money markets now almost fully priced for tightening at the June meeting.

Powell’s testimony continues later Wednesday.

“Powell’s unexpectedly hawkish tone overnight, essentially asserting that inflation risk has primacy over growth/Omicron risks, should leave the (dollar index) forging ahead,” Westpac strategists wrote in a client note.

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The index, which measures the dollar against six major peers, traded at 95.921 after sliding to 95.544 on Tuesday for the first time since Nov. 18, weighed down largely by an unwinding of bearish bets on the euro, the most heavily weighted component in the basket.

Westpac recommends buying dips in the index down to the mid-95 level.

The single currency slipped 0.04% to $1.1331, down from a two-week high of $1.1387 overnight.

Sterling traded not far from an 11-month low of $1.31945 reached overnight, last changing hands at $1.32955.

(Reporting by Kevin Buckland; Editing by Shri Navaratnam)

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OPEC+ begins two days of talks amid oil rout

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December 1, 2021

LONDON (Reuters) – OPEC and its allies begin two days of meetings on Wednesday to decide whether to release more oil into the market or restrain supply amid an oil price rout and fears the Omicron coronavirus variant could weaken global energy demand.

Oil prices fell to near $70 a barrel on Tuesday from as high as $86 in October, posting their biggest monthly decline since the outset of the pandemic, as the new variant raised fears of a supply glut.

For November, Brent fell by 16.4%, while WTI fell 20.8%, the biggest monthly fall since March 2020.

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“The threat to oil demand is genuine,” said Louise Dickson, senior oil markets analyst at Rystad Energy. “Another wave of lockdowns could result in up to 3 million bpd (barrels per day) of oil demand lost in the first quarter of 2022.”

Also pressuring prices, Federal Reserve Chair Jerome Powell said the U.S. central bank likely will discuss speeding its reduction of bond purchases amid a strong economy and expectations that a surge in inflation will persist.

The Organization of the Petroleum Exporting Countries (OPEC) will meet on Wednesday after 1300 GMT, followed by a meeting on Thursday of OPEC+, which groups OPEC with allies including Russia.

Several OPEC+ ministers, including from Russia and Saudi Arabia, have said there was no need for a knee-jerk reaction from the group.

But some analysts have suggested OPEC+ might put plans to add 400,000 barrels per day (bpd) to supply in January on hold.

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The group was already weighing the effects of last week’s announcement by the United States and other countries to release emergency crude reserves to temper energy prices.

OPEC+ has been gradually winding down record supply cuts of 10 million bpd implemented last year and currently has some 3.8 million bpd of reductions still in place.

The increase in OPEC’s oil output in November has again undershot the rise planned under a deal with allies, a Reuters survey found.

(Reporting by OPEC team, writing by Dmitry Zhdannikov, editing by Richard Pullin)

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New York accuses Amazon of backsliding over worker safety, seeks monitor

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December 1, 2021

By Jonathan Stempel

NEW YORK (Reuters) -New York state’s attorney general on Tuesday asked a state judge to appoint a monitor to oversee worker safety at an Amazon.com Inc fulfillment center in New York City, citing the retailer’s alleged rollbacks of COVID-19 safety measures that were “already inadequate.”

Letitia James, the attorney general, also wants a court order requiring the rehiring of Christian Smalls, who Amazon fired for allegedly violating a paid quarantine by leading a March 2020 protest over conditions at the Staten Island facility.

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James, a Democrat running to become New York governor, sued https://www.reuters.com/article/us-amazon-com-complaint/new-york-attorney-general-sues-amazon-over-covid-19-shortfalls-idUSKBN2AH0C2 Amazon in February in a New York state court in Manhattan over its safety protocols for thousands of workers at the Staten Island facility and a distribution center in the New York City borough of Queens.

She said Amazon is valuing profit over safety and “acting as if the pandemic is over” by rolling back safety protocols even as the Omicron variant https://www.reuters.com/business/healthcare-pharmaceuticals/omicron-variant-could-outcompete-delta-south-african-disease-expert-says-2021-11-30 of the COVID-19 virus threatens to increase transmission rates.

The alleged rollbacks include making the Staten Island facility “mask-optional” for vaccinated workers while not requiring masks for unvaccinated workers, and failing to enforce social distancing.

In her motion for a preliminary injunction, James said the proposed monitor would oversee upgraded cleaning, hygiene and social distancing procedures.

“While case rates, hospitalizations, and deaths rise, Amazon rescinds protections and packs in more workers for its holiday rush,” James said in her motion. “Amazon’s ongoing – and worsening – failure to protect workers must be halted.”

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Amazon said in a statement it has taken a “comprehensive approach” to COVID-19 safety.

“It’s disappointing that the Attorney General is seeking to politicize the pandemic by asking for ’emergency’ relief now despite having filed this lawsuit nine months ago,” Amazon said.

The Seattle-based company is appealing a judge’s refusal in October to dismiss James’ lawsuit.

Amazon on Nov. 15 reached a separate settlement with California https://www.reuters.com/legal/government/amazon-settles-california-claims-it-concealed-covid-19-cases-workers-2021-11-15 over claims it violated a state “right-to-know” law by concealing from warehouse workers and local health agencies the numbers of workers being infected with COVID-19.

(Reporting by Jonathan Stempel in New York; Editing by Matthew Lewis and Stephen Coates)

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