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Fed Chairman Powell says economic reopening could cause inflation to pick up temporarily

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Federal Reserve Chairman Jerome Powell said Thursday that he expects some inflationary pressures in the time ahead but they likely won’t be enough to spur the central bank to hike interest rates.

“We expect that as the economy reopens and hopefully picks up, we will see inflation move up through base effects,” Powell said during a Wall Street Journal conference. “That could create some upward pressure on prices.”

Markets reacted negatively to Powell’s comments, with stocks sliding and Treasury yields jumping. Some investors and economists had been looking for him to address the recent surge in rates, with a possible nod toward adjusting the Fed’s asset purchase program.

The Fed currently is buying $120 billion a month in Treasurys and mortgage-backed securities. Recent market chatter has revolved around the central bank potentially implementing a new version of “Operation Twist,” in which it sells short-term notes and buys longer-dated bonds.

According to Fed officials, the central bank is far from any action to try to influence the long end of yields, despite expectations from economists and Wall Street strategists, CNBC’s Steve Liesman reported.

Powell instead reiterated past statements he has made on inflation in saying that he doesn’t expect the move up in prices to be long lasting or enough to change the Fed from its accommodative monetary policy. He did note that the rise in yields did catch his attention, as have improving economic conditions.

“There’s good reason to think that the outlook is becoming more positive at the margins,” he said.

The Fed likes inflation to run around 2%, a rate it believes signals a healthy economy and provides some room to cut interest rates during times of crisis. However, the rate has run below that for most of the past decade and inflation has been particularly weak during the coronavirus pandemic.

With the economy increasingly back on its feet, some price pressures are likely to emerge, said Powell, but he added they likely will be transitory and look higher because of “base effects,” or the difference against last year’s deeply depressed levels just as the Covid-19 crisis began.

Raising interest rates, he added, would require the economy to get back to full employment and inflation to hit a sustainable level above 2%. He doesn’t expect either to happen this year.

“There’s just a lot of ground to cover before we get to that,” he said. Even if the economy sees “transitory increases in inflation … I expect that we will be patient.”

The Fed has repeatedly said that it will keep short-term rates anchored near zero and continue its monthly bond-buying program until it sees not only a low unemployment rate but also a jobs recovery that is “inclusive” across income, gender and racial lines.

However, some economists have worried that the Fed’s commitment to low rates will foster inflation. Powell said he’s “very mindful” of the lessons from runaway inflation in the 1960s and ’70s, but believes this situation is different.

“We’re very mindful and I think it’s a constructive thing for people to point out potential risks. I always want to hear that,” he said. “But I do think it’s more likely that what happens in the next year or so is going to amount to prices moving up but not staying up and certainly not staying up to the point where they would move inflation expectations materially above 2%.”

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Ryanair CEO on why he is no longer an environment skeptic

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A Ryanair Boeing 737-800 aircraft parked at Eindhoven airport in the Netherlands.

Nicoloas Economou | NurPhoto | Getty Images

LONDON — Climate awareness has come a long a way, according to Ryanair‘s CEO Michael O’Leary, who concedes he was an initially an environmental skeptic himself.

Speaking to CNBC on Wednesday, O’Leary said: “I was one of the original skeptics.”

When asked what made him change his mind, he replied: “We learn from our experiences. Frankly, 20, 30 years ago we all thought the environmentalists were a bunch of nutters, you know. Clearly, it’s moved front and center, it is something that our customers and the people working here at Ryanair wants us to focus on and we tend to be very responsive.”

The airline industry has come under immense pressure to reduce carbon emissions in recent years, and policymakers have faced renewed calls to enact measures designed to tackle the climate emergency in the wake of the coronavirus pandemic.

This is paramount from an environmental perspective, but also for the airline business itself. Trends such as “flight shaming,” a term which refers to the feeling of guilt of travelling via plane due to its environmental impact, have gained ground and could severely disrupt business models.

In France, for example, lawmakers have voted to suspend domestic flights on routes that can be taken by a direct train in less than two-and-a-half hours.

When asked about the initiative, however, O’Leary said he was concerned about this sort of step.

“I get very worried about these, you know, big-stake initiatives. Largely speaking on flights below two-and-a-half hours, the trains (already) dominate that market,” he said, citing how traffic from London to Paris and Brussels is already done by train.

Eurostar trains, for example, allow customers to go from Paris to London in two hours.

But ultimately, the domestic short-haul flight was “never a big feature of our business,” O’Leary said.

 

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Biden plan to raise minimum wage would boost growth, OECD April 2021

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Workers repair glass on the East Front rotunda doors that was damaged during the January 6 attack on the US Capitol on February 08, 2021 in Washington, DC.

Tasos Katopodis | Getty Images

LONDON — The U.S. should go ahead with a plan to increase its federal minimum wage to help with a more inclusive recovery from the coronavirus crisis, the Organization for Economic Cooperation and Development said on Wednesday.

President Joe Biden wants to increase the minimum pay of federal employees to $15 per hour and an executive order in this sense could come in the coming weeks. According to the OECD, this is critical to support low-income earners, who have been more severely impacted by the pandemic.

“In several advanced economies, the pandemic and ongoing labour market changes … brought the issue of minimum wages to the fore,” the OECD said in its Going For Growth report published Wednesday.

“This is particularly the case in the United States, where raising the federal minimum wage is among the top priorities. Recent evidence suggests that increases of the minimum wage up to 59% of the median wage have little negative impact on employment,” the Paris-based institution said.

“Raising the federal minimum wage would both incentivize participation and help to ameliorate earnings inequalities,” it added. 

The U.S. minimum wage has been $7.25 an hour since 2009. Small business owners have said that the plan to increase pay would be a burden at a difficult time for them.

On the other hand, some worker rights’ groups have argued that Biden should do more, including stepping up protections for those with disabilities and better enforce workplace rights to reduce discrimination.

The OECD also said that the United States should go further in improving labor market conditions.

This would mean supporting workers’ mobility, providing more training programs and reducing red tape for people with criminal records looking to obtain occupational licenses.

“We need to make our economies more resilient, we need to make them more inclusive,” Laurence Boone, chief economist at OECD, told CNBC on Wednesday.

She added that it is important to “focus on those people that are left behind.”

The United States is seen growing at a pace of 6.4% this year, according to forecasts from the International Monetary Fund. This means it is on track to surpass its pre-pandemic GDP levels this year.

But new labor market friendly policies could limit the scarring effects of the crisis and lead to more employment.

The IMF projected an unemployment rate of 8.1% for the U.S. in 2020, followed by 5.8% in 2021.

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Analysts discuss growth and profitability

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SINGAPORE — Investors will be keeping a close eye on when Grab will turn profitable after its record-breaking SPAC listing, according to Tom White, senior research analyst at D.A. Davidson.

“There’s obviously a growing scrutiny from investors about a path to profitability,” White told CNBC’s “Squawk Box Asia” on Wednesday. But there has been a shift in investor sentiment from a singular focus on growth and market share gains to a more balanced approach, he said.

While still focused on breaking even, investors will likely also give the Southeast Asian ride-hailing firm more leeway to invest in new product categories, said White.

The Grab Holdings Inc. app is displayed on a smartphone in an arranged photograph taken in Singapore, on Friday, Sept. 25, 2020.

Ore Huiying | Bloomberg | Getty Images

Singapore-headquartered Grab announced on Tuesday it will go public through a SPAC merger with Altimeter Growth Corp. — a deal set to value the ride-hailing company at $39.6 billion. It was the world’s largest blank-check merger involving special purpose acquisition companies, which are set up to raise money to buy over private companies such as Grab.

Path to profitability

Grab as a whole is still not profitable. It lost $800 million in 2020 on an EBITDA basis and projected a $600 million loss for this year, according to a regulatory filing.

EBITDA — a measure of overall financial health for a business — stands for earnings before interest, taxes, depreciation and amortization. It is a common earnings metric used by tech companies even though seasoned investors are skeptical about it.

Grab said EBITDA for its transport segment turned positive since the fourth quarter of 2019. Adjusted net revenue last year came in at $1.6 billion and is projected to jump to $4.5 billion in 2023 — Grab predicted it might generate $500 million of EBITDA in two years.

“They do have, I think, a nice story to tell when you look at the two core segments,” said White, who also covers other online ride hailing and delivery apps like Uber and DoorDash.

“All their markets in ride sharing are at least EBITDA profitable, so, presumably, not burning cash. Five out of the six markets for food delivery are EBITDA profitable as well,” he said.

“Grab, I think, is going to be given a fair bit of leeway from the market to invest in new adjacencies, new categories, new products, given how well they’ve executed in the two legacy offerings,” White added.

Building up scale

One of Grab’s key business is the financial services segment, which includes digital payments, lending, insurance, digital banking and wealth management.

The company has yet to prove its market leadership in fintech — unlike in ride-sharing and food delivery —and this segment will likely be a high-growth, cash-burning business in the near term, according to Mittal.

“Hence, this whole listing will raise funds and those funds can be deployed towards fintech,” he said.

As part of the SPAC merger, SoftBank-backed Grab will receive about $4.5 billion in cash, which includes $4 billion in a private investment in public equity arrangement, managed by BlackRock, Fidelity, T. Rowe Price, Morgan Stanley’s Counterpoint Global fund and Singapore state investor Temasek.

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