JACKSON HOLE, Wyoming — The Federal Reserve’s credibility in the eyes of financial markets helped in its battle against inflation over the past two years, but it had to be earned afresh with interest rate hikes that backed up policymakers’ verbal promises to restore price stability, according to new research presented at the Kansas City Fed’s annual research conference in Jackson Hole, Wyoming.

A strong perception in financial markets that a central bank is committed to inflation control can make monetary policy more effective, prompting markets to shift financial conditions faster and lowering inflation with a less-serious hit to economic growth than would otherwise be the case.

While investors came to believe that the U.S. central bank under the leadership of Fed Chair Jerome Powell was serious about defending its 2% inflation target, that belief only formed over time and after the officials began raising the policy interest rate in March 2022 and accelerated the rate hikes over that summer, the researchers found.

“Forecasters and markets were highly uncertain about the monetary policy rule prior to ‘liftoff’ and learned about it from the Fed’s rate hikes,” economists Michael Bauer from the San Francisco Fed, Carolin Pflueger from the University of Chicago, and Adi Sunderam from the Harvard Business School, found in their research. “Substantial rate hikes were apparently necessary for perceptions to shift. … The public did not fully understand the Fed’s strategy and policy rule prior to liftoff.”

The research serves as a warning of sorts against central bankers putting too much weight on the power of “talk therapy” — or the ability to influence economic outcomes with words and promises alone.

Earning public trust

The Fed in recent years has been characterized by a surfeit of speeches and public comments by its officials, whether by the head of the central bank, other members of its presidentially appointed Board of Governors, or its 12 regional bank presidents, under the notion that more transparency is good for public accountability and makes policy more effective.

Fed officials in the recent inflation battle often noted that public belief in their commitment to the inflation target would help on its own to lower the pace of price increases, shorten the time it took for tighter monetary policy to have an impact, and lower inflation with less damage to the job market and other aspects of the “real” economy.

The researchers found, however, that while the Fed under Powell eventually earned the benefit of public trust, it also wasn’t a given.

The research used survey data to quantify how professional forecasters perceived the Fed would respond to higher inflation and found that even as prices began rising in 2021 the expected Fed response to inflation was near zero.

While that could have been attributed to several factors, including a belief that inflation would ease on its own, the researchers concluded it was because forecasters weren’t sure how the central bank would react.

After the first rate increase in March of 2022, however, perceptions began to shift, with forecasters eventually expecting the Fed to respond on an almost one-for-one basis to any rise in inflation.

The change in perceptions coincided with policymakers shifting from the initial quarter-percentage-point move to the first of four 75-basis-point hikes in June 2022, and with a stern speech by Powell at that year’s Jackson Hole conference that reaffirmed his intent to defend the inflation target despite the economic pain it might cause.

As market perceptions about the Fed’s sensitivity to inflation increased, “interest rates became significantly more sensitive to inflation data surprises,” the research found, adding that “the increase in the perceived inflation response likely aided the transmission of monetary policy to the real economy and improved the Fed’s inflation-unemployment tradeoff.”

For future policymakers, the researchers said, the conclusion is clear: Actions speak louder than words.

“Policy rate actions contribute to, and may even be necessary for, the effectiveness of communication, particularly when uncertainty about the monetary policy framework is high,” they found, suggesting the Fed’s quarterly Summary of Economic Projections could be changed to make the central bank’s “reaction function” more explicit. “A timely policy rate response to inflation matters not only for influencing immediate financial conditions, but also for signaling that policymakers are serious.”
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TORONTO — A workers’ union Friday threatened a strike at one of Canada’s two major freight railroads, only hours after the company’s trains restarted following a potentially devastating stoppage. A government-ordered arbitration hearing wrapped up without a decision, and Canadian National trains were expected to keep moving at least through Monday morning.

CN and Canadian Pacific Kansas City Ltd. locked out their workers Thursday when negotiations over a new labor contract reached a deadline without an agreement. That resulted in a near total shutdown of freight rail in the country for more than a day, until Canadian National resumed its service Friday morning. Trains operated by CPKC remain parked, and its workers, who had already been on strike since Thursday, stayed on the picket line Friday.

The government forced the companies and the union, Teamsters Canada Rail Conference, into arbitration overseen by the Canada Industrial Relations Board — an order the union is challenging. Friday’s nine-hour hearing ended with no order from the board.

The union filed a 72-hour strike notice against CN on Friday morning shortly after it announced that it planned to challenge the arbitration order, union spokesperson Marc-Andre Gauthier said.

If the board orders the union back to work, “the TCRC will lawfully abide by the decision, but will undertake steps to challenge to the fullest extent,” the Teamsters said in a statement. “Unfortunately, this will not provide immediate relief, but the Union is prepared to appeal to federal court if necessary.”

Canadian National, which has about 6,500 workers involved in the dispute, said the impact of the strike notice will depend on the timing of the Canada Industrial Relations Board’s decision. “It is in the national interest of Canada that the CIRB rule quickly, before even more harm is caused,” the railroad said in a written statement. CPKC has about 3,000 engineers, conductors and dispatchers involved.

Perrin Beatty, president and CEO of the Canadian Chamber of Commerce, said the union’s latest actions “will prolong the damage to our economy and jeopardize the wellbeing and livelihoods of Canadians, including union and nonunion workers across multiple industries.”

Labor Minister Steven MacKinnon announced the decision to force the parties into binding arbitration Thursday afternoon, more than 16 hours after the lockout shut down the railroads, saying the economic risk was too great to allow them to continue. The government had declined to order arbitration two weeks ago. MacKinnon said he had hoped that negotiations between the companies and the union on a new contract would succeed.

“This is not about disobeying the minister’s order. It’s about exercising our right,” Teamsters Canada President Francois Laporte said Friday in announcing the strike. “We will exercise our right within the legal framework.”

Canadian National trains had begun rolling at 7 a.m. across Canada, said CN spokesperson Jonathan Abecassis. The development initially appeared to at least partially end a work stoppage that threatened to wreak havoc on the economies of Canada and the United States. Both countries, across all industries, rely on railroads to deliver their raw materials and finished products.

“While CN is focused on its recovery plan and powering the economy, Teamsters are focused on getting back to the picket line and holding the North American economy hostage to their demands,” Abecassis said following the union’s strike notice.

Getting even one of the railroads running again is a relief for businesses. In most past rail labor disputes, only one of the Canadian railroads stopped and the economy was able to weather that disruption.

The negotiations that began last year are hung up on issues around the way workers are scheduled and contract rules designed to prevent fatigue. The railroads had proposed shifting away from the current system that pays workers based on the number of miles they travel, to a system based on the hours they work. The railroads said the switch would make it easier to provide predictable schedules. But the union resisted because it feared the proposed changes would erode hard-fought protections against fatigue and jeopardize safety.

In Canada, another issue at CN is the railroad’s intention to expand a system that allows it to temporarily relocate workers to other parts of its network when it’s short on employees in a certain region.

Regarding wages, the railroads said they both offered raises in line with other recent deals in the industry for what are already well-paying jobs. Canadian National has said its engineers make about $150,000 and conductors earn roughly $121,000 for working 160 days a year, although some of their time off is spent stuck at hotels on the road between train trips while getting required rest. CPKC says its pay is comparable.

Nearly all of Canada’s freight handled by rail — worth more than $730 million a day and adding up to more than 375 million tons of freight last year — stopped Thursday along with rail shipments crossing the U.S. border.

About 30,000 commuters in Canada were also affected because their trains use CPKC’s lines. CPKC and CN’s trains continued operating in the U.S. and Mexico during the lockout.

Billions of dollars of goods move between Canada and the U.S. via rail each month, according to the U.S. Department of Transportation.

“There are a lot of goods and services shipped across borders,” Sean O’Brien, president of the International Brotherhood of Teamsters, said at a rally in Calgary, Alberta, on Friday. “If this company chooses to continue its bad behavior, then it is going to have an impact. … They’ve got a lot of decisions they need to make. And they need to make the most important decision: Reward these workers with what they’ve earned and don’t try to diminish safety just so they need to feed their bottom lines.”
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Jakarta, Indonesia — Cellphones, electric pots and pans, and car washing machines were among goods worth $1.3 million destroyed Monday by the Indonesian Trade Ministry in West Java. Alcoholic drinks with an ethyl alcohol or ethanol content ranging from 5% to 20% were also destroyed.

The ministry demolished the goods as part of the government’s crackdown on illegal imports, a major issue that experts say stems from Indonesia’s unpreparedness for the ASEAN-China Free Trade Agreement signed 15 years ago.

Trade Minister Zulkifli Hasan said the goods did not comply with state regulations and lacked a surveyor’s report, goods registration number, or import approval, and exceeded import quotas or failed to meet Indonesian national standards.

This is the third operation conducted by the Trade Ministry, following operations at the Cikarang customs and excise storage area in West Java and at Jakarta’s Cengkareng Port.

On August 6, the Trade Ministry disclosed that $2.9 million of illegal imports were found at the Cikarang facility. The Trade Ministry confiscated 20,000 textile rolls. The National Police seized 1,883 bales of used clothing, while customs’ officers at Tanjung Priok port seized 3,044 bales of used clothing. In addition, hundreds of carpets, towels, cosmetics, footwear and more than 6,500 electronics were seized.

Since its establishment in July, the Anti-Illegal Imports Task Force has been investigating illegal import schemes, collecting data and seizing illegal goods.

The head of the Indonesian National Police’s criminal investigation unit, Wahyu Widada, said, “Illegal imports not only harm the country in terms of revenue loss, but also has an impact on small and medium scale entrepreneurs.”

Mohammad Faisal, executive director of the Center on Reform of Economics, links the current problem to Indonesia’s unpreparedness when it signed the ASEAN-China Free Trade Agreement 15 years ago.

“Indonesia’s domestic industries were not ready to compete with China’s competitive products in the local market. Indonesia had a huge domestic market and very low trade barriers then. It’s not just tariff barriers but also the non-tariff barriers were very limited. So that’s why it’s actually easy for foreign suppliers to enter the Indonesian market,” Faisal said.

According to recent data from the Ministry of Cooperatives and Small and Medium-sized Enterprises (SMEs), approximately 50% of imported textiles and textile products are unregistered. That means the state loses out on $399 million from unpaid taxes and excise duties.

In 2022, China exported $3.95 billion of textiles to Indonesia but only $2.04 billion of Chinese textile imports were recorded. Overall, the financial loss is equal to the potential creation of 67,000 jobs and over $762 million in gross domestic product. Indonesia’s GDP in 2023, according to the World Bank, was $1.37 trillion.

Zulkifli said one of the major obstacles to fighting illegal imports is the existence of an underground economy. The Minister of Cooperatives and SMEs, Teten Masduki, said that almost 30% to 40% of goods sold in Indonesian markets are involved in the underground economy and therefore the state does not receive taxes on them.

As a result, Zulkifli added that Indonesia’s tax ratio is lower than other developed Asian nations such as South Korea, Japan and China.

“Imagine if we sent illegally imported goods to South Korea or China. Don’t expect that to happen, it’s impossible. That’s why these nations can become developed countries. If our “house” continues to get burglarized, how can we move forward?” he said.

Zulfkli announced in late June a plan to impose stiff tariffs of up to 200% on some products. The plan, which is still under review, initially was announced as an import duty on Chinese goods, but the minister said later the duties would apply to all countries.

Indonesia’s Shopping Center Retail and Tenant Association has detected shops suspected of selling illegally imported goods online across North Sumatra to East Java, and some have opened shops at Jakarta’s wholesale shopping centers.

Budihardjo Iduansjah, chairman of the association, said “These Chinese entrepreneurs store their goods at local warehouses and sell them online. But now many have started selling at shops including at International Trade Centers.”

During a visit to shops suspected of selling illegally imported goods from China, VOA spotted clothing with labels written in Mandarin that were sold for $1 each. A seller there admitted that he and many other sellers sold their goods online and shipped the clothes in bulk to resellers across the country.

Zulkifli claims that the investigations carried out by his task force have caused many foreign nationals suspected of dealing in illegal imports to leave.

He plans to work with universities to research the root causes of illegal imports. He is confident that the illegal imports crackdown will continue under President-elect Prabowo Subianto, who will be inaugurated in October.
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JACKSON HOLE, Wyoming — With the Federal Reserve considered certain to start cutting its benchmark interest rate next month, Chair Jerome Powell’s highly anticipated speech Friday morning at an economic conference will be closely watched for any hints about how many additional rate cuts might be in the pipeline.

Powell is expected to say the Fed has become more confident that inflation is nearing its 2% target, more than two years after it hit a painful four-decade high. Yet the Fed chair may take an overall cautious approach in his remarks at an annual conference of central bankers in Jackson Hole, Wyoming. Economists note that forthcoming economic data, including a monthly jobs report on Sept. 6, will help determine the size of future Fed rate cuts — whether a typical quarter-point cut or a more aggressive half-point drop — and how fast they occur.

“We think he will seek to dampen expectations of [a half-point cut] as well as reiterate that the Fed is data-dependent and does not make decisions in advance,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a research note.

Powell’s speech comes as the central bank is moving toward achieving a much sought-after “soft landing,” in which its rate hikes — 11 of them in 2022 and 2023 — manage to curb inflation without causing a recession. Inflation was just 2.5% in July, according to the Fed’s preferred measure, having tumbled from a 7.1% peak two years ago.

The progress made on inflation has likely made many Fed officials more open to cutting rates several times this year now that elevated borrowing costs have largely succeeded in cooling the economy and taming inflation.

Still, a slowdown in hiring and an uptick in the unemployment rate last month heightened concern that the Fed could soon make a mistake in the other direction — by keeping rates too high for too long, throttling growth and plunging the economy into recession. Powell will likely refer to that balancing act in his speech Friday.

On Wednesday, minutes from the Fed’s most recent meeting, held July 30-31, showed that the “vast majority” of policymakers said at the time that they would likely support a rate reduction at the next meeting in mid-September as long as inflation stayed low. Several of the Fed’s 19 officials even supported a rate cut at that meeting, the minutes showed.

Also Wednesday, the Labor Department revised its estimate of job growth for the 12 months that ended in March: It said that 818,000 fewer jobs were added during that year than it had earlier reported. The revisions, which were preliminary, will be finalized in February.

Hiring over that period was still solid, averaging 174,000 a month rather than 242,000, the government said. Yet because the figures show that hiring wasn’t as robust as was previously thought, a Fed rate cut next month is “a certainty,” Shepherdson wrote.

Economists generally agree that the Fed is getting closer to conquering high inflation, which brought hardship to millions of households beginning three years ago as the economy rebounded from the pandemic recession. Yet few economists think Powell or any other Fed official is prepared to declare “mission accomplished.”

After the government reported this month that hiring in July was much less than expected and that the jobless rate reached 4.3%, the highest in three years, stock prices plunged for two days on fears that the U.S. might fall into a recession. Some economists began speculating about a half-point Fed rate cut in September and perhaps another identical cut in November.

But healthier economic reports last week, including another decline in inflation and a robust gain in retail sales, partly dispelled those concerns. Wall Street traders now expect the Fed to cut its benchmark rate by a quarter-point in both September and November and by a half-point in December. Mortgage rates have already started to decline in anticipation of rate reductions.

A half-point Fed rate cut in September would become more likely if there were signs of a further slowdown in hiring, some officials have said.

Raphael Bostic, president of the Fed’s Atlanta branch, said in an interview Monday with The Associated Press that “evidence of accelerating weakness in labor markets may warrant a more rapid move, either in terms of the increments of movement or the speed at which we try to get back” to a level of rates that no longer restricts the economy.

“I’ve got more confidence that we are likely to get to our target for inflation,” he said. “And we’ve seen labor markets weaken considerably relative to where they were” last year. “We might need to shift our policy stance sooner than I would have thought before.” Several months earlier, Bostic had said he would likely support just one rate cut in the final three months of the year.
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Windhoek, Namibia — Namibia’s minister of agriculture has urged farmers in the Southern African country to look at alternative markets for its charcoal and beef products since the European Union, one of its largest trading partners, has implemented nontariff barriers that came into force in 2023.

A unilateral decision by the European Union to impose regulations on agricultural products from Namibia that come from areas that have been deforested has raised concerns regarding market access for products such as beef and charcoal.

These products will no longer have access to the European market unless they comply with the new rules that Namibian Minister of Agriculture Calle Schlettwein describes as stringent and prohibitive.

“When you want to conduct agriculture, you have to clear lands. We have [the] charcoal industry. We have a number of industries in the agricultural sector where we do have an impact on deforestation. And I said that farmers must be careful that if they do that, they must be in compliance with these regulations.”

The chairperson of the Namibia Biomass Industry Group, which represents over 150 members in the sector, Colin Lindeque, says the European Union Deforestation Regulation (EUDR) will not negatively impact exports to the EU.

He said the EU is only asking for additional information. It wants geographic location tags that show that the charcoal they are exporting does not come from areas that have been deforested, but rather areas that are regarded as savannah, an argument with which Schlettwein disagrees.

Lindeque told VOA the regulations are fair, and the members of the Bio-mass Industry Group are compliant and meet the new EU requirements.  

“There was a consultant here recently from the EU looking at EUDR, and they specifically said Namibia’s bush encroachment is definitely not a forest in their opinion. But one of the challenges is our government hasn’t made the distinction, and that is actually the bigger point of interest, because we in the current Forest Act of 2001 do not even define what a forest is.”

Director of Forestry at Namibia’s Ministry of Environment, Johnson Ndokosho, says the ambiguities in the country’s law regarding what is considered a forest, woodlands and savannah are being dealt with in the new Forestry Act, which is being revised.

He cautioned that Namibia is at the mercy of the EU when it comes to whether Namibia’s beef and charcoal will still be able to enter their market.

“If they found that maybe this beef is coming out of an area where deforestation is occurring, then that may affect our exports.”

Last year, Namibia exported 270,000 tons of charcoal worth $72 billion (1.3 billon NAD) mainly to South Africa, which then exports it to other markets, including Europe. Europe is the top destination for Namibia’s beef, with the union consuming about 80 percent of the country’s total exports valued at roughly $23.5 million (420 million NAD).

Namibia is not the only country affected by the new EU regulations. Other countries include Brazil, Cameroon and Nigeria.

Products that are affected by the new EU regulations include cocoa, soy, palm oil and coffee.
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