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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 long experience in the global financial market.

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Investment

Barclays Tell High Net Worth Investors to Shun Africa and Other Emerging Economies

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Barclays to High Net Worth Clients, Stay Off Africa and Other Emerging Economies

Barclays, one of the world’s largest investment banks, has started advising high net worth clients to stay off Africa and other emerging economies.

According to Barclays, despite the recent recovery noticed in emerging-market stocks, investors are better off avoiding the risks that still abound in emerging nations. Barclays Plc, however, advised high net worth clients to focus on U.S equities despite the S&P’s breakneck rally.

The investment bank said emerging economies do not have enough fiscal buffers to spend their way out of the COVID-19 pandemic and will likely continue to struggle in the near-time compared to the US with 12 percent of gross domestic product fiscal-support.

It said the huge US stimulus may halt rebound in emerging-markets stocks as more money is expected to flow into the world’s largest economy and its European counterparts.

“Compared to the U.S., emerging-market economies appear more vulnerable,” said Haider, the London-based managing director and head of global growth markets. “Their central banks have less room to maneuver, their governments may not be able to provide unlimited support and equity markets, given their sector mix, can be more challenged by an economic slowdown.”

Barclays added that even after 33 percent rebound in stocks of emerging markets since the panic selloff subsided in March, stocks are still down by 9 percent from year-to-date while the US S&P 500 stocks are up by 45 percent. Presently, their stocks trading at a 36 percent discount to US stocks, up from 25 percent three months ago.

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Economy

Crude Oil Rises to $43.1 Per Barrel on Production Cuts Extension

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  • Crude Oil Hits $43.1 Per Barrel Following OPEC’s Production Cuts Extension

Brent crude oil, against which Nigerian oil price is measured, rose by 1.25 percent on Monday during the Asian trading session following OPEC and allies’ agreement to extend crude oil cuts to the end of July.

OPEC and allies, known as OPEC plus, agreed to extend production cuts of 9.7 million barrels per day reached in April to July on Saturday.

In the virtual conference, delegates agreed that members, including Nigeria and Iraq presently struggling to attain a 100 percent compliance level must keep to the agreement or be forced to do so in subsequent months.

Nigeria, Iraq and others failed to keep to the cartel’s agreement in May after reports show that Nigeria only managed to attain a 19 percent compliance level during the month while Iraq struggled to attain just 38 percent in the same month.

Russia and Saudi Arabia, the two largest producers of the group, warned members to stick to the agreed quota if they want to rebalance the global oil market.

While the errant producers such as Iraq and Nigeria have vowed to reach 100% conformity and compensate for prior underperformance, we still think they will likely continue to have some commitment issues over the course of the summer,” said Helima Croft, head of global commodity strategy at RBC Capital Markets.

The potential return of Libyan output could also cause considerable challenges for the OPEC leadership.

Earlier on Monday, Brent crude oil hits $43.1 per barrel, more than a month record-high, before pulling back slightly to $42.83 per barrel.

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Gold Dips by 2 Percent on Better Than Expected Job Report

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  • Gold Dips by 2 Percent on Better Than Expected Job Report

Gold prices declined by 2 percent on Friday following a better than expected US non-farm payroll report.

The report showed an increase of 2.5 million payroll numbers against a decline of 7.5 million predicted by many experts.

The surprise number boosted investors’ confidence in US recovery as many dumped their haven investment (gold) for the stock market.

“We had significantly stronger-than-expected U.S. payroll numbers – an increase of 2.5 million versus an expectation of a decline of 7.5 million – that 10-million swing has brought forward expectations of the economic recovery in the United States,” said Bart Melek, head of commodity strategies at TD Securities.

Spot gold immediately declined by 1.9 percent per ounce to $1,678.81 while the U.S. gold futures slid 2.6 percent to settle at $1,683.

Gold was also being pressured by stronger yields and a slightly firmer dollar, “meaning the opportunity cost to hold gold in the portfolio has gone up,” Melek added.

The surprise didn’t stop there, US Dow Jones was up 614 points despite the protest going on the US and US-China tension.

Also, NASDAQ rose by 29 points while the S&P index added 50 points increase.

Note: Investors generally increase their investments in gold and other haven assets during a crisis to avert risk exposure and do the opposite once they sense a better economy.

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