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Highlights
HILSENRATH'S TAKE: MIXED INFLATION READINGS COMPLICATE FED'S CONFIDENCE HURDLE
The Federal Reserve has said it will begin raising short-term interest rates when officials are reasonably confident that inflation is on a path to move toward 2%. Can they get reasonably confident at a time when one of their key measures of inflation is decelerating?
The Commerce Department reported Thursday that its personal consumption expenditure price index, excluding volatile food and energy prices, was up 1.2% in May from a year earlier, the smallest increase since May 2014. It has slowed from increases of 1.5% between May and October of last year.
The PCE price index is the Fed's preferred inflation measure. It is the measure officials forecast in the Fed's quarterly Summary of Economic Projections, which helps guide their interest rate decisions. The PCE index excluding food and energy -- which they also project in the SEP -- is especially important now because officials are trying to look through the volatility in energy prices that has moved the headline index substantially in the past seven months.
There is a lot at play in the core PCE slowdown. It is likely due in part to pass-through from the energy price drop into other sectors. Oil price declines coincided with the slowdown in prices outside of the energy sector. The strengthening dollar also has weighed on imported goods prices, a factor restraining non-food and non-energy prices. Fed officials see both of these developments as transient and something they're prepared to look past in making rate decisions. Still, it is striking that services prices -- which should be less exposed to oil price drops and import price declines than goods prices -- have slowed in the PCE index as well.
Meantime, a divergence is building between prices measured in the PCE index and those measured in the consumer price index produced by the Labor Department. While core PCE prices have slowed, core CPI prices were up 1.7% in May from a year earlier and they have been rising at around that pace since last August. This divergence is due in part to the different weightings the two indexes place on various sectors. The CPI index places heavy weight on home rental and ownership costs, which are firming. The PCE index places heavy weight on health care costs which have been restrained.
It complicates the judgment officials have to make in the months ahead about when to raise rates and how aggressively to proceed. Fed Chairwoman Janet Yellen said in March that she did not need to see a significant pickup in core inflation readings before making a decision to raise rates. Some stabilization, however, would probably help at this point.
-By Jon Hilsenrath
MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD
Tarullo: Something's Changed in the Bond Market. Federal Reserve governor Daniel Tarullo said Thursday changing bond-market liquidity conditions remain unaccounted for, with uncertain implications for overall financial stability. Mr. Tarullo was addressing rising anxiety that changes in financial firms' regulation, among other factors, is causing some companies to pull back from the bond market, in turn boosting the risk stress-driven volatility could cause harm to the economy as a whole.
Powell: More to Do on Payment Security. More can and should be done to improve the security of the U.S. payment system, including the adoption of new technologies in a "prudent fashion," Fed governor Jerome Powell said Thursday. "The market should be the primary driver of change, and government should avoid stifling healthy innovation," Mr. Powell said in remarks at a conference hosted by the Federal Reserve Bank of Kansas City in Kansas City, Mo.
Any Deal on New Greek Bailout Funds Put Off Until Weekend. European finance chiefs pushed off talks to seal a Greek bailout deal until the weekend after ending another meeting without agreement, leaving only days to keep Athens from defaulting on a loan payment early next week.
Euro Exit Would Bring Greece Trauma Before Growth .
Analysis: 'Grexit' Isn't the Scary Prospect It Once Was .
Politics May Yet Save the Euro.
Belgian Official: ECB Supports Continue Lending to Greece. The European Central Bank's governing council's continued approval of emergency loans to Greek banks is justified because the banks are solvent with adequate collateral, Belgium's Central Bank Governor Jan Smets said Thursday. The ECB kept its lending to Greek banks unchanged Thursday under the emergency lending program known as ELA, according to a person familiar with the matter. Lending under the program had been rising steadily in recent days, and now stands at nearly 89 billion euros ($99.58 billion), as uncertainty over Greece's future in the eurozone had sparked an outflow of deposits from its banks.
Lending to Eurozone's Private Sector Rises in May. Lending to the eurozone's private sector rose at its fastest rate in more than three years in May, according to a report on Friday from the European Central Bank, suggesting the region's economic recovery is beginning to broaden out and boost demand for new credit.
Mersch: ECB Needs To See Rise in Inflation Before We Can 'Declare Success' The European Central Bank will need to see "convincing evidence" that inflation is getting back to its target of just below 2% before it can "declare success," ECB executive board member Yves Mersch said in remarks Thursday. "We intend to carry out our public sector purchases until end-September 2016 and, in any case, until we see a sustained adjustment in the path of inflation," said Mr. Mersch in comments made in London and published on the ECB's website. "Only once we see convincing evidence that inflation has returned sustainably to levels in line with our objective will we be able to declare success."--Dow Jones Newswires.
Brazil to Narrow Inflation Target Range to 3%-6%. Brazil will narrow the inflation target range for its central bank starting in 2017, a signal the bank intends to be tougher in its fight to control price increases. The center point of the range will remain unchanged at 4.5%, but the tolerance band will be cut to 3% to 6%, from 2.5% to 6.5% now, the finance ministry said Thursday. The current range has been in effect since 2006.
India's State-Owned Banks Strained by Bad Debt. The gulf between India's healthy private banks and its fragile state-owned lenders is widening, sparking concerns that the swelling pile of bad debt is straining government-controlled banks and preventing them from growing, a report by the country's central bank warned Thursday. Privately-owned banks, which account for about a third of the Indian banking sector's assets, are showing faster credit and deposit growth, steady profitability and a lower share of bad loans on their balance sheets, said the report.
Philippines Will Stand Out After U.S. Interest Rates Rise. The Philippines is well positioned to weather the shock resulting from a rise in U.S. interest rates, said finance secretary Cesar Purisima. "There'll be a knee-jerk reaction" to the change of U.S. monetary policy, where money will flee from emerging markets, but after investors reassess the shock, the Philippines will stand out and "look favorable" compared with other markets, said Mr. Purisima in an interview with The Wall Street Journal.
Reserve Bank of New Zealand Outlines Priorities for Next Three Years. The Reserve Bank of New Zealand's priorities and initiatives for the next three years include implementing changes arising from its regulatory review and developing a comprehensive stress-test frame for New Zealand's banking system and a new financial management systems for the banking industry--Dow Jones Newswires.
GRAPHIC CONTENT
Inflation Undershoots Target. The personal consumption expenditures price index, which is the Fed's preferred inflation gauge, rose a seasonally adjusted 0.3% from April, the Commerce Department said Thursday. It was the biggest rise in more than two years and largely reflected increased prices for energy, including gasoline. Food prices were flat, and prices excluding food and energy ticked up 0.1%. Still, for the 37th consecutive month, annual inflation undershot the central bank's 2% target.
FORWARD GUIDANCE
-12:45 p.m. EDT: Kansas City Fed's George speaks on the payments system in Kansas City, Mo.
RESEARCH
The Real Impact of Gas Prices. The Brookings Institution's Adie Tomer looks at how fluctuations in gas prices really affect consumers. "Gas prices matter--but only to a degree. There's no question that sustained price increases will hit consumers, and they're likely to crowd out more elastic categories like entertainment and apparel. But the real economic impact of more expensive gas can only be understood when compared to other, larger expense categories like housing," he writes. "At the same time, the significance of gas prices shouldn't be understated, either. So finding ways to reduce demand--or increasing the elasticity of demand so that we can buy less when prices rise--is the most promising way to dull the impact of rising gas prices."
COMMENTARY
(MORE TO FOLLOW) Dow Jones Newswires
June 26, 2015 07:18 ET (11:18 GMT)
Is Financial Repression Here to Stay? Howard Davies at Project Syndicate imagines a world in which interest rates stay low for the foreseeable future. "Can we really expect the old normal -- positive long-term interest rates on government bonds -- to return? Maybe it is unreasonable for investors to expect positive rates on safe assets in the future. Perhaps we should expect to pay central banks and governments to keep our money safe, with positive returns offered only in return for some element of risk. One reason is that investment may never reach its previous levels. If a service-based economy simply has less need for expensive fixed capital, why should we expect a return to the days when business investment was a strong component of demand? Apps are cheap."
What's Behind the U.K. Yield Curve? Minouche Shafik on VoxEU has a more optimistic outlook on interest rates. "The current low level of yields reflects the influence of a set of precautionary actions taken by public and private participants in financial markets. Since the onset of the financial crisis, households, firms and governments have had an increased desire to reduce their debt; financial market participants have sought greater protection against downside risks; and international central banks have embarked on asset purchase schemes in response to economic developments. These are legitimate reasons for the low level of long yields in the UK. But they shouldn't be mistaken as indicating that the headwinds currently affecting the nominal and real economy will persist for decades to come."
The ECB and Income Inequality. Economists at the Bruegel think tank write that the European Central Bank's unconventional monetary policy operations may have further increased income inequality in the eurozone by raising the prices of assets largely owned by the wealthy. But while they said the ECB should "monitor" the impact of its programs on inequality, they concluded it is down to governments to address the problem. "The ECB should focus on its price stability mandate and thereby support the fragile recovery now taking place in the euro area," they write. "This is the best way for monetary policy to contribute to the avoidance of an increase in inequality in times of recession."
BASIS POINTS
Consumer Spending Soared. Personal spending jumped a seasonally adjusted 0.9% in May from a month earlier, the fastest rate in almost six years, the Commerce Department said.
Jobless Claims Up. Initial claims for jobless benefits, a measure of layoffs across the U.S. economy, increased by 3,000 to a seasonally adjusted 271,000 in the week ended June 20, the Labor Department said Thursday.
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(END) Dow Jones Newswires
June 26, 2015 07:26 ET (11:26 GMT)
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