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Yellen Sees ‘Plausible Ways’ Hot Economy Could Heal Growth

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  • Yellen Sees ‘Plausible Ways’ Hot Economy Could Heal Growth

Federal Reserve Chair Janet Yellen said there are “plausible ways” that running the U.S. economy hot for a while could fix some of the damage caused to growth trends by the Great Recession.

“Increased business sales would almost certainly raise the productive capacity of the economy by encouraging additional capital spending,” Yellen said Friday in the text of a speech to a Boston Fed conference on the elusive economic recovery. “A tight labor market might draw in potential workers who would otherwise sit on the sidelines.”

The economic recovery which began in the middle of 2009 has proceeded at sluggish pace. It took more than six years to drive the unemployment rate close to Fed officials’ definition of full employment. Inflation has remained below the Fed’s 2 percent target since 2012, and wages haven’t grown as fast as in previous expansions. Economists at the Boston Fed conference examined the sources and definitions of the slow recovery, with some arguing that demographic trends that were already in place before the recession are driving a substantial portion of it.

Yellen pondered whether a “high-pressure economy” could reverse some of the damage done in the recession, including declines in research spending and labor force participation. In effect, that has been the Federal Open Market Committee’s bet this year, though Yellen cautioned that running a low-rate policy for too long “could have costs that exceed the benefits” by increasing financial risk or inflation.

Still, Yellen said, “the influence of labor market conditions on inflation in recent years seems to be weaker than had been commonly thought prior to the financial crisis.”

She noted that inflation fell during the recession but said the decline was “quite modest” given how high unemployment rose. “Likewise, wages and prices rose comparatively little as the labor market gradually recovered.”

Yellen also used her remarks to prominent monetary economists to pose a list of questions that she said required new research.

These included the somewhat unorthodox idea that changes in demand might have a persistent impact on supply, and why the influence of labor market conditions on inflation has weakened in recent years and whether that was caused by the Great Recession. She also asked how policy makers can reduce the frequency and severity of future crises by understanding better the connections between the financial sector and the broad economy.

Fed officials have maintained exceptionally easy monetary policy. They cut rates to near-zero in late 2008 and have since raised them only once, in December, leaving policy on hold so far this year as they sought to shield the U.S. expansion from headwinds abroad. Despite the shocks, Yellen has maintained her focus on labor market slack, arguing that there were still more gains to be made despite the low unemployment rate.

However, minutes from the Sept. 20-21 meeting of the Federal Open Market Committee showed that “several” members of the central bank’s policy-setting panel judged that it would be appropriate to raise the benchmark lending rate “relatively soon.”

Uncertainty over the economic outlook, and the Fed’s desire to assure that job growth remains strong, has encouraged investors to bet more heavily on a rate hike in December rather than at the FOMC’s Nov. 1-2 meeting, the week before the U.S. presidential election. Pricing in federal funds future contracts indicates they see a roughly two thirds probability of a move in December versus less than 20 percent next month.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

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Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

Oil retreated from an earlier rally with investment banks and traders predicting the market can go significantly higher in the months to come.

Futures in New York pared much of an earlier increase to $63 a barrel as the dollar climbed and equities slipped. Bank of America said prices could reach $70 at some point this year, while Socar Trading SA sees global benchmark Brent hitting $80 a barrel before the end of the year as the glut of inventories built up during the Covid-19 pandemic is drained by the summer.

The loss of oil output after the big freeze in the U.S. should help the market firm as much of the world emerges from lockdowns, according to Trafigura Group. Inventory data due later Tuesday from the American Petroleum Institute and more from the Energy Department on Wednesday will shed more light on how the Texas freeze disrupted U.S. oil supply last week.

Oil has surged this year after Saudi Arabia pledged to unilaterally cut 1 million barrels a day in February and March, with Goldman Sachs Group Inc. predicting the rally will accelerate as demand outpaces global supply. Russia and Riyadh, however, will next week once again head into an OPEC+ meeting with differing opinions about adding more crude to the market.

“The freeze in the U.S. has proved supportive as production was cut,” said Hans van Cleef, senior energy economist at ABN Amro. “We still expect that Russia will push for a significant rise in production,” which could soon weigh on prices, he said.

PRICES

  • West Texas Intermediate for April fell 27 cents to $61.43 a barrel at 9:20 a.m. New York time
  • Brent for April settlement fell 8 cents to $65.16

Brent’s prompt timespread firmed in a bullish backwardation structure to the widest in more than a year. The gap rose above $1 a barrel on Tuesday before easing to 87 cents. That compares with 25 cents at the start of the month.

JPMorgan Chase & Co. and oil trader Vitol Group shot down talk of a new oil supercycle, though they said a lack of supply response will keep prices for crude prices firm in the short term.

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Crude Oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

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Crude oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

Oil prices rose on Monday as the slow return of U.S. crude output cut by frigid conditions served as a reminder of the tight supply situation, just as demand recovers from the depths of the COVID-19 pandemic.

Brent crude was up $1.38, or 2.2%, at $64.29 per barrel. West Texas Intermediate gained $1.38, or 2.33%, to trade at $60.62 per barrel.

Abnormally cold weather in Texas and the Plains states forced the shutdown of up to 4 million barrels per day (bpd) of crude production along with 21 billion cubic feet of natural gas output, analysts estimated.

Shale oil producers in the region could take at least two weeks to restart the more than 2 million barrels per day (bpd) of crude output affected, sources said, as frozen pipes and power supply interruptions slow their recovery.

“With three-quarters of fracking crews standing down, the likelihood of a fast resumption is low,” ANZ Research said in a note.

For the first time since November, U.S. drilling companies cut the number of oil rigs operating due to the cold and snow enveloping Texas, New Mexico and other energy-producing centres.

OPEC+ oil producers are set to meet on March 4, with sources saying the group is likely to ease curbs on supply after April given a recovery in prices, although any increase in output will likely be modest given lingering uncertainty over the pandemic.

“Saudi Arabia is eager to pursue yet higher prices in order to cover its social break-even expenses at around $80 a barrel while Russia is strongly focused on unwinding current cuts and getting back to normal production,” said SEB chief commodity analyst Bjarne Schieldrop.

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Crude Oil

Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

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Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

Oil prices rose to $65.47 per barrel on Thursday as crude oil production dropped in the US due to frigid Texas weather.

The unusual weather has left millions in the dark and forced oil producers to shut down production. According to reports, at least the winter blast has claimed 24 lives.

Brent crude oil gained $2 to $65.47 on Thursday morning before pulling back to $64.62 per barrel around 11:00 am Nigerian time.

U.S. West Texas Intermediate (WTI) crude rose 2.3 percent to settle at $61.74 per barrel.

“This has just sent us to the next level,” said Bob Yawger, director of energy futures at Mizuho in New York. “Crude oil WTI will probably max out somewhere pretty close to $65.65, refinery utilization rate will probably slide to somewhere around 76%,” Yawger said.

However, the report that Saudi Arabia plans to increase production in the coming months weighed on crude oil as it can be seen in the chart below.

Prince Abdulaziz bin Salman, Saudi Arabian Energy Minister, warned that it was too early to declare victory against the COVID-19 virus and that oil producers must remain “extremely cautious”.

“We are in a much better place than we were a year ago, but I must warn, once again, against complacency. The uncertainty is very high, and we have to be extremely cautious,” he told an energy industry event.

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