The Times - UK (2020-08-28)

40 1GM Friday August 28 2020 | the times

Business

Analysis

S

uccess in central

banking is measured

in increments (Philip

Aldrick writes). A

GDP forecast that

misses by a few decimal

points is embarrassing.

Interest rates change a

quarter of a percentage

point at a time. So when the

US Federal Reserve says it

will formalise a policy that

lets it overshoot its 2 per

cent inflation target by a

“moderate” amount “for

some time” by introducing a

“flexible form of average

inflation targeting”, it is a

big deal.

Markets certainly thought

so. The policy tweak, which

effectively means US rates

will stay at about zero for

even longer than the very

long time already expected,

pumped up equity prices

and the dollar in the hope of

better economic growth.

The policy works by

matching accidental

inflation undershoots with

deliberate inflation

overshoots to achieve

average inflation of 2 per

cent over an arbitrary time

period. Before, rates would

rise if inflation moved above

2 per cent even after years of

below target inflation. Now,

above target inflation would

be the new target and there

would be no rate rise.

Policymakers choose to

overheat the economy

before cooling it back down.

That promise of higher

inflation helped steepen the

yield curve yesterday as

investors demanded better

returns on long-dated

government debt to protect

them against supposedly

rapidly rising prices in

future. Inflation has

averaged 1.3 per cent since

2012 in the US, so there is a

lot of catching up to do.

A steeper yield curve is

healthy and helps

commercial bank

profitability, whose game is

“maturity transformation”

— borrowing short term at

cheap rates and lending long

at higher ones. Bank share

prices rose accordingly.

The market responses

were welcome, but they

were based on a charade:

the assumption that the Fed

will let inflation rip for a bit.

Jerome Powell, the Fed

chairman, said there would

be no “mathematical

formula” on how the policy

would work and did not even

give a time period for

measuring the average.

Judgment will be applied,

he stressed, which makes

average inflation targeting

sound like existing flexible

inflation targeting with

overshoots tolerated — like

the spikes in UK inflation

above 5 per cent in 2008

and 2011 and above 2.5 per

cent after Brexit, none of

which brought higher rates.

Formalising the informal

“tolerance” for overshoots

should help and is a small

step in monetary

policymaking, Its impact is

likely to be minimal.

Fed inflation plan

to help growth

Continued from page 37

to stay with those people. We are

looking at a long tail of probably a

couple of years at least.”

On average inflation targeting, he

said that “we are not tying ourselves to

a mathematical formula” and did not

announce a time period over which the

average target would be judged. Since

2012, US inflation has averaged 1.3 per

cent. The strategy was approved by all

17 policymakers.

Karen Ward, of JP Morgan Asset

Management, said: “Interest rates will

be held down for longer, [but] how

much of an overshoot in inflation will

the Fed really tolerate, and how potent

is monetary policy today?”

Companies are regaining confidence in
the economy but they are still deeply
cautious about the outlook, a survey
has found.
According to the latest Lloyds Bank
business barometer, business confi-
dence has climbed for a third month in
a row to -14 per cent. Although it rose by
eight points, the index is still stuck in
negative territory, which suggests that
companies are more pessimistic than
they are optimistic.
The pandemic is weighing heavily on
trading conditions, even though the
lockdown has been eased. Almost two
thirds of respondents, 62 per cent,
reported weaker levels of demand

Protesters in Miami Beach have been complaining that Florida’s system for unemployed workers has not paid out benefits

The number of new claims for unem-
ployment benefit in the United States
remained around a million last week,
prompting concerns that the country’s
economic recovery is stalling.
The Department of Labor received
1.006 million initial claims for unem-
ployment insurance in the week that
ended on August 22. This was 98,000
fewer than the previous week and was
broadly in line with expectations.
Another 607,806 people applied for
support under federal schemes for self-
employed workers. This was up from
524,986 the previous week.
The jobs market has improved since
March, when new claims for unem-
ployment benefits peaked at 6.9 million
in a single week. Before the pandemic,
however, the worst week had been in
1982, when 695,000 people made initial
claims for unemployment benefits.
The number of continuous claims
also has fallen from its peak of 24.9 mil-
lion in May. Across both federal and
state programmes, there were 14.5 mil-
lion people claiming benefits as of
August 15. This was down from 14.8 mil-
lion the week before.
The latest figures suggest that some
businesses are starting to hire again.
However, the high new claims numbers
indicate that the pace of the recovery is
starting to slow after a resurgence in
coronavirus cases in America over the
summer.
Ian Shepherdson, at Pantheon Mac-

Confidence rises, but caution still rules

because of the pandemic, a small

improvement from 66 per cent in July.

Those in manufacturing and retail

reported the sharpest downturns.

Economists have warned that busi-

ness activity could take years to recover

to pre-pandemic levels. The economy is

enjoying a sharp rebound now that

restrictions have been lifted, but

analysts fear that this could soon peter

out, especially if unemployment rises

sharply as the government’s job reten-

tion scheme is wound down.

According to the Office for Budget

Responsibility, unemployment will

climb from 3.9 per cent to almost 12 per

cent in the latter part of the year. The

Bank of England expects a more

modest rise to 7.5 per cent.

Lloyds found that only 18 per cent of

businesses expected to retain all of the

staff they have put on furlough. It said

that the vast majority were still making

use of the scheme, which will officially

close in October. Only one third of

businesses said that they had no em-

ployees on furlough.

However, some said that they were

looking to expand their workforce. The

sub-index for hiring intentions rose to

-20 per cent, with a fifth, 19 per cent, of

businesses saying that they expected to

increase employment over the next

year. This was up two points on July.

Lloyds surveyed between 200 and

300 companies in the fortnight to

August 17. It found that concerns about

the strength of the recovery were

weighing on businesses. A net balance

of -14 per cent said thsat they were opti-

mistic about trading conditions in the

year ahead. The sub-index rose by nine

points, the largest monthly increase in

three years but still deep in negative

territory.

The biggest gains in business confi-

dence were in the South East, where the

index jumped by 32 points to 1 per cent

in August. The region is the first to

record a positive result since March.

In total, nine of the twelve regions

monitored by Lloyds registered an im-

provement in business confidence. The

North East came in at -5 per cent, while

the North West registered -10 per cent.

At -35 per cent, companies in Scotland

were the most negative. This was fol-

lowed by Northern Ireland at -27 per

cent and the South West at -26 per cent.

Hann-Ju Ho, senior economist,

Lloyds Bank Commercial Banking,

said: “With business confidence sitting

well below the long-term average and

official data for the second quarter con-

firming the UK re-entered recession,

the shape of any economic recovery re-

mains highly uncertain. Nevertheless,

it is encouraging to see gradual im-

provements in trading prospects and

economic optimism, albeit from a low

base, which hopefully will continue.”

-14%

Net balance of optimism about the

economy, up eight points

Source: Lloyds Bank business barometer

Gurpreet Narwan
Economics Correspondent

Fears for US recovery as

weekly unemployment

claims remain at 1m

Gurpreet Narwan roeconomics, the consultancy, said:
“The weekly initial claims numbers are
noisy, but the underlying trend prob-
ably is still falling, albeit slowly. We had
hoped that claims would be well under
one million by now, but the second
Covid wave scuppered that idea.”
Experts expect the US economy to
rebound in the third quarter after busi-
nesses reopened, but concerns about
the pace of the recovery have caused
some analysts to revise down their fore-
casts for GDP in the third and fourth
quarters. “Base effects mean that a big
double-digit jump in GDP is baked-in
for Q3, but we are becoming increas-
ingly worried about the fourth quarter,
given the softness of much of the near-
real-time data,” Mr Shepherdson said.
Yesterday the commerce department
revised up its second-quarter growth
estimates. It said that GDP at an annu-
alised rate had fallen by 31.7 per cent
between April and June, an improve-
ment on the initial estimate of a 32.9 per
cent drop. It is still the steepest fall in
output since the government started
keeping records in 1947.
Gregory Daco, of Oxford Econ-
omics, another consultancy, said: The
upwardly revised 31.7 per cent GDP
contraction in the second quarter, still
the sharpest on record, adds little to a
story that has already been written. The
figure is an important testament to the
economic pain inflicted by the corona-
virus pandemic and should motivate
policymakers to get their act together
to preserve the nascent recovery.”

JOE RAEDLE/GETTY IMAGES