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A Fed pivot, born of volatility, missteps, and new economic reality





WASHINGTON (Reuters) – The Federal Reserve’s promise in January to be “patient” about further interest rate hikes, putting a three-year-old process of policy tightening on hold, calmed markets after weeks of turmoil that wiped out trillions of dollars of household wealth.

FILE PHOTO: A screen displays the headlines that the U.S. Federal Reserve raised interest rates as a trader works at a post on the floor of the New York Stock Exchange (NYSE) in New York, U.S., December 19, 2018. REUTERS/Brendan McDermid/File Photo

But interviews with more than half a dozen policymakers and others close to the process suggest it also marked a more fundamental shift that could define Chairman Jerome Powell’s tenure as the point where the Fed first fully embraced a world of stubbornly weak inflation, perennially slower growth and permanently lower interest rates.

Along with Powell’s public comments, Fed minutes, and other documents, the picture emerges of a central bank edging towards a period of potentially difficult change as it reviews how to do business in light of that new reality. One question, for example, is whether to make crisis-fighting policies a part of the routine toolkit. Another is whether to try to prepare the public to accept higher inflation from time to time.

Policymakers have debated for years how well traditional central banking fits a world transformed by the global financial crisis a decade ago. But it was a brief Oct. 3 remark by Powell that set off the chain of events which helped settle the matter.

“We’re a long way from neutral now, probably,” Powell said at a Washington think-tank event, referring to a level of interest rates that neither cool or boost the economy.

Though Powell was effectively summarizing what the Fed had just concluded at its Sept. 25-26 policy meeting, when it raised rates amid stronger than expected U.S. growth, his characterization touched a nerve.

Investors dumped stocks and bonds, fearing the Fed aimed to drive rates higher than they felt the economy could withstand.

It was the beginning of weeks of volatility that led the Fed to recalibrate its message, with more than one misstep along the way.

In doing so, the central bank went beyond fine-tuning its language or adjusting to changing conditions. Interviews with officials as well as analysis of Fed minutes and policymakers’ public statements suggest the emergence of a long-elusive consensus that interest rates would likely never return to pre-crisis levels, and that once established relationships, such as inflation rising when unemployment fell, no longer worked.

Concern that years of solid economic growth and falling unemployment would inevitably rekindle inflation or threaten financial stability have been a staple of Fed debates, but had largely disappeared by the Fed’s Dec. 18-19 meeting, according to a review of Fed meeting minutes and officials’ public statements.

GRAPHIC – How the Fed’s meeting minutes reflected changing views on interest rates:

It was a conclusion hiding in plain sight. After a year when the Trump administration pumped around $1.5 trillion of tax cuts and public spending into a full employment economy, the Fed in 2018 would miss its 2 percent inflation target yet again.

“I hate to say we were right,” Dallas Federal Reserve president Robert Kaplan told reporters on Jan. 15 in Dallas. “But we have been warning for quite some time that…the structure of the economy has changed dramatically.”

Technological innovation, globalization, and the Fed’s commitment to its inflation target all held down prices, and “those forces are powerful and they are accelerating,” he said.

His arguments echoed those made by St. Louis Fed president James Bullard and Minneapolis Fed president Neel Kashkari. New Fed vice chairman Richard Clarida and Governor Lael Brainard have flagged similar issues.

Later in January, the Fed’s policy meeting jettisoned mention of any further rate increases and cited “muted inflation” among the reasons, largely aligning the Fed with the prevailing sentiment among investors who saw conditions weakening.

At first, it was investors who appeared to have overreacted to Powell’s “long way from neutral” remark in early October.

Global markets had absorbed nearly two years of quarterly Fed rate increases in stride, but yields on U.S. 10 year Treasury bonds spiked a tenth of a percentage point that day and stocks started a slide that wiped out 10 percent of the S&P 500’s value by late November.

If sustained, It was the type of environment, with asset values falling and borrowing conditions tightening, that could hurt the Main Street economy and not just the investor class.

The initial response from Powell and others at the Fed was that the U.S. economy remained strong, and that it was not the central bank’s job to coddle Wall Street.

“We watch markets very carefully,” Powell said at a mid-November event in Dallas. “But it is one of many, many factors that go into a very large economy.”

But investors were not just reacting to the Fed and the prospect of higher rates. Weakening business and consumer confidence, slowing global growth, and potential disruptions from President Donald Trump’s trade war with China also factored in.

Over the next few weeks the Fed tried to build those concerns into its policy stance, but it became clear the situation was more fragile than they had divined.

In early December a portion of the bond yield curve “inverted,” with short term rates rising above long term ones in what can be seen as a loss of faith in economic growth.

For months, Fed officials had debated whether to discount such developments as the clash and clang of daily trading or to treat them as a significant warning. Some, including Bullard, warned against ignoring what markets seemed to be saying, and both he and Kashkari said the Fed should stop raising rates or risk trouble.

When the Fed met in December, policymakers thought they could square the circle.

Officials proceeded with another quarter-point rate increase, as expected at the time, and released updated projections showing two more rate hikes for 2019 – one less than in September, but still heading higher.


The Fed hoped, though, that between a small change in its policy statement and Powell’s follow-up news conference, things would stay calm, a strategy Fed officials spelled out after the fact in interviews and in minutes of the December meeting.

By replacing the phrase that the Fed “expected” further rate hikes with one saying it “judged” them likely, the central bank tried to show it was now less committed to tighter policy.

But that nuance was lost on markets, and Powell’s assurance at the news conference of a newly “patient” Fed got lost as well when he described the Fed’s monthly rundown of as much as $50 billion in assets as on “automatic pilot.”

To investors, that undermined the intended message, since the regular decline in the Fed’s asset holdings effectively worked to tighten financial conditions.

The S&P 500 fell another 7.5 percent in the days that followed.

Investors felt the Fed was “not fully appreciating” how market turbulence and “softening global data” put the U.S. itself at risk, the Fed’s January minutes concluded in reviewing how the December statement was perceived.

“It was a delicate time,” New York Fed President John Williams told Reuters on Tuesday. The tweak in the December statement “was a pretty subtle message. That’s one of the challenges of trying to communicate a very complicated and complex situation in just one page.”

Over the next few weeks, the Fed eschewed subtlety for a more public acknowledgement that its view of economic reality had changed.

For a Jan. 4 question-and-answer session at the American Economic Association Powell came armed with written notes and a core message that the Fed was “always prepared to shift the stance of policy and to shift it significantly” if conditions weakened.

After the January meeting that message became official. References to the new “patient” approach and “muted inflation,” words cited in minutes of the December meeting, became part of the Fed’s policy statement. A longstanding mention of the need for higher rates was deleted.

The changes drew no dissent, with even those who have worried most about inflation and financial risk falling silent.

It was a significant moment of unanimity at a central bank that has spent the last decade wondering when, rather than whether, inflation or financial risks would re-emerge. Throughout that era some group of officials – including Powell early in his central banking career – has consistently warned that the combination of falling unemployment, cheap money, and trillions of dollars injected by the Fed’s crisis era policies would inevitably cause problems.

FILE PHOTO: Federal Reserve Chairman Jerome Powell holds a press conference following a two day Federal Open Market Committee policy meeting in Washington, U.S., January 30, 2019. REUTERS/Leah Millis -/File Photo

As the Fed’s January meeting minutes showed, not all officials have sworn off further rate increases and some noted that a possible turn for the better – a resolution of trade tensions for example – could lead them to raise rates again.

But to veteran Fed watchers, the bar is now higher. The January statement, JP Morgan analyst Michael Feroli wrote recently, showed the Fed “subtly but profoundly evolving” to a new view of the world where a variety of forces have changed the way inflation and interest rates work, and have now changed how the central bank responds.

GRAPHIC – The Fed’s new normal:

Reporting by Howard Schneider; Additional reporting by Ann Saphir and Jason Lange; Editing by Dan Burns and Tomasz Janowski


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Ottawa education workers still teaching special-ed students at schools want safety checks





Some Ottawa educators say they are concerned about the safety of classrooms that remain open in schools for special-education students.

Ontario elementary and secondary students have been sent home to study virtually because of the dangers posed by rising rates of COVID-19. However, special-education classes are still operating at many bricks-and-mortar schools.

The special-education classes include students with physical and developmental disabilities, autism and behaviour problems. Some don’t wear masks and require close physical care.

Two unions representing teachers and educational assistants at the Ottawa-Carleton District School Board have sent letters to Ottawa Public Health expressing their concerns.

It’s urgent that public health officials inspect classrooms to assess the safety of the special-ed classes, said a letter from the Ottawa branch of the Ontario Secondary School Teachers’ Federation, which also represents the educational assistants who work with special-needs children.

“In the absence of reasons based on medical evidence to keep specialized systems classes open, we are unsure as to the safety of staff and students in these programs,” said the letter signed by president Stephanie Kirkey and other union executives.

The letter said staff agreed that students in specialized classes had difficulty with remote education and benefited most from in-person instruction.

“Our members care deeply about the students they work with and are not only concerned about their own health and safety, but also about that of their students, as they are often unable to abide by COVID safety protocols that include masking, physical distancing and hand hygiene, thus making it more likely that they could transmit the virus to one another,” the letter said.

The Ottawa-Carleton District School Board has 1,286 elementary and secondary students in special-education classes attending in person at 87 schools, said spokesperson Darcy Knoll.

While final numbers were not available, Knoll said the board believed a large number of the special-education students were back in class on Friday at schools.

In-person classes for other elementary and secondary students are scheduled to resume Jan. 25.

The school boards provide PPE for educators in special-education classes as required, including surgical masks, face shields, gloves and gowns.

Several educators interviewed said they don’t understand why it has been deemed unsafe for students in mainstream classes to attend class, but not special-ed students.

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Ottawa sets record of 210 new COVID-19 cases following lag in data reporting





Ottawa has now broken its daily record for new COVID-19 cases twice in 2021, with 210 new cases added on Friday amid a lag in data reports from earlier in the week.

The nation’s capital has now seen 10,960 cases of the novel coronavirus.

Ottawa Public Health’s COVID-19 dashboard reports 977 active cases of the virus in Ottawa, a jump of more than 100 over Thursday’s figures.

One additional person has died in relation to COVID-19 in Ottawa, raising the city’s death toll in the pandemic to 395.

The record-setting case count comes a day after Ottawa reported a relatively low increase of 68 cases. Ontario’s COVID-19 system had meanwhile reported 164 new cases on Thursday.

OPH said Thursday that due to a large number of case reports coming in late Wednesday, the local system did not account for a large portion of cases. The health unit said it expects the discrepancy to be filled in the subsequent days.

Taken together, Thursday and Friday’s reports add 278 cases to Ottawa’s total, a daily average of 139 cases.

The new single-day record surpasses a benchmark set this past Sunday, when the city recorded 184 new cases.

Ontario also reported a new record of 4,249 cases on Friday, with roughly 450 of those cases added due to a lag in reporting in Toronto.

The number of people hospitalized with COVID-19 also continues to climb in Ottawa. OPH’s dashboard shows there are currently 24 people in hospital with COVID-19, seven of whom are in the intensive care unit.

Three new coronavirus outbreaks were added to OPH’s dashboard on Friday. One outbreak affects a local shelter where one resident has tested positive for the virus, while the other two are traced to workplaces and private settings in the community.

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Ottawa family dealing with mould issue in apartment grateful for support





OTTAWA — An Ottawa family, who has been dealing with mould in their south Ottawa apartment, is grateful for the support they have received from the community.

“I would like to say big very mighty, big thank you to everyone,” says Nofisat Adeniyi.

Adeniyi lives with her three sons in a South Keys apartment. Her son Desmond turned to social media on Sunday to seek help for the family, saying they’ve been dealing with mould in their unit and it has taken too long to fix.

“I see my mom go through a struggle everyday; with three kids, it’s not easy,” says 16-year-old Desmond Adeniyi.

He setup a GoFundMe page to help the family raise money to move out. After gaining online attention and the story, which originally aired CTV News Ottawa on Tuesday, they have been able to raise over $30,000.

“Yes! I was surprised, a big surprise!” says Nofisat Adeniyi, “We are free from the mess that we’ve been going through.”

The family was so touched, they decided to pay it forward and donated $5,000 to another family in need, “A lady my son told me about,” says Nofisat Adeniyi.

The recipient wants to remain anonymous, but when she found out from Adeniyi, “She was crying, she has three kids; I remember when I was, I can feel what she’s feeling – because I was once in those shoes.”

CTV News Ottawa did reach out to the property management company for an update on the mould. In a statement on Wednesday, a spokesperson for COGIR Realty wrote:

“We respect the privacy of our residents and are unable to disclose any specific information regarding any of our residents. We can, however, let you know that we are working with the residents and are making every effort to resolve this matter as soon as possible,” said Cogir Real Estate

The giving did not stop at just cash donations. “When I saw the segment, the thing that struck me the most was how easily the situation can be resolved,” says mould removal expert Charlie Leduc with Mold Busters in Ottawa.

Leduc is not involved in the case, but appeared in the original story, and after seeing the mould on TV wanted to help.

“This isn’t something that we typically do, but given the circumstance and given the fact that this has gone on way too long, our company is willing to go in and do this work for free,” said Leduc.

The Adeniyi family may now have some options, and are grateful to the community for the support.

“Yes, It’s great news — you can see me smiling,” says Nofisat.

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