- Yellen Backs Gradual Rate Rises as Fed Not Behind the Curve
Federal Reserve Chair Janet Yellen backed a strategy for gradually raising interest rates, arguing that the central bank wasn’t behind the curve in containing inflation pressures but nevertheless can’t afford to allow the economy to run too hot.
“I consider it prudent to adjust the stance of monetary policy gradually over time,” she said Thursday in remarks to the Stanford Institute for Economic Policy Research in California, while stressing the considerable doubt surrounding that outlook.
Yellen’s second speech this week comes just a day before the inauguration of Donald Trump as U.S. president. She said that future alterations in fiscal policy were just one of the many uncertainties that the Fed would have to grapple with as it plots its monetary moves in the months ahead.
Not only is the size, timing and composition of such changes unclear, estimates of their impact on the economy by budget experts vary considerably, Yellen noted in a footnote to the speech.
“She doesn’t feel like the economy is overheating,” said Laura Rosner, senior U.S. economist at BNP Paribas in New York. “Nothing in her speech gave a strong signal that a hike is coming in March.” Policy makers next meet Jan. 31-Feb. 1, followed by a gathering on March 14-15.
In making the case that the Fed had not fallen behind the curve, Yellen said that wages had risen “only modestly” and the manufacturing sector was operating well below capacity.
What’s more, she didn’t see that changing soon. Payroll growth has slowed while the economic expansion “seems unlikely to pick up markedly in the near term” given weak foreign demand and prospective gradual increases in interest rates, she said.
Still, she saw dangers in permitting the economy to overheat and inflation expectations to get out of control. “Allowing the economy to run markedly and persistently ‘hot’ would be risky and unwise,” she said.
Another factor arguing for a gradual approach to raising interest rates is what Yellen called a “passive” removal of monetary accommodation via the Fed’s balance sheet.
In another footnote to her speech, Yellen said a shortening in the average maturity of the central bank’s bond holdings and the approach of an eventual reduction in its balance sheet could increase the yield on the 10-year Treasury note by 15 basis points this year. That would be roughly equivalent to two 25 basis point increase in the inter-bank federal funds rate. She did not say when the reduction in the balance sheet would begin.
The Fed raised interest rates in December for the first time in a year, lifting its target range for the benchmark federal funds rate to 0.5 percent to 0.75 percent. Policy makers have penciled in three quarter-point increases for 2017, according to the median of their quarterly estimates in December.
Yellen spelled out in detail a point that she also made in her shorter speech on Wednesday, namely, that the Fed was close to achieving its goals of full employment and stable prices.
The jobless rate stood at 4.7 percent in December, slightly below the level most Fed policy makers view as full employment.
“In the coming months, I expect some further strengthening in labor market conditions as the economy continues to expand at a moderate pace,” Yellen said.
The “strong labor market” should help lift inflation to the Fed’s 2 percent goal over the next couple of years, she added.
As measured by the personal consumption expenditure price index, inflation rose 1.4 percent in the 12 months through November. That’s up markedly from 0.5 percent on the same basis in November 2015, in part because of a rebound in oil prices.
Answering audience questions, Yellen described the risks to stability of the financial system as “moderate” and nowhere near as big as they were in the midst of the 2008-09 crisis. “There’s a little less to lose sleep about now,” she said.
One potential danger on the U.S. central bank’s radar screen: financial developments in China, though Yellen said the Fed thinks the Asian nation has the ability to deal with them.
Yellen and Taylor
Yellen spent much of her speech discussing the benefits and drawbacks of using simple rules to guide monetary policy, such as one developed by John Taylor, a scholar at the Stanford Institute and a professor at Stanford University.
In response to a question from Taylor, who was in the audience, Yellen said she believed in “systematic monetary policy” but was opposed to efforts by Republican lawmakers to force the Fed to adopt a rule of its own choosing to guide policy.
While rules can serve as “useful benchmarks,” they often do not take into account important factors potentially affecting the economic outlook, such as fiscal policy, she said in her speech.
Given all the uncertainties, determining how best to adjust interest rates to sustain a strong jobs market while maintaining low and stable inflation “will not be easy,” Yellen said.
The Drop in US Crude Oil Inventories Boosted Oil Prices on Wednesday
Crude oil prices rose on Wednesday following a decline in US crude inventories last week.
The American Petroleum Institute (API) had reported that United States crude oil inventories declined by 5.3 million barrels in the week ended January 22, 2021, more than a reduction of 430,000 barrels predicted by a Reuters poll.
The unexpected decline, coupled with slowing new COVID-19 cases in China, the world’s largest importer of crude oil, boosted oil prices on Wednesday.
Brent crude, against which Nigerian crude oil is measured, rose by 41 cents or 0.7 percent to $56.32 per barrel.
The U.S. West Texas Intermediate (WTI) crude oil also gained 56 cents or 1 percent to $53.17 a barrel.
“WTI is slightly firmer on the back of a larger-than-expected draw in US crude inventories reported by the API, which is offset by builds in gasoline and distillates,” said Vandana Hari, oil market analyst at Vanda Insights.
The data, however, showed petrol inventories grew by 3.1 million barrels in the week, more than experts projected.
Similarly, API data revealed that distillate fuel inventories that include diesel and heating oil, jumped by 1.4 million barrels, far higher than the 361,000 barrels decline predicted. However, refinery runs declined by 76,000 barrels per day.
“Market participants are now in ‘wait and see’ mode, wanting to see how lockdowns evolve in the coming weeks and months, and how successful countries are in rolling out Covid-19 vaccines,” ING economics said in a note.
COVID-19 Plunges Nigeria’s Oil Revenue by 41% in the First Nine Months of 2020
Nigeria’s oil revenue declined by 41.44 percent in the first nine months of 2020 to $2.033 billion, according to the latest data from the Nigerian National Petroleum Corporation, NNPC.
This represents a decline of 41.44 percent from $3.47 billion filed in the same period of 2019 when there was no COVID-19.
In the September 2020 edition of NNPC’s Monthly Financial and Operations Report (MFOR), revenue from oil and gas rose by 16 percent to $120.49 million in the month of September, a 66 percent or $234.81 million drop from $355.3 million posted in the same month of 2019.
The global lockdowns caused by the COVID-19 pandemic plunged Nigeria’s crude oil sales and global demand for the commodity. This was further compounded by Nigeria’s high cost of production compared to Saudi Arabia, Russia and others that were offering discounts to boost sales during one of the most challenging periods in human history.
Experts like Prof. Yinka Omorogbe, President of Nigeria Association of Energy Economics, NAEE, were not surprised with the drop in earnings given the effect of COVID-19 on the world’s economy.
She, however, called for the revamp of the nation’s petroleum sector laws and diversification of the economy away from oil revenue dependence. She said “Covid-19 made 2020 a very hot year and it battered the oil industry internationally and we are not an exception; so we could not have been unaffected”.
She also said the effect of the fall “is definitely a wake-up call; we have to diversify, strengthen our other resources and capabilities”.
Omorogbe, a former NNPC Board Secretary, urged the government and the operators in the sector to look inward and think strategically, stating: “think medium term, think of where they want to be and the government, above all, must think of how best we can utilize our resources, so that we can achieve our objectives once we know and define them.
“It is a clear wake-up call, if not we will just sit here and find that we have become one of the poorest nations in the world”, she noted.
Crude Oil, Other Commodities Closing Price for Monday
Brent crude oil, Nigeria’s crude oil benchmark, gained 47 cents to $55.88 per barrel on Monday, while the US crude oil expanded by 50 cents to $52.77 per barrel.
Gold for February delivery fell $1 to $1,855.20 an ounce. Silver for March delivery fell 7 cents to $25.48 an ounce and March copper was little changed at $3.63 a pound.
The dollar fell to 103.80 Japanese yen from 103.83 yen. The euro fell to $1.2139 from $1.2167.
Wholesale gasoline for February delivery rose 1 cent to $1.56 a gallon. February heating oil rose 2 cents to $1.59 a gallon. February natural gas rose 16 cents to $2.60 per 1,000 cubic feet.
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