Powell Doesn't See Target Core Inflation Until 2025; Big Banks Fare Well in Fed Stress Tests

Powell Doesn't See Core Inflation Returning to Target Until 2025; Big Banks Fare Well in Fed Stress Tests By Michael Maloney

Good day. The Federal Reserve is likely to keep lifting interest rates even though officials this month decided to slow the pace of increases by holding off on another move higher, Chair Jerome Powell said yesterday at the European Central Bank's policy forum in Sintra, Portugal. Bank of Japan Gov. Kazuo Ueda, also in Sintra, said he is looking to see more evidence that inflation will remain high before changing monetary policy. And the largest U.S. banks performed well in the Fed's latest round of stress tests.

Now on to today's news and analysis.

Top News Powell Says Fed's Inflation Fight Could Take Years

Fed leader Jerome Powell said because the central bank had lifted rates so quickly last year, there hasn't been enough time to see the effects of those moves in slowing economic activity and inflation. "Policy hasn't been restrictive for very long...so we believe there's more restriction coming," Powell said during a panel discussion with other central bankers.

And in remarks prepared for delivery at a conference in Madrid today, Powell said that the failures of Silicon Valley Bank and two other midsize lenders this spring underscore the need for strong capital buffers to ensure the banking system is resilient during times of stress.

Fed Says Biggest Banks Can Weather Severe Recession

The Fed said the biggest U.S. lenders remain healthy , a vote of confidence for the financial system after a series of midsize bank failures earlier this year. All 23 firms that participated in the latest stress tests performed well, the Fed said, meaning they would stay above minimum capital levels and keep lending to businesses and households in a severe recession.

U.S. Economy Cheaper Natural-Gas Prices in Store This Summer

Natural gas is starting the summer at less than half the price it was a year ago. Cheaper natural gas should mean lower electricity bills for a lot of American households when they crank up their air conditioners. Makers of chemicals, cat litter, fertilizer, wallboard, steel and paper have told investors over the past few weeks that lower gas bills are easing cost pressures and bolstering profit margins.

Biden in a Race to Reverse Voters' Pessimism About Economy

President Biden doesn't have much time for his economic policies to take root . His 2024 re-election campaign is under way, at a time when inflation remains high, and polling suggests most Americans disapprove of his management of the economy. That leaves him with a limited number of months to turn around perceptions about his ability to steer the U.S. economy out of the aftermath of the global pandemic.

Key Developments Around the World BOJ Seeks More Evidence Inflation Will Stay High, Ueda Says

Bank of Japan Gov. Kazuo Ueda said he sees signs that the country's inflation rate is heading toward target but isn't yet confident enough to change monetary policy. "We think underlying inflation is still a bit lower than 2%. That's why we are keeping rates unchanged," Ueda said.

ECB Aims for New Operation Framework in Six to Nine Months

The European Central Bank's latest monetary-policy operational framework to shrink its balance sheet might be ready later than previously expected.

"We are discussing our operational framework and hopefully we will be able to complete that work in the next six to nine months, and that will really decide the desirable size of our balance sheet," ECB chief Christine Lagarde said. Previously, the ECB had wanted to complete this work by the end of the year. (Dow Jones Newswires)

BOE's Bailey 'Interested' by Market's Pricing in of Brief Rate Peak

The governor of the Bank of England expressed some surprise that the market seems to believe the peak in interest rates will be relatively brief. "I've always been interested that the market thinks the peak will be quite short-lived in a world where we're dealing with more persistent inflation," Andrew Bailey said at a panel discussion with other central bank chiefs at the ECB Forum on Central Banking. With the transmission of monetary tightening different from previous cycles, particularly because there are more fixed-rate mortgages in the U.K. than previously, history isn't going to be a great guide, he said. Bailey also said that the heads of the major central banks regularly discuss global developments, but don't coordinate on monetary policy. (DJN)

China's Property Market Enters Troubling New Phase

China's long-running battle to stabilize its real-estate market appears to be entering a troubling new phase , with data showing waning demand as a wave of home listings hits the market, raising fresh risks for an already-fragile economy.

Financial Regulation Roundup FTX Begins Talks on Reboot Amid Regulatory Crackdown on Crypto

FTX is moving ahead with plans to restart its flagship international cryptocurrency exchange, an effort that will face major challenges as regulators ratchet up their oversight of the industry. The crypto company has been holding early talks with investors about backing a potential restart of the https://urldefense.com/v3/__http://FTX.com__;!!F0Stn7g!CNVHFAsvzwu2s7B5qXKdd6wPyMjmTPFRrbDfEocHuU5qzAA32TmU1r3g11cyE_zzMf-IIRvS1gpsKgOvM2uMNzEF3UXf18booA_l05vh$ exchange through structures including a joint venture, people familiar with the discussions said.

Broker Faces Insider-Trading Probe Tied to Morgan Stanley Deals

Federal prosecutors in Manhattan are investigating whether a securities broker and his associates traded on confidential information illegally obtained from Morgan Stanley about planned mergers and acquisitions, according to people familiar with the matter.

Forward Guidance Thursday (all times ET)

8:30 a.m.: U.S. gross domestic product, third estimate for first quarter; U.S. weekly jobless claims

10 a.m.: U.S. pending home sales index for May

12:30 p.m.: Bank of England's Tenreyro speaks to Society of Professional Economists

3 p.m.: Atlanta Fed's Bostic speaks to Irish Association of Investment Managers

Friday

2 a.m.: U.K. gross domestic product, second quarterly estimate

5 a.m.: Euro-area inflation flash estimate for June

8:30 a.m.: U.S. personal-consumption expenditures (PCE) price index for May; U.S. personal income and outlays for May

9:45 a.m.: Chicago Business Barometer for June

10 a.m.: University of Michigan consumer survey for U.S., final for June

10:30 a.m.: Bank of Canada business outlook and consumer expectations surveys

Commentary Curb Your AI Enthusiasm: Just Look at the Insurtech Carnage

Uprisings can fall short, even robotic ones. Investors riding the artificial-intelligence wave should look at the insurance industry for a cautionary tale, writes WSJ's Jon Sindreu . Shares in "insurtech" startups, which look to upend traditional insurance through the use of automation, data and AI, have enjoyed a small bounce lately thanks to the mania unleashed by OpenAI's ChatGPT. But they remain far below their levels a few years ago, when many went public.

Basis Points The U.S. trade deficit in goods narrowed by 6% in May due to lower oil prices and less demand among consumers for imports, perhaps a sign of a softer U.S. economy. The trade gap in goods declined to $91.1 billion from a six-month high of $97.1 billion in April, the Census Bureau said. (Dow Jones Newswires) U.S. inventories of crude oil fell sharply last week, but stockpiles at the hub in Cushing, Okla. hit a two-year high, according to data released by the Energy Information Administration. Commercial crude-oil stockpiles slid by 9.6 million barrels last week to 453.7 million barrels, putting them about 1% below the five-year average, the EIA said. (DJN) Australian retail sales were stronger-than-expected in May as consumers rushed to take advantage of discounts and promotions heading into the end of the financial year. (DJN) New Zealand business confidence leapt 13 points in June to -18%, the highest reading since November 2021, while the measure of expected own activity jumped 8 points to +2.7%, the first time in 14 months that indicator has been in the black, according to ANZ. (DJN) Sweden's central bank on Thursday lifted its key policy rate to 3.75% from 3.50%, as expected, and signaled a further hike later in the year as it continues to fight stubbornly high inflation. (DJN) Spanish inflation dropped further in June on easing fuel and food prices, although underlying pressures, while cooling, remain strong, as Prime Minister Pedro Sanchez touts his recent economic record ahead of a general election to be held in July. (DJN) Feedback Loop

This newsletter is compiled by Michael Maloney in New York and Perry Cleveland-Peck [mailto:[e-mail]] in Barcelona.

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06-29-23 0716ET