Fed's Harker Sees Four Rate Increases This Year; Bank of Canada Rate Rise Next Month Looks Certain

Fed's Harker Sees Four Rate Increases This Year; Bank of Canada Rate Rise Next Month Looks Certain By James Christie

Good day. Federal Reserve Bank of Philadelphia President Patrick Harker said Tuesday he supports the Fed raising interest rates next month, but probably not by 50 basis-points. A voting member of the rate-setting Federal Open Market Committee, Mr. Harker also said he expects the Fed will raise rates four times this year, though he noted there is much uncertainty about that outlook in light of how high inflation is pushing the Fed toward tighter monetary policy. Elsewhere, Statistics Canada said early estimates suggest Canada's economy grew 6.3% at an annual rate in the fourth quarter. Canadian economic output grew at a faster-than-expected pace in November and lifted total activity above prepandemic levels. Economists said the November GDP result cements the case for the Bank of Canada's first interest rate increase in more than three years next month. There also was a hint of hawkishness in a speech by Reserve Bank of Australia Gov. Philip Lowe. "We will do what is necessary to maintain low and stable inflation," he said in comments that followed data that showed inflation surged in the fourth quarter of 2021, while unemployment fell sharply in December.

Now on to today's news and analysis.

Top News Fed's Harker Leans Against 50 Basis-Point Rate Hike

Federal Reserve Bank of Philadelphia President Patrick Harker said he is on board with a March rate rise but is leaning against a supersize move up in the central bank's now near-zero short-term rate target.

"I would be supportive of a 25 basis-point increase in March," Mr. Harker said in a Bloomberg television interview. "Could we do 50 [basis points]? Should we? I'm a little less convinced of that right now, but we'll see how the data turns out in the next couple of weeks," he added.

RBA Gov: Will Do What Is Necessary to Maintain Low, Stable Inflation

The Reserve Bank of Australia will do "what is necessary" to keep inflation within its target of 2-3% over time, Gov. Philip Lowe said, in a sign that some hawkishness might be creeping into the central bank's narrative on interest rates.

U.S. Economy National Debt Exceeds $30 Trillion for First Time

U.S. national debt exceeded $30 trillion for the first time , reflecting increased federal borrowing during the pandemic. That was a nearly $7 trillion increase from late January 2020, just before the pandemic hit.

Consumers Are Pivoting Spending to Services Like Dining and Travel

Americans responded to the pandemic with a dramatic shift in spending to goods from services . That now appears to be reversing and should gather steam as the Omicron wave of Covid-19 ebbs, economists say.

Key Developments Around the World Canada GDP Rises 0.6% in November, Surpasses Prepandemic Level

Canadian economic output grew at a faster-than-expected pace in November, enough to lift total activity above prepandemic levels and reinforcing the case for a Bank of Canada rate rise in four weeks. Gross domestic product climbed 0.6% in November from the previous month to a seasonally adjusted 2.014 trillion Canadian dollars, or the equivalent of about US$1.59 trillion. Market expectations called for a 0.4% gain, according to economists at TD Securities. (MarketWatch)

Bank of Mexico Governor Rodriguez Joins Board at BIS

Bank of Mexico Gov. Victoria Rodriguez was elected to the board of directors at the Bank for International Settlements. The board is responsible for determining the strategic and policy direction of Switzerland-based BIS, which is headed by former Bank of Mexico Gov. Agustin Carstens. Rodriguez took up the helm of the Mexican central bank on Jan. 1, replacing Alejandro Diaz de Leon whose term ended. (Dow Jones Newswires)

Ukraine's Economy Braces for Impact as War With Russia Looms

The psychological pressure of a possible all-out war is already damaging Ukraine's economy, which is one of Europe's poorest and sustained a severe blow when Russia seized the country's Crimean peninsula and Donbas areas in 2014.

Eurozone Inflation Rises to Fresh Record, Against Expectations

The eurozone's inflation rate rose to a fresh record high in January , an unwelcome surprise for policy makers at the European Central Bank who have said they don't expect to raise their key interest rate this year.

Financial Regulation Crypto Industry Hopes Legal Brawl Will Thwart SEC's Regulation Push

The booming cryptocurrency sector's complaints that Washington has gone too far in cracking down on its unregulated products are getting tested in a key SEC lawsuit targeting Ripple Labs Inc. and its digital coin, XRP.

Forward Guidance Wednesday (all times ET)

Time N/A: Central Bank of Brazil releases policy statement

Thursday

Time N/A: Central Bank of Egypt releases policy statement

7 a.m.: Bank of England releases monetary policy report, summary and minutes

7:45 a.m.: European Central Bank releases policy statement

8:30 a.m.: European Central Bank's Lagarde speaks at press conference; Czech National Bank releases policy statement

7:30 p.m.: Reserve Bank of Australia releases policy statement

Research Russia Sanctions Could Help Undermine Dollar's Global Status

If the U.S. imposes harsh sanctions to punish Russia should it attack Ukraine, the dollar's reserve-currency status is unlikely to be affected in the near term, George Pearkes of Bespoke Investment Group writes in a research note for the Atlantic Council. Because of the dollar's dominant role in global finances, using it as a weapon could be extremely painful for Russia, but it could also start a long process in which some nations try to build a global financial system that would allow them to be less reliant on U.S. money, Mr. Pearkes writes. "Dollar weaponization cannot end the reserve status of the dollar overnight, but it could help to accelerate such a shift," he writes, adding that "while deploying the dollar as a weapon offers much lower costs than using armed conflict to meet the same ends, it is not without costs."

-Michael S. Derby

Commentary December's Job Market Showed Resilience in the Face of Omicron

What is striking is that December's addition of a net 363,000 jobs shown in Tuesday's Labor Department report isn't far off the previous month's 391,000, so even with Omicron, U.S. employers kept on adding workers , Justin Lahart writes.

Basis Points U.S. construction spending increased 0.2% in December on month, according to Commerce Department data, below the 0.7% increase expected by economists polled by The Wall Street Journal. Residential construction rose 1.1% on month, while spending on nonresidential building fell 0.7% compared with November. Outlays on construction of new, single family homes climbed 2.1%. (Dow Jones Newswires) U.S. manufacturing activity slowed in January to the lowest level since November 2020 as production and demand lost steam as the Covid-19 Omicron variant disrupted factories, lowering the ISM Manufacturing Report on Business PMI from 58.8 in December to 57.6. Any reading above 50 signals expansion. (DJN) IHS Markit's Canada manufacturing PMI softened this month to 56.2 from 56.5 in December. IHS said supply-chain disruptions and a rise of Covid-19 Omicron cases were largely responsible for the slowdown. Still, a reading over 50 indicates an overall increase in activity, and IHS Markit said price pressures for manufacturers showed further signs of easing, with rates of output and input price inflation down to 10- and 11-months lows, respectively. (DJN) Economists polled by the Bank of Mexico in January forecast the country's economy to grow 2.2% this year, down from their 2.8% estimate in the bank's December survey. GDP expanded 5% seasonally adjusted in 2021 with declines in the third and fourth quarters slowing the recovery. (DJN) Mexicans living abroad sent home a record $51.6 billion in 2021, 27% more than in the previous year, the Bank of Mexico said. In December, remittances rose 30% from a year earlier to $4.76 billion. Around 95% of the remittances last year came from the U.S. Argentine lawmaker Maximo Kirchner stepped down as head of the ruling party's legislators in the Chamber of Deputies to protest the government's agreement with the IMF to restructure $44 billion in debt, a blow to President Alberto Fernandez's government as Kirchner is an influential member of the ruling Peronist's far-left faction and the son of powerful Vice President Cristina Kirchner. (DJN) Unemployment in New Zealand fell to 3.2% in the final quarter of 2021 from a revised 3.3% in the July-September quarter, Statistics New Zealand said on Wednesday. The jobless rate has not been so low since late 2007. (DJN) The eurozone's jobless rate declined in December, as the recovery in the labor market continued despite supply-chain disruptions, rising prices and a surge in coronavirus cases. Unemployment fell from 7.1% in November to 7.0%, European Union statistics agency Eurostat said. Economists polled by The Wall Street Journal had a consensus 7.2% forecast. (DJN) German retail supply problems eased considerably in January, the Ifo Institute says. According to an Ifo's survey, 57.1% of German retailers complained that they won't receive all the goods they ordered in January. In December, the figure was 81.6%. (DJN) U.K. retail prices grew at nearly double the pace in January as the previous month, according to the latest report by the British Retail Consortium and NielsenIQ. Retail prices rose 1.5% on year in January after climbing 0.8% in December, marked by a significant increase in nonfood prices. (DJN) Feedback Loop

This newsletter is compiled by James Christie in San Francisco.

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02-02-22 0715ET