Category: Central Banks

Markets Start to Ponder the $13 Trillion Gorilla in the Room

Bloomberg/Enda Curran, Liz McCormick & Eric Lam/04-18-17

After heading into the uncharted territory of quantitative easing, the world’s central banks are starting to plan their course through the uncharted waters of quantitative tightening.

How the Federal Reserve, European Central Bank and — eventually — the Bank of Japan handle the transition could make the difference between a global rerun of the 2013 “taper tantrum,” or the near undetectable market response to China’s run-down of U.S. Treasuries in recent years. Combined, the balance sheets of the three now total about $13 trillion, equating to greater than either China’s or the euro region’s economy.

“You know what they say about mountaineering right? The descent is always more dangerous than the ascent,” said Stephen Jen, London-based chief executive of hedge fund Eurizon SLJ Capital Ltd. “Shrinking the balance sheet will be the descent.”

Posted in Central Banks, Monetary Policy, QE |

The Fed’s only possible reason to raise rates is vanishing

BusinessInsider/Pedro Nicolaci da Costa/04-17-17

The Fed’s June rate hike is suddenly sliding off the table.

…The possibility that inflation was finally moving higher, which had been the main justification for the central bank’s stated desire to push interest rates higher, suddenly disappeared as consumer prices fell in March for the first time in over a year. Core prices, which exclude food and energy costs and are closely watched by Fed officials, also slipped 0.1%, making for their first decline since January 2010.

At the same time, US retail sales, a key barometer of growth for an economy two-thirds reliant on consumer spending, fell for a second straight month.

Posted in Central Banks, inflation, Monetary Policy |

Central Bank Hubris Bubbles To The Surface

ZeroHedge/Mike Shedlock/04-14-17

How’s this for Grade 1 central bank hubris?

Peter Praet, the ECB’s chief economist said in a recent interview that, “Since the crisis, we have had serious concerns about deflationary risks on several occasions in the euro area, but now we can say they have disappeared.”

Really? Has he seen the chart above, which shows core CPI in the Eurozone heading sharply lower and now approaching its all-time low seen at the start of 2015!

…Similarly, Janet Yellen was quoted saying the Fed is “doing pretty well” in meeting its congressionally mandated goals of low and stable inflation and a full-strength labor market. It’s this sort of comment that has led Marc Faber to want to short central bankers, the only way being to buy gold. The increasing volume of central bank hubris may even explain the recent breakout of gold to the upside!

Posted in Central Banks, Deflation, Monetary Policy |

Trump’s Weaker Dollar Dream at Odds With Strong Economy Promise

Bloomberg/Andrew Mayeda/04-13-17

President Donald Trump has signaled his preference for a weaker dollar and low interest rates. He may end up with neither if the U.S. economy continues to recover and he delivers on his ambitious agenda of tax cuts and infrastructure spending.

…The bigger question is how Trump can coax the dollar lower and still promise to inject fiscal stimulus, Setser said. “Historically, a bigger fiscal deficit has put upward pressure on the dollar.”

…”I don’t see why the president shouldn’t be allowed to talk about this,” said Joseph Gagnon, a former Fed official who is now a senior fellow at the Peterson Institute for International Economics. “The strong-dollar policy has outlived its usefulness.”

Posted in Central Banks, Economy, Monetary Policy, Politics, U.S. Dollar |

The Fed Is Communicating A Recession Is Imminent

ZeroHedge/Chris Hamilton/04-13-17

The Federal Reserve is clearly and plainly telling us that it intends to take the US into recession in short order. I’m not sure what message the markets are hearing, but the Fed is messaging two to three more rate hikes this year into (according to GDP) a sluggish and slowing economy. The FFR (Federal Funds Rate) has been raised by 80 basis points and meanwhile the 10yr US Treasury yield has flat-lined. At this pace, the spread (which is as near a full proof indicator of recession as we have) suggests by year end we will have recession. Of course the Fed could halt it’s likely June, September, and December rate hikes (I’m assuming 30bps each…though 50bp jumps aren’t out of the question) and/or the 10yr yield could rise (but below I’ll show why this is highly unlikely). So, absent course correction, the spread on bank lending will vanish and likely turn negative by year end…and the economic impact is recession.

Posted in Central Banks, Economy, Monetary Policy |

Why did Trump flip flop on Yellen? She may be the dove he needs, analysts say

MarketWatch/Greg Robb/04-13-17

Federal Reserve Chairwoman Janet Yellen is the dove that President Donald Trump needs to achieve his economic goals, central bank experts said Wednesday as they contemplated the apparent reversal in his stance.

In an interview with the Wall Street Journal, Trump said he had respect for Yellen and said she was “not toast” when her term helming the central bank ends next year.

“I do like a low-interest rate policy, I have to be honest with you,” Trump said in the interview.

Posted in Central Banks, Economy, Monetary Policy, Politics |

BoC held steady, as was widely expected. They are “mindful of the significant uncertainties weighing on the outlook.”

Posted in Central Banks, Monetary Policy |

Yellen Signals Shift From Stimulating Economy to Sustaining Growth


NYT/Binyamin Appelbaum/04-10-17

Janet L. Yellen, the Federal Reserve chairwoman, said Monday that the Fed was shifting its focus from stimulating the economy to keeping growth on an even keel.

She said the economy was “pretty healthy,” thanks in part to the Fed’s long-running stimulus campaign, which the central bank is moving to end.

“Looking forward, I think the economy is going to continue to grow at a moderate pace,” Ms. Yellen said during an event at the University of Michigan. “Our job is going to be to try to set monetary policy to sustain what we have achieved.”

Posted in Central Banks, Monetary Policy |

Libor: Bank of England implicated in secret recording

BBC/Andy Verity/04=10-17

A secret recording that implicates the Bank of England in Libor rigging has been uncovered by BBC Panorama.

The 2008 recording adds to evidence the central bank repeatedly pressured commercial banks during the financial crisis to push their Libor rates down.

Libor is the rate at which banks lend to each other, setting a benchmark for mortgages and loans for ordinary customers.

PG View: Yet another blow to already shaky central bank credibility.

Posted in Central Banks |

Bond Traders Ignore Fed Balance Sheet at Their Peril

Bloomberg/Lisa Abramowicz/04-05-17

The Federal Reserve is trying to send a message to bond traders: prepare for a reduction in its $4.5 trillion balance sheet. But the traders aren’t buying it yet.

Such a move would most likely cause longer-term borrowing costs to rise because the Fed has been a large buyer of Treasuries and mortgage debt since the 2008 financial crisis. More than $400 billion of its holdings is set to mature next year, so a reduction in the Fed’s reinvestment could potentially depress market values.

…im Bianco, founder and head of Bianco Research in Chicago, said many traders think the Fed won’t make a move until 2020 or beyond.

“It is a mistake to conclude that the current talk means the market is fine with the balance sheet being reduced,” he said.

Posted in Central Banks, Markets, Monetary Policy, QE |

Stocks close lower; Dow and S&P post biggest 1-day reversal in 14 months after Fed minutes

CNBC/Fred Imbert/04-05-17

U.S. stocks erased earlier gains to close lower Wednesday after the Federal Reserve released the minutes from its March meeting.

…The Dow and S&P also posted their biggest one-day reversal since February 2016.

The minutes showed Fed officials want to start unwinding the central bank’s massive $4.5 trillion balance sheet later this year.

Posted in Central Banks, Markets, Monetary Policy |

Fed Is Expected to Pare Investment Holdings, Officials Signal


NYT/Binyamin Applebaum/04-05-17

Most Federal Reserve officials expect the Fed to begin reducing its huge investment holdings later this year, an important step toward ending the Fed’s post-2008 economic stimulus campaign.

Officials discussed the change at the Fed’s most recent meeting in March, according to an official account that the Fed published on Wednesday. No decision was reached about the timing or the details of the move. However, if the economy continues to grow, most officials “judged that a change to the committee’s reinvestment policy would likely be appropriate later this year.”

Posted in Central Banks, Monetary Policy, QE |

Fed’s Lacker leaves central bank over role in Medley leak

Reuters/Jason Lange & Howard Schneider/04-04-17

Richmond Federal Reserve President Jeffrey Lacker left the U.S. central bank on Tuesday after saying a conversation he had with a Wall Street analyst in 2012 may have disclosed confidential information about Fed policy options.

“It was never my intention to reveal confidential information,” Lacker said in a statement describing an Oct 2, 2012 conversation with an analyst from Medley Global Advisors.

The next day, Medley Global Advisors unveiled details of a September Fed policy-setting meeting, one day ahead of the publication of the central bank’s own record of the discussions.

Posted in Central Banks |

The Fed is running out of reasons to keep raising interest rates

BusinessInsider/Pedro Nicolaci da Costa/03-31-17

Federal Reserve Chair Janet Yellen said the primary reason for raising interest rates in March was a simple one: the central bank is confident in a steadily improving economy.

Here’s the rub. The economy hasn’t really been improving lately, it’s actually been deteriorating somewhat. Despite record-setting rallies in stocks and renewed optimism among business leaders, hard data mostly point to a still-subdued environment for both investment and consumer spending.

…So while the Fed has promised to raise interest rates a few more times this year — some say two more, others three — the reasoning for such an increase may be unraveling a bit.

PG View: Yellen acknowledged disappointing growth in her testimony before Congress, but markets shrugged it off. That may be starting to change

Posted in Central Banks, Economy, Monetary Policy |

Fed economists’ study warns of future episodes of ultra-low rates

FT/Sam Fleming/03-23-17

Even as US rate-setters make tentative progress in the direction of more normal monetary policy, economists are warning that central banks are set to find themselves with official interest rates stuck back down at near-zero levels dispiritingly often in the future.

A study to be presented at the Brookings Papers conference this week by two Federal Reserve Board economists finds that rates could hit zero as much as 40 per cent of the time – far more often than predicted by other studies.

PG View: This could explain why the Fed is raising rates into economic weakness, just so they have some room above the zero-bound and don’t have to go negative.

Posted in Central Banks, Monetary Policy |

Fed’s Yellen does not comment on monetary policy

Reuters/Lindsay Dunsmuir/03-23-17

Federal Reserve Chair Janet Yellen did not address monetary policy or the economic outlook in prepared remarks for a childhood education conference in Washington on Thursday.

The two-day conference which she was introducing is focused on how to educate children and young adults for future success in employment.

Yellen is not scheduled to take any audience questions, according to the conference agenda.

PG View: This will free markets to continue on their post-FOMC trajectories. Good for gold.

Posted in Central Banks, Monetary Policy |

A blind spot masks the danger signs in finance

FT/Gillian Tett/03-17-17

Debate has been frenzied this week about how fast the US Federal Reserve plans to raise interest rates. But as investors look forward, it is also a good time to glance back and ask why rates have been so low this decade.

Conventional wisdom usually blames two factors: first, central banks such as the Fed have deliberately pushed down policy rates with startling quantitative easing experiments; second, rates have been depressed by the curse of “secular stagnation”, the phrase coined by Harvard economist Lawrence Summers.

More specifically, Mr Summers and others argue that the global economy is suffering from a stark structural decline in aggregate demand. Thus low (or negative) market rates are a consequence and a signal of collective investor forecasts about future economic gloom; or so this narrative goes.watch full Kong: Skull Island movie online

But could this secular stagnation explanation be completely wrong?

PG View: The suggest being, that central banks perpetuated economic pessimism by keeping rates too low for too long.

Posted in Central Banks, Monetary Policy |

Pound Rallies, Gilts Fall After BOE Holds Rate Amid Split Vote


Bloomberg/Anooja Debnath/03-16-17

The pound appreciated against all of its major peers and bonds fell after Bank of England policy maker Kristin Forbes voted for an interest-rate increase, a dissent that caught some in the market by surprise.
The most important market news of the day.

Sterling climbed to a two-week high and gilts sold off across the curve as the central bank kept the benchmark rate at a record low in an 8-1 vote. Investors are now pricing an 80 percent chance policy makers will raise rates by September 2018, compared with about 60 percent yesterday, money-market pricing shows. Forbes supported a rate increase to 0.5 percent, and some of those in the majority said it wouldn’t take much more strength in inflation or growth for them to also shift their view.

Posted in Central Banks, Monetary Policy |

As near as I can tell, the last Fed dissenter opposing a rate hike, was Governor Mark Olson at the September 20, 2005 FOMC meeting.

Release Date: September 20, 2005

For immediate release

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3-3/4 percent.

…Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn; Michael H. Moskow; Anthony M. Santomero; and Gary H. Stern. Voting against was Mark W. Olson, who preferred no change in the federal funds rate target at this meeting.

Posted in Central Banks, Monetary Policy |

FED’S KASHKARI: There are a few simple reasons why I voted to keep rates on hold

BusinessInsider/Pedro Nicolaci da Costa/03-15-17

His argument was fairly straight forward: Why tighten monetary conditions when inflation remains below the Fed’s target, inflation expectations are subdued, and the job market is probably still not operating at its full potential despite the low jobless rate?

…Add to that the uncertainty generated by some of the recent political chaos in Washington, and the case for a near-term Fed rate hike becomes much less compelling.

Posted in Central Banks, inflation, Monetary Policy |

Gold surges on Fed decision that included the first dovish dissent since…since…I’ll have to do some research on that…

Posted in Central Banks, Gold News, Gold Views, Monetary Policy |

Fed raises rates by 25 bps, as was widely expected. Minneapolis Fed’s Neel Kashkari dissents.

Release Date: March 15, 2017
For release at 2:00 p.m. EDT

Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the Committee’s 2 percent longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.

Posted in Central Banks, Monetary Policy |

Atlanta Fed GDPNow Latest forecast: 0.9 percent — March 15, 2017

Atlanta Fed/03-15-17

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 0.9 percent on March 15, down from 1.2 percent on March 8. The GDP growth forecast declined 0.3 percentage points on Friday when the February estimate of the model’s latent dynamic factor used to forecast yet-to-be released GDP source data declined after the employment situation release from the U.S. Bureau of Labor Statistics (BLS). The forecast for first-quarter real consumer spending growth inched down from 1.6 percent to 1.5 percent after this morning’s retail sales report from the U.S. Census Bureau and the Consumer Price Index release from the BLS.

PG View: That chart does not reflect a situation that would typically warrant a rate hike . . . just sayin’.

Posted in Central Banks, Monetary Policy |

ECB holds rates at record lows as inflation rises

FT/Claire Jones/03-09-17

The European Central Bank has kept interest rates on hold at record lows, despite internal pressure from hawks for Mario Draghi to start reining in the currency bloc’s monetary stimulus.Watch movie online The Transporter Refueled (2015)

…Despite the concern of governing council members who have highlighted rising inflation, the ECB’s statement also reaffirmed the bank’s landmark quantitative easing programme, which is due to purchase €780bn worth of bonds this year.

Posted in Central Banks, Monetary Policy, QE |

ECB left monetary policy unchanged, maintains QE schedule and easing bias, but Draghi hints at slow move toward neutral bias.

Posted in Central Banks, Monetary Policy, QE |

Fed officials jolt market with talk of pending rate hike

Reuters/Ann Saphir & Jonathan Spicer/03-01-17

A handful of Federal Reserve policymakers on Tuesday jolted markets into higher expectations for a March U.S. interest rate increase, with comments that suggested rate-setters are worried about waiting too long in the face of pending economic stimulus from Washington.

New York Fed President William Dudley, among the most influential U.S. central bankers, said on CNN that the case for tightening monetary policy “has become a lot more compelling” since the election of President Donald Trump and a Republican-controlled Congress.

Posted in Central Banks, Monetary Policy |

China eyes 12 percent broad money supply rise in 2017 – sources

Reuters/Kevin Yao/02-28-17

China plans to target broad money supply growth of around 12 percent in 2017, slightly lower than last year’s goal, policy sources said, signaling a bid to contain debt risks while keeping growth on track.

Under its new “prudent and neutral” policy, the People’s Bank of China (PBOC) has adopted a modest tightening bias in a bid to cool torrid credit expansion, though it is treading cautiously to avoid hurting the economy.

Posted in Central Banks, Monetary Policy |

The World’s Most Radical Experiment in Monetary Policy Isn’t Working

WSJ/John Lyons & Miho Inada/02-26-17

Japan remains definitively stuck, despite a long and aggressive experiment with ultralow rates. A quarter-century after its property bubble burst, a penny-pinching generation has come of age knowing only economic malaise, stagnant wages and deflation—a condition where prices fall instead of rise.

The belief that deflation will continue has become so ingrained it has presented seemingly insurmountable challenges to monetary policy, a lesson for other countries that are traveling a similar path.

“It is hard to change the deflationary mind-set even with radical policies,” says Frederic Neumann, co-head of Asia economics for HSBC. “I would argue Japan will remain in its funk and will remain there for many years.”

PG View: I would suggest Japan may be stuck indefinitely . . .

So, is the Fed moving ever-so-slowly in the opposite direction in recognition of this harsh reality? Or are they just giving themselves a little clearance above the zero-bound so they can do more if it?

Posted in Central Banks, Monetary Policy, Negative interest rates, QE |

Trump’s vast power to reshape the Fed could lead to complete mayhem for markets

BusinessInsider/Pedro Nicolaci da Costa/02-14-17

President Donald Trump already had ample leeway to reshape the Federal Reserve, with Janet Yellen’s term as chair expiring early next year and two key slots on the central bank’s board left open after Republicans failed to bring President Barack Obama’s longstanding nominees to a vote.

Now, with the sudden resignation of Daniel Tarullo, Trump pretty much has free rein over the powerful US central bank.

PG View: If the plan is to cut taxes and unleash a massive infrastructure spending plan, it might behoove President Trump to pack the Fed with doves. Similarly, Trump’s concerns about dollar strength could easily be resolved by reversing expectations of further rate hikes.

Posted in Central Banks, Currency Wars, Monetary Policy |

Here Is How the Federal Reserve Could End the Bull Market in Stocks


TheStreet/Scott Gamm/02-15-17

The Federal Reserve is stuck in a major pickle — and it’s not about how many times to raise interest rates this year.

The problem stems from years and years of asset purchases — known as quantitative easing. Under the program, the Fed purchased bonds and mortgage-backed securities from banks in the years following the 2008 financial crisis, hoping the companies would use the cash to lend money and stimulate the economy.

PG View: When the Fed ultimately moves to start unwinding its $4.5 trillion balance sheet it could prove incredibly disruptive to markets. And what do you suppose are the odds of another crisis hitting before the balance sheet is fully unwound? I’d say very high as this is likely to be multi-decade process.

Posted in Central Banks, Monetary Policy, QE |