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Yellen Keeps a Gradual Rate-Hike Outlook as Inflation Puzzles the Fed

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  • Yellen Keeps a Gradual Rate-Hike Outlook as Inflation Puzzles the Fed

Federal Reserve Chair Janet Yellen said the U.S. economy should continue to expand over the next few years, allowing the central bank to keep raising interest rates, while also stressing a gradual approach to tightening as the Fed monitors too-low inflation.

“Considerable uncertainty always attends the economic outlook,” Yellen said Wednesday in remarks delivered to the U.S House Financial Services Committee. “There is, for example, uncertainty about when — and how much — inflation will respond to tightening resource utilization.”

As is typical in her testimony before the panel, Yellen was asked a broad range of questions, including her views on the national debt, whether regulators have too much input into the decisions of private bank boards, and would she would accept another term as Fed chair.

Her current term expires in February, which could make Wednesday’s hearing one of her last before the House committee. Republicans welcomed her Monetary Policy Report’s discussion of rule-based policy, while Democrats highlighted the Fed’s new attention on racial disparities in the economy.

On monetary policy, Yellen didn’t diverge far from the comments she made at a press conference after the June policy meeting. She sounded slightly more cautious on the inflation outlook, while sticking to an expectation for continued rate hikes and maintaining the initiative to begin reducing the Fed’s balance sheet “relatively soon.”

Consistent Theme

“We thought that it was pretty balanced and a pretty steady continuation of the themes” that Yellen had laid out after the Fed’s meeting last month, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “It was pretty straight down the middle.”

U.S. stocks remained higher in New York trading after the testimony while Treasury yields fell.

In the question-and-answer session with lawmakers, Yellen indicated the Fed is hewing to a baseline forecast that a prolonged period of moderate growth continues to whittle away at resource slack and gradually boosts prices. Still, the Fed is considering risks around the inflation outlook, even though “temporary” influences, such as the costs of mobile-phone plans and prescription drugs, are holding down price measures for now. Inflation has been below the central bank’s 2 percent target for most of the past five years.

On Path

“To my mind, a prudent course is to make some adjustments as long as our forecast is that we’re heading back to 2 percent” inflation, Yellen said. “It is premature to reach the judgment that we are not on the path to 2 percent inflation over the next couple of years.”

If progress on inflation stalls, “they are more likely to initiate a longer pause in the rate hike cycle,” said Michael Gapen, chief U.S. economist at Barclays Capital Inc. in New York. “I don’t think they will adjust balance sheet policy unless the economy goes into a recession.”

Yellen will appear Thursday before the Senate Banking Committee, wrapping up her final testimony to Congress as Fed chair, unless she is re-nominated by President Donald Trump. Yellen’s current term expires on Feb. 3. She was asked several times about whether she would serve a second term as chair during the House hearing.

“It’s something that hasn’t been an issue so far,” but it’s “certainly something that I would discuss with the president, obviously,” Yellen said in response to a question.

Her assessment of the economy was optimistic. A faster pace of global growth should support U.S. exports, Yellen said, and a recovery in drilling activity should support business investment.

Along with continued job growth and rising income, “these developments should increase resource utilization somewhat further, thereby fostering a stronger pace of wage and price increases,” she said.

Yellen said the central bank’s policy rate “would not have to rise all that much further” to get to a rate that keeps supply and demand in balance in the economy. Eventually, “factors” she did not specify that are holding down the so-called neutral rate will diminish over time, she said, which supports the Fed’s case for continued rate hikes over the next couple of years.

Balance Sheet

She also mentioned that the Fed anticipates it will start reducing its balance sheet “this year.” The size of the balance sheet once this process has been completed is uncertain, she said, partly because the banking system’s demand for reserves is not yet known.

Yellen stepped away from her recent comments that asset prices look “somewhat rich” noting instead that the financial system is strong and resilient, while gains in markets have not been accompanied by a “substantial increase in borrowing.”

“Looking at asset prices and valuations, we try not to opine on whether they’re correct,” she said.

With U.S. economy growing at a steady pace, Yellen’s Fed is gradually pulling back from crisis-era stimulus. It raised interest rates in June for a second time this year and forecast another hike in 2017.

The U.S. expansion is in its ninth year and continues to create jobs without much inflation. Unemployment was 4.4 percent in June and employers have added 187,000 jobs a month on average over the past 12 months. But stronger demand for labor hasn’t fed into higher wages.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Energy

Nigeria’s Power Sector to Get $7.5bn from $30bn African Electrification Initiative, Says Minister Adelabu

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Minister of Power Adebayo Adelabu has said that Nigeria is set to receive a portion of a $30 billion investment aimed at electrifying Africa.

During a visit to Splendor Electric Nigeria Limited, Adelabu revealed that the World Bank and the African Development Bank (AfDB) have committed to this ambitious initiative with Nigeria slated to receive approximately $7.5 billion, or 25% of the total fund.

The groundbreaking initiative is designed to extend electrification to an additional 300 million Africans over the next five years.

This large-scale project aims to address the energy deficit that has long plagued the continent and is expected to transform the power infrastructure significantly.

Adelabu expressed optimism about Nigeria’s role in the project, citing the country’s large population and ongoing power sector reforms as key factors in securing a substantial share of the funds.

“I want to inform you of the proposal or the intention, which is at an advanced stage, by the World Bank and the African Development Bank to spend about $30 billion to extend electrification to an additional 300 million Africans within the next five years. Nigeria is going to participate fully in this. I am confident that nothing less than 20% or 25% of this fund would come into Nigeria because of our population,” Adelabu stated.

The minister’s visit to Splendor Electric Nigeria Limited, a porcelain insulator company, underscores the government’s commitment to involving local businesses in the electrification drive.

The investment will focus on enhancing and upgrading power infrastructure, which is crucial for improving electricity access and reliability across Nigeria.

Despite the promising news, Nigeria continues to face significant challenges in its power sector. The country’s power grid has suffered frequent collapses, with the Nigerian Bureau of Statistics reporting less than 13 million electricity customers and frequent nationwide blackouts.

The International Energy Agency highlighted that Nigeria’s national grid experienced 46 collapses from 2017 to 2023, exacerbating the nation’s energy crisis.

To combat these issues, the government is also advancing the Presidential Power Initiative, a project in collaboration with Siemens, which aims to build thousands of new lines and numerous transmission and injection substations.

Adelabu noted that the pilot phase of this initiative is nearing completion and that Phase 1 will commence soon.

With over 200 million people and a chronic energy shortfall, Nigeria’s power sector is in urgent need of overhaul.

The additional $7.5 billion from the African Electrification Initiative represents a critical step toward achieving reliable and widespread electricity access.

The investment is expected to stimulate not only infrastructure development but also economic growth, creating opportunities for local companies and improving the quality of life for millions of Nigerians.

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Crude Oil

Oil Prices Climb as Markets Eye Potential US Rate Cuts in September

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Crude oil - Investors King

Oil prices rose during the Asian trading session today on speculation that the U.S. Federal Reserve may begin cutting interest rates as soon as September.

Brent crude oil, against which Nigerian oil is priced, increased by 32 cents to $82.95 a barrel, while U.S. West Texas Intermediate crude oil climbed 34 cents to $80.47.

The anticipation of rate cuts stems from recent U.S. inflation and labor market data indicating a trend towards disinflation and balanced employment, according to ANZ Research.

The Federal Reserve is set to review its policy on July 30-31, with expectations of holding rates steady but providing clues for potential cuts in September.

The potential rate cuts could stimulate economic activity, increasing demand for oil. This optimism has been partially offset by recent concerns over China’s slower-than-expected economic growth, which could dampen global oil demand.

President Joe Biden’s announcement to not seek re-election and endorse Vice President Kamala Harris had minimal impact on oil markets.

Analysts suggest that U.S. presidential influence on oil production is limited, although a potential Trump presidency could boost oil demand due to his stance against electric vehicles.

In response to economic challenges, China surprised markets by lowering key policy and lending rates. While these measures aim to bolster the economy, analysts remain cautious about their immediate impact on oil demand.

With OPEC+ production cuts continuing to support prices, the focus remains on the U.S. Federal Reserve’s next moves.

Any decision to cut rates could further influence oil prices in the coming months, highlighting the interconnectedness of global economic policies and energy markets.

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Dangote Refinery Clash Threatens Nigeria’s Oil Sector Stability

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Nigeria’s oil and gas sector is facing a new challenge as a dispute between Dangote Industries Limited and the Nigerian Midstream and Downstream Petroleum Regulatory Agency (NMDPRA) intensifies.

The disagreement centers on claims by NMDPRA that diesel from the Dangote Refinery contains high sulfur levels, making it inferior to imported products.

The $20 billion Dangote Refinery, located near Lagos, has the potential to process half of Nigeria’s daily oil output, promising to reduce dependency on foreign fuel imports and create thousands of jobs.

However, the recent accusations have cast a shadow over what should be a significant achievement for Africa’s largest economy.

Industry experts warn that the ongoing conflict could deter future investments in Nigeria’s oil sector.

“Regulatory uncertainty is a major disincentive for investors,” said Luqman Agboola, head of energy at Sofidia Capital. “Any factor affecting foreign investment impacts the entire value chain, risking potential energy deals.”

The regulatory body, led by Farouk Ahmed, maintains that Nigeria cannot rely solely on the Dangote facility to meet its petroleum needs, emphasizing the need for diverse sources.

This position has stirred controversy, with critics accusing the agency of attempting to undermine a vital national asset.

Amidst these tensions, energy analyst Charles Ogbeide described the agency’s comments as reckless, noting that the refinery is still in its commissioning stages and is working to optimize its sulfur output.

In response, Dangote Industries has called for fair assessments of its products, asserting that their diesel meets African standards.

The refinery’s leadership argues that certain factions may have ulterior motives, aiming to stifle progress through misinformation.

As the dispute continues, the broader implications for Nigeria’s oil sector remain uncertain. The outcome will likely influence not only domestic production but also the country’s standing in the global energy market.

Observers hope for a resolution that supports both industrial growth and regulatory integrity, ensuring stability in a sector crucial to Nigeria’s economy.

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