Mester Says Still More Work Needed in Inflation Fight; Yellen Takes Hawkish Stand Over China; Fed Rethinks Bank-Capital Loophole

Mester Says Still More Work Needed in Inflation Fight; Yellen Takes Hawkish Stand Over China; Fed Rethinks Bank-Capital Loophole By James Christie

Good day. Inflation is still too high and proving to be stubborn, Federal Reserve Bank of Cleveland President Loretta Mester said yesterday, noting that,"Some measures of underlying inflation...have shown little improvement since their peaks." To move toward the Fed's 2% inflation target, Ms. Mester said she expects monetary policy will need to go somewhat further into restrictive territory this year, with the Fed's benchmark federal-funds rate rising above 5%. Also Thursday, former Fed Chair Janet Yellen, now Treasury secretary, laid out the Biden administration's vision for its economic relationship with China, saying "The United States will assert ourselves when our vital interests are at stake. But we do not seek to decouple our economy from China's." She added that "A full separation of our economies would be disastrous for both countries." And today, the Journal reports that the the Fed is considering ending an exemption that allows some banks to boost the amount of capital they report for regulatory purposes, according to people familiar with the matter.

Read on for today's news and analysis.

Top News Loretta Mester Says Fed Must Do More to Tackle Stubborn Inflation

Federal Reserve Bank of Cleveland President Loretta Mester said the U.S. central bank is much closer to the end of monetary policy tightening than the beginning, but it must still do more to lower inflation .

Despite progress in lowering inflation from last year's highs, it remains too high and is proving to be stubborn, Ms. Mester said Thursday during a speech in Akron, Ohio.

Banks Take Out More Loans from Fed

Cash-hungry banks slightly increased borrowing from the Federal Reserve for the first time in five weeks, to $143.9 billion, in a sign of lingering stress on the U.S. financial system. A bevy of mostly mid- to small-sized banks have borrowed heavily from the Fed through an emergency program set up after the failure of Silicon Valley Bank in March. The Fed set up the program to prevent further bank runs and stabilize the U.S. financial system. Borrowing rose by $4.4 billion in the seven days ended April 19 from $139.5 billion in the prior week, according to a Fed survey released Thursday. (MarketWatch)

Fed Rethinks Loophole That Masked Losses on SVB's Securities

The Federal Reserve is considering closing a loophole that allows some midsize banks to effectively mask losses on securities they hold, a contributing factor in the collapse of Silicon Valley Bank.

U.S. Economy Yellen Says Security Comes Before Economy in U.S.-China Ties

Treasury Secretary Janet Yellen said protecting national security would be the U.S. priority in its relationship with China, even if that slows the economy, taking a hawkish tone while calling for more communication between the superpowers.

Home Sales Fell in March as Mortgage Rates Weighed on Market

U.S. existing-home sales, which make up most of the housing market, fell by 2.4% in March from the prior month to a seasonally adjusted annual rate of 4.44 million, and declined by 22% from a year earlier.

Mortgage Rates Rise for First Time in More Than a Month

Drop in Transportation Stocks Foreshadows Weakening Economy

Economically sensitive stocks, like those of transportation and small-cap companies, are trailing the broader market, reflecting growing investor concern about a potential recession striking the U.S.

AT&T Sees Signs of Businesses, Consumers Paring Back Spending

Biden's Labor Secretary Pick Seeks to Win Over Skeptical Democrats

Acting Labor Secretary Julie Su defended her record at the start of a confirmation hearing Thursday, as she seeks to gain Senate approval to lead the department. Some Democrats haven't said whether they would support her.

Key Developments Around the World Europe's Economy Grows Despite Banking Stress

Europe's economy has kept growing in April, with a monthly survey of purchasing managers showing little sign that the recent banking strains on the continent are weighing on the region's economic rebound.

Russia Mistakenly Bombs Own City

Russia said it had mistakenly bombed its own territory late Thursday as Ukraine's Western backers were preparing to meet to discuss future military deliveries to the country to assist in Kyiv's expected counteroffensive.

Andes Turmoil Rattles Governments, Spurs Migration to U.S.

Mounting violent crime and political upheaval are buffeting Andean countries in South America that had recently been stable, threatening fragile governments and prompting hundreds of thousands to flee north to the U.S.

Glynn's Take: Woe to Those Signing Up to the New RBA Board By James Glynn

Australian Treasurer Jim Chalmers moved to retool the country's central bank this week by throwing out its old policy-setting board in favor of a modernized committee of experts that will look and operate a lot like similar bodies at the Bank of England and the Bank of Canada.

For some observers, the change looks like a breath of fresh air for a Reserve Bank of Australia that has grown stale in its way of thinking. For the Australians who lived through a record-breaking streak of 10 straight interest-rate increases over the past year, there is hope that perhaps the new board experts will ease pressure on a crippled mortgage belt. The problem is that neither of these assertions ring true. And worryingly, the changes make the path for future monetary policy much less clear. Read more .

Financial Regulation Roundup U.S. Lets Bankrupt Voyager Sell User Accounts to Binance.US

The U.S. government reached an agreement with Voyager Digital Ltd. allowing the bankrupt cryptocurrency platform to sell its user accounts to Binance.US, meaning Voyager customers will be able to access their funds again .

Shopping for Insurance Against Debt-Ceiling Debacle? Buyer Beware

As the U.S. government nears yet another debt-ceiling crisis, an obscure Wall Street instrument is gaining attention for the first time in 10 years. It is basically an insurance contract known as a credit-default swap.

Forward Guidance Friday (all times ET)

4 a.m.: Eurozone Flash PMI for April

10:30 a.m.: ECB's Elderson speaks to Peterson Institute for International Economics

4:35 p.m.: Fed's Cook speaks at Georgetown University McDonough School of Business

Tuesday

9 a.m.: S&P CoreLogic Case-Shiller Home Price Index for February

10 a.m.: U.S. new-home sales for March; The Conference Board Consumer Confidence Index for April

Research Hawkish Data Dims Chance of Halt to BOE Rate Increases

It is difficult to be a dove right now in the U.K., HSBC economists write in a note. Hawkish data such as consumer-price index annual inflation of 10.1% in March coming in well above Bank of England expectations of 9.2% at this point means monetary-policy committee members at the central bank that might have been inclined to join doves in May are likely to be thinking again, the economists write. An expected slowdown in wage growth in February also failed to materialize, and high food and core inflation continue to worry, they add. Until now, the 25 basis-point rise in March would have been "all for now," but HSBC now pencils in two further interest rate increases of 25 basis points in May and June, with no scopes for cuts this year or next.

-Edward Frankl

Size of ECB Interest-Rate Rise at May Meeting Remains Open

With two weeks left until the European Central Bank's May 4 meeting, the only question seems to be whether the ECB will opt for a 25- or a 50-basis point interest-rate rise, Carsten Brzeski, global head of macro at ING, writes in a note. "The growing divide within the ECB, signaled in the accounts, is probably the best argument for a compromise of a 25bp interest-rate increase," he writes after the ECB released its accounts of its March 16 meeting. The next inflation print and the latest Bank Lending Survey, both to be released only a few days before the May meeting, will tip the balance, he writes, adding that a 50 basis point increase can't be ruled out.

-Emese Bartha

Commentary The Labor Market Might Be Bending; It Isn't Breaking

Maybe by their following meeting, in mid-June, Federal Reserve policy makers will have the evidence they need to go on hold with interest rates, but that is by no means a sure thing , Justin Lahart writes.

Executive Insights

Editor's Note: Each week, we will share selections from WSJ Pro that provide insight and analysis we hope are useful to you. The stories are unlocked for The Wall Street Journal's subscribers.

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04-21-23 0715ET