President Biden cheered the report in a statement Thursday morning. “For months, doomsayers have been arguing that the U.S. economy is in a recession, and congressional Republicans have been rooting for a downturn,” he said. “But today we got further evidence that our economic recovery is continuing to power forward.”

By one common definition, the U.S. economy entered a recession when it experienced two straight quarters of shrinking G.D.P. at the start of the year. Officially, however, recessions are determined by a group of researchers at the National Bureau of Economic Research, who look at a broader array of indicators, including employment, income and spending.

Most analysts don’t believe the economy meets that more formal definition, and the third-quarter numbers — which slightly exceeded forecasters’ expectations — provided further evidence that a recession had not yet begun.

But the overall G.D.P. figures were skewed by the international trade component, which often exhibits big swings from one period to the next. Economists tend to focus on less volatile components, which have showed the recovery steadily losing momentum as the year has progressed. One closely watched measure suggested that private-sector demand stalled out almost completely in the third quarter.

Mortgage rates passed 7 percent on Thursday, their highest level since 2002.

“Housing is just the single largest trigger to additional spending, and it’s not there anymore; it’s going in reverse,” said Diane Swonk, chief economist at the accounting firm KPMG. “This has been a stunning turnaround in housing, and when things start to go really quickly, you start to wonder, what are the knock-on effects, what are the spillover effects?”

The third quarter was in some sense a mirror image of the first quarter, when G.D.P. shrank but consumer spending was strong. In both cases, the swings were driven by international trade. Imports, which don’t count toward domestic production figures, soared early this year as the strong economic recovery led Americans to buy more goods from overseas. Exports slumped as the rest of the world recovered more slowly from the pandemic.

Both trends have begun to reverse as American consumers have shifted more of their spending toward services and away from imported goods, and as foreign demand for American-made goods has recovered. Supply-chain disruptions have added to the volatility, leading to big swings in the data from quarter to quarter.

Few economists expect the strong trade figures from the third quarter to continue, especially because the strong dollar will make American goods less attractive overseas.

Jim Tankersley contributed reporting.

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Impac Mortgage Holdings, Inc. Announces Completion of Exchange Offers Relating to its Preferred Stock

IRVINE, Calif.–(BUSINESS WIRE)–Impac Mortgage Holdings, Inc. (NYSE American: IMH) (the “Company”) today announced the completion of its previously announced offers to each holder of the Company’s 9.375% Series B Cumulative Redeemable Preferred Stock, par value $0.01 per share (“Series B Preferred Stock”) and each holder of the Company’s 9.125% Series C Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series C Preferred Stock,” and together with the Series B Preferred Stock, the “Preferred Stock”) to exchange all outstanding shares of Preferred Stock for certain stock and warrant consideration (the “Exchange Offers”).

In conjunction with the closing of the Exchange Offers, the Company will issue approximately (A) (i) 6,142,213 shares of Common Stock and (ii) 13,823,340 shares of the Company’s 8.25% Series D Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “New Preferred Stock”) in exchange for the shares of Series B Preferred Stock tendered in the Exchange Offer for the Series B Preferred Stock, and (B) (i) 1,188,106 shares of Common Stock, (ii) 950,471 shares of New Preferred Stock, and (iii) 1,425,695 Warrants to purchase the same number of shares of Common Stock in exchange for the shares of Series C Preferred Stock tendered in the Exchange Offer for the Series C Preferred Stock.

In addition, in connection with the petitions (the “Plaintiff Series B Award Motions”) for a court award of attorney’s fees, expenses or other monetary award to be deducted and paid from the Company’s payment of distributions or other payments to the holders of the Company’s Series B Preferred Stock in the matter Curtis J. Timm, et al. v Impac Mortgage Holdings, Inc. et al. (the “Maryland Action”), the Company will deposit, no later than November 2, 2022, approximately (i) 13,311,840 shares of New Preferred Stock and (ii) 4,437,280 shares of the Company’s Common Stock in the custody of a third party custodian or escrow agent (the “Escrow Shares”). The allocation of the Escrow Shares will be made by instruction from the Circuit Court of Baltimore City upon final disposition of all outstanding matters in the Maryland Action, including the Plaintiff Series B Award Motions.

D.F. King & Co., Inc. served as the Information Agent and Solicitation Agent for the Exchange Offers and the accompanying solicitation of consents from the holders of Preferred Stock, and American Stock Transfer & Trust Company, LLC served as the Exchange Agent.

This announcement is for informational purposes only and shall not constitute an offer to purchase or a solicitation of an offer to sell the shares of Preferred Stock, an offer to sell or a solicitation of an offer to buy any shares of the Company’s Common Stock, par value $0.01 per share, warrants to purchase Common Stock, or shares of the Company’s 8.25% Series D Cumulative Redeemable Preferred Stock, par value $0.01 per share, or a solicitation of the related consents. The Exchange Offers were made only through, and pursuant to the terms and conditions set forth in, the Company’s Schedule TO, Prospectus/Consent Solicitation and related Letters of Transmittal and Consents.

Forward-Looking Statements

This press release contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, some of which are based on various assumptions and events that are beyond our control, may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “capable,” “will,” “intends,” “believe,” “expect,” “likely,” “potentially,” “appear,” “should,” “could,” “seem to,” “anticipate,” “expectations,” “plan,” “ensure,” “desire,” or similar terms or variations on those terms or the negative of those terms. The forward-looking statements are based on current management expectations. Actual results may differ materially as a result of several factors, including, but not limited to the following: acceptance of a plan for regaining compliance with the NYSE American’s listed company standards; impact on the U.S. economy and financial markets due to the outbreak and continued effect of the COVID-19 pandemic; our ability to successfully consummate the contemplated exchange offers for our outstanding preferred stock and receive the requisite consents for the proposed amendments to our charter documents to facilitate the redemption from holders of our outstanding preferred stock who do not participate in the exchange offers; any adverse impact or disruption to the Company’s operations; changes in general economic and financial conditions (including federal monetary policy, interest rate changes, and inflation); increase in interest rates, inflation, and margin compression; ability to successfully sell aggregated loans to third-party investors; successful development, marketing, sale and financing of new and existing financial products, including NonQM products; recruit and hire talent to rebuild our TPO NonQM origination team, and increase NonQM originations; volatility in the mortgage industry; performance of third-party sub-servicers; our ability to manage personnel expenses in relation to mortgage production levels; our ability to successfully use warehousing capacity and satisfy financial covenants; our ability to maintain compliance with the continued listing requirements of the NYSE American for our common stock; increased competition in the mortgage lending industry by larger or more efficient companies; issues and system risks related to our technology; ability to successfully create cost and product efficiencies through new technology including cyber risk and data security risk; more than expected increases in default rates or loss severities and mortgage related losses; ability to obtain additional financing through lending and repurchase facilities, debt or equity funding, strategic relationships or otherwise; the terms of any financing, whether debt or equity, that we do obtain and our expected use of proceeds from any financing; increase in loan repurchase requests and ability to adequately settle repurchase obligations; failure to create brand awareness; the outcome of any claims we are subject to, including any settlements of litigation or regulatory actions pending against us or other legal contingencies; and compliance with applicable local, state and federal laws and regulations.

For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see our latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q we file with the SEC and in particular the discussion of “Risk Factors” therein. This document speaks only as of its date and we do not undertake, and expressly disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements except as required by law.

About the Company

Impac Mortgage Holdings, Inc. (IMH or Impac) provides innovative mortgage lending and real estate solutions that address the challenges of today’s economic environment. Impac’s operations include mortgage lending, servicing, portfolio loss mitigation, real estate services, and the management of the securitized long-term mortgage portfolio, which includes the residual interests in securitizations.

For additional information, questions or comments, please call Justin Moisio, Chief Administrative Officer at (949) 475-3988 or email Justin.Moisio@ImpacMail.com.

Website: http://ir.impaccompanies.com or www.impaccompanies.com

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U.K. Live Updates: Rishi Sunak Will Become the U.K.’s Next Prime Minister on Tuesday

Rishi Sunak already has experience steering Britain’s public finances through a crisis, but that is unlikely to make tackling the country’s economic challenges any less daunting.

As chancellor of the Exchequer from February 2020 to July this year, Mr. Sunak spent heavily to shield households and businesses from some of the economic fallout from the coronavirus pandemic. Back then, inflation was low and the Bank of England was buying government debt, helping keep interest rates low as borrowing ballooned to pay for the large increase in spending.

Now, Mr. Sunak, who is set to be Britain’s next prime minister after being named leader of the Conservative Party on Monday, will face a very different economic backdrop: The inflation rate has topped 10 percent, the highest in 40 years and, like many countries, the economy is slowing down and at risk of falling into a recession. Meanwhile, the Bank of England is continuing to raise interest rates to curb inflation, and won’t be there to purchase government debt because starting next month it is planning to slowly sell its holdings of bonds. That means the government will rely more on investors, who have been demanding higher interest rates, than the central bank to buy bonds.

In these circumstances, Mr. Sunak has several urgent issues to resolve. One is how to support households squeezed by rising energy costs, after Russia’s war in Ukraine introduced huge volatility into global energy markets. As things stand, household bills have been frozen from this month through to April at an average of 2,500 pounds ($2,826) a year, but after that the government is expected to develop a cheaper policy to help the most vulnerable households. A similar policy is in place to help businesses for six months.

After setting aside tens of billions of pounds to keep energy bills down, the government is also under pressure to show how it will keep borrowing in check, in an effort to restore Britain’s fiscal credibility in markets. Jeremy Hunt, the finance minister recently installed by Liz Truss but a supporter of Mr. Sunak, is scheduled to deliver a fiscal statement on Oct. 31 that he said would show Britain’s debt falling as a share of national income over the medium term.

To bring down debt levels, “decisions of eye-watering difficulty” on spending and tax will need to be made, Mr. Hunt has said. He said he will be asking every government department to find ways to save money despite their already stretched budgets. At the same time, Mr. Hunt said taxes are likely to rise as well. Mr. Sunak, however, is not obligated to keep Mr. Hunt as chancellor or stick to the current timetable for the fiscal statement, though many analysts expect him to.

“The United Kingdom is a great country, but there is no doubt we face a profound economic challenge,” Mr. Sunak said on Monday in a short speech. “We now need stability and unity.”

At this stage, Mr. Sunak hasn’t revealed details about his economic plan as prime minister but investors appear to be taking the prospect of his premiership in their stride.

The pound is trading at about $1.13, a little higher than it was on Sept. 22 before the tax-cutting plan by Ms. Truss that roiled markets, pushing the pound steeply lower and borrowing costs higher. Government bonds yields have fallen from their recent highs. On Monday afternoon, the yield on 10-year bonds was at about 3.75 percent, after closing at 4 percent on Friday. It’s the lowest level since the fiscal statement by Ms. Truss’s government in September.

Lower interest rates will be a comfort to Mr. Sunak. For one, lower rates will shrink the amount of money the Treasury will need to set aside for interest rate payments, which could ease spending cuts and tax increases. But there are other reminders of the economic difficulties Britain faces.

On Monday, a measure of economic activity in Britain dropped, as the services industry posted its worst monthly decline since January 2021, according to the Purchasing Managers’ Index which measures economic trends. The index for both services and manufacturing activity fell to 47.2 points. A reading below 50 means a contraction in activity.

The data showed that the pace of economic decline was gathering momentum, said Chris Williamson, an economist at S&P Global Market Intelligence.

And on Friday, the credit ratings agency Moody’s changed its outlook on Britain to negative, from stable, while reaffirming the country’s current Aa3 investment grade rating. A lower credit rating tends to lead to higher government borrowing costs.

Moody’s said the outlook was changed to negative because of the “heightened unpredictability in policymaking amid weaker growth prospects and high inflation.” There was also a risk that increased borrowing would challenge Britain’s debt affordability, especially if there was a “sustained weakening in policy credibility.”

These are just the latest in a laundry list of the government’s economic concerns. They include supporting low-income households against the rising cost of living, encouraging investment to improve weak productivity growth, smoothing Britain’s trading relationship with the European Union and growing the labor market to ensure businesses can find people with the right skills.

“We need a clear long-term vision of how the new prime minister will deal with the challenges ahead,” Shevaun Haviland, the director general of the British Chambers of Commerce, said in a statement, “and create the business conditions that allow firms, and the communities that rely on them, to thrive.” 

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Liz Truss’s Departure Creates Economic Uncertainty As Inflation Rises

The fall of Liz Truss, Britain’s prime minister for just six tumultuous weeks, has plunged the nation into another phase of economic uncertainty.

When Ms. Truss announced her resignation on Thursday as Conservative Party leader, saying she would stand down as prime minister, the markets that had rebelled against her fiscal policies engaged in a weak and short-lived rally. Investors were left wondering who would be the new leader and what lay ahead for Britain’s economic policy. On Friday morning, government bonds were falling, pushing yields higher, and the pound was dropping.

“It’s a leap into the unknown,” said Antoine Bouvet, an interest rates strategist at ING.

Overall the initial reaction, Mr. Bouvet added, suggested that investors expect that a new prime minister will go ahead with fiscal plans generally supported by the market. But he said it was too early to be sure.

“Let’s see who gets elected leader and what they say on fiscal policy,” he said.

The next prime minister, the third this year, will face a long list of economic challenges. Annual inflation topped 10 percent last month as food prices rose at their fastest pace in more than 40 years. Wages haven’t kept up with rising prices, bringing about a cost-of-living crisis and labor unrest. There is a deepening slump in consumer spending with data on Friday showing people were buying less than before the pandemic. Interest rates are set to rise even as the economy stagnates. And Russia’s war in Ukraine is still rippling through the global economy, especially the energy market.

provoked extraordinary volatility in markets at the end of September when her first chancellor of the Exchequer, Kwasi Kwarteng, announced a plan for widespread tax cuts and huge spending, to be financed by borrowing. Amid the highest inflation in four decades and rising interest rates, markets deemed the plan, delivered without any independent assessment, a rupture in Britain’s reputation for fiscal credibility. The pound dropped to a record low, and government bond yields shot up so violently the central bank was forced to intervene to stop a crisis in the pension funds industry.

began to settle markets. However, bond yields remain noticeably higher than they were before the September tax plan was announced, as investors still demand a higher premium to lend to Britain. On Thursday, 10-year government bond yields closed at 3.91 percent, up from 3.50 percent on Sept. 22, the day before Mr. Kwarteng’s policy announcement.

Ms. Truss’s tenure as prime minister, the shortest in British history, was undone by economic policies that harked back to the trickle-down economics of the 1980s, built on the belief that tax cuts for the wealthy were fair and would lead to investment and economic growth that would benefit everyone.

fixed rates have settled higher.

Meanwhile, the new government is likely to be focused on restoring the government’s fiscal credibility. Mr. Hunt is set to deliver a “medium-term fiscal plan,” with spending and tax measures, on Oct. 31. He said he expected to make “difficult” spending cuts as he planned to show that debt levels were falling in the medium term.

It will be accompanied by an independent assessment of the fiscal and economic impact of the policies by the Office for Budget Responsibility, a government watchdog.

While markets have cheered the government’s promise to have its policies independently reviewed, questions remain about how the gap in the public finances can be closed. Economists say there is very little room in stretched department budgets to make cuts. That has led to concerns of a return to austerity measures, reminiscent of the spending cuts after the 2008 financial crisis.

There is a danger,” Mr. Chadha said, “that we end up with tighter fiscal policy than actually is appropriate given the shock that many households are suffering.” This could make it harder to support people suffering amid rising food and energy prices. But Mr. Chadha argues that it’s clear what needs to happen next: a complete elimination of unfunded tax cuts and careful planning on how to support vulnerable households.

The chancellor could also end up having a lot more autonomy over fiscal policy than the prime minister, he added.

“The best outcome for markets would be a rapid rallying of the parliamentary Conservative Party around a single candidate” who would validate Mr. Hunt’s approach and the timing of the Oct. 31 report, Trevor Greetham, a portfolio manager at Royal London Asset Management, said in a written comment.

Three days after the fiscal statement, on Nov. 3, Bank of England policymakers will announce their next interest rate decisions.

Bond investors are trying to parse how the central bank will react to the rapidly changing fiscal news. On Thursday, before Ms. Truss’s resignation, Ben Broadbent, a member of the central bank’s rate-setting committee, indicated that policymakers might not need to raise interest rates as much as markets currently expect. Traders are betting that the bank will raise rates above 5 percent next year, from 2.25 percent.

The bank could raise rates less than expected next year partly because the economy is forecast to shrink over the year. The International Monetary Fund predicted that the British economy would go from 3.6 percent growth this year to a 0.3 percent contraction next year.

That’s a mild recession compared with some other forecasts, but it would only compound the longstanding economic problems that Britain faced, including weak investment, low productivity growth and businesses’ inability to find employees with the right skills. These were among the challenges that Ms. Truss said she would resolve by shaking up the status quo and targeting economic growth of 2.5 percent a year.

Most economists didn’t believe that “Trussonomics,” as her policies were called, would deliver this economic growth. Instead, they predicted the policies would prolong the country’s inflation problem.

Despite the change in leadership, analysts don’t expect a big rally in Britain’s financial markets. The nation’s international standing could take a long time to recover.

“It takes years to build a reputation and one day to undo it,” Mr. Bouvet said, adding, “Investors will come progressively back to the U.K.,” but it won’t be quickly.

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U.K. Live Updates: Liz Truss Resigns as Prime Minister

LONDON — For Liz Truss, the end came on Thursday in a midday meeting with grandees of the Conservative Party. But Ms. Truss’s fate as prime minister was all but sealed three weeks earlier when currency and bond traders reacted to her new fiscal program by torpedoing the pound and other British financial assets.

The market’s swift, withering verdict on Ms. Truss’s tax-cutting agenda shattered her credibility, degraded Britain’s reputation with investors, drove up home mortgage rates, pushed the pound down to near parity with the American dollar, and forced the Bank of England to intervene to prop up British bonds.

That repudiation, measured in the second-by-second fluctuations of bond yields and exchange rates, mattered more than the noisy departures of Ms. Truss’s cabinet ministers or the hothouse anxieties of Conservative lawmakers that ultimately made her position untenable.

For that reason, world leaders, buffeted by economic challenges, are watching the turmoil in Britain with anything but relish, concerned about the stability of Britain itself. Interest rates, energy costs and inflation are rising around the world. Labor unrest is proliferating across borders. Non-British pension funds potentially face the same financial stresses that afflicted those in Britain. The last thing leaders want is for Ms. Truss’s woes to be a harbinger for other countries.

President Emmanuel Macron of France, who recently mended fences with Ms. Truss after she refused last summer to characterize him as a friend or foe, said: “I wish in any case that Great Britain will find stability again and moves on, as soon as possible. It’s good for us, and it’s good for our Europe.”

Credit…Henry Nicholls/Reuters

Ms. Truss, economists said, is correct to argue that markets are driven by global trends broader than her tax cuts. Central banks worldwide are raising rates to battle inflation, which has been fueled by a surge in demand as the coronavirus pandemic ebbed and a spike in gas prices driven by Russia’s war in Ukraine.

“The problems are by no means all Truss’s doing but she should have known that getting blamed for everything comes with the territory,” said Kenneth Rogoff, a professor of economics at Harvard and a scholar of financial upheavals.

“What is really worrisome now,” he said, is that the situation in Britain “might be the canary in the coal mine as global interest rates keep soaring, especially as they do not seem likely to come down anytime soon.”

Ms. Truss long cultivated a reputation as a disrupter and a free-market evangelist in the tradition of Margaret Thatcher and Ronald Reagan. Her tax cut proposals made her an outlier among leaders of big economies fighting inflation. But she made no apologies for offending either economic orthodoxy or the expectations of financial markets in pursuit of her vision of a “low-tax, high growth” Britain.

“Not everyone will be in favor of change,” a defiant Ms. Truss said a week ago at the annual meeting of the Conservative Party, even though one of her planned tax cuts, for high-earning people, had already been reversed. “But everyone will benefit from the result: a growing economy and a better future.”

The prime minister’s fatal miscalculation, experts said, was to believe that Britain could defy the gravity of the markets by passing sweeping tax cuts, without corresponding spending cuts, at a time when inflation is running in double digits and interest rates were rising.

“It was the combination of the wrong fiscal policy at the wrong time — borrowing when rates were rising rather than, as in 2010s, when they were low,” said Jonathan Portes, a professor of economics and public policy at Kings College London.

He cited what he called Ms. Truss’s “institutional vandalism,’’ in particular the way she and her ousted chancellor of the Exchequer, Kwasi Kwarteng, broke with custom by announcing sweeping tax cuts without subjecting them to the scrutiny of the government’s fiscal watchdog, the Office of Budget Responsibility.

In that sense, he said, Ms. Truss was following in the footsteps of her predecessor, Boris Johnson, who resigned as prime minister barely three months earlier after a series of scandals prompted a wholesale walkout of his ministers.

Credit…Oli Scarff/Agence France-Presse — Getty Images

Mr. Kwarteng’s budget maneuvering led many in the markets to suspect the government was engaged in a kind of fiscal sleight of hand, which would inevitably require massive borrowing to cover a hole in the budget estimated at 72 billion pounds ($81.5 billion).

Mr. Kwarteng, who studied the history of financial crises as a doctoral student at Cambridge University, brushed off the blowback in financial markets as a temporary phenomenon. Like Ms. Truss, he is a believer in disruptive change. Together, they were among the authors of “Britannia Unchained,” a manifesto for a Thatcher-style, free-market revolution in post-Brexit Britain. Among other things, the authors described Britons as “among the worst idlers in the world.”

When, or even whether, Britain can fully recover from this period of political and economic turbulence is not yet clear. On Thursday, as news of Ms. Truss’s resignation broke, the pound rose against the dollar and yields on British government bonds fell.

Virtually all the government’s planned tax cuts have been reversed, and the next prime minister, regardless of his or her politics, will have little choice but to pursue a policy of spending cuts and strict fiscal discipline. Some fear a return to the bleak austerity of Prime Minister David Cameron in the years after the 2008 financial crisis.

“Rishi or another can steady the ship and calm the markets,” Professor Portes said, referring to Rishi Sunak, a former chancellor who ran unsuccessfully against Ms. Truss and may seek to succeed her. “But it’s hard to see how, given the state of the Conservatives, any Tory prime minister can repair the longer-term damage.”

Much of that damage is to Britain’s once-sterling reputation in the markets. Economists have begun mentioning Britain in the same breath as fiscally wayward countries like Italy and Greece. Lawrence H. Summers, the former U.S. Treasury secretary, told Bloomberg News, “It makes me very sorry to say, but I think the U.K. is behaving a bit like an emerging market turning itself into a submerging market.”

That is a humbling comedown for a country that in 2009 announced a $1.1 trillion emergency fund to bail out the global economy.

“If you’re an American fund manager, you’re not going to put Britain in the super-safe category you might have earlier,” said Jonathan Powell, who served as chief of staff to Prime Minister Tony Blair. “It’s not about Britain’s standing in the world, but what category we’ve put ourselves in.”

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EXCLUSIVE Fed’s Bullard favors ‘frontloading’ rate hikes now, with wait-and-see stance in 2023

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WASHINGTON, Oct 14 (Reuters) – A “hotter-than-expected” September inflation report doesn’t necessarily mean the Federal Reserve needs to raise interest rates higher than officials projected at their most recent policy meeting, St. Louis Fed President James Bullard said on Friday, though it does warrant continued “frontloading” through larger hikes of three-quarters of a percentage point.

In a Reuters interview, Bullard said U.S. Consumer Price Index data for September, which was released on Thursday, showed inflation had become “pernicious” and difficult to arrest, and therefore “it makes sense that we’re still moving quickly.”

After delivering a fourth straight 75-basis-point hike at its policy meeting next month, Bullard said “if it was today, I’d go ahead with” a hike of the same magnitude in December, though he added it was “too early to prejudge” what to do at that final meeting of the year.

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If the Fed follows through with two more 75-basis-point hikes this year, its policy rate would end 2022 in a range of 4.50%-4.75%.

In what were tempered remarks for one of the Fed’s most hawkish voices recently, Bullard said that at that point he would let further increases rest on incoming data.

“I do think 2023 should be a data-dependent sort of year. It’s two-sided risk. It is very possible that the data would come in a way that forces the (Federal Open Market) Committee higher on the policy rate. But it’s also possible that you get a good disinflationary dynamic going, and in that situation the committee could keep the policy rate and hold it steady,” Bullard said a day after the U.S. government reported that consumer price inflation remained above 8% last month.

The possibility of a fifth larger-than-usual increase in December is “a little more frontloading than what I’ve said in the past,” he added.

But the trajectory mapped out by Bullard would still leave the target policy rate at the median level that Fed officials projected last month they would need to reach – evidence of a broad consensus at the central bank around at least a temporary stopping point after a year in which they have ratcheted rate expectations steadily higher.

Even if some of Bullard’s colleagues want to reach that point in smaller interim steps and not until early next year, Bullard said he regards faster increases as warranted because the U.S. labor market remains strong, and “there’s just not much indication that we’re getting the disinflation that we’re looking for.”

Though some investors and economists expect the Fed will need to lift its policy rate even further, to 5% or higher, Bullard said, “I wouldn’t predict that now … If that happens it will be because inflation doesn’t come down the way we’re hoping in the first half of 2023 and we continue to get hot inflation reports.”

The level he has penciled in for the end of the year is adequate, he believes, to lower the Fed’s closely-watched core personal consumption expenditures inflation index to below 3% next year, a long way back to the central bank’s 2% target.

‘SOFT LANDING’

Bullard said that despite the sense of turbulence in financial markets, there was “still a fair amount of potential for a soft landing,” with the United States likely to avoid a recession and companies reluctant to lay off workers who have been hard to hire during the post-pandemic economic reopening.

Warnings about recession risk may be distorted in part by inflation itself, Bullard said, with short-term bond yields driven higher than longer-term ones not for lack of faith in the economy, an “inversion” of the yield curve that shows investors betting on a recession, but because of the premium charged for the inflation taking place now.

Volatility in markets is to be expected when rates rise, he said, but may settle after a period of adjustment.

“It’s the transition that throws everybody for a loop,” Bullard said. But after that, the economy “could grow just as fast at the higher interest rates,” he said.

Asked about the sense that overseas events, such as the tension between the Bank of England and the current British government, may risk broader financial problems, Bullard said that his regional bank’s index of financial stress showed it to be low.

Compared to the sorts of serious market seizures seen during the financial crisis in 2008 or the start of the COVID-19 pandemic in early 2020, “I don’t think we’re in a situation where global markets are facing a lot of stress of that type.”

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Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao

Our Standards: The Thomson Reuters Trust Principles.

Howard Schneider

Thomson Reuters

Covers the U.S. Federal Reserve, monetary policy and the economy, a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics reporter and on the local staff of the Washington Post.

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U.S. Treasury asks major banks if it should buy back bonds

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Oct 14 (Reuters) – The U.S. Treasury Department is asking primary dealers of U.S. Treasuries whether the government should buy back some of its bonds to improve liquidity in the $24 trillion market.

Liquidity in the world’s largest bond market has deteriorated this year partly because of rising volatility as the Federal Reserve rapidly raises interest rates to bring down inflation.

The central bank, which had bought government bonds during the COVID-19 pandemic to stimulate the economy, is now also reducing the size of its balance sheet by letting its bonds reach maturity without buying more, a move which investors fear could exacerbate price swings.

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The Treasuries market has swelled from $5 trillion in 2007 and $17 trillion in early 2020, while banks are facing more regulatory constraints that they say make it more difficult to intermediate trades.

The Treasury is asking dealers about the specifics of how buybacks could work “in order to better assess the merits and limitations of implementing a buyback program.”

These include how much it would need to buy in so-called off-the-run Treasuries, which are older and less liquid issues, in order to “meaningfully” improve liquidity in these securities.

The Treasury is also querying whether reduced volatility in the issuance of Treasury bills as a result of buybacks made for cash and maturity management purposes could be a “meaningful benefit for Treasury or investors.”

It is further asking about the costs and benefits of funding repurchases of older debt with increased issuance of so-called on-the-run securities, which are the most liquid and current issue.

“The Treasury is acknowledging the decline in liquidity and they’re hearing what the street has been saying,” said Calvin Norris, portfolio manager & US rates strategist at Aegon Asset Management. “I think they’re investigating whether some of these measures could help to improve the situation.”

He said buying back off-the-run Treasuries could potentially increase liquidity of outstanding issues and buyback mechanisms could help contain price swings for Treasury bills, which are short-term securities.

However, when it comes to longer-dated government bonds, investors have noted that a major constraint for liquidity is the result of a rule introduced by the Federal Reserve following the 2008 financial crisis which requires dealers to hold capital against Treasuries, limiting their ability to take on risk, particularly at times of high volatility.

“The underlying cause of the lack of liquidity is that banks – due to their supplementary leverage ratios being capped – don’t have the ability to take on more Treasuries. I view that as the most significant issue right now,” said Norris.

The Fed in April 2020 temporarily excluded Treasuries and central bank deposits from the supplementary leverage ratio, a capital adequacy measure, as an excess of bank deposits and Treasury bonds raised bank capital requirements on what are viewed as safe assets. But it let that exclusion expire and big banks had to resume holding an extra layer of loss-absorbing capital against Treasuries and central bank deposits.

The Treasury Borrowing Advisory Committee, a group of banks and investors that advise the government on its funding, has said that Treasury buybacks could enhance market liquidity and dampen swings in Treasury bill issuance and cash balances.

It added, however, that the need to finance buybacks with increased issuance of new securities could increase yields and be at odds with the Treasury’s strategy of predictable debt management if the repurchases were too variable in size or timing.

The Treasury is posing the questions as part of its regular survey of dealers before each of its quarterly refunding announcements.

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Reporting By Karen Brettell and Davide Barbuscia; Editing by Chizu Nomiyama and Chris Reese

Our Standards: The Thomson Reuters Trust Principles.

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Bank of England governor has ‘meeting of minds’ with Hunt

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  • Bailey says he talked to new finance minister on Friday
  • ‘Very clear and immediate meeting of minds’ on fiscal challenge
  • Rates likely to rise by more than thought in August – Bailey
  • Recent bond-buying not about targeting yields

WASHINGTON, Oct 15 (Reuters) – Bank of England Governor Andrew Bailey said there was an “immediate meeting of minds” when he spoke with finance minister Jeremy Hunt about the need to fix the public finances after the tax cut plans of Hunt’s predecessor unleashed market turmoil.

Bailey, speaking in Washington where British officials attending International Monetary Fund meetings have been put on the spot about the crisis engulfing the country, said he had spoken to Hunt on Friday after he replaced Kwasi Kwarteng.

“I can tell you that there was a very clear and immediate meeting of minds between us about the importance of fiscal sustainability and the importance of taking measures to do that,” Bailey said.

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“Of course there was an important measure taken yesterday,” he said at an event where he also hinted at a big interest rate rise by the central bank next month.

Prime Minister Liz Truss, seeking to save her term in office which is barely a month old, said on Friday that Britain’s corporation tax rate would increase, reversing a key pledge made during her bid for Downing Street.

Hunt said earlier on Saturday that some taxes might have to rise and others might not fall as much as planned, signalling a further shift away from Truss’s original plans.

Bailey, speaking at an event organised by the Group of Thirty, which comprises financiers and academics, welcomed the role that Britain’s independent budget watchdog would have in assessing the budget plan that Hunt will publish on Oct. 31.

The Office for Budget Responsibility was not tasked with weighing up the impact of Kwarteng’s “mini-budget” which set off a slump in the value of the pound and government bonds when he announced it on Sept. 23.

“Flying blind is not a way to achieve sustainability,” Bailey said.

Truss criticised the BoE during her leadership campaign, saying she wanted to set a “clear direction of travel” for the central bank. BoE officials pushed back at those comments saying their independence was key to managing the economy.

‘STRONGER RESPONSE’ WITH RATES

Bailey said the BoE might raise interest rates by more than it previously thought because of the government’s huge energy bill support – which could lower inflation in the short term but push it up further ahead – and whatever it decides to do on tax cuts and spending.

“We will not hesitate to raise interest rates to meet the inflation target,” Bailey said. “And, as things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”

The BoE raised rates by half a percentage point in August – at the time its biggest increase in 27 years – and then did so again in September with inflation around 10%, far above the BoE’s target of 2%.

It is due to announce its next decision on Nov. 3 and many investors think it will either raise them from their current level of 2.25% to 3% or possibly 3.25%.

In the shorter term, the BoE will be keeping a close eye on how financial markets behave on Monday after it ended its emergency bond-buying programme on Friday.

Bailey said the now-completed intervention was “not about steering market yields towards some particular level, but rather preventing them from being distorted by market dysfunction”.

He said the BoE had acted after the violent market moves which exposed the “flaws in the strategy and structure” of a lot of pension funds.

The intervention was different to the much bigger and longer-running bond-buying that the BoE undertook during the coronavirus pandemic and earlier as a monetary policy tool.

“In these difficult times, we need to be very clear on this framework of intervention,” Bailey said.

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Reporting by Howard Schneider in Washington and William Schomberg in London; Additional reporting by Michael Holden in London; Editing by David Clarke

Our Standards: The Thomson Reuters Trust Principles.

Howard Schneider

Thomson Reuters

Covers the U.S. Federal Reserve, monetary policy and the economy, a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics reporter and on the local staff of the Washington Post.

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Labor Hoarding Could be Good News for the Economy

PROVO, Utah — Chad Pritchard and his colleagues are trying everything to staff their pizza shop and bistro, and as they do, they have turned to a new tactic: They avoid firing employees at all costs.

Infractions that previously would have led to a quick dismissal no longer do at the chef’s two places, Fat Daddy’s Pizzeria and Bistro Provenance. Consistent transportation issues have ceased to be a deal breaker. Workers who show up drunk these days are sent home to sober up.

Employers in Provo, a college town at the base of the Rocky Mountains where unemployment is near the lowest in the nation at 1.9 percent, have no room to lose workers. Bistro Provenance, which opened in September, has been unable to hire enough employees to open for lunch at all, or for dinner on Sundays and Mondays. The workers it has are often new to the industry, or young: On a recent Wednesday night, a 17-year-old could be found torching a crème brûlée.

Down the street, Mr. Pritchard’s pizza shop is now relying on an outside cleaner to help his thin staff tidy up. And up and down the wide avenue that separates the two restaurants, storefronts display “Help Wanted” signs or announce that the businesses have had to temporarily reduce their hours.

added 263,000 workers in September, fewer than in recent months but more than was normal before the pandemic. Unemployment is at 3.5 percent, matching the lowest level in 50 years, and average hourly earnings picked up at a solid 5 percent clip compared with a year earlier.

roughly 20 percent and sent unemployment to above 10 percent. Few economists expect an outcome that severe this time since today’s inflation burst has been shorter-lived and rates are not expected to climb nearly as much.

are still nearly two open jobs for every unemployed worker — companies may be hesitant to believe that any uptick in worker availability will last.

“There’s a lot of uncertainty about how big of a downturn are we facing,” said Benjamin Friedrich, an associate professor of strategy at Northwestern University’s Kellogg School of Management. “You kind of want to be ready when opportunities arise. The way I think about labor hoarding is, it has option value.”

Instead of firing, businesses may look for other ways to trim costs. Mr. Pritchard in Provo and his business partner, Janine Coons, said that if business fell off, their first resort would be to cut hours. Their second would be taking pay cuts themselves. Firing would be a last resort.

The pizzeria didn’t lay off workers during the pandemic, but Mr. Pritchard and Ms. Coons witnessed how punishing it can be to hire — and since all of their competitors have been learning the same lesson, they do not expect them to let go of their employees easily even if demand pulls back.

“People aren’t going to fire people,” Mr. Pritchard said.

But economists warned that what employers think they will do before a slowdown and what they actually do when they start to experience financial pain could be two different things.

The idea that a tight labor market may leave businesses gun-shy about layoffs is untested. Some economists said that they could not recall any other downturn where employers broadly resisted culling their work force.

“It would be a pretty notable change to how employers responded in the past,” said Nick Bunker, director of North American economic research for the career site Indeed.

And even if they do not fire their full-time employees, companies have been making increased use of temporary or just-in-time help in recent months. Gusto, a small-business payroll and benefits platform, conducted an analysis of its clients and found that the ratio of contractors per employee had increased more than 60 percent since 2019.

If the economy slows, gigs for those temporary workers could dry up, prompting them to begin searching for full-time jobs — possibly causing unemployment or underemployment to rise even if nobody is officially fired.

Policymakers know a soft landing is a long shot. Jerome H. Powell, the Fed chair, acknowledged during his last news conference that the Fed’s own estimate of how much unemployment might rise in a downturn was a “modest increase in the unemployment rate from a historical perspective, given the expected decline in inflation.”

But he also added that “we see the current situation as outside of historical experience.”

The reasons for hope extend beyond labor hoarding. Because job openings are so unusually high right now, policymakers hope that workers can move into available positions even if some firms do begin layoffs as the labor market slows. Companies that have been desperate to hire for months — like Utah State Hospital in Provo — may swoop in to pick up anyone who is displaced.

Dallas Earnshaw and his colleagues at the psychiatric hospital have been struggling mightily to hire enough nurse’s aides and other workers, though raising pay and loosening recruitment standards have helped around the edges. Because he cannot hire enough people to expand in needed ways, Mr. Earnshaw is poised to snap up employees if the labor market cools.

“We’re desperate,” Mr. Earnshaw said.

But for the moment, workers remain hard to find. At the bistro and pizza shop in downtown Provo, what worries Mr. Pritchard is that labor will become so expensive that — combined with rapid ingredient inflation — it will be hard or impossible to make a profit without lifting prices on pizzas or prime rib so much that consumers cannot bear the change.

“What scares me most is not the economic slowdown,” he said. “It’s the hiring shortage that we have.”

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