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Fed To Tweak Message In Policy Meeting: Analysts

Washington (AFP) — The Federal Reserve is expected to maintain its slow march toward a normal monetary stance in its policy meeting Tuesday and Wednesday.

But a small, key adjustment to its messaging could confirm growing confidence in the economy.

After the surprisingly poor jobs market report for August, pressure has alleviated somewhat on the Federal Open Market Committee from so-called inflation hawks to move soon to raise interest rates.

And although U.S. economic data Friday showed encouraging improvements in consumer spending and confidence, it likely is not enough to sway the FOMC off its plan to increase interest rates only as early as mid-2015.

“We expect the FOMC to have a moderately hawkish tone at its 16-17 September meeting,” said Thomas Costerg at Standard Chartered.

“The FOMC may update its exit principles, but there should be no surprises.”

The FOMC’s main policy action of the past year, the steady reduction of its once-$85 billion a month bond-buying stimulus program, will continue with the aim of winding it up completely in October.

The next step after that would be to begin raising the benchmark fed funds interest rate, stuck at zero since the end of 2008, and now blamed for overheating asset markets around the globe.

So far the Fed has stuck to its forecast — based on the averaged expectations of FOMC members — that interest rates won’t be lifted before the second half of 2015, and only slowly after then.

So far, too, inflation has remained repressed, providing the hawks with little to back their calls for an earlier rate hike.

But the labor market, and how that will shape inflation, remains a conundrum, and the FOMC is unlikely to change policy until they are more clear about it.

– Waiting for data? –

After seven straight months over 200,000, job generation plunged to 142,000 in August, raising questions over whether the economy is weaker than even doves like Fed chair Janet Yellen had thought.

Yellen’s stance since taking over the Fed in February has been to wait for the data, which means likely looking to see how the jobs market performs this month and next.

On the other hand, the Fed could adjust its message to the markets based on how it sees policy unrolling.

“Forward guidance” has played a crucial policy role since the 2008-09 recession, used to assure skittish market and business how long they can expect a hyper-loose monetary policy with ultra-low interest rates.

To reassure markets, in December when the FOMC embarked on its “taper” of the stimulus, it also assured that the end of the program would not lead directly to a rate hike.

The official guidance in FOMC policy statements was that any rate increase would come “a considerable time” after the stimulus program ends, with Yellen at one point suggesting six months.

Increasingly, though, some Fed inflation hawks and doves alike argue that the “considerable time” qualification ties their hands on policy, especially if inflation picks up suddenly.

Charles Plosser, the long-time inflation hawk who leads the Philadelphia branch of the Fed, objected to the phrase in the last FOMC meeting and voted against the Fed policy statement.

“Given the clear progress we have made toward achieving our long-term goals over the past year, and the progress and momentum that appears to be building in the economy and in the broader labor market, I no longer believe that the forward guidance language in the statement is appropriate or warranted,” he explained.

But such a move — which could curb excessive risk-taking in already sky-high markets — might be held off as the FOMC seeks more certainty on the economy’s path, said analysts at IHS.

“Even if the Fed was contemplating making the change next week, the disappointing August jobs report will likely stay their hand so that they can be sure that what was probably a fluke was in fact a fluke.”

AFP Photo/Justin Sullivan

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United States Hits Russia’s Largest Bank, Energy Sector With Sanctions

By Paul Handley

Washington (AFP) — The United States hit Russia’s top bank and leading energy and technology companies with sanctions Friday, restricting access to finance and technology to punish Moscow’s support for Ukraine’s separatist rebels.

In its latest round of sanctions, Washington slapped tight controls on business dealings with for Sberbank, pipeline giant Transneft, and energy firms Lukoil, Gazprom, Gazprom Neft, and Surgutneftgas.

Also listed was state defense technology group Rostec, and five other state owned companies in the defense sector.

The White House actions followed similar moves by Europe aimed at punishing the Russian economy over the country’s interference in neighboring Ukraine.

“Given Russia’s direct military intervention and blatant efforts to destabilize Ukraine, we have deepened our sanctions against Russia today, in concert with our European allies,” said U.S. Treasury Secretary Jacob Lew.

“These steps underscore the continued resolve of the international community against Russia’s aggression.”

The U.S. sanctions ban American entities from offering anything but short-term financing to Sberbank, Rostec, and two of the energy companies listed, a move that could restrict their business activities and long-term planning.

For Sberbank and Rostec, the limit is 30 days maturity for any new debt issued by the companies. For Gazprom Neft and Transneft, it is 90 days.

For Lukoil, Gazprom, and Surgutneftgas, U.S. companies are blocked from providing any support, materials, or technology for oil and gas exploration projects involving the Arctic region, offshore anywhere, or shale-based resources.

The sanctions also freeze any U.S.-based assets of the five defense sector companies.

The latest effort to ratchet up pressure on Moscow also tightened earlier sanctions on Russian businesses. The previous 90-day financing limit for Bank of Moscow, VTB Bank, and the Russian Agricultural Bank was reduced to a 30-day maximum.

And the support for exploration activities for the energy companies named Friday was extended to oil giant Rosneft, also listed under a previous round of sanctions.

“Russia’s economic and diplomatic isolation will continue to grow as long as its actions do not live up to its words,” said Lew.

“Russia’s economy is already paying a heavy price for its unlawful behavior. Growth has fallen to near zero, inflation is well above target, and Russian financial markets continue to deteriorate.”

Russian President Vladimir Putin quickly lashed out at the U.S. and European effort, saying it would not make Russia change tack, and arguing that Ukraine is being used by the West to destabilize international relations.

“We have been convinced a long time ago that the implementation of sanctions as a foreign policy instrument has little effect and practically never delivers the intended results,” Putin said in Tajikistan, according to Russian news agencies.

“I’ve had a sneaking thought that Ukraine itself does not interest anyone but is being used as an instrument to destabilize international relations.”

AFP Photo/Dimitar Dilkoff

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U.S. Economy Grew At Robust 4.2 Percent Pace In 2nd Quarter

Washington (AFP) — The U.S. Commerce Department raised its estimate for U.S. economic growth to 4.2 percent Thursday, confirming the solid rebound from the first quarter’s steep contraction.

The department said a fuller set of data showed a higher level of fixed investment by companies and the government, contributing to the 0.2 point upward revision from July’s number.

It also showed strong gains in corporate profits, possibly boosting the prospects for more hiring that would remove some of the persistent slack in the labor market.

Analysts said the revision improved the picture of the U.S. economy for the rest of 2014, when added to recent monthly data on industry, hiring, and general confidence.

“While the impact of the revision on the IHS forecast is relatively small, the changes have positive implications for growth in the second half of this year,” said Doug Handler at economic consultancy IHS Global Insight.

The 4.2 percent annual pace in the April-June period followed a 2.1 percent contraction in the first quarter, the consequence mainly of unusually severe winter storms that had battered the eastern half of the United States, depressing economic activity.

In the second quarter, the revised data showed pickups in consumer spending and business investment, and improved government spending and home building.

On the other hand, gross domestic product was dampened by an increase in imports, not surprising given the rebound in activity after the first quarter, analysts say.

The new report left its key inflation indicator unchanged: the price index for gross domestic purchases stayed at 1.9 percent, up from 1.4 percent in the first quarter.

The threat, or lack of, inflation has been key to debates over whether the Federal Reserve needs to tighten monetary policy sooner rather than later to prevent price increases from getting out of hand.

The report also showed that corporate profits and spending mostly recovered from the first quarter downturn.

Jay Morelock of FTN Financial called that “a welcome development that will hopefully lead to hiring in the second half of the year.”

“Once wages follow the upward trend in business spending, a prosperous cycle could lift the economy toward the 3.0 percent trend that remains a fixture of consensus forecasts and stock price assumptions.”

The economy’s rebound has not been uniform, as Federal Reserve Chair Janet Yellen has repeatedly pointed out.

Though job creation has picked up, there remain a huge number of people underemployed or out of the labor market, and wages have remained fairly flat in the recovery from the 2008-2009 recession.

Jim O’Sullivan of High Frequency Economics pointed out that the revised data showed lower nominal growth in wages in the second quarter than previously estimated, 4.7 percent year-on-year instead of 4.9 percent.

However, he said, “the data suggest that average hourly earnings are understating the extent to which tightness in the labor market is putting upward pressure on costs and boosting consumer spending power.”

Economists took the report and other fresh data — including a pickup in pending home sales in July that demonstrated the resilience of the housing comeback — and projected that the economy in the third quarter would grow at pace of 3.0 percent or better. IHS stuck to its high 3.6 percent forecast.

Markets, which after a runup to record levels have been looking for any sign of growth at a pace that would ignite inflation and force the Fed to raise rates, fell slightly. The S&P 500 was down 0.2 percent around midday; Treasury bond prices fell only marginally.

AFP Photo/Don Emmert

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Yellen: U.S. Jobs Market ‘Yet To Fully Recover’

By Paul Handley

Washington (AFP) — Federal Reserve Chair Janet Yellen said Friday that the U.S. jobs market has not yet fully recovered, but acknowledged that data is sending mixed signals, spurring debate over inflationary pressures.

In a speech to leading central bankers in Jackson Hole, Wyo., Yellen, who has kept Fed policy expansive due to perceived excess slack in the jobs market, gave no clear new signs for monetary policy.

Alluding to the rising pressure from so-called inflation hawks inside and outside the Fed to begin tightening policy, she admitted that analyzing the data has been “especially challenging recently”.

The hawks argue that the sharp fall of the jobless rate to 6.2 percent is a clear foretoken of inflation and want the Fed to move forward its timeline for an interest rate hike next year.

While agreeing that the data is sending mixed signals, Yellen did not embrace the argument that a burst of inflation is looming and demands a decisive policy adjustment, like moving forward an interest rate hike to early 2015 from later in the year.

There still remains “considerable uncertainty about the level of employment,” she told the Fed’s annual central banking symposium, according to the text of her remarks.

“There is no simple recipe for appropriate policy in this context.”

Yellen picked through the various arguments over what the seemingly contradictory data says: the faster-than-expected fall in the jobless rate to 6.2 percent from 7.3 percent a year ago, against the persistently extremely low labor force participation rate since the Great Recession, just 62.9 percent.

Inflation hawks, like Philadelphia Fed chief Charles Plosser, a member of the policy-setting Federal Open Market Committee, argue that the jobless rate decline is real.

They downplay the low participation rate as a sign of not cyclical joblessness but fundamental changes in the labor market, including demographic shifts.

Yellen agreed that there have been some structural changes that have affected the way the labor market signals tightening through indicators such as part-time work, the number of people leaving jobs, and wage gains — which have been virtually insignificant since the recession ended in 2009.

But she insisted that the combined data that the Fed is reviewing suggests that the jobless rate decline “somewhat overstates” labor market improvements.

“Five years after the end of the recession, the labor market has yet to fully recover,” she said.

That, analysts said, was a sign for the moment that the Fed would be sticking to its forecast that its benchmark federal funds interest rate would remain at the near-zero level, where it has been for nearly six years, until the second half of 2015.

“Yellen confirmed the majority view of the FOMC: Much more labor recovery is needed before the Fed raises policy rates,” said David Kotok of Cumberland Advisors.

“We expect the zero interest rate policy to continue worldwide for, at least, six more months and, perhaps, a year or longer.”

AFP Photo/Brendan Smialowski

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