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Time for Strong Medicine: How Central Banks Got Tough on Inflation




The world’s most-watched central banks are finally stamping down on a surge in inflation. But this week it became clear that they know this comes at a cost.

From the UK, where the Bank of England raised interest rates for the fifth time in as many meetings, to Switzerland, which bumped up rates for the first time since 2007, policymakers in almost every major economy are turning off the stimulus taps, spooked by inflation that many initially dismissed as fleeting.

But for the big two in particular — the US Federal Reserve and the European Central Bank — the prospect of sharply higher rates brings awkward trade-offs. For the Fed, that is in employment, which is at risk as it pursues the most aggressive campaign to tighten monetary policy since the 1980s. The ECB, meanwhile, this week scrambled an emergency meeting and said it would speed up work on a new plan to avoid splintering in the eurozone — an acknowledgment of the risk that Southern Europe and Italy in particular could plunge in to crisis.

Most central banks in developed countries have a mandate to keep inflation under 2 per cent. But the roaring consumer demand and supply-chain crunch stemming from the Covid reopening, combined with the energy price spiral generated by Russia’s invasion of Ukraine, has made this impossible.

At first, policymakers considered inflation spikes to be transitory. But now, US inflation is running at an annual pace of 8.6 per cent, the fastest in more than 40 years. For the eurozone, it is 8.1 per cent and in the UK, 7.8 per cent. Central banks are being forced to act far more aggressively.

Investors and economists think policymakers will struggle to avoid imposing pain, from rising unemployment to economic stagnation. Central banks have moved “from whatever it takes to whatever it breaks”, says Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.

The Fed faces reality

Above all, the US Federal Reserve this week dramatically scaled up its response. It has been raising rates since March, but on Wednesday it delivered its first 0.75 percentage point rate rise since 1994. It also set the stage for much tighter monetary policy in short order. Officials project rates to rise to 3.8 per cent in 2023, with most of the increases slated for this year. They now hover between 1.50 per cent and 1.75 per cent.

The Fed knows this might hurt, judging from the statement accompanying its rate decision. Just last month, it said it thought that as it tightens monetary policy, inflation will fall back to its 2 per cent target and the labour market will “remain strong.” This time around, it scrubbed that line on jobs, affirming instead its commitment to succeeding on the inflation front.

To those familiar with reading the runes of the Fed, this matters. “This was not unintentional,” says Tim Duy, chief US economist at SGH Macro Advisors. “The Fed knows that it is no longer possible in the near term to guarantee” both stable prices and maximum employment.

The prospect of a recession in the US and elsewhere has already sent financial markets swooning. US stocks have posted the worst start to any year since the 1960s, declines that have accelerated since the latest central bank pronouncements. Government bonds, meanwhile, have flipped around violently under the competing forces of recession fears and rising benchmark rates.

“The big fear is that central banks can no longer afford to care about economic growth, because inflation is going to be so hard to bring down,” says Karen Ward, chief market strategist for Europe at JPMorgan Asset Management. “That’s why you are getting this sea of red in markets.”

At first glance, fears of a US recession might appear misplaced. The economy roared back from Covid lockdowns. The labour market is robust, with vigorous demand for new hires fuelling a healthy pace of monthly jobs. Almost 400,000 new positions were created in May alone, and the unemployment rate now hovers at a historically low 3.6 per cent.

But raging inflation puts these gains in jeopardy, economists warn. As the Fed raises its benchmark policy rate, borrowing for consumers and businesses becomes more costly, crimping demand for big-ticket purchases like homes and cars and forcing companies to cut back on expansion plans or investments that would have fuelled hiring.

“We don’t have in history the precedent of raising the federal funds rate by that much without a recession,” says Vincent Reinhart, who worked at the US central bank for more than 20 years and is now chief economist at the Dreyfus and Mellon units of BNY Mellon Investment Management.

The Fed says a sharp contraction is not inevitable, but confidence in that call appears to be ebbing. While Fed chair Jay Powell this week said the central bank was not trying to induce a recession, he admitted that it had become “more challenging” to achieve a so-called soft landing. “It is not going to be easy,” he said on Wednesday. “It’s going to depend to some extent on factors we don’t control.”

That more pessimistic stance and the Fed’s aggression against rising prices has compelled many economists to pull forward their forecasts for an economic downturn, an outcome for the central bank that Steven Blitz, chief US economist at TS Lombard, says was a “moment of their own design” by moving too slowly last year to take action against a mounting inflation problem. Most officials now expect some rate cuts in 2024.

“Because of their inept handling of monetary policy last year, and their own belief in a fairytale world as opposed to seeing what was really going on, they put the US economy and markets in this position that they now have to unwind,” he says. “They were wrong and the US economy is going to have to pay the price.”

Whatever it takes?

The ECB has a challenge of a more existential kind.

This week it called an emergency meeting just days after its president Christine Lagarde announced a plan to raise rates and to stop buying more bonds in July. That plan makes sense in the context of record-breaking inflation. But it had the awkward effect of hammering government bonds issued by Italy, historically a big borrower and spender. Italy’s 10-year bond yield rose to an eight-year high above 4 per cent and its gap in yields from Germany hit 2.5 percentage points, its highest level since the pandemic hit two years ago.

This outsized pressure on individual member states’ bonds makes it hard for the ECB to apply its monetary policy evenly across the 19-state eurozone, risking the “fragmentation” between nations that ballooned a decade ago in the debt crisis. Faced with early signs of a potential rerun, the ECB felt it had to act.

Italian central bank governor Ignazio Visco said this week that its emergency meeting did not signal panic. But he also said that any increase in Italian yields beyond 2 percentage points above Germany’s created “very serious problems” for the transmission of monetary policy.

The result of the meeting was a commitment to speed up work on a new “anti-fragmentation” tool — but with little detail on how it would work — while also reinvesting maturing bonds flexibly to tame bond market jitters.

Some think this is not enough. It has certainly not repeated the trick achieved by Lagarde’s predecessor Mario Draghi — now the Italian prime minister — who famously turned the tide of the eurozone debt crisis in the summer of 2012 simply by saying the central bank would do “whatever it takes” to save the euro.

For now, the ECB has halted the downward spiral in Italian bonds, stabilising 10-year yields at about 3.6 per cent with the spread at 1.9 percentage points. But investors are hungry for details of its new toolkit.

“All the ECB did [this week] was show it is watching the situation,” says one senior London-based bond trader. “It does not have the leadership that’s willing or able to do what Draghi did. Eventually the market will test the ECB.”

The central bank hopes that by introducing a new bond-buying instrument it will be able to keep a lid on the borrowing costs of weaker countries while still raising rates enough to bring inflation down.

Hawkish rate-setters at the ECB normally dislike bond-buying, but they support the idea of a new tool, believing it will clear the way to increase rates more aggressively. Deutsche Bank analysts raised their forecast for ECB rate rises this year after Wednesday’s meeting, predicting it could lift its deposit rate from minus 0.5 per cent to 1.25 per cent by December.

“Central banks will hike until something breaks, but I don’t think they’re convinced that anything has broken yet,” says James Athey, a senior bond portfolio manager at Abrdn.

Financial asset prices have tumbled, but from historically elevated levels, he says, and policymakers who have in the past been keen on keeping their currencies weak — a boon for exports — are now raising rates in part to support them, to deflect inflationary pressures.

“The [Swiss National Bank] is a case in point,” he says. “All they have done for a decade is print infinite francs to weaken their currency. It’s a complete about face.”

The Swiss surprise leaves Japan as a lone holdout against the tide of rising rates. The Bank of Japan on Friday stuck with negative interest rates and a pledge to pin 10-year government borrowing costs close to zero.

The BoJ can afford to bet that the current bout of inflation is “transitory” — a term ditched long ago by central banks elsewhere in the developed world — because there is little sign that the commodity shock is shaking Japan from its long history of sluggish price rises in the broader economy. Consumer inflation in Japan is hovering at about 2 per cent, broadly in line with targets.

Even so, the pressure from markets has become intense. The Japanese central bank has been forced to ramp up its bond purchases at a time when other central banks are powering down the money printers, to prevent yields being dragged higher by the global sell-off. At the same time, the growing interest rate gulf between Japan and the rest has dragged the yen to a 24-year low against the dollar, spreading unease in Tokyo’s political circles.

The pain from rate rises will be felt globally, Athey predicts. “When the basics that everyone needs to live, like food, energy and shelter, are going up, and then you jack up interest rates, that’s an economic sledgehammer. If they end up actually delivering the tightening that’s priced in then economies are in big trouble.”

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Shoppers Astonished As Price of Lurpak Butter Soars to Eye-watering Sum




CUSTOMERS have shared their shock after a 500g pack of Lurpak shot up in price to an eye-watering new level.

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Key Passages From the US Supreme Court on Abortion Rights





The US Supreme Court on Friday struck down Roe vs Wade, the 1973 ruling that guaranteed a constitutional right to abortion, in one of its most consequential decisions on civil rights in years.

The arguments on both sides are lengthy and involved, and the final ruling comprised five separate opinions spanning 213 pages: the opinion of the court, two concurring opinions, an opinion agreeing only with the court’s judgment and a dissenting opinion.

Below are some of the most notable passages from each.

Opinion of the court, written by Samuel Alito

Much of Alito’s majority opinion matched a leaked draft from February 10, which was published by Politico in May.

To begin, Alito argued that the court overstepped when first deciding Roe.

As Justice Byron White aptly put it in his dissent, the [Roe] decision represented the “exercise of raw judicial power”, and it sparked a national controversy that has embittered our political culture for a half-century.

He argued that the case was wrongly decided, and poked at its reasoning. (He also cited Planned Parenthood vs Casey, another abortion case that affirmed Roe.)

Roe was egregiously wrong from the start. Its reasoning was exceptionally weak, and the decision has had damaging consequences. And far from bringing about a national settlement of the abortion issue, Roe and Casey have enflamed debate and deepened division.

Alito argued that there is no right to an abortion rooted in American “history and tradition”.

We hold that Roe and Casey must be overruled. The constitution makes no reference to abortion, and no such right is implicitly protected by any constitutional provision, including the one on which the defenders of Roe and Casey now chiefly rely — the Due Process Clause of the Fourteenth Amendment. That provision has been held to guarantee some rights that are not mentioned in the constitution, but any such right must be “deeply rooted in this nation’s history and tradition” and “implicit in the concept of ordered liberty”.

He reiterated the Roe court’s “errors” and lamented that the issue had been taken out of the hands of those who opposed abortion rights.

Roe was on a collision course with the constitution from the day it was decided . . . and the errors do not concern some arcane corner of the law of little importance to the American people. Rather, wielding nothing but “raw judicial power,” the court usurped the power to address a question of profound moral and social importance that the constitution unequivocally leaves for the people . . . The court short-circuited the democratic process by closing it to the large number of Americans who dissented in any respect from Roe . . . Roe and Casey represent an error that cannot be allowed to stand.

Finally, Alito wrote that court does not know, and need not consider, the implications of its decision.

We do not pretend to know how our political system or society will respond to today’s decision over-ruling Roe and Casey. And even if we could foresee what will happen, we would have no authority to let that knowledge influence our decision. We can only do our job, which is to interpret the law, apply longstanding principles of stare decisis, and decide this case accordingly.

We therefore hold that the constitution does not confer a right to abortion. Roe and Casey must be overruled, and the authority to regulate abortion must be returned to the people and their elected representatives.

Concurring opinion by Clarence Thomas

Thomas, widely considered to be the most conservative justice, agreed. He also said the court should perhaps go further and reconsider its decisions on contraception, same-sex relationships and same-sex marriage, citing Supreme Court cases relevant to each issue.

For that reason, in future cases, we should reconsider all of this court’s substantive due process precedents, including Griswold, Lawrence, and Obergefell. Because any substantive due process decision is “demonstrably erroneous,” we have a duty to “correct the error” established in those precedents.

Concurring opinion by Brett Kavanaugh

Kavanaugh, another conservative, wrote to share his “additional views”. He emphasised that the court was returning the issue of abortion to the people, rather than outlawing it.

To be clear, then, the court’s decision today does not outlaw abortion throughout the United States. On the contrary, the court’s decision properly leaves the question of abortion for the people and their elected representatives in the democratic process.

He claimed the constitution was “neutral” when it comes to abortion rights.

In sum, the constitution is neutral on the issue of abortion and allows the people and their elected representatives to address the issue through the democratic process. In my respectful view, the court in Roe therefore erred by taking sides on the issue of abortion.

And he wrote that court itself must be “scrupulously neutral” — a point to which the court’s liberals took exception.

In my judgment, on the issue of abortion, the constitution is neither pro-life nor pro-choice. The constitution is neutral, and this court likewise must be scrupulously neutral. The court today properly heeds the constitutional principle of judicial neutrality and returns the issue of abortion to the people and their elected representatives in the democratic process.

Opinion by John Roberts, concurring in judgment

Roberts, the chief justice, concurred with the court’s specific judgment upholding Mississippi’s 15-week restriction on abortions, but not with the dramatic scope of its decision. He called it a “serious jolt to the legal system”.

I would take a more measured course . . . Our abortion precedents describe the right at issue as a woman’s right to choose to terminate her pregnancy. That right should therefore extend far enough to ensure a reasonable opportunity to choose, but need not extend any further.

He reiterated that overturning Roe was unnecessary to deciding the case.

I would decide the question we granted review to answer — whether the previously recognised abortion right bars all abortion restrictions prior to viability, such that a ban on abortions after 15 weeks of pregnancy is necessarily unlawful. The answer to that question is no, and there is no need to go further to decide this case.

Dissenting opinion by Stephen Breyer, Sonia Sotomayor and Elena Kagan

The impassioned dissent by the court’s three-member liberal wing begins by pointing to the “half a century” during which Roe vs Wade “protected the liberty and equality of women”.

Respecting a woman as an autonomous being, and granting her full equality, meant giving her substantial choice over this most personal and most consequential of all life decisions.

They said they fear the “draconian restrictions” and punishments that states may now mete out.

Enforcement of all these draconian restrictions will also be left largely to the states’ devices. A state can of course impose criminal penalties on abortion providers, including lengthy prison sentences. But some states will not stop there. Perhaps, in the wake of today’s decision, a state law will criminalise the woman’s conduct too, incarcerating or fining her for daring to seek or obtain an abortion.

And in any case, they wrote, women’s rights have been curtailed.

Whatever the exact scope of the coming laws, one result of today’s decision is certain: the curtailment of women’s rights, and of their status as free and equal citizens.

The dissenters also took a direct shot at Kavanaugh’s neutrality argument.

When the court decimates a right women have held for 50 years, the court is not being “scrupulously neutral”. It is instead taking sides: against women who wish to exercise the right, and for states (like Mississippi) that want to bar them from doing so.

And unlike Alito, they specifically sought to address the real-world implications.

The disruption of overturning Roe and Casey will therefore be profound. Abortion is a common medical procedure and a familiar experience in women’s lives. About 18 per cent of pregnancies in this country end in abortion, and about one-quarter of American women will have an abortion before the age of 45 . . . [P]eople today rely on their ability to control and time pregnancies when making countless life decisions: where to live, whether and how to invest in education or careers, how to allocate financial resources, and how to approach intimate and family relationships.

They warned of the fragility of constitutional protections.

The American public, they thought, should never conclude that its constitutional protections hung by a thread — that a new majority, adhering to a new “doctrinal school”, could “by dint of numbers” alone expunge their rights.

Supreme Court justices often conclude their dissents by saying they “respectfully dissent” or, to hit a stronger note, that they simply “dissent”. On Friday, the court’s liberal bloc dissented “with sorrow”.

With sorrow — for this court, but more, for the many millions of American women who have today lost a fundamental constitutional protection — we dissent.

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US Supreme Court Overturns Roe Vs Wade in Major Blow to Abortion Rights





The US Supreme Court has struck down Roe vs Wade, the legal decision that has enshrined the constitutional right to an abortion for nearly 50 years, in a dramatic ruling by the court’s conservative majority that will shake up American society, politics and jurisprudence for years to come.

In the decision authored by Justice Samuel Alito, the justices of the Supreme Court upheld a state law in Mississippi that bans abortion after 15 weeks. They also went further, saying that the Roe vs Wade ruling of 1973 was incorrectly decided. The court’s three liberal justices dissented.

The court’s ruling was one of its most intensely anticipated in years — even more so after a draft of the majority opinion heralding its final decision to overturn Roe vs Wade was published by Politico in April, triggering a highly unusual probe within the institution into the leak. 

In denying a constitutional right to an abortion, the court has effectively given a green light for states to enact abortion laws that can be as restrictive as they wish. Several states run by Republican-led governors and legislatures have already passed laws that mean more restrictions on abortion will be automatically implemented if Roe is overturned.

The sweeping opinion in the Mississippi case was made possible by the appointment of three conservative Supreme Court justices during the presidency of Donald Trump, who secured their confirmation through the then Republican-led Senate. The court’s conservative majority is now so strong that it can afford to lose the support of Chief Justice John Roberts, who is considered a more moderate conservative, and still prevail in key rulings.

Earlier this year, the Democratic-led Senate confirmed Ketanji Brown Jackson, a liberal nominated by Joe Biden, to be a justice on America’s highest court. Since she is replacing Stephen Breyer, another liberal, her appointment will not affect the court’s balance of power.

The Supreme Court ruling on abortion was released with less than five months to go before November’s midterm elections, and may alter the political dynamic heading into the vote, though it is unclear whether it can overpower the impact of high inflation and economic perceptions as a factor for voters.

With polls showing that a majority of Americans opposed to overturning Roe vs Wade, Democrats are hoping that the ruling will trigger outrage, mobilise its base, and attract moderate swing voters who will see Republican positions on the issue as increasingly extreme.

But Republicans believe that disappointment with Biden’s handling of the economy, and high consumer prices, particularly for food and petrol, will still carry the day and give them a strong chance of recapturing control of the House of Representatives and possibly even the Senate. 

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