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Fed Chairman in Middle of Debate Over How Long Inflation Surge Will Last; Purchasing Managers Report Activity Is Slowing

08/24/2021 | 08:45am EST

Good day. As Federal Reserve Chairman Jerome Powell heads into the annual Jackson Hole conference being held virtually this week, he will be at the center of a debate over high inflation. Mr. Powell is siding with central bank officials who expect recent price surges to reverse on their own. Others, however, see dangers that high inflation could continue, forcing the Fed to consider raising interest rates sooner or more aggressively than central bankers had anticipated to force it down. Meanwhile, U.S. factories and service providers reported sharply slower growth this month, forecasting firm IHS Markit's surveys of purchasing managers showed.

Now on to today's news and analysis.

Top News

Fed Chairman Powell Navigates the Inflation Debate

After a decade of low growth and inflation, Federal Reserve Chairman Jerome Powell unveiled a new strategy a year ago in which the central bank would keep interest rates lower for longer.

Now, reality has dealt Mr. Powell the biggest inflation spike in decades, and he heads into the Kansas City Fed's annual conference this week at the center of the debate over how long the currently higher inflation will last, and what the Fed should do about it.

Record $1.136 Trillion Flows Into Fed Reverse-Repo Facility

The Federal Reserve Bank of New York reported a record inflow of cash into its reverse repo facility on Monday, as money market funds, government sponsored companies and others pumped $1.136 trillion into the central bank facility seeking its 0.05% return. The surge of money into the facility continues a long running trend of too much cash and a shortage of safe assets. Given money market returns, many firms are directing cash to the central bank, and the Fed seems to be fine with that. -- Michael S. Derby

U.S. Economy

U.S. Expansion Slowed in August, Survey Shows

Softening demand at a time of rising Covid-19 cases, labor shortages and persistent knots in shipping networks are restraining businesses in the U.S. and across the globe, according to private-sector surveys released Monday.

U.S. Home Sales Rose 2% in July Amid Higher Inventory

The frenzied housing market of earlier this year is showing signs of winding down, but the market remains competitive for buyers. And while the inventory of homes is up in recent months, supply remains well below demand.

If You Bought Municipal Bonds a Long Time Ago, This Is a Great Time

Prices of municipal bonds are surging, hurting yields for new investors, as comments by President Biden ignite tax-increase fears and local governments weather the Covid-19 pandemic better than expected.

Key Developments Around the World

Euro Falls to Nine-Month Low as Fed, ECB Policies Diverge

The euro is trading near its lowest level against the dollar in nine months as investors bet that the eurozone will maintain lower interest rates and have a slower economic recovery than the U.S.

Afghanistan's Collapsing Economy Pressures Taliban to Negotiate

No longer facing serious military opposition, Afghanistan's Taliban rulers are grappling with a new threat: an economic meltdown that could fuel renewed challenges to their rule and that has put pressure on them to share power.

Financial Regulation Roundup

Cryptocurrency's Surge Leaves Global Watchdogs Trying to Catch Up

After years of relative inattention, regulators and lawmakers are scrambling to catch up, aiming to rein in a rebellious industry that has adopted the tech world's blueprint for aggressively deploying new products to quickly amass users.

Bitcoin Prices Pass $50,000 for First Time Since May

Antigraft Watchdog Probes Party Leaders in Alibaba, Ant's Backyard

China's anticorruption watchdog is investigating top officials in Hangzhou, where Alibaba Group Holding Ltd and Ant Group Co. are based, raising questions about close ties between local Communist Party officials and the private sector.

Forward Guidance

Tuesday (all times ET)

National Bank of Hungary releases policy statement

8:30 a.m.: European Central Bank's Schnabel speaks on panel on nonbank financial intermediation at virtual EEA-ESEM conference

10 a.m.: U.S. Commerce Department releases July new-home sales


8:30 a.m.: U.S. Commerce Department releases July durable-goods data


Research Firm Doubts Fed Needs to Lift Reverse Repo Cap

It is probably too soon for the Federal Reserve to increase the counterparty cap in place for its reverse repo facility, Wrightson ICAP said in a note to clients over the weekend. In comments sparked by the Fed's late July meeting minutes, the research firm said there aren't signs yet that money market funds are running into individual constraints that limit how much cash they can park at the Fed via reverse repos. Referring to the $80 billion per-firm cap, "in the July 31 money fund reports collated by the Office of Financial Research, no individual fund had a [reverse repo] balance of more $60 billion, and only four had allocations in excess of $50 billion," Wrightson ICAP said. It added that "there is no indication that the current $80 billion figure will be a significant constraint on aggregate volume in the near term." The New York Fed reported a record inflow of cash into its reverse repo facility on Monday. Money market funds, government sponsored companies and others placed $1.136 trillion with the central bank facility for a return of 0.05%.

-- Michael S. Derby

Basis Points

The U.S. economy grew above average in July, picking up speed compared with the previous month, according to the Federal Reserve Bank of Chicago, whose Chicago Fed National Activity Index rose to 0.53 last month from minus 0.01 in June, above the 0.15 consensus of economists polled by FactSet.

House Speaker Nancy Pelosi (D., Calif.) and a group of centrist House Democrats worked to break a deadlock Monday over the party's legislative strategy, as leaders tried to unify the party's rival wings.

Consumer confidence among Eurozone households declined again in August as the spread of the Delta coronavirus variant prompted restrictions, with the European Commission saying its confidence measure for the currency area edged down to minus 5.3 from minus 4.4 in July. Economists polled by The Wall Street Journal had forecast a minus 4.8 reading. (DJN)

Singapore's consumer prices rose at their quickest pace in more than seven years in July due to a pickup in core inflation and higher accommodation inflation, lifting the month's consumer-price index 2.5% from a year earlier, the country's Department of Statistics said. (DJN)

Germany's second-quarter GDP growth was revised up as virus concerns eased. On an adjusted basis, the economy grew 1.6% over the previous quarter, the country's statistics office Destatis said. The preliminary estimate had put the expansion at 1.5%. (DJN)

India plans to raise 6 trillion rupees ($81 billion) over the next four years by monetizing some government assets, a move aimed at encouraging private-sector investments and to boost economic growth

(END) Dow Jones Newswires

08-24-21 0844ET

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