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Does the American army’s future lie in Europe or Asia?

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THE YEAR 1973 was pivotal for America’s army. The force was battered and broken from Vietnam. In January the defence secretary announced the end of conscription; two months later the last combat troops left Vietnam. But the Arab-Israeli war which broke out on Yom Kippur in October planted the seeds of renewal. The lessons of that war, absorbed by American officers sent to Israel, helped reshape America’s army into the modern and professional force which would vanquish Iraq in 1991.

Today’s generals, who came of age during that transformation, are keenly aware of the resonance. “There’s a loose analogy between the early 1970s and the army of Desert Storm,” says General James Rainey, who leads the army’s Future Command, “and the army which invaded Iraq in the early 2000s and where we need to be in 2040.” Two decades of war in Afghanistan and Iraq wore out troops, equipment and ideas. A recruitment shortage remains unresolved. Now the rise of China and the lessons from the war in Ukraine have prompted introspection, renewal and reform.

Among army civilian and military leaders there are three big unsettled questions, according to people familiar with those debates. One is whether profound shifts in the character of war, some evident in Ukraine, might render ground forces less important, if not irrelevant.

A second is how to balance resources between Asia and Europe (Asia being the Pentagon’s priority, and Europe where Russia is rearming fast). The army can prepare for conflicts in both places, but it cannot actually wage those wars at the same time—and it is no longer asked to do so. The 2018 National Defence Strategy ended the “two war” standard, a change accepted by the Biden administration.

That leads to a third question, and the most existential for the army. What, beyond the provision of logistics and air defence, would be the role of a ground force in a future war in the Pacific?

When General Randy George, the army’s chief of staff, was recently asked for book recommendations, he cited “The Arms of the Future” by Jack Watling, a young British analyst. The book describes how in recent rounds of Warfighter, a big annual exercise led by America, combat brigades facing increasingly good sensors and longer-range and deadlier munitions took huge losses, emerging with 20% combat effectiveness. Artillery devastates infantry and armour well before they can get within sight of the enemy.

The war in Ukraine has reinforced those findings. Some argue that America’s army, better trained and armed than Ukraine’s, and with air cover, would fare better. General Rainey assumes the worst. “We’re going to fight under constant observation,” he says, “and in constant contact of some form. There is no break. There is no sanctuary.” He says American “lessons learned” teams were in place three days before the invasion to collect observations. They will have had some nasty surprises. American-made GPS-guided shells and rockets at first worked well; more recently, they have struggled against Russian jamming.

The army recognises that whereas it could once patiently muster its forces before launching a large offensive—as it did against Iraq in 1991 and 2003—it now has to prioritise dispersal, mobility and concealment. The drone attack which killed three soldiers in Jordan on January 28th was the first successful attack on American troops by aircraft since the Korean war. Katie Crombe, an army officer, and John Nagl, of the US Army War College in Pennsylvania, note in a recent paper that Ukraine’s battalion command posts comprise seven soldiers who dig into the ground and move twice daily. “That standard”, they warn, pointing to stubborn habits of more static command posts, “will be hard for the US Army to achieve.”

The commanders of battalions (about 1,000 soldiers) and brigades (a few thousand), the core units of combat in Afghanistan and Iraq, would be consumed by this intense fighting in a way they were not during counterinsurgency missions. The army is thus reorganising so that more of the burden of planning, logistics, command and control, and long-range firepower falls on divisions—larger formations typically led by two-star generals which stand farther back from the front lines and have more time and space to orchestrate the frenetic battles of the future.

What remains unsettled, says Billy Fabian, a former infantry officer and Pentagon planner, is how, precisely, the army’s combat forces should be organised for future wars: the balance between firepower on the one hand, dominant in Ukraine, and so-called manoeuvre elements, such as infantry and armour, on the other. “Fighting land wars is the army’s raison d’être,” he says, “and Ukraine raises tough questions that challenge deeply ingrained elements core to the army’s self-conception.”

Army dreamers

Hanging over these reforms is the larger question of where the army will be asked to fight. National defence strategies published by the Trump and Biden administrations instruct the Pentagon to focus on China. Yet the army increased its footprint in Europe after Russia’s first invasion of Ukraine in 2014. It has since reinforced the continent with a corps and division headquarters, an infantry and armour brigade, a rocket artillery battalion and numerous other support forces. In contrast, relatively few new forces have flowed into Asia.

For years the army’s principal role in the Pacific was to guard bases, provide air defence and handle logistics. To the extent it was a “manoeuvre” force, in military parlance, it was focused on North Korea. Other services have looked down their noses at it. “The navy has a stranglehold on the leadership of Indo-Pacific Command,” says Stacie Pettyjohn of the Centre for a New American Security, a think-tank in Washington. “They see the army only in a supporting role in a maritime theatre.”

Chart: The Economist

General Charles Flynn, the commander of the US Army Pacific, vigorously rebuts such ideas. “Humans have this unique tendency to live on land,” he says. “At the end of the day, decisions are going to be made by the pointy end of a gun.” The primacy of land is as true in Asia as it is in Europe, he argues, not least because the region’s largest countries, like India and Indonesia, have military forces dominated by armies. By building ties to them in peacetime, the army can position itself to project military power westward.

The growing pace of exercises (more than 40 take place annually) is a core part of that. General Flynn points to the examples of Talisman Sabre in Australia and Garuda Shield in Indonesia. Both were once relatively modest army-to-army exercises. They have grown and now involve the navy and air force. Both also involved the army’s Joint Pacific Multinational Readiness Centre, in essence physical and virtual training equipment that can be deployed around the region to do things which could only have been done at a large base in Louisiana. Such drills are morphing into a near-permanent presence: the army is deployed in the region for eight months of the year.

Alongside that is a reimagining of how the army would fight. The premise is that China has optimised its forces to attack American satellites, ships and air bases. “What it’s not designed against”, says General Bernard Harrington, “is to find, fix and finish land formations that are distributed, mobile and networked.” That has prompted the creation of three experimental “multi-domain task forces”, or MDTFs, the first of which is focused on Asia and commanded by General Harrington.

Each MDTF has four battalions which can deploy small units along the first island chain which runs from Japan to the Philippines. The idea is that these can fight not just on land—soldier v soldier, tank v tank—but across domains. Imagine that America needs to target a Chinese ship. The MDTF’s “effects” battalion might jam the vessel’s radar and hack its networks; if that does not neutralise the ship, it makes it more likely that anti-ship missiles launched by a “fires” battalion will get through. The force’s long-range hypersonic missiles, which arrived last year, have a range of nearly 3,000km—enough to reach from Japan to Taiwan, or from the Philippines to the South China Sea.

Initial experiments with the MDTFs have shown promise, though some are sceptical that this high-tech vision of war would survive contact with reality. Two MDTFs are currently devoted to Asia, with a third for Europe. The original plan envisioned a total of five, with an additional one in the Arctic and one for global tasks.

All this would seem to offer a definitive answer to the army’s identity crisis: Asia first. Inside the Department of the Army, nestled within the Pentagon, there are doubts, though. One question is whether its own plans mesh with those of the armed services as a whole. “The army still feels marginalised in the Pacific,” says Ms Pettyjohn. Another is whether the army itself has pivoted ruthlessly enough. Its fleet of water craft has shrunk dramatically in recent years, for instance. “Water craft are an absolute indicator of true commitment to the Pacific,” says J.P. Clark, another Army War College professor. “They are quite expensive, only really useful for that theatre, and absolutely essential.”

Hard choices ahead

The MDTFs themselves remain “niche” formations, argues Mr Fabian. The largest allocated to the region is the 25th Infantry Division in Hawaii, he points out, a light-infantry division. “It seems like the army is trying to have it both ways,” he says. “Talk about fires and air defence for the Pacific, but stay a combined-arms force organised for close combat like it’s always been.” The army hedges its bets, says an insider, because it rarely wages the war it expects.

Trade-offs abound. Short-range artillery is vital for Europe; less so in Asia. “I just don’t know what you’d fire a 155-round at out in the Pacific other than the water,” quipped a top Pentagon official recently. The army will have to make firm choices in the next year or two, say officials. In part that is because it is creating more units than it can reliably man. The army expected to finish last year short of 10,000 recruits, a 15% shortfall and the second consecutive year of under-enlistment. Much of that is the result of America’s tight labour market, but it also reflects waning enthusiasm for military service, and for combat arms in particular.

The fall in the size of the “individual ready reserve”—reservists not allocated to a unit—from 450,000 in 1994 to 76,000 in 2018 worsens the problem. Ukraine shows how intense wars tend to chew up regular armies, requiring an infusion of citizens with military experience. Today’s shortage of combat soldiers is tomorrow’s shortage of reservists. Ms Crombe and Mr Nagl are among those who have floated the notion of “partial conscription”, an idea backed by just 20% of Americans. Now, as in the pivotal moments of the mid-1970s, the army finds itself wrestling with profound questions over its size, shape and purpose: questions that will eventually touch, as they did back then, its relationship to American society.

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Economics

UK inflation, November 2024

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The columns of Royal Exchange are dressed for Christmas, at Bank in the City of London, the capital’s financial district, on 20th November 2024, in London, England.

Richard Baker | In Pictures | Getty Images

LONDON — U.K. inflation rose to 2.6% in November, the Office for National Statistics said Wednesday, marking the second straight monthly increase in the headline figure.

The reading was in line with the forecast of economists polled by Reuters, and climbed from 2.3% in October.

Core inflation, excluding energy, food, alcohol and tobacco, came in at 3.5%, just under a Reuters forecast of 3.6%.

Headline price rises hit a three-and-a-half year low of 1.7% in September, but was expected to tick higher in the following months, partly due to an increase in the regulator-set energy price cap this winter.

“This upwards trajectory looks set to continue over the next few months,” Joe Nellis, economic adviser at accountancy MHA, said in emailed comments on Wednesday, citing the energy market and “the long-term pressure of a tight domestic labor market.”

Persistent inflation in the services sector, the dominant part of the U.K. economy, has led money markets to price in almost no chance of an interest rate cut during the Bank of England’s final meeting of the year on Thursday. Those bets were solidified earlier this week when the ONS reported that regular wage growth strengthened to 5.2% over the August-October period, up from 4.9% over July-September.

The November data showed services inflation was unchanged at 5%.

If the BOE leaves monetary policy unchanged in December, it will finish out the year with just two cuts of its key rate, bringing it from 5.25% to 4.75%. The European Central Bank has meanwhile enacted four quarter-percentage-point cuts and this month signaled a firm intention to move lower next year.

The U.S. Federal Reserve is widely expected to trim rates by a quarter point at its own meeting on Wednesday, taking total cuts of the year to a full percentage point. Some skepticism lingers over whether it should take this step, given inflationary pressures.

This is a breaking news story and will be updated shortly.

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The Fed has a big interest rate decision coming Wednesday. Here’s what to expect

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Federal Reserve Chair Jerome Powell speaks during a news conference following the November 6-7, 2024, Federal Open Market Committee meeting at William McChesney Martin Jr. Federal Reserve Board Building, in Washington, DC, November 7, 2024. 

Andrew Caballero-Reynolds | AFP | Getty Images

Inflation is stubbornly above target, the economy is growing at about a 3% pace and the labor market is holding strong. Put it all together and it sounds like a perfect recipe for the Federal Reserve to raise interest rates or at least to stay put.

That’s not what is likely to happen, however, when the Federal Open Market Committee, the central bank’s rate-setting entity, announces its policy decision Wednesday.

Instead, futures market traders are pricing in a near-certainty that the FOMC actually will lower its benchmark overnight borrowing rate by a quarter percentage point, or 25 basis points. That would take it down to a target range of 4.25%-4.5%.

Even with the high level of market anticipation, it could be a decision that comes under an unusual level of scrutiny. A CNBC survey found that while 93% of respondents said they expect a cut, only 63% said it is the right thing to do.

“I’d be inclined to say ‘no cut,'” former Kansas City Fed President Esther George said Tuesday during a CNBC “Squawk Box” interview. “Let’s wait and see how the data comes in. Twenty-five basis points usually doesn’t make or break where we are, but I do think it is a time to signal to markets and to the public that they have not taken their eye off the ball of inflation.”

Former Kansas City Fed Pres. Esther George: I would not cut rates this week

Inflation indeed remains a nettlesome problem for policymakers.

While the annual rate has come down substantially from its 40-year peak in mid-2022, it has been mired around the 2.5%-3% range for much of 2024. The Fed targets inflation at 2%.

The Commerce Department is expected to report Friday that the personal consumption expenditures price index, the Fed’s preferred inflation gauge, ticked higher in November to 2.5%, or 2.9% on the core reading that excludes food and energy.

Justifying a rate cut in that environment will require some deft communication from Chair Jerome Powell and the committee. Former Boston Fed President Eric Rosengren also recently told CNBC that he would not cut at this meeting.

“They’re very clear about what their target is, and as we’re watching inflation data come in, we’re seeing that it’s not continuing to decelerate in the same manner that it had earlier,” George said. “So that, I think, is a reason to be cautious and to really think about how much of this easing of policy is required to keep the economy on track.”

Fed officials who have spoken in favor of cutting say that policy doesn’t need to be as restrictive in the current environment and they don’t want to risk damaging the labor market.

Chance of a ‘hawkish cut’

If the Fed follows through on the cut, it will mark a full percentage point lopped off the federal funds rate since September.

While that’s a considerable amount of easing in a short period of time, Fed officials have tools at their disposal to let the markets know that future cuts won’t come so easily.

One of those tools is the dot-plot matrix of individual members’ expectations for rates over the next few years. That will be updated Wednesday along with the rest of the Summary of Economic Projections that will include informal outlooks for inflation, unemployment and gross domestic product.

Another is the use of guidance in the post-meeting statement to indicate where the committee sees policy headed. Finally, Powell can use his news conference to provide further clues.

It’s the Powell parley with the media that markets will be watching most closely, followed by the dot plot. Powell recently said the Fed “can afford to be a little more cautious” about how quickly it eases amid what he characterized as a “strong” economy.

“We’ll see them leaning into the direction of travel, to begin the process of moving up their inflation forecast,” said Vincent Reinhardt, BNY Mellon chief economist and former director of the Division of Monetary Affairs at the Fed, where he served 24 years. “The dots [will] drift up a little bit, and [there will be] a big preoccupation at the press conference with the idea of skipping meetings. So it’ll turn out to be a hawkish cut in that regard.”

What about Trump?

Powell is almost certain to be asked about how policy might position in regard to fiscal policy under President-elect Donald Trump.

Thus far, the chair and his colleagues have brushed aside questions about the impact Trump’s initiatives could have on monetary policy, citing uncertainty over what is just talk now and what will become reality later. Some economists think the incoming president’s plans for aggressive tariffs, tax cuts and mass deportations could aggravate inflation even more.

“Obviously the Fed’s in a bind,” Reinhart said. “We used to call it the trapeze artist problem. If you’re a trapeze artist, you don’t leave your platform to swing out until you’re sure your partner is swung out. For the central bank, they can’t really change their forecast in response to what they believe will happen in the political economy until they’re pretty sure there’ll be those changes in the political economy.”

“A big preoccupation at the press conference is going to the idea of skipping meetings,” he added. “So it’ll turn out to be, I think, a hawkish easing in that regard. As [Trump’s] policies are actually put in place, then they may move the forecast by more.”

Other actions on tap

Most Wall Street forecasters see Fed officials raising their expectations for inflation and reducing the expectations for rate cuts in 2025.

When the dot plot was last updated in September, officials indicated the equivalent of four quarter-point cuts next year. Markets already have lowered their own expectations for easing, with an expected path of two cuts in 2025 following the move this week, according to the CME Group’s FedWatch measure.

The outlook also is for the Fed to skip the January meeting. Wall Street is expecting little to no change in the post-meeting statement.

Officials also are likely to raise their estimate for the “neutral” rate of interest that neither boosts nor restricts growth. That level had been around 2.5% for years — a 2% inflation rate plus 0.5% at the “natural” level of interest — but has crept up in recent months and could cross 3% at this week’s update.

Finally, the committee may adjust the interest it pays on its overnight repo operations by 0.05 percentage point in response to the fed funds rate drifting to near the bottom of its target range. The “ON RPP” rate acts as a floor for the funds rate and is currently at 4.55% while the effective funds rate is 4.58%. Minutes from the November FOMC meeting indicated officials were considering a “technical adjustment” to the rate.

Expect a 'hawkish cut' from the Fed this week, says BofA's Mark Cabana

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Iran faces dual crisis amid currency drop and loss of major regional ally

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A briefcase filled with Iranian rial banknotes sits on display at a currency exchange market on Ferdowsi street in Tehran, Iran, on Saturday, Jan. 6, 2018.

Ali Mohammadi | Bloomberg | Getty Images

Iran is confronting its worst set of crises in years, facing a spiraling economy along with a series of unprecedented geopolitical and military blows to its power in the Middle East.

Over the weekend, Iran’s currency, the rial, hit a record low of 756,000 to the dollar, according to Reuters. Since September, the embattled currency has suffered the ripple effects of devastating hits to Iran’s proxies, including Lebanon’s Hezbollah and Palestinian militant group Hamas, as well as the November election of Donald Trump to the U.S. presidency.

With the fall of Syrian President Bashar al-Assad amid a shock offensive by rebel groups, Tehran lost its most important ally in the Middle East. Assad, who is accused of war crimes against his own people, fled to Russia and left a highly fractured country behind him.

“The fall of Assad has existential implications for the Islamic Republic,” Behnam ben Taleblu, a senior fellow at the Foundation for Defense of Democracies in Washington, told CNBC. “Lest we forget, the regime ahs spent well over a decade in treasure, blood, and reputation to save a regime which ultimately folded in less than two weeks.”

The currency’s fall exposes the extent of the hardship faced by ordinary Iranians, who struggle to afford everyday goods and suffer high inflation and unemployment after years of heavy Western sanctions compounded by domestic corruption and economic mismanagement.

Trump has pledged to take a hard line on Iran and will be re-entering the White House roughly six years after unilaterally pulling the U.S. out of the Iranian nuclear deal and re-imposing sweeping sanctions on the country.

Iranian President Masoud Pezeshkian has expressed his government’s willingness to negotiate and revive the deal, officially known as the Joint Comprehensive Plan of Action, which lifted some sanctions on Iran in exchange for curbs to its nuclear program. But the attempted outreach comes at a time when the International Atomic Energy Agency says Tehran is enriching uranium at record levels, reaching 60% purity — a short technical step from the weapons-grade purity level of 90%.

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