Good day. During his confirmation hearing yesterday, Federal Reserve Chairman Jerome Powell said he felt positive supply-chain problems would ease this year and help lower inflation, but he added that if prices stay high, the Fed would raise rates in due course. He also said the central bank could begin to shrink its $8.8 trillion portfolio of bonds and other assets later this year, which would be another tool for tightening financial conditions. Separately, two regional Fed bank presidents, Esther George of the Kansas City Fed and Loretta Mester of the Cleveland Fed, said they support the central bank paring its economic stimulus in light of high inflation and a solid outlook for growth and hiring. Today, Ms. Mester will discuss the economic and policy outlook at the WSJ CFO Network Summit. Please see details below for how to follow her presentation.
Now on to today's news and analysis.
Top News
Powell Says Economy No Longer Needs Aggressive Stimulus
In a confirmation hearing for his second term as Federal Reserve chairman, Jerome Powell said the central bank would use its tools to tamp down inflation. Photo: Graeme Jennings-Pool/Getty Images
Federal Reserve Chairman Jerome Powell called high inflation a "severe threat" to a full economic recovery and said Tuesday that the central bank was preparing to raise interest rates because the economy no longer needed emergency support.
Mr. Powell said he was optimistic that supply-chain bottlenecks would ease this year to help bring down inflation as the Fed takes its foot off the gas pedal. But he told lawmakers at his Senate confirmation hearing that if inflation stayed elevated, the Fed would be ready to step on the brakes. "If we have to raise interest rates more over time, we will," he said.
Two Fed Officials Say It Is Time to Pare Back Stimulus
Two regional Federal Reserve bank chiefs, both voting members of the rate-setting FOMC, said they are on board with withdrawing stimulus from the economy amid high levels of inflation and a solid outlook for growth and hiring.
Powell: Fed's New Ethics Rules Are Strong, Will Be Implemented Soon
Federal Reserve Chairman Jerome Powell said Tuesday the central bank is close to finalizing a broad revamp of its ethics rules prompted by criticism of officials' financial transactions during the coronavirus pandemic.
U.S. Economy
2021 Is Expected to Rank as Biggest Year for Inflation in Four Decades
U.S. inflation is on track to have closed out 2021 near its highest level since 1982 as robust consumer demand exacerbated pandemic-related supply shortages.
Big Banks Band Together to Measure and Manage Climate Risk
Banks including Bank of America Corp., Wells Fargo & Co. and Royal Bank of Canada have formed a consortium to jointly address climate-related risks, a move that comes as financial institutions increasingly grapple with the issue.
Bank of America to Cut Overdraft Fees to $10 From $35
WSJ Conversation With Loretta Mester
Watch live at 11:10 am EST Wednesday as The Wall Street Journal hosts Cleveland Fed President Loretta Mester to discuss the economic and policy outlook for 2022. Her presentation at the WSJ CFO Network Summit will be broadcast on the Journal's Twitter account, @WSJ. For more information on the summit, click here.
Key Developments Around the World
Omicron, Supply-Chain Troubles to Slow Growth, World Bank Says
The global economy is poised to slow down in 2022, the World Bank forecast Tuesday, citing the effects of the Omicron variant, supply-chain disruptions, labor shortages and the winding down of government economic support.
Covid-19's Economic Fallout Seen Lingering
The World Economic Forum's annual risk report showed a significant increase in pessimism about global prospects, with executives and leaders worried about the longer-term fallout from the Covid-19 pandemic.
China Covid-19 Lockdowns the Latest Knock to Supply Chains
With Covid-19 flaring up across China, major manufacturers are shutting factories, ports are clogging up and workers are in short supply as officials impose city lockdowns and mass testing on a scale unseen in nearly two years.
Turks Pile Into Bitcoin and Tether to Escape Plunging Lira
The Turkish lira has become so volatile that Turks have ditched the local currency for assets with an even riskier reputation: cryptocurrencies.
Financial Regulation Roundup
Bank Stocks Set for Big Gains Ahead of Potential Fed Rate Increases
Investors are betting looming interest-rate increases will fuel profits in financials and make the sector more attractive than tech. The KBW Nasdaq Bank Index rose 10% last week, the largest percentage gain since November 2020.
Citigroup to Exit Mexico Consumer Banking Business
Citigroup Inc. said Tuesday that it would exit its consumer, small-business and middle-market banking in Mexico, a business best known as Banamex, as part of its continuing "strategic refresh."
Forward Guidance
Wednesday (all times ET)
8:30 a.m.: U.S. Labor Department releases December CPI
10:30 a.m.: European Central Bank's Enria speaks at exchange of views with European Affairs Committee of French Senate
11:10 a.m.: Cleveland Fed's Mester speaks on economy and monetary policy in online Wall Street Journal interview
1 p.m.: Minneapolis Fed's Kashkari speaks at St. Paul Area Chamber virtual town hall
Thursday
4:30 a.m.: Bank of England releases credit conditions survey for the fourth quarter of 2021
8:30 a.m.: U.S. Labor Department releases December producer price index
10 a.m.: U.S. Senate Banking Committee holds nomination hearing for Fed's Brainard
12 p.m.: Chicago Fed's Evans speaks at Milwaukee Business Journal Economic Forecast 2022; Richmond Fed's Barkin speaks to Virginia Bankers Association and Virginia Chamber of Commerce
Research
New York Fed: Reverse Repos Working Well Despite Massive Size
The Federal Reserve Bank of New York said in a research note Tuesday that its reverse repo facility is working well even as cash keeps piling into it. The tool takes in cash mostly from money market firms and is designed to set a floor under short-term rates and has seen massive inflows, hitting nearly $2 trillion on the final day of 2021. The research note said the reverse repo facility helps balance liquidity in the financial system, and is particularly valuable during times of stimulus via central bank bond purchases, because the tool in part helps banks hold lower levels of reserves. As reverse repo use grows, it reduces market pressures "by offering liabilities that can be held by a broader set of financial market participants, supporting the [Federal Open Market Committee's] efforts to stimulate the economy through asset purchases," the research note said.
-- Michael S. Derby
Commentary
For Europe's Hot Carbon Market, Politics Is the Ceiling
EU carbon credits aren't so much a commodity as a political tool and that has underpinned a stunning rally over the past year, but it also caps the market's potential for financial speculation, Rochelle Toplensky writes.
Stock Market Normality Returns, and It Hurts
In one way, this year so far looks very like last year: the benchmark 10-year Treasury yield has risen by almost exactly the same amount, a little over 0.2 percentage points, writes James Mackintosh in the Journal's Streetwise column. In most ways, though, it looks completely different: rather than rewarding rampant speculation, the stock market has been punishing those who bet on fashionable stocks.
Basis Points
U.S. household debt is on the rise, with families holding onto more than $15.2 trillion in debt, NerdWallet said. The average indebted household owes some $155,622, the personal finance app added. (Dow Jones Newswires)
The dollar's DXY index fell to its lowest since late November at 95.5340 in the wake of Monday's testimony by Federal Reserve Chair Jerome Powell, and it may take a "material upside inflation surprise" in U.S. inflation data at 1330 GMT to avoid further falls, says MUFG.
Among U.S. mortgages in October, 3.8% were in some stage of delinquency, compared with 6.1% a year earlier, CoreLogic said. (DJN)
Housing experts and economists are split on whether U.S. home sales will rise or fall this year as concerns over worsening affordability collide with expectations for rising inventory, according to a Zillow survey. It found 41% of respondents expect sales will grow, 41% predict a slowdown and 18% believe sales will remain roughly the same. (DJN)
Improving confidence among U.S. small business owners lifted the NFIB Small Business Optimism Index to 98.9 in December from 98.4 in November, slightly ahead of the 98.7 consensus forecast from economists polled by The Wall Street Journal. (DJN)
Consumer prices in Brazil increased by 0.73% in December from November, the Brazilian Institute of Geography and Statistics said, and rose by 10.06% from a year earlier, the first time since May 2020 that the 12-month rate declined. (DJN)
Mexico's industrial production slipped by 0.1% in November from October in seasonally adjusted terms, the National Statistics Institute said. (DJN)
Energy prices in the OECD area soared by a 41-year-high of 28% in the 12 months through November, pushing overall inflation to 5.8%, the highest rate since 1996. (DJN)
China's factory-gate prices and consumer inflation in December both eased more than expected compared with the previous month, thanks to the plunge in oil prices, as well as Beijing's efforts to ensure commodity and food supply, which gives more room for policy easing in 2022, official data showed. (DJN)
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