Federal Reserve Jefferson: Progress Toward Achieving the 2% Target Is Slow, and the Path to Inflation Reduction Is Expected to Remain Uneven

Remarks of Officials

Summary:

Federal Reserve Vice Chairman Jefferson indicated that the current U.S. inflation rate remains somewhat elevated. Progress toward the Fed's 2% target has been slow over the past year, and the path of inflation is expected to remain uneven. The Fed may consider pausing adjustments to the policy interest rate.

The U.S. economy exhibits considerable resilience, although inflation persists slightly above the long-term target. Robust consumer spending has been a critical economic support as the Fed combats inflation, largely due to wealth accumulation among numerous households since the pandemic's onset. Substantial gains in equity and real estate values have significantly contributed to the strength of the consumer sector. Of particular note is the increase in household liquid assets, concentrated among higher-income brackets. Overall, household liquid assets have risen by approximately 20% compared to pre-pandemic levels, while those of middle- and lower-income households have decreased.

The labor market remains generally robust, with unemployment rates remaining low. By mid-2024, the gap between available jobs and available workers had essentially reverted to 2019 levels, and the unemployment rate appears to have stabilized, approaching the median of 4.2%, which is the long-run sustainable level currently perceived by FOMC participants. This reflects a decline in job vacancies and an improvement in labor supply. Various indicators suggest that the labor market remains tight but is no longer overheating.

Overall, the Fed's monetary policy stance continues to work to restrain the economy, even though cumulative rate cuts of 100 basis points last year have brought the policy closer to neutral. A strong economy will allow the Fed to prudently ease further in the near term.

Jefferson's Speech

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Warren Takunda

Stocks

London stocks fell in early trade on Thursday as investors mulled a slump in consumer confidence and results from the likes of Lloyds and Centrica.

At 0830 GMT, the FTSE 100 was down 0.3% at 8,689.26.

Investors were mulling a survey out earlier from the British Retail Consortium, which showed that consumer confidence worsened this month, with views about the economic situation and personal finances taking a hit.

The BRC Consumer Sentiment Monitor for February showed that 50% of people expect the state of the UK economy to worsen over the next three months, up from 48% in January and 42% in December.

With just 13% of consumers expecting better conditions and 32% predicting no change, that nets out to a balance of -37, down from -34 the month before.

This was the fifth straight month of worsening expectations, and a sharp drop since the summer, when more people predicted an improvement in conditions than a deterioration.

"People’s expectations of the economy reached a new low, having fallen almost 40 points since July 2024," said the BRC's chief executive Helen Dickinson.

Consumer views of their own financial situation fell to a balance of -11 in February from -4 in January, and while personal retail spending expectations rose to -5 from -9, this may have been driven by expectations of higher prices in the coming months, the BRC said.

Two-thirds of retailers have said that prices will have to rise due to £7bn of additional costs coming their way, which include higher employer national insurance contributions and a new packaging levy, the BRC said.

"With many businesses warning of the impact that April’s employer NIC’s increase will have on hiring, and the rising energy price cap pushing up the cost of domestic bills, it is little surprise that many households are worried. And while there was a positive increase in expectations of personal retail spending, this may be largely driven by the expectations of higher prices in the future," Dickinson said.

In equity markets, British Gas owner Centrica surged as it hiked its dividend and announced a £500m share buyback after full-year earnings beat forecasts.

Anglo American was also a high riser despite posting a full-year loss of $3.1bn after a large impairment related to its De Beers diamond operation as it continued restructuring plans to focus on copper and iron ore.

The loss attributable to shareholders compared to a profit of $283m in 2023, while the dividend was cut to 64 cents a share, from 96 cents.

Lloyds Bank gained even as it said annual profit fell 20.4%, worse than expected, and set aside an extra £700m to cover potential claims against motor finance commission deals.

Pre-tax profit came in at £5.97bn, compared to £7.5bn a year earlier and consensus estimates of £6.39bn.

Net interest margin - the difference between savings and loan rates - fell 16 basis points to 2.95%.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said the £700mn motor finance charge "tarnishes a strong final quarter".

"Lloyds has capped off a strong year with a clouded fourth-quarter result, setting aside a hefty £700m provision for potential charges related to the ongoing motor finance saga. While you could argue the provision is overly cautious, Lloyds holds the largest exposure of any major UK bank, and the outcome remains uncertain. Despite this, the stock is up over 40% in the past year, reflecting a solid banking outlook and robust performance," he said.

"Beneath the surface, Lloyds is delivering strong results. Excluding the motor finance charge, fourth-quarter figures exceeded expectations, thanks to borrowers performing better than anticipated. Remarkably, Lloyds has managed to improve its loan quality over the course of the year, defying fears that borrowers would buckle under the pressure of persistent inflation."

On the downside, opioid addiction treatment maker Indivior tanked after results.

Recruiter Hays lost ground as it reported a drop in first-half profit amid "challenging" market conditions, as economic and political uncertainty weighed on client and candidate confidence.

Source: Sharecast

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FED

Remarks of Officials

On February 19, Raphael Bostic, President of the Federal Reserve Bank of Atlanta, gave an interview, with the following key points:

The January Consumer Price Index (CPI) data exceeded expectations, but it is too early to determine whether this marks a new inflationary trend. The data showed that the core CPI, excluding food and energy, rose by 0.4% MoM, higher than the 0.2% increase in December and marking the largest monthly gain since April 2023. Additionally, the YoY increase in core CPI was 3.3%, slightly above December's 3.2%, representing the first uptick in inflation since July of last year. U.S. inflation is expected to decline to around the 2% target level by early 2026. The neutral interest rate is anticipated to be between 3% and 3.5%, with the potential to approach this level by early next year. Policymakers will continue to monitor data over the coming months to assess whether there is a change in the inflation trajectory.

As long as the economy remains robust, officials are prepared to maintain interest rates at a restrictive level until inflation cools further. Some officials have also proposed slowing or pausing the pace of the Federal Reserve's balance sheet reduction, as debt ceiling dynamics over the next few months could cause significant fluctuations in reserves.

Bostic emphasized that the current stance remains restrictive. Policymakers should be more cautious than they were over the past six to eight months, with the debt ceiling being one factor and how banks allocate capital also being an issue to watch. The economic policies of the Trump administration add uncertainty to inflation, with some potentially exacerbating inflationary pressures and others possibly promoting investment. Bostic expressed agreement with the idea of the Federal Reserve pausing policy adjustments under the current economic conditions to observe how the economy evolves and using this information to guide policy-making over the next few months.

Overall, if inflation continues to rise, the Fed may delay rate cuts and even reconsider the possibility of further tightening. Conversely, if economic growth slows and inflation declines, there could still be room for rate cuts within the year.

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Justin

Economic

Commodity

Gold prices rose to a record high on Thursday as investors turned to bullion for safety on fears US President Donald Trump's tariff plans would stoke inflation and a global trade war.

Spot gold was up 0.5% at US$2,945.83 an ounce, as of 0621 GMT, after hitting a record high of US$2,947.11 earlier in the session.

Bullion has risen 12% so far this year and hit a fresh peak for the tenth time on Trump tariff fears.

US gold futures GCcv1 gained 0.9% to US$2,963.80 on Thursday.

"Uncertain outlooks for both global trade and inflation are proving to be conducive for gold and are acting to bring the US$3,000 level within range," said Tim Waterer, chief market analyst at KCM Trade.

Since his inauguration, Trump has imposed a 10% tariff on Chinese imports and a 25% tariff on steel and aluminium. He said on Wednesday he would announce tariffs related to lumber, cars, semiconductors and pharmaceuticals "over the next month or sooner."

Minutes of the Federal Reserve's last policy meeting showed on Wednesday that Trump's initial policy proposals raised concerns about higher inflation and affirmed a continued pause on rate cuts.

Despite chances of fewer rate cuts this year, market participants maintain their overall bullish outlook for gold.

"Gold has and should continue to benefit from robust physical market demand, underpinned by resilient central bank purchases and as physical gold ETFs transition from sellers to marginal buyers," said Trevor Yates, analyst at Global X.

Gold is seen as a hedge against geopolitical risks and inflation, but higher interest rates dampen the non-yielding asset's appeal.

"If we look at potential risks which could slow gold prices down, safe-haven demand could dry up somewhat if a peace deal moves closer to fruition between Russia and Ukraine," Waterer said.

Trump denounced Ukrainian President Volodymyr Zelenskiy as a "dictator" on Wednesday and warned he had to move quickly to secure peace or risk losing his country.

Spot silver firmed 0.5% to US$32.88 an ounce. Platinum gained 0.4% to US$976, while palladium rose 0.6% to US$973.87.

Source: Theedgemarkets

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RBNZ

Remarks of Officials

On February 20, RBNZ Governor Adrian Orr testified at a hearing, highlighting the following points:

Economic activity in New Zealand is recovering, with the economic outlook consistent with the inflation target over the medium term, supporting further rate cuts. The central bank expects the official cash rate (OCR) to drop to 3.45% by June and to 3.10% by year-end, lower than the previously projected 3.2%. Since August last year, the RBNZ has cumulatively reduced interest rates by 175 basis points, with inflation deceleration providing policymakers with additional room for monetary easing.

Inflation in New Zealand has declined in recent months, currently standing at 2.2%. However, the RBNZ projects that inflation may temporarily rise to 2.7% in the third quarter before falling again. The central bank emphasized its ability to maintain price stability over the medium term and to address future inflationary shocks, although global tariff policy uncertainties pose some risks to the economy. Significant spare capacity remains in the economy, and domestic inflationary pressures are expected to continue to ease.

In the fourth quarter of 2024, the unemployment rate reached 5.1%, the highest since the end of 2020. Including underemployed workers, the underutilization rate of the labor force rose from 10.7% a year earlier to 12.1%, highlighting the weakening labor market. Employment fell by 32,000, with males accounting for 85% of the decline. The reduction was mainly concentrated in trade and machinery-related positions, with a significant drop in full-time employment for males and an increase in part-time positions. The labor force participation rate fell from 71.2% three months earlier to 71%, partially offsetting the rise in unemployment. Employment growth is expected to rebound in the second half of the year as domestic activity accelerates.

The RBNZ plans to implement two 25-basis-point rate adjustments, with a cumulative 50-basis-point cut expected by mid-year. Future interest rates will continue to decline, but the central bank is not in a rush to adjust rates to the 3% level, as inflation remains elevated.

Near-term risks include a slowdown in GDP growth, while long-term risks involve U.S. tariff policies that could dampen global economic growth. The RBNZ is prepared to address any potential shocks and will take action as necessary to support the economy.

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Glendon

Economic

Forex

SHANGHAI (Feb 20): China's yuan strengthened against the dollar on Thursday, as market sentiment improved after US President Donald Trump said a new trade deal with Beijing was possible.

Renewed tariff threats under the Trump administration have been weighing on the yuan in recent months, and the president's latest comment eased investor worries about a further deterioration in the Sino-US trade tensions in the short term, currency traders said.

During Trump's first term as president, a series of tit-for-tat US-China tariff announcements drove the yuan down more than 12% against the dollar between March 2018 and May 2020.

As of 0331 GMT, the onshore yuan was 0.07% higher at 7.2724 to the dollar, while its offshore counterpart traded at 7.2731.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1712 per dollar, and 1,144 pips firmer than a Reuters estimate of 7.2856.

The central bank has set its official guidance on the firmer side of market projections since mid-November, which analysts and traders see as a sign of unease over the yuan's decline.

The yuan's strength also comes as authorities face a delicate balancing act between financial and currency stability and monetary easing, traders and analysts said.

China left lending benchmark loan prime rates (LPRs) unchanged for the fourth straight month in February.

"The US's relatively mild 10% tariffs on Chinese goods, with room for trade negotiation, suggested that the trade war shocks could be more affordable to China, reducing the urgency for immediate rate cuts," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

Meanwhile, the state-owned Economic Daily said on Thursday that the central bank's recent improvements to its macroprudential policy toolbox were a key initiative for preventing and fending off financial risks and maintaining the stability of financial markets.

"The global economic and financial situations remain severe and complex, with the adverse impact of changes in the external environment deepening and factors of instability and uncertainty clearly increasing," the newspaper said in an editorial.

The newspaper listed examples of improvements including the central bank's recent move to boost capital flows by allowing companies to borrow more overseas and the regular issuance of yuan bills in Hong Kong to stabilise foreign exchange market expectations and increase market resilience.

Source: Theedgemarkets

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Alex

Economic

US President Donald Trump said it would be possible to reach a fresh trade deal with China, signalling he is open to heading off a brewing trade fight between Washington and Beijing.

“It’s possible, it’s possible,” Trump told reporters on Air Force One on Wednesday, when asked if he would make a new agreement with China.

Trump did not describe the parameters of a potential deal, and any agreement would face significant obstacles — some of the president’s own making. Trump has ratcheted up pressure on China with an additional 10% tariff on all imports from the country, punishment for what he said are unfair Chinese trade practices and failure to stop the flow of fentanyl into the US.

The president nonetheless heaped praise on Chinese President Xi Jinping, but once again did not say if or when they would speak directly.

“There’s a little bit of competitiveness, but the relationship I have with President Xi is, I would say, a great one,” Trump said.

Trump brokered what was billed as an initial trade deal with China in Jan. 2020, under which Beijing promised to crack down on theft of US trade secrets and technology, pledged to purchase an additional US$200 billion (RM886 billion) in American products by the following year and lower some trade barriers for US exports. But the relationship was derailed just weeks later when the coronavirus pandemic swept the globe, which Trump blamed on China.

“They had about US$50 billion worth of our product, and we were making them buy it. The problem is that Biden didn’t push them to adhere to it,” Trump said, referring to his predecessor.

‘Off the cuff’

Trump’s comments, made during Asian market hours, are the latest example of the president’s ability to influence market sentiment with a few short words, forcing China-focused traders to parse scant details and tone for clues as to the future of the US-China relationship.

Their initial read settled on mildly positive. The Chinese yuan climbed on Trump’s comments, gaining 0.2% in the offshore market after three straight sessions of drops. The onshore yuan rose 0.1%. Chinese stocks pared some of their early declines, and the Hang Seng China Enterprises Index, which comprises Chinese stocks listed in Hong Kong, trimmed its intraday drop to under 1.5% from as much as 2.4%.

“Markets are still getting used to the barrage of social media posts, comments to reporters and interviews that President Trump is giving,” said Khoon Goh, the head of Asia research at ANZ Banking Group. “This is so different from the previous administration.”

Trump’s comments on China are “just an off the cuff comment and I wouldn’t read too much into it”, he added.

Eddie Cheung, a senior strategist at Credit Agricole CIB in Hong Kong, said Trump’s approach to China has been “milder than expected” so far, which has given some support to markets. “But it’s reasonable to assume there will still be bumps on the way towards such a trade deal.”

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