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Thursday June 8th, 2023

Fed to end injections sooner, ‘retire’ transitory, Powell says as inflation rages in Sri Lanka

UNDER FIRE: Inflation has been above 2.0 percent for long enough, under fire Powell admits

ECONOMYNEXT – Federal Reserve Chairman Jerome Powell who has been firing a global commodity boom and asset price bubbles at home, pushing inflation to 30-year highs says liquidity injections may be terminated faster that earlier indicated.

“We haven’t made a decision on that,” Powell told a congressional hearing. “The most recent data particularly since the November FOMC meeting show elevated inflation pressures, a rapid improvement in many labour market indicators, without an accompanying addition of labor supply.

“And also strong spending that signals significant growth in coming months. Remember that every dollar of asset purchases actually add accommodation to the economy.

“But at this point the economy is very strong and inflationary pressures are high and it is therefore appropriate to consider wrapping up the taper of our asset purchases which we actually announced at the November meeting perhaps a few months sooner.

And I expect that we will discuss that at our upcoming meeting in a couple of weeks.”

Sri Lanka’s inflation hit a 12-year high as Powell was giving testimony to the congress.


Sri Lanka inflation hits 12-year high in Nov 2021 amid money printing.

Sri Lanka has been printing money for two years, with inflationists defending their actions pointing to US and other reserve currency central bank money printing, which has now pushed prices to 30 year highs in advanced nations.

Sri Lanka’s rupee is soft-pegged to the US and whenever it depreciates the inflation is amplified.

Powell grilled by a senator on persistent inflation said it may be time to retire the word ‘transitory’.

Senator Pat Toomey, a former Wall Street Banker, roasted the Powell saying the agency’s “new flexible average inflation targeting” framework remains at 2.0 percent but the time frame is unspecified.

Headline inflation which people fell is already above 6.0 percent.

“Core PCE the Fed’s preferred inflation metric is running above 2.0 percent over the past five years, nearly 3.0 percent over the past three years, and 4.1 percent over the past year,” Toomy charged.

“So it is above target, it has been above target, and it is accelerating.

“Yet the Feds maintained an extraordinary emergency monetary policy stance.”

“This framework looks to be like a weakening of the Feds commitment to stable prices.

“Now I know you believe this is transitory. But everything is transitory. Life is transitory. How long does inflation have to rise above your target, before the Fed decides may be it is not so transitory”

Powell admitted that inflation has run above 2.0 percent for “long enough”.

“I think the word transitory has different meanings to different people. To many it has a sense of short lived. We tend to mean that it won’t mean a permanent mark in the form of higher inflation.

‘I think it is a good time to retire that word and explain more clearly what we mean.”

Toomy pointed out that the US economy was “well past recovery” and was in a “full blown expansion” and raging asset prices had made houses were unaffordable to people in many areas.

“And yet the Fed’s going to purchase 35 billion dollars of mortgaged backed securities in December alone. And scheduled to continue purchasing mortgage backed securities for months on end.

“I would strongly urge you to reconsider the pace of the tapering.”

Tighter US policy has always hit pegged nations that do not tighten in tandem, triggering meltdowns and defaults.

Sri Lanka’s rupee fell in 2015 and 2018 as then Fed Chief Janet Yellen first withdrew liquidity in a first tightening cycle in 2014, also raised rates in the second ccle while withdrawing liquidity.

Sri Lanka’s central bank is one of several set up by Fed ‘money doctors’ in Latin America styled after Argentina’s central which go into regular external default.

Sri Lanka’s stocks have also been soaring partly driven by export firms on expectations of a falling rupee.

Laughably rising inflation in the US and has been blamed on supply chains not the worst aggregate demand bubble seen in 20 yeas and the highest money supply growth the US has seen in decades.

Classical economists have said that Powell was delusional for suggesting that there was no link between money supply growth and inflation.


Conditions ripe for global commodity super-cycle: Steve Hanke

US inflation will overshoot target, Powell delusional: Hanke

The Fed is the biggest known global bubble blower in history. It created the Great Depression after stumbling on open market operations in the 1920s triggering the “roaring 20s” bubble and busted a centuries old gold standard in 1971, trying to target an “output gap”

Most recently it created the Great Recession after firing the Greenspan-Bernanke bubble and is now in the midst of the Powell Bubble pushing up food and energy prices across the globe. (Colombo/Dec01/2021)

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Sri Lanka’s shares slip on profit taking and selling pressure

ECONOMYNEXT – Sri Lanka’s shares closed lower on Wednesday after four consecutive gains in previous sessions spiraled into selling interest and profit taking, an analyst said.

The main All Share Price Index was down 0.28 percent or 24.39 points to 8,722.06, this is the lowest the index has been since May 02, while the most liquid index S&P SL20 was down 0.40 percent or 9.92 points to 2,468.44.

“The market was gaining in the previous sessions and there is selling and profit taking present today, due to continuously being on green,” an analyst said.

In the previous sessions the market was seeing gains, due to lowered policy rates and low inflation stimulating buying interest and driving the sentiment up, an analyst said.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

“There are gradual improvements in the market sentiment, with positive sentiments coming in from lowered policy rates and inflation,” an analyst said.

The market generated foreign inflows of 12 million rupees and received a net foreign inflow of 18 million rupees, due to low share prices and discounted shares followed by a dividend announcement.

The market generated a revenue of 554 million rupees, this is the lowest the turnover has been since May 10, while the daily turnover average was 1 billion rupees. From the total generated revenue, the banking sector contributed 120 million rupees, Diversified Banks contributed 115 million rupees and the Capital Goods Industry generated 78 million rupees.

Top losers during trade were Sampath Bank, Commercial Bank and Aitken Spence. (Colombo/June06/2023)

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Sri Lanka Treasuries yields plunge, 12-month down 318bp

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

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Sri Lanka forex reserves rise US$722mn in May 2023

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed as deflationary policy and weak credit reduced ‘above the line’ outflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.


No pre-determined level to stop Sri Lanka rupee appreciation: CB Governor

Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.


Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)

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