By Howard Schneider

WASHINGTON – Abrupt changes to the federal funds rate could stress the economy and financial markets, with steady and well-communicated increases preferable given the uncertainty about how hard and fast rate hikes will hit business and household spending, Kansas City Fed president Esther George said on Monday.

With inflation running at a 40-year high, “the case for continuing to remove policy accommodation is clear-cut,” George said in remarks prepared for delivery to a labor-management conference in Missouri.

But “the speed at which interest rates should rise…is an open question,” she said in remarks made as several of her colleagues have already endorsed a second consecutive three-quarter point increase at the upcoming July Fed meeting. George dissented against an increase of that size in June, preferring the half-point increase the public was expecting until the weekend before the meeting.

“The pace at which this path unfolds will need to be carefully balanced against the state of the economy and financial markets,” George said in what amounts to the bluntest warning yet from a policymaker that the central bank may be at risk of overdoing it.

The Fed since March has been raising interest rates to try to curb inflation, and in the space of three meetings has moved in quarter point then half point then three-quarter point increments. This has ignited a rapid shift in financial conditions seen in higher home mortgage rates and a reordering of bond and stock financial markets.

“This is already a historically swift pace of rate increases for households and businesses to adapt to, and more abrupt changes in interest rates could create strains, either in the economy or financial markets,” said George.

“Communicating the path for interest rates is likely far more consequential than the speed with which we get there,” George said, hinting she may be inclined against another three-quarter point hike when the Fed meets in July.

Financial markets currently expect that larger increase. But many investors and economists also have been flagging a heightened risk the central bank may raise interest rates so high it triggers a recession.

George said she found it “remarkable” a recession debate had emerged “just four months” after the Fed started raising rates, with some analysts even forecasting the Fed will need to begin cutting the federal funds rate next year, presumably because of an economic slowdown.

The Fed is at a sensitive point in its inflation fight. Headline data have given no clear evidence the battle has been won. Data to be released Wednesday is expected to show consumer prices rose at an 8.8% annual rate, the fastest since late 1981, and recent job market surveys show continued strong hiring and a historically outsized number of job openings.

In a survey released Monday the New York Fed said that consumer expectations for inflation over the next year hit a series high 6.8%.

Yet over a 3-year period household inflation expectations fell in the latest survey from 3.9% to 3.6% – still well above the Fed’s 2% target, but moving in the right direction.

Recent economic data has also shown consumption spending falling on an inflation-adjusted basis, and the outsized wage gains of the pandemic era beginning to moderate.

Overall economic growth may end up being negative for the April through June period, just as it was for the first three months of the year, a possibility that may add to recession warnings.

(Reporting by Howard Schneider; Editing by Chizu Nomiyama)

By Susan Mathew and Devik Jain

(Reuters) -European shares fell on Monday, dragged lower by economy-sensitive stocks, as concerns over an energy supply crunch and fresh COVID-19 cases in China hurt risk appetite and heightened worries about a recession.

Nord Stream I, the biggest single pipeline carrying Russian gas to Germany, began annual maintenance on Monday, with flows expected to stop for 10 days, but governments, markets and companies are worried the shutdown might be extended because of the war in Ukraine.

The pan-European STOXX 600 index broke a three-day winning streak to end 0.5% lower, after posting its best week in seven on Friday.

China-exposed automobiles fell 2.8%, the most among the European sectors, and dragging the German DAX down by 1.4%.

Miners slid 1.9% as metal and iron ore prices slumped on worries that rising COVID-19 cases in Shanghai would lead to more curbs.[MET/L][IRONORE/]

Investors are worried about the effects on industries across the board, Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown said, adding that if emergency plans implemented by the government include rationing, then they would really hurt growth within economies highly reliant on exports from Russia.

A complete halt of Nord Stream I would keep European gas prices higher for longer, piling pressure on the European Central Bank, which is set to increase its key interest rate later this month for the first time in more than a decade.

Uniper, among the first to flag a hit from falling Russian supplies, dropped 14.4% as a dispute between Germany and Finland over the cost of rescuing the gas importer flared.

Markets have had a tough couple of weeks on recession worries, and the euro approaching parity with the dollar adds to investor worries about the hit to earnings. [FRX/]

Euro zone finance ministers said on Monday the fight against inflation was the current priority despite dwindling growth in the bloc, as they are set to be informed of a deteriorating economic outlook by the European Commission.

Investor await U.S. June inflation data due on Wednesday for further clues on the U.S. interest rate path later this year, followed by an upcoming second-quarter reporting season for signs on how corporate are faring amidst higher inflation and tightening financial conditions.

A gauge of eurozone lenders dipped 2.3% tracking a sharp fall in euro zone bond yields.

Defensive sectors rose, with utilities up 1.3%.

Sinch tumbled 27.5% as short seller Ningi Research shorted the Swedish cloud communications company.

Dufry gained 3.8% after the duty-free retailer agreed to buy Italian airport and motorway caterer Autogrill.

(Reporting by Susan Mathew and Devik Jain in Bengaluru; Editing by Sherry Jacob-Phillips and Bernadette Baum)

(This July 8 story corrects first paragraph to read pollution could “reduce shipments” of LNG and changes fifth paragraph to use the word significant instead of huge)

By Valerie Volcovici

WASHINGTON – Cheniere Energy Inc has asked the Biden administration to exempt it from limits on emissions of cancer-causing pollutants, arguing they would reduce shipments from the top U.S. exporter of liquefied natural gas for an extended period and endanger the country’s efforts to ramp up supplies to Europe, according to documents reviewed by Reuters.

The request imposes an uncomfortable dilemma on President Joe Biden’s administration as it tries to balance efforts to slash pollution from the fossil fuel industry against promises to help European allies cut energy ties with Moscow over its invasion of Ukraine.

Denying Cheniere could reduce America’s LNG exports for months or years, while granting its request would mean ongoing emissions of toxic pollutants into poor and minority neighborhoods Biden has vowed to protect.

Texas regulators have already given Cheniere’s massive LNG plant on the outskirts of the Gulf Coast city of Corpus Christi a pass for overshooting emissions limits on other pollutants, according to previous Reuters reporting.

The request also reflects a significant financial vulnerability for Cheniere and its shareholders at a time it has been enjoying increased sales and a rising stock price.

At issue is a rule under the U.S. Clean Air Act called the National Emissions Standards for Hazardous Pollutants (NESHAP), which imposes curbs on emissions of known carcinogens like formaldehyde and benzene from stationary combustion turbines.

The Environmental Protection Agency (EPA) announced in February that starting in August, the rule will apply to two types of gas-fired turbines that had been left out of the regulation for nearly two decades.

Gas-powered turbines emit formaldehyde and other dangerous pollutants through a chemical transformation that occurs when methane is superheated.

Around 250 U.S. gas turbines will be subject to the rule, according to an EPA list that showed Cheniere is the only LNG company that uses these type of turbines and whose facilities will be impacted.

The Houston-based company, which accounts for around 50% of U.S. shipments of the supercooled fuel, told the EPA in a series of emails this spring that its two LNG facilities in Louisiana and Texas use a unique turbine design that cannot be easily equipped with pollution controls.

“The design of Cheniere’s LNG terminals is complex, and the subject turbines are located on elevated pedestals with limited space for installing control equipment,” Cheniere’s law firm Bracewell said in a letter emailed to EPA Administrator Michael Regan on March 8.

“Potentially imposing significant costs and operational disruption on the U.S. LNG industry at the same time the administration is focused on Europe’s strategic need to break its reliance on Russian gas is counterproductive,” it said.

A separate Cheniere email dated March 9, sent to other EPA officials, said design and engineering work to evaluate the feasibility of retrofitting all 62 turbines at its facilities would likely take “several years”, making it impossible to meet the federal pollution standard on time.

The company asked the EPA to reverse its decision to subject gas-fired turbines to the NESHAP rule, or exempt the specific design used by Cheniere, according to the documents. Company representatives later met with senior EPA staff, including Principal Deputy Assistant Administrator Joseph Goffman and Deputy EPA Administrator Janet McCabe, to discuss the issue, according to the documents.

The EPA confirmed that Cheniere, through its law firm Bracewell, had made the request for relief from the regulation and that agency staff and officials met with the company in March and April to discuss it.

“At this time we have not made a decision to lift the stay or issue an exemption,” the EPA said in a statement.

Cheniere’s request could carry some weight in the Biden administration as it is one of a handful of companies that advises a White House and EU-backed task force developing a plan to wean EU countries off Russian gas.

Biden in March promised to increase LNG shipments to the European Union to 50 billion cubic meters per year by 2030 – more than double the amount sent there from the United States in 2021 – to help supplant Russian supply.

TWO-DECADE REPRIEVE

The EPA first imposed the standard for stationary combustion turbines under NESHAP in 2004, but issued a “stay” temporarily excusing two types of gas-fired turbines commonly used by the energy industry after business groups petitioned to keep them out of the regulation – arguing that the pollution they create is “negligible.”

The EPA kept that stay in place for 18 years, but never formally delisted the turbines because of a 2007 decision by the D.C. Circuit Court of Appeals saying it had no authority to do so.

In February 2020, after environmental groups threatened to sue the agency for inaction, Biden’s EPA announced it would finally lift the stay and require operators to meet the standard.

Under the rule, these turbines will have to comply with an emissions limit of 91 parts per billion for formaldehyde within 180 days. That level that for formaldehyde is meant to ensure lower levels of emissions for other dangerous chemicals too, according to the EPA.

Frank Maisano of Bracewell told Reuters that Cheniere is awaiting a formal response from the EPA on the company’s request for relief from the rule.

Neither Maisano nor Cheniere would comment to Reuters on why the company used a turbine design at its facilities that could not easily accommodate equipment that might be needed if the regulatory stay on gas turbines were lifted.

In its correspondence with the EPA, Cheniere said its facilities were built in accordance with regulations in effect at the time. The Sabine Pass facility, which produces about 30 million tonnes per annum (MTPA) of LNG, started operating in 2016, while the 15-MTPA Corpus Christi plant entered into service in June 2018.

Cheniere approved last month a major expansion at its Corpus Christi facility that would add seven liquefaction trains to produce around 10.5 MTPA of LNG. A Cheniere spokesperson told Reuters the company will use electric turbines for the new trains, instead of gas-fired turbines.

(Reporting by Valerie Volcovici; additional reporting by Nichola Groom; Editing by Marguerita Choy)

By Sabrina Valle and Ron Bousso

LONDON -Western energy majors will cut output and lose billions of dollars if Russia, as is feared, suspends a pipeline that is almost the only export route for oil from land-locked Kazakhstan, company sources, traders and analysts say.

The closure of the CPC pipeline that carries oil from Kazakhstan to the Black Sea Russian export terminal in the port of Novorossiisk would shut in more than 1% of global oil supply, exacerbating what is already the most severe energy crunch since the Arab oil embargo in the 1970s.

The pipeline, which runs through Russian territory and is owned by a consortium of Western, Asian, Russian and Kazakh companies, has been in the spotlight since Russia on Feb. 24 invaded Ukraine in what Moscow calls a “special military operation”.

Last Wednesday, a court in Novorossiisk ordered CPC to suspend operations for 30 days, citing concern about oil spill management.

A Russian court on Monday overturned the ruling against CPC and instead fined it 200,000 roubles ($3,300).

The sources, however, said they still thought major disruption likely. Pipeline co-owner Russia has said all stoppages are driven by technical issues.

Storm damage in March has already interrupted flows through the 1.3 million barrels per day (bpd) oil artery, operated by the Caspian Pipeline Consortium.

Major oil companies, including Chevron, Exxon Mobil, Shell and Italy’s Eni, in addition to several Russian and Kazakh firms have stakes in the CPC. Western companies also hold stakes in Kazakh oilfields.

The CPC pipeline is the route for nearly all Kazakh oil exports.

Three sources at Western oil companies operating in Kazakhstan, asking not to be named because of the sensitivity of the issue, said they expected a prolonged CPC pipeline suspension.

One trader at a Western major said such an outage would result in a decline of 50 million tonnes of oil per year (1 million bpd) because land-locked Kazakhstan has limited alternative export routes.

Many Western companies have exited operations in Russia, with oil majors among the first to leave in the days after the conflict began. Western sanctions have disrupted Russian exports and pushed up energy prices.

In response, Russia made steps towards seizing oil and gas projects Sakhalin 1 and 2, where Shell and Exxon have stakes.

A Western executive familiar with CPC operations said Sakhalin was “a definite sign of things to come for CPC”.

Shortly after Russia’s invasion of Ukraine, international oil prices spiked to their highest levels since the records of 2008.

They have since eased to just above $100 a barrel as the market anticipates economic weakness will lower demand, although selling has been limited by concerns of tight supplies that would be exacerbated by a cut in CPC output.

“Losing one million barrels per day in an already tight environment can lead to an unsolvable problem for the oil market,” Amrita Sen from Energy Aspects in London said.

JP Morgan analysts predicted last week oil prices could jump to an all-time high of $190 per barrel if a combined 3 million bpd of output from Russia and Kazakhstan was hit by sanctions and related issues.

LACK OF ALTERNATIVES

Kazakhstan produces some 1.6 million bpd of oil, and exports about 80% of that volume, mostly through the CPC.

Of the remainder, 15% leaves the country also via Russia, and around 5% goes to China and various destinations via rail and the Caspian Sea, Kazakhstan’s Energy Ministry data shows.

Last week, Kazakh President Kassym-Jomart Tokayev told his government to diversify oil supply routes.

But that would take time, Camille Chautard, analyst at Moody’s ratings, said.

Oil majors have studied the viability of alternative routes in recent months, the three sources said, including to China and trans-Caspian shipments to Azerbaijan and Georgia. All of those options are challenging.

The pipeline to China can take oil from east and central Kazakhstan, but most of the large fields are in the West.

On the Caspian Sea, exporters face tanker shortages and have little capacity to take more oil.

“To be honest, I don’t think we can re-route anything,” one Western trader familiar with CPC operations said.

CHEVRON MOST EXPOSED

Chevron would be particularly exposed to any pipeline closure because it has the biggest Western stake in Kazakh production at around 380,000 bpd, or more than 12%, of its total output.

Recent temporary disruptions should not have a material impact on the company’s credit standing, but an eventual “prolonged disruption would be very material to Chevron’s production volumes,” Elena Nadtotchi from Moody’s said.

If Chevron’s investments in Kazakhstan were impaired or lost, that could lead to a ratings downgrade, she said.

A long-term closure would also threaten Chevron’s future growth plans. The U.S. major planned to boost output by 40% at Kazakhstan’s largest field Tengiz to around 1 million bpd.

Credit Suisse analysts estimate that Chevron, which controls 50% of Tengiz, would have seen free cash flow rising to $3.0-$3.5 billion by 2024 following the expansion and to $4.0-$4.5 billion by 2026 on the basis of oil prices of $60 per barrel.

In May, Chevron flagged the risk of sanctions to its output but said measures had not yet had a material impact.

The Chevron-led Tengiz consortium TCO, which also includes Exxon, declined to comment on specific details if the CPC pipeline was shut.

“As global oil markets continue to encounter challenges arising from geopolitics, TCO’s primary focus is on maintaining safe operations, and we are exploring potential crude oil exporting options,” it said in a statement to Reuters.

Exxon is the second largest foreign producer in Kazakhstan with output of 213,000 bpd of oil and 234 million cubic feet of gas. It is followed by Eni with some 145,000 barrels of oil equivalent per day, Shell with around 100,000 boed and TotalEnergies with some 80,000 boed in 2021.

Shell, Eni and Total declined to comment, as did Exxon, saying TCO was best-placed to respond.

(Editing by Barbara Lewis)

By Francesco Guarascio

BRUSSELS -Euro zone finance ministers said on Monday the fight against inflation was the current priority despite dwindling growth in the bloc, as they were informed of a deteriorating economic outlook by the European Commission.

At a regular monthly meeting of the so-called Eurogroup, the EU executive gave an update of its economic forecasts, showing slower growth and higher inflation, the commission’s vice-president Valdis Dombrovskis said on the sidelines of the meeting.

“One can expect some downwards revisions, even more so for next year,” Dombrovskis said, adding that growth remained resilient.

He said “inflation is going to be revised upwards”, anticipating the substance of the Commission’s forecasts, due to be unveiled on Thursday.

Economics commissioner Paolo Gentiloni warned that risks to the economy were increasing as Russia could cut its gas supplies to Europe. He added Brussels could adopt a number of measures to reduce inflationary pressure from gas imports, including price caps, although no decision had been made on that yet.

In May, the Commission had cut its growth forecasts for the 19 countries sharing the euro to 2.7% this year from 4.0% predicted in February, and to 2.3% next year from 2.7%, in its first assessment of the impact of the war in Ukraine on the bloc’s economy.

Inflation was estimated in May to be 6.1% for this year, which was in itself a major rise from the previously estimated 3.5%.

TAMING PRICE HIKES

Despite the expected further drop in economic growth, ministers focused on fighting inflation, indicating a will to shift further away from the massive economic stimulus offered during the acute phase of the COVID-19 pandemic.

“The priority is to contain inflation,” Spain’s Economic Minister Nadia Calvino told reporters before the meeting.

Inflation is a major concern and is there to stay at high levels also next year, Dutch Finance Minister Sigrid Kaag said.

To fight skyrocketting prices, estimated by Eurostat at 8.6% on the year in June, ministers pushed for fiscal prudence.

The fiscal advice should recognize that “we have moved away from the need to help the economy,” one official said

“Fiscal policies in all countries should aim at preserving debt sustainability,” the 19 ministers said in a joint statement after they discussed the matter at the meeting, in a warning to high-debt countries such as Greece, Italy and France.

The statement added that this would facilitate the task of the European Central Bank’s monetary policy “to ensure price stability by not adding inflationary pressures”.

The discussion on the 2023 fiscal stance comes before governments prepare their national budgets for next year.

Fiscal prudence should mean cutting budgets and also embarking on structural reforms, said Belgium’s Finance Minister Vincent Van Peteghem.

(Reporting by Francesco Guarascio; Editing by Bernadette Baum)

By Howard Schneider

WASHINGTON -Abrupt changes to the federal funds rate could stress the economy and financial markets, with steady and well-communicated increases preferable given the uncertainty about how hard and fast rate hikes will hit business and household spending, Kansas City Fed president Esther George said on Monday.

With inflation running at a 40-year high, “the case for continuing to remove policy accommodation is clear-cut,” George said in remarks prepared for delivery to a labor-management conference in Missouri.

But “the speed at which interest rates should rise…is an open question,” she said in remarks made as several of her colleagues have already endorsed a second consecutive three-quarter point increase at the upcoming July Fed meeting. George dissented against an increase of that size in June, preferring the half-point increase the public was expecting until the weekend before the meeting.

“The pace at which this path unfolds will need to be carefully balanced against the state of the economy and financial markets,” George said in what amounts to the bluntest warning yet from a policymaker that the central bank may be at risk of overdoing it.

The Fed since March has been raising interest rates to try to curb inflation, and in the space of three meetings has moved in quarter point then half point then three-quarter point increments. This has ignited a rapid shift in financial conditions seen in higher home mortgage rates and a reordering of bond and stock financial markets.

“This is already a historically swift pace of rate increases for households and businesses to adapt to, and more abrupt changes in interest rates could create strains, either in the economy or financial markets,” said George.

“Communicating the path for interest rates is likely far more consequential than the speed with which we get there,” George said, hinting she may be inclined against another three-quarter point hike when the Fed meets in July.

Financial markets currently expect that larger increase. But many investors and economists also have been flagging a heightened risk the central bank may raise interest rates so high it triggers a recession.

George said she found it “remarkable” a recession debate had emerged “just four months” after the Fed started raising rates, with some analysts even forecasting the Fed will need to begin cutting the federal funds rate next year, presumably because of an economic slowdown.

The Fed is at a sensitive point in its inflation fight. Headline data have given no clear evidence the battle has been won. Data to be released Wednesday is expected to show consumer prices rose at an 8.8% annual rate, the fastest since late 1981, and recent job market surveys show continued strong hiring and a historically outsized number of job openings.

In a survey released Monday the New York Fed said that consumer expectations for inflation over the next year hit a series high 6.8%.

Yet over a 3-year period household inflation expectations fell in the latest survey from 3.9% to 3.6% – still well above the Fed’s 2% target, but moving in the right direction.

Recent economic data has also shown consumption spending falling on an inflation-adjusted basis, and the outsized wage gains of the pandemic era beginning to moderate.

Overall economic growth may end up being negative for the April through June period, just as it was for the first three months of the year, a possibility that may add to recession warnings.

(Reporting by Howard SchneiderEditing by Chizu Nomiyama)