Inflation is coming back. Consumer prices climbed more than expected in March, data shows.

Walmart coronavirus shopping
Shoppers are seen wearing masks while shopping at a Walmart store, in North Brunswick, New Jersey, on July 20, 2020.

  • A popular gauge of US inflation rose faster than expected in March as the economy reopened.
  • Consumer prices rose 2.6% year-over-year, partially lifted by March 2020’s drop in price growth.
  • The Fed has signaled that reopening will drive a strong but transitory surge in inflation.
  • See more stories on Insider’s business page.

Prices of common consumer goods rose faster than expected last month as widespread reopening accelerated the economic recovery.

The Consumer Price Index, a popular measure of overall inflation, gained 0.6% from February to March, according to data published by the Bureau of Labor Statistics. Economists surveyed by Bloomberg had expected an increase of 0.5%. The reading follows a 0.4% gain in February. A 9.1% surge in gasoline prices drove the bulk of the uptick.

Core inflation – which excludes volatile energy and food prices – increased 0.3%. That also exceeded the median estimate of a 0.2% month-over-month jump.

Consumer prices jumped 2.6% year-over-year, marking the largest increase since the pandemic began. The reading also exceeded the economist forecast of a 2.5% climb. The measure is somewhat skewed, however, by data from March 2020, when prices declined when the pandemic first froze economic activity. That drop artificially lifts the year-over-year figure by giving the latest measure a lower bar to clear.

“We expect year-over-year inflation to remain steady as the upward pressure of a fast-reopening economy and fiscal stimulus is counteracted by somewhat tougher year-over-year comps,” David Kelly, chief global strategist at JPMorgan Asset Management, said.

Still, the increases suggest inflation will strengthen through the economic recovery, as expected. Price growth trended below the Federal Reserve’s 2% target for decades, signaling consistently weak demand. Now, with businesses reopening, consumers deploying stimulus-boosted savings, and hiring picking up, economists expect inflation to come in above 2% for some time.

The Fed anticipated such a bounce and has dampened concerns that inflation will run rampant. The central bank adjusted its inflation target in August to pursue above-2% inflation for a period of time to counter years of below-target price growth.

Fed Chair Jerome Powell has said that, while reopening will drive stronger inflation, the effect will likely be “transitory” and quickly fade as the economy enters a new normal.

“It is more likely that what happens in the next year or so is going to amount to prices moving up, but not staying up. And certainly not staying up to the point where they would move inflation expectations above 2%,” Powell said in early March, adding the central bank will “be patient” in waiting to pull back on its ultra-accommodative policy.

Americans, however, aren’t yet buying Powell’s message. The median expectation for one-year inflation rose to 3.2% last month, its highest point since 2014. The estimate for three-year inflation edged higher to 3.1% from 3%. Though the Fed hasn’t clarified how high it’s willing to let inflation run, 3% price growth would be the strongest since the early 1990s.

While it’s true that inflation expectations have steadily landed above actual inflation for decades, expectations alone can drive inflation higher. Businesses tend to lift prices and workers usually demand higher wages when the country expects stronger inflation over the next year.

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S&P 500 hits record amid higher-than-expected jobless claims and continued Fed support

Traders work on the floor of the New York Stock Exchange (NYSE) on December 07, 2018 in New York City
Traders work on the floor of the New York Stock Exchange .

  • The S&P 500 stretched further in record highs Thursday as the Federal Reserve signaled it will accommodate conditions for economic growth.
  • Technology stocks tracked on the Nasdaq Composite led gainers.
  • Jobless claims rose to 744,000, pointing to persistently high unemployment levels.
  • See more stories on Insider’s business page.

US stocks hung around record highs Thursday, with the S&P 500 hitting a new high after insight from the Federal Reserve indicated that monetary policy makers will maintain their stance in supporting growth in the world’s largest economy as it continues to recover from the COVID-19 pandemic.

The S&P 500 index pushed further into record-high territory after reaching a closing peak in the previous session. Technology stocks marched up but blue-chip stocks tracked on the Dow Jones Industrial Average tilted slightly lower.

Stock futures ahead of the open showed little reaction to the Labor Department’s report that weekly jobless claims rose to 744,000, higher than the 680,000 claims expected by economists surveyed by Bloomberg. The report indicated that unemployment remains at persistently high levels, with the previous week’s reading upwardly revised to 728,000 from 719,000.

Here’s where US indexes stood at 9:30 a.m. on Thursday:

Members of the Fed’s rate-setting board expect “it would likely be some time until substantial further progress” on reaching targets of maximum employment and above-2% inflation, according to the minutes from the Federal Reserve Open Market Committee’s mid-March meeting released Wednesday.

“FOMC members were quite positive on short-term growth prospects, but made quite clear that short-term acceleration only goes so far towards their long-term “full employment” goal, suggesting even if growth remains robust through 2Q 2021, we’ll still be in a waiting pattern for Fed policy,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, told Insider in emailed comments.

“On balance, there was nothing material in the minutes which changes my view of a reduction in [quantitative easing] beginning in early-2022 followed by a potential first rate hike in late-2022,” said LeBas. “I view a 2022 QE reduction as much more likely than a 2022 rate hike,” he said. “If anything, the first hike will be later and the path of hikes steeper than what the markets have currently priced.”

Around the markets, GameStop shares rose after the video game retailer said it plans to elect Reddit favorite Ryan Cohen as chairman.

Trading app Robinhood reportedly failed to disclose data on certain stock trades for more than a year.

Billionaire tech investor Peter Thiel warned bitcoin might serve as a Chinese financial weapon against the US – and says it threatens the dollar.

Gold rose 0.6% to $1,753.20 per ounce. Long-dated US Treasury yields fell, with the 10-year yield down at 1.647%.

Oil prices were mixed. West Texas Intermediate crude lost 1% to trade at $59.23 per barrel. Brent crude, oil’s international benchmark, dropped 0.6%, to $62.76 per barrel.

Bitcoin rose 2.1% to $57,546.

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Americans have saved $1.6 trillion since the pandemic started and it poses little inflation risk, the Fed says

Capital One ATM
A man uses the ATM at a Capital One bank in Midtown Manhattan on July 30, 2019 in New York City.

  • Americans’ savings rose by $1.6 trillion during the pandemic thanks to stimulus and weak spending.
  • Some experts fear households will quickly spend their savings and fuel runaway inflation.
  • Studies suggest most will hold onto the cash even after the US reopens, Fed researchers said.
  • See more stories on Insider’s business page.

Gradual reopening and widespread vaccination have economists wondering how Americans will spend in a post-pandemic economy. Researchers at the Federal Reserve Bank of New York see little cause for concern.

Americans enjoyed a savings surge during the pandemic as government stimulus hit households and lockdown measures cut down on spending. Estimates suggest people held on to roughly $1.6 trillion in savings since last March, when the health crisis first slammed the economy.

The sum highlights the scale of the government’s support throughout the coronavirus recession. Yet some experts fear that, if too much of these savings are spent too quickly, the recovery will be disrupted as rampant inflation takes hold.

Such a demand bounce is unlikely, professors and economists at the New York Fed said in a Monday blog post. For one, Americans who kept their jobs still haven’t spent nearly as much as they would in a pre-pandemic economy.

“Increased purchases of furniture, electronics, and other goods have compensated only in part for this reduced spending on services,” the economists said. “As a result, overall consumption has fallen for many households, even if their income is more or less intact.”

The roughly $5 trillion in stimulus passed by President Donald Trump and President Joe Biden over the last year also contributed to the savings boom. Relief doled out in direct payments and expanded unemployment benefits was used to pay down debts and cover living costs, but some was tucked away as savings.

It’s also possible that some households increased their saving habits as a precautionary measure due to uncertainty around how the economy would fare, the researchers said.

NYFed
Source: Federal Reserve Bank of New York.

The very nature of excess savings suggests they won’t be unwound too quickly. Stimulus recipients spent roughly one-third of the government support, according to Fed estimates. The rest was mostly saved, likely by households that already enjoy a financial buffer. It’s possible that circumstances change and force Americans to tap their savings sooner than expected, but the economy’s steady recovery should lead habitual savers to keep holding on to their funds, the team said.

Even when the economy fully reopens and Americans have more ways to deploy their cash, the researchers don’t expect a sudden rise in spending. Many are sure to dine out more often or take a vacation that wouldn’t have been taken otherwise, but there’s a limit to how much a household can boost its discretionary spending, the team said.

“It is certainly possible that some of these savings will pay for extra travel and entertainment once the COVID-19 nightmare is behind us, but our conclusion is that the resulting boost to expenditures will be limited,” the economists said.

This conclusion – and likely outcome – is a key reason why, as Insider’s Hillary Hoffower reported, a full economic recovery depends on the wealthiest Americans spending much more than they did over the last 12 months of the pandemic.

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Biden’s infrastructure plan should supercharge growth over the long term, Dallas Fed president says

Robert Kaplan
Dallas Federal Reserve Bank President Robert Kaplan.

  • Biden’s infrastructure plan can fuel a permanent boost to growth, the Dallas Fed’s president said.
  • Where stimulus will fuel a sudden rise, infrastructure is a “long-term investment,” Robert Kaplan said.
  • Inflation will still likely trend within the Fed’s comfort zone amid the new spending, he added.
  • See more stories on Insider’s business page.

President Joe Biden’s infrastructure proposal can permanently lift the country’s economic output and drive stronger growth for years after the recovery, Robert Kaplan, president of the Federal Reserve Bank of Dallas, said.

The president rolled out the American Jobs Plan in a Wednesday speech, marketing the measure as a critical next step for his plan to revive the US economy. The $2.3 trillion spending package includes investments in traditional infrastructure like roads and bridges, nationwide broadband, clean water, and affordable housing.

The plan’s unveiling comes just weeks after Biden approved a $1.9 trillion stimulus plan. The March bill was necessary to breathe life back into the economy, but the “bump in GDP” expected from the stimulus will wear off over time, Kaplan said in a Bloomberg TV interview.

In contrast, the president’s new spending plan would provide a longer-lasting boost to economic growth as the country emerges from the pandemic, he added.

“The nice thing and the desirable thing, for me, about infrastructure spending: it’s that it’s a long-term investment,” the central bank president said. “It should help, in the future, create higher potential GDP growth, higher sustainable growth, better productivity.”

The American Jobs Plan is only the first half of the White House’s new spending push. Biden said Wednesday he aims to reveal the American Families Plan – a spending proposal with funds for public education and care facilities – in the coming weeks. Combined, the two packages will reportedly cost up to $4 trillion.

The additional spending measures come as economists debate whether Biden’s stimulus risks fueling rampant inflation. Where progressive economists see the plan as necessary, others fear the plan will overfill the hole in the economy.

The Fed has signaled it will allow inflation to rise above 2% as the economy recovers in hopes of reaching maximum employment. The stimulus could drive a sharp rise in inflation, but the impact will likely be temporary as the growth rate similarly slows, Kaplan said.

“I think you’ll see inflation moderate as we get into 2021 and into 2022 and 2023. But I also think it’s wise as a central banker to have a good dose of humility and an openness to learning as this all unfolds,” he added.

Kaplan isn’t a voting member of the Federal Open Market Committee and is set to become one in 2023.

The outlook is similar to that held by Fed Chair Jerome Powell. The central bank chief said the Fed aims to maintain its ultra-easy monetary policy stance well into the future due to lasting uncertainty around the coronavirus recession. Any stimulus-fueled jump in inflation is likely to be transitory, he added in a press conference.

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The typical older Black millennial has 17 times less wealth than white peers, and student debt may be why

Millennial
The millennial racial wealth gap persists.

Older millennials born in the 1980s are making a wealth comeback, but there’s a vast racial wealth gap lurking underneath this progress.

In 2016, older millennials’ wealth levels were 34% below where they should be if the Great Recession hadn’t occured, per a 2018 study by the Federal Reserve Bank of St. Louis. Within three years, the first part of a new St. Louis Fed study found, they had narrowed that wealth deficit down to 11%.

However, the second installment of the Fed’s study reveals that these strides look quite different when broken down by race. While white and Hispanic families saw improvement in building wealth, the study states, Black families experienced the reverse as they fell further below wealth expectations between 2007 and 2019.

From 2016 to 2019, white families of this older millennial cohort saw wealth levels go from 40% to 5% below where they should be. That wealth deficit doubles to 10% for Hispanic families, but that is still less than their 2016 wealth deficit of 15%. The deficit soars for Black families, who were 52% below wealth expectations in 2019 – a significant increase from 39% three years prior.

These differences look just as staggering when framed as median wealth for the same year. For older white millennial families, that’s $88,000 – four times the $22,000 median wealth for Hispanic families and roughly 17 times the $5,000 median wealth for Black families.

The report doesn’t take into consideration effects from coronavirus recession, as full data for that period isn’t yet available.

Black millennials bear a bigger student debt burden

Despite these wealth differences, the St. Louis Fed found that all three groups had income levels that aligned with expectations, indicating that earnings weren’t preventing wealth accumulation.

The report suggests that one reason older Black millennials are increasingly falling below wealth expectations is because of their staggering student-loan debt.

Black students shoulder a heavier debt burden than their white peers: About 87% of Black students attending four-year colleges take out student loans compared to about 60% of white students. They also owe $7,400 more on average than their white peers after graduating, per the Brookings Institute.

Black borrowers under the age of 40 were also more likely to be behind on payments in 2019 than white or Hispanic borrowers, according to the Federal Reserve. Black graduates are nearly five times as likely to default on their loans than their white peers.

The racial wealth gap is why some politicians and lawmakers are advocating for student-debt cancellation. Several experts previously told Insider that communities of color would be one of the groups that will gain the most from student-debt cancellation plans.

Right now, it looks like this socieconomic divide isn’t close to narrowing any time soon. As the St. Louis Fed report’s authors, Ana Hern√°ndez Kent and Lowell Ricketts, wrote, “Given the large wealth deficit and negative trend, the disparities among older Black millennials may persist as these families age, inhibiting their full participation in the economy.”

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Dow drops 308 points as rising COVID-19 cases cloud economic-recovery optimism

Traders work on the floor of the New York Stock Exchange (NYSE) on November 20, 2019 in New York City
Traders work on the floor of the New York Stock Exchange.

  • The S&P 500 and the Dow Jones Industrial Average mark their third declines in four sessions.
  • European COVID-19 cases are rising and spurring more lockdowns in the region.
  • US economic recovery continues but is ‘far from complete,’ says Fed Chairman Powell.
  • See more stories on Insider’s business page.

US stocks dropped Tuesday as a rise in COVID-19 cases in Europe stoked concerns about the path for recovery in the global economy from the pandemic.

All three of Wall Street’s major indexes fell, with losses picking up pace in afternoon dealings. The S&P 500 and the Dow industrials declined for the third time in four sessions. Tech stocks as tracked on the Nasdaq Composite lost grip of earlier gains.

Stocks struggled in the face of rising coronavirus cases in Europe. The higher case counts have prompted Germany, Europe’s largest economy, to order lockdown measures over Easter and France has enacted more restrictions in the country.

Here’s where US indexes stood at the 4 p.m. ET close on Tuesday:

Meanwhile, Italy has issued new lockdowns. In the UK, the government in an effort to control cases is seeking to impose a £5,000 fine ($7,000) on people traveling outside of England without a valid reason. The worsening conditions in Europe pressured the demand outlook for oil, sending Brent oil prices sharply lower.

The US economy is seeing a lower amount of COVID-19 cases compared with Europe, alongside encouraging data and an improved rate of vaccinations, said Federal Reserve Chair Jerome Powell on Tuesday.

“But the recovery is far from complete,” he cautioned in remarks prepared for testimony to the House Financial Services Committee. The Fed “will continue to provide the economy the support that it needs for as long as it takes.”

AstraZeneca shares fell after US health officials raised questions about the drugmaker’s COVID-19 vaccine, saying the company could have used some outdated trial data in its update about the formula.

GameStop fell before the video game retailer late Tuesday releases its first quarterly financial report since its Reddit-fueled rally in January. Meanwhile, Melvin Capital, the hedge fund at the heart of the GameStop frenzy, is facing nine lawsuits from retail investors who alleged a conspiracy to limit trading caused them to lose money.

While stocks have pulled back in recent session, the market’s fear gauge, the Cboe VIX Volatility Index, is back at pre-pandemic lows, and it’s signaling big upside ahead, says Fundstrat’s Tom Lee.

Anthony Scaramucci’s SkyBridge Capital and investment firm First Trust Advisors have applied for regulatory approval for a bitcoin exchange-traded fund.

Oil prices tumbled, with West Texas Intermediate crude down 6% to $57.60 per barrel. Brent, oil’s international benchmark, was down 6.5% to $60.47.

Gold fell 0.6% to $1,727 per ounce as US treasury yields eased.

Bitcoin lost 2.5%, to trade at $55,328.

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The US is recovering faster than expected but economic rebound is far from complete, Fed’s Powell says

Jerome Powell waits to testify before the Senate Banking, Housing and Urban Affairs Committee on his nomination to become chairman of the U.S. Federal Reserve in Washington, U.S., November 28, 2017.   REUTERS/Joshua Roberts
Federal Reserve Chair Jerome Powell.

  • The US economic recovery has progressed faster than expected, Fed Chair Jerome Powell said.
  • Still, a full recovery is far off and the Fed will keep support in place, he testified to Congress.
  • Today’s unemployment rate of 6.2% “underestimates the shortfall” in the labor market, Powell added.
  • See more stories on Insider’s business page.

Despite lower COVID-19 case counts, encouraging economic data, and an improved rate of vaccination, the US economy has plenty of work to do to fully recover, Federal Reserve Chair Jerome Powell said.

The US is nearing the end of the tunnel. Widespread vaccination suggests the country could have a grasp on the coronavirus’ spread by the summer – or sooner. Key indicators including nonfarm payrolls and manufacturing gauges also show sectors nearing or trending above their pre-pandemic levels. Democrats’ $1.9 trillion relief package stands to further accelerate growth coming out of lockdowns.

Still, government and Fed support are necessary to get the US back on track, Powell said.

“The recovery has progressed more quickly than generally expected and looks to be strengthening,” the central bank chief said in remarks prepared for testimony to the House Financial Services Committee on Tuesday. “But the recovery is far from complete, so, at the Fed, we will continue to provide the economy the support that it needs for as long as it takes.”

Powell reiterated that the path of the recovery hinges on the trajectory of the virus, a message uttered by Fed officials since the pandemic made landfall in the US last year. For now, that trajectory looks promising. The country reported 55,621 new cases on Monday, according to The New York Times, down 8% from two weeks ago. Hospitalizations are down 16% from two weeks ago.

The steady decline in cases has lifted household spending on goods, but the services industry is still mired in a downturn. Sectors hit hardest by the virus “remain weak,” and the current unemployment rate of 6.2% “underestimates the shortfall,” Powell said.

The central bank announced last week it would keep interest rates near zero and maintain its pace of asset purchases. It also published a new set of quarterly economic projections that reflected a considerably more optimistic outlook than the December set.

Fed policymakers now expect the unemployment rate to fall to 4.5% by the end of 2021 instead of the prior estimate of 5%, and see full-year economic growth of 6.5% this year, up from the previous forecast of a 4.2% expansion.

The new estimates reflect the strong economic gains made since December, but the Fed still has its eye on those left behind, Powell said.

“We welcome this progress, but will not lose sight of the millions of Americans who are still hurting, including lower-wage workers in the services sector, African Americans, Hispanics, and other minority groups that have been especially hard hit,” he added.

Powell is scheduled to testify alongside Treasury Secretary Janet Yellen at 12 p.m. ET on Tuesday. The two are then slated to appear before the Senate Banking Committee on Wednesday.

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Bitcoin won’t replace the dollar because it’s too volatile, Fed’s Powell says

GettyImages 1165380762
  • Cryptocurrencies like bitcoin are too volatile to replace the dollar, Fed Chair Jerome Powell said Monday.
  • Bitcoin has surged in price as companies including Tesla and Square invest in the token.
  • The Fed is still exploring use cases for a digital currency issued by the central bank, Powell said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Federal Reserve Chair Jerome Powell said Monday that, while the central bank is still exploring the potential for a central bank digital currency, cryptocurrencies like bitcoin can’t serve as an effective replacement to the US dollar.

Bitcoin has enjoyed new fame over the past year as large companies’ adoption of cryptocurrencies has sent prices surging. Companies including Tesla, MicroStrategy, and Square have all invested in the token. Meanwhile, players in the financial sector are warming to cryptocurrencies’ use as an alternative asset.

The positive developments helped bitcoin surge as high as $61,742 earlier this month as more investors looked to profit on the token’s growing popularity.

Powell has his doubts about cryptocurrencies and their supposed use cases. The tokens might be a substitute for gold, but their wild price swings make them unfit to replace the dollar, the central bank chief said during a teleconference hosted by the Bank of International Settlements.

“Crypto assets are highly volatile – see bitcoin – and therefore not really useful as a store of value,” Powell said, according to MarketWatch. “They’re not backed by anything. They’re more of an asset for speculation.”

Bitcoin fell slightly through the day following Powell’s remarks. The cryptocurrency traded just above $57,000 as of 2:30 p.m. ET, up roughly 98% year-to-date.

While cryptocurrencies aren’t likely to gain the Fed’s favor, the central bank has considered creating a digital currency of its own. The Fed partnered with MIT researchers in August to build and test a central bank digital currency. Officials sought to gain a better understanding of digital currencies and their potential implementation through the tests, Fed Governor Lael Brainard said at the time. Still, the token included in the study was merely “hypothetical,” she added.

Powell reiterated that, though the bank is still studying the potential for a digital dollar, serious vetting is necessary before such a currency is implemented.

“To move forward on this, we would need buy-in from Congress, from the administration, from broad elements of the public, and we haven’t really begun the job of that public engagement,” the Fed chair said. “Because we’re the world’s principal reserve currency, we don’t need to rush this project. We don’t [need] to be first to market.”

Somewhere between a central bank digital currency and cryptocurrencies exist stable coins. These tokens counter the volatility seen with cryptocurrencies by tying their value to more stable assets like government-issued currencies.

Stable coins are “an improvement” over cryptocurrencies and “may have a role to play” in digitizing the dollar, but they’re unlikely to form the foundation for a global payment system, Powell said. Any candidate for a global currency controlled by a private company deserves “the highest level of regulatory expectations,” he added.

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Tech stocks rebound as Treasury yields stabilize amid inflation fears

nyse surprised trader
  • Tech stocks staged a rebound on Friday amid stabilizing Treasury yields after a sharp sell-off the previous day.
  • On Friday morning an announcement from the Federal Reserve regarding bank capital rules sent the 10-year yield higher and banks stocks lower.
  • Yields rose this week as investors grew concerned that the stimulus will cause a rise in inflation.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Tech stocks rebounded Friday after a sharp-sell off the previous day as Treasury yields stabilized.

Earlier on Friday, the Fed announced that its temporary pandemic-era rule that relaxed bank capital requirements will not be extended after March 31. That offset the positive effect of stabilizing bond yields, which then spiked on the news.

Bond yields have risen as investors grow concerned that the $1.9 trillion fiscal stimulus will cause a rise in inflation, leading the Federal Reserve to change policy and raise rates sooner than expected.

But some on Wall Street aren’t concerned about the 10-year rising for much longer. JPMorgan’s Marko Kolanovic expects yields to stabilize, pushing tech stocks higher and helping the S&P 500 finish the year at 4,400, a 12% gain from current levels.

Here’s where US indexes stood after the 4 p.m. close on Friday:

The Fed’s decision to let the bank capital requirement rule expire sent bank stocks lower on Friday. Shares of JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup all ended in the red.

Shares of Visa slipped as much as 6% on Friday after a report said the Department of Justice is investigating the firm’s debit-card practices. Visa is under investigation for “anticompetitive practices” in the debit-card market, reported the Wall Street Journal, citing unnamed sources.

Oil prices rose after tumbling 7% on Thursday. West Texas Intermediate crude rose as much as 2.9%, to $61.72 per barrel. Brent crude, oil’s international benchmark, rose 2.6%, to $64.95 per barrel, at intraday highs.

Gold jumped as much as 0.5%, to $1,745.47 per ounce.

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The Fed will end a pandemic-era capital break it gave to Wall Street banks

Federal Reserve
  • The Fed will end a pandemic-era rule that eased banks’ capital requirements on March 31.
  • The policy allowed major banks to hold less cash against Treasurys and was meant to spur lending.
  • The announcement fueled a short jump in Treasury yields and dragged bank stocks lower.
  • See more stories on Insider’s business page.

A rule change that eased capital requirements for major banks will expire as planned on March 31, the Federal Reserve said on Friday.

The pandemic-era policy to give banks relief from what is formally called the supplementary leverage ratio allowed Wall Street firms to keep less cash on hand against Treasurys than usual. The rule aimed to free up banks’ abilities to lend during the downturn, as well as cut down on bond-market froth. By no longer counting Treasurys and central bank deposits when calculating the amount of reserves needed, banks would have more cash to lend out to struggling businesses and households.

The SLR relief was slated to expire at the end of the month, yet investors had been looking to the Fed to clarify whether it would extend the rule. While banks’ quarterly reports showed a robust recovery through 2020, some had expected the relief would continue as part of the Fed’s ultra-easy policy stance.

That group’s reaction to the Friday announcement was captured in knee-jerk reactions across markets. The 10-year Treasury yield temporarily shot higher before paring most of the sudden gains. Bank stocks faced more permanent losses, with JPMorgan, Goldman Sachs, and Morgan Stanley all tumbling immediately after the open.

The central bank said it will soon seek public comment on adjustments to the SLR. New dynamics in the bond market and the broad economic recovery could warrant additional rule changes, according to the Fed.

“Because of recent growth in the supply of central bank reserves and the issuance of Treasury securities, the Board may need to address the current design and calibration of the SLR over time to prevent strains from developing that could both constrain economic growth and undermine financial stability,” the Fed added in a statement.

Still, such adjustments won’t erode the strength of banks’ capital requirements, the central bank noted.

The SLR was formed in 2014 out of a broader set of capital requirements put in place after the global financial crisis. The international regulations, known as Basel III, seek to mitigate financial-system risk by mandating that banks maintain certain ratios of cash in accordance with their leverage.

Implementation of the new rules in 2009 gave the Fed a new tool with which to ease monetary conditions during the coronavirus recession.

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