Tag Archives: Richard Clarida

Business

Fed Vice Chair Clarida to step down early following scrutiny over his trades during pandemic

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Federal Reserve Vice Chairman Richard Clarida said Monday he will be leaving his post with just a few weeks left on his term and amid revelations regarding his trading of stock funds.

In an announcement released Monday afternoon, Clarida said he will be stepping down from his post this Friday. His term expires on Jan. 31.

The move comes following additional disclosures regarding trades Clarida made in February 2020, around the time when the Fed was getting ready to roll out what eventually would become its most aggressive policy tools ever, in an effort to combat the Covid crisis.

“Rich’s contributions to our monetary policy deliberations, and his leadership of the Fed’s first-ever public review of our monetary policy framework, will leave a lasting impact in the field of central banking,” Fed Chairman Jerome H. Powell said in a statement. “I will miss his wise counsel and vital insights.”

Clarida’s exit comes amid heightened scrutiny over what he had described as pre-planned portfolio rebalancing on Feb. 27, 2020. However, recent disclosures, first reported by the New York Times, showed that three days earlier, Clarida sold shares in three stock funds that he would repurchase on the 27th.

Markets dropped on Feb. 24 amid worries that the spreading coronavirus could cause substantial economic damage. On Feb. 26, Fed policymakers huddled to discuss what policy moves they might take to combat what eventually would become a full-blown pandemic.

Within weeks, the Fed would cut its benchmark interest rate to zero and institute an unprecedented array of lending and liquidity programs to help the economy and financial markets function.

Clarida’s announcement did not mention anything about the controversy, which has been a focal point of Fed criticism from Sen. Elizabeth Warren (D-Massachusetts) and some other lawmakers. Two regional Fed presidents, Eric Rosengren of Boston and Robert Kaplan of Dallas, both resigned following questions over their trading activities.

Clarida called serving on the Fed “a distinct honor and immense privilege” and noted the measures it took during the pandemic.

“I am proud to have served with my Federal Reserve colleagues as we, in a matter of weeks, put in place historic policy measures that, in conjunction with fiscal policy, steered the economy away from depression and that have supported a robust recovery in economic activity and employment since,” he said in a resignation letter to President Joe Biden. “There is still road left to walk and damage to be repaired.”

The resignation comes the same week Powell appears before a Senate committee for his confirmation hearing to a second term. That hearing will happen Tuesday. Two days later, Fed Governor Lael Brainard will face a hearing to be confirmed as vice chairman to take Clarida’s spot.

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Business

Inflation Stayed High in September

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U.S. inflation accelerated slightly in September, rising 5.4% from a year before as supplies and labor continued to drive up prices.

Economists surveyed by The Wall Street Journal expected inflation to rise 5.3% in September from a year earlier and a seasonally adjusted 0.3% in September from August.

Satellite images show the scale of the backlog at ports in California, as ongoing supply chain issues now threaten the holiday shopping season. WSJ’s Jennifer Smith explains what’s causing the holdups for ships and cargo. Photo: Planet Labs Inc

“It looks like some of these supply-chain and inventory challenges are going to stick with us for a bit longer—at least through the rest of this year,” said

Omair Sharif,

founder of Inflation Insights LLC. He said recent price pressures include the firming up of housing rents and other prices that tend to move more slowly. He also cited an expected rise in the price of health insurance, which is adjusted once a year and will show up in last month’s inflation figures for the first time.

Rising energy prices—driven by the global recovery in demand, disrupted supply and geopolitical forces—could also keep prices aloft. Consumers are already feeling this directly as gasoline prices now average $3.29 a gallon, the highest level in seven years, according to the U.S. Energy Information Administration. Steeper energy bills could add to the higher costs companies now face, increasing the pressure to pass those on to shoppers.

Unusually high demand is a crucial factor driving higher inflation. Spending jumped at an 11.9% pace in the second quarter as more people received Covid-19 vaccinations, businesses reopened and trillions of dollars in federal aid coursed through the economy. Consumer spending continued to surge in August.

The shortage of workers is also driving up wages, putting pressure on companies to raise prices. The sharp uptick in restaurant prices during the past few months is a sign of this pass-through from wages into higher prices, economists say.

Companies are struggling with scarce materials caused by a combination of snarled supply chains, as well as disrupted production and elevated demand because of the pandemic. The ratio of sales to inventories for retailers hit record lows in the spring and have inched up only slightly since. The combination of truck-driver shortages and continued consumer demand for goods has gummed up ports, causing delays in deliveries of goods and sending shipping prices soaring.

Restaurant prices have risen sharply in recent months, as a worker shortage boosts wages. An Arlington, Va., restaurant in September.



Photo:

Jacquelyn Martin/Associated Press

Many companies are passing on higher labor and materials costs to consumers. In September, some 46% of small businesses said they planned to raise prices in the next three months, on net, according to the National Federation of Independent Business, a trade association, the most since monthly records began in 1986.

“We seem to be in a slightly different environment where perhaps workers have got more say over pay and where companies have more say over prices being charged,” said

James Knightley,

chief international economist at ING.

An example is the shortage of semiconductors that has curbed auto production, causing new- and used-vehicle prices to soar. The supply of new autos continues to be constrained by the chip shortage, as well as by a resurgence of Covid-19 infections in Asia that led to shutdowns of factories and ports. Prices for new vehicles are still rising, and there are signs that used-car prices are rebounding. The Manheim index of U.S. used-car wholesale prices reached a new high in September after edging lower over the summer.

“‘We seem to be in a slightly different environment where perhaps workers have got more say over pay and where companies have more say over prices being charged.’”


— James Knightley, ING’s chief international economist

Federal Reserve officials are closely watching many inflation measures to gauge whether the recent jump in prices will prove temporary or lasting. One such factor is consumer expectations of future inflation, which can prove self-fulfilling as households are more likely to demand higher wages and accept higher prices when they anticipate higher future price growth. Consumers’ median inflation expectation for three years from now rose to 4.2% in September, from 4% a month earlier, according to a survey by the New York Fed. September’s reading was the highest since the survey began in 2013.

Fed Vice Chairman

Richard Clarida

said Tuesday that the underlying rate of inflation in the U.S. economy is near the Fed’s 2% longer-run objective and, thus, that the recent surge will prove “largely transitory” once the supply bottlenecks clear. However, he said the Fed would raise rates if it saw evidence that households and businesses were beginning to expect higher inflation.

“Monetary policy would react to that,” Mr. Clarida said. “But that is not the case at present.”

Higher inflation is complicating business planning at many companies.

Adam Lewin,

who owns a building-materials distribution business based in Columbus, Ohio, started noticing the price increases in the spring. “And then it was just one after another,” he said. His company, Hamilton Parker, sells masonry, tile, fireplaces and other building products to consumers and other businesses, and it soon raised its own prices to keep up.

Clogged ports, such as in Los Angeles, are helping to lift shipping prices.



Photo:

frederic j. brown/Agence France-Presse/Getty Images

Shipping delays are compounding the uncertainty around prices. Delivery times for all of the company’s products are stretched. Garage doors are arriving in 15 weeks when they used to take just two, Mr. Lewin said. With shipments so delayed, suppliers have begun raising prices on orders that had already been negotiated.

“The risk to us as a result of price changes is that projects can be canceled, impacting future sales. Customer relationships can be challenged based on unforeseen price changes, and there is significant stress on my team communicating these price updates,” he said.

Prices for services hit hardest by Covid-19 are still recovering to pre-pandemic levels, including for air travel, entertainment and recreation. The recent outbreak of the Delta variant of Covid-19 likely weakened that rebound somewhat in August, many economists say. Conversely, as cases recede, prices for those services will likely stage a recovery.

Write to Gwynn Guilford at gwynn.guilford@wsj.com

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Business

Fed could be source of volatility as Powell speaks in week ahead

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Chairman of the Federal Reserve Jerome Powell listens during a Senate Banking Committee hearing on “The Quarterly CARES Act Report to Congress” on Capitol Hill in Washington, U.S., December 1, 2020.

Susan Walsh | Reuters

The Federal Reserve could remain a source of angst for markets in the week ahead, with chairman Jerome Powell scheduled to testify twice before Congress and more than a dozen other Fed speeches expected.

The bond market’s reaction to the central bank this past week was unusually volatile.

Though the market was initially steady after the two-day Fed meeting and Powell’s briefing Wednesday, Thursday came with a big selloff in bonds and spiking rates. Traders reacted to the fact that the central bank is willing to let inflation and the economy run hot while the job market recovers.

In the approaching week, bond market professionals will be watching Powell and other member of the Fed for further cues.

“This is bonds’ — I wouldn’t call it day in the sun — it’s more like day in the tornado,” said Michael Schumacher, head of rate strategy at Wells Fargo. “Clearly the bond market is the one the equity market is watching right now, and normally that’s not the case.”

Stocks were lower on the week, with the Dow off about 0.5% and the S&P 500, down 0.7%. The Nasdaq Composite was off 0.8% for the week.

The Russell 2000, however, was hit the hardest, losing close to 3% for the week.

Yields ratcheted higher as the market sold off. Bond yields move inversely to price.

The benchmark 10-year Treasury yield, which impacts mortgages and other loans, rose as high as 1.75% Thursday, a move of more than 10 basis points in less than a day. It was at 1.72% Friday afternoon.

“The bond move has been huge, and it’s starting to scare people,” said Schumacher.

“There’s been this question hanging out there for awhile: How much of an increase in yield can some of the higher octane stocks take?” he asked. “There’s no magic number, but as we speak, the 10-year is up 80 basis points this year. It’s incredible.”

Powell speaks

Powell testifies Tuesday and Wednesday before Congressional committees along with Treasury Secretary Janet Yellen on Covid relief efforts and the economy.

He also speaks on central bank innovation at a Bank for International Settlements event Monday morning.

Other central bank speakers this week include Fed Vice Chairman Richard Clarida, Vice Chairman Randal Quarles, Fed Governor Lael Brainard, and New York Fed President John Williams.

Inflation and the Fed

There is also some key data.

Important releases include the personal consumption and expenditure data on Friday, which includes the PCE deflator, the Fed’s preferred inflation measure. Core PCE inflation was running at an annual pace of 1.5% in January.

The Federal Reserve this past week took no action at its two-day meeting, but it did present new economic projections including a forecast of 6.5% for gross domestic product this year. The central bank’s forecast now shows PCE inflation going to 2.4% this year, but falling to 2% next year.

The majority of Fed officials did not see any interest rate hikes through 2023.

Powell reiterated that the Fed sees just a temporary pickup in inflation this year because of the base effects against last year’s numbers when prices fell.

The central bank will target an average range of inflation around 2%, so that number could exceed that threshold for some time. It’s a change to the Fed’s ground rules, which makes the bond market nervous.

Normally, the Fed would hike interest rates if inflation flared up to avoid an overheating economy and avert a bust cycle.

“For the bond market, and the Fed, there is a communications problem and there’s a consensus problem. There can’t not be tension,” said Diane Swonk, chief economist at Grant Thornton.

“They will be trying to clarify the Fed’s message, but without a consensus on what those numbers and guardrails mean, it will be hard,” she said. “They will be explaining themselves as economists, and they’ll be speaking a different language than the bond market speaks.”

Leo Grohowski, chief investment officer at BNY Mellon Wealth Management, expects the bond market could be more volatile than stocks, and inflation would be problematic for both.

At some point, he expects there could be a 10% stock market correction, and inflation or a sharp move in bond yields could be a trigger.

“The market is trying to make sense of what could be perceived as a disconnect, between their economic projections and the Fed’s dual mandate of unemployment and inflation,” said Grohowski.

“Yet, they’re committed to keep short rates on hold until the end of 2023,” he said. “That’s what the market is struggling with. I think it’s unsettling to me to hear words like ‘overshoot.'”

Rotation from tech into cyclicals

Grohowski expects what he calls the ‘great rotation’ from tech and growth stocks into cyclicals and value to continue. Growth and tech have been most sensitive to rising rates, and the Nasdaq has corrected more than 10%.

“I think we’re in the sixth or seventh inning of a nine-inning game. It’s not over, but I think we’ve seen the lion’s share of the great rotation out of growth, into value,” said Grohowski. He said that view depends on the 10-year not rising much above 1.75%.

Grohowski is concerned by the Fed’s willingness to let inflation overshoot because inflation is a negative for stocks.

Supply chain issues are a concern. He pointed to Nike’s comments Thursday that its sales were hurt by port congestion, and also the shortage of semiconductors, which is impacting automobile production.

“Inflation expectations are troublesome for P/E [price-earnings] ratios,” Grohowski said. The [stock] market is trading at 22 times our estimate for this year’s earnings.”

He said the market is having difficulty reconciling the lack of any forecasted interest rate hikes versus the strength of the Fed’s economic forecast.

“If you ask me what I lose sleep over? …It’s too much of a good thing. Too much of a good thing is being too accommodative,” Grohowski said.

Bond market direction

Schumacher said there’s a chance the bond market could steady in the next couple of weeks, even if yields tick up.

He said corporate pension funds appear likely to reallocate capital into bonds before the end of the quarter March 31, and that could be supportive. Also as the Japanese fiscal year is set to begin, there could also be new buying in U.S. Treasurys because on a currency adjusted basis U.S. debt looks very cheap, Schumacher said.

He is also watching Treasury auctions in the coming week.

The Treasury auctions $60 billion 2-year notes Tuesday; $61 billion 5-year notes Wednesday, and $62 billion 7-year notes Thursday.

In particular, Schumacher is watching the 7-year auction, which drew poor demand last month.

Week ahead calendar

Monday

Earnings: Tencent Music Entertainment

9:00 a.m. Fed Chairman Jerome Powell at Bank for International Settlement summit

10:00 a.m. Existing home sales

10:00 a.m. Quarterly Financial Report

1:00 p.m. San Francisco Fed President Mary Daly

1:30 p.m. Fed Vice Chairman Randal Quarles

7:15 p.m. Fed Governor Michelle Bowman

Tuesday

Earnings: Adobe, IHS Markit, DouYu, GameStop, Steelcase

8:30 a.m. Current account

9:00 a.m. St. Louis Fed President James Bullard

10:00 a.m. New home sales

12:00 p.m. Fed Chairman Powell, Treasury Secretary Janet Yellen at House Financial Services Committee

1:00 p.m. Treasury auctions $60 billion 2-year notes

1:25 p.m. Fed Governor Lael Brainard

1:45 p.m. New York Fed President John Williams

3:45 p.m. Fed Governor Brainard

4:20 p.m. St. Louis Fed’s Bullard

Wednesday

Earnings: General Mills, Shoe Carnival, KB Home, RH, Tencent, Embraer, Winnebago

8:30 a.m. Durable goods

9:45 a.m. Manufacturing PMI

9:45 a.m. Services PMI

10:00 a.m. Fed Chairman Powell, Treasury Secretary Yellen at Senate Banking Committee

1:00 p.m. Treasury auctions $61 billion 5-year notes

1:35 p.m. New York Fed’s Williams

3:00 p.m. San Francisco Fed’s Daly

7:00 p.m. Chicago Fed President Charles Evans

Thursday

Earnings: Darden Restaurants

5:30 a.m. New York Fed’s Williams

8:30 a.m. Initial claims

8:30 a.m. Q4 GDP third reading

10:10 a.m. Fed Vice Chairman Richard Clarida

10:30 a.m. New York Fed’s Williams

1:00 p.m. Treasury auctions $62 billion 7-year notes

1:00 p.m. Chicago Fed’s Evans

7:00 p.m. San Francisco Fed’s Daly

Friday

8:30 a.m. Personal income/spending

8:30 a.m. Advance economic indicators

10:00 a.m. Consumer sentiment

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