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Category: Central Banks
It won’t take much for the Federal Reserve to raise short-term interest rates too far, triggering an economic reversal making indebted students, corporations and other borrowers unable to repay loans, according to billionaire bond manager Bill Gross.
“Central bankers and indeed investors should view additional tightening and ‘normalizing’ of short-term rates with caution,” Gross, who runs the $2.1 billion Janus Henderson Global Unconstrained Bond Fund, said in an investment outlook published Thursday.
The European Central Bank left its ultra easy monetary policy stance unchanged as expected on Thursday, keeping rates at record lows and even leaving the door open to more asset buys if the outlook worsens.
Having raised the prospect of policy tightening last month, Thursday’s inaction was likely to signal that any policy tweaks would come only slowly and gradually, likely taking years to wean the European economy off monetary support.
Still, with the euro zone economy now growing for the 17th straight quarter, its best run since before the global financial crisis, the ECB can at least contemplate easing off the accelerator, preserving some its remaining firepower after printing nearly 2 trillion euros to jump start growth.
PG View: Bunds jumped and euro fell on the absence of taper mention in statement. Draghi presser upcoming.
Last week the Fed raised the white flag on further rate hikes. There won’t be any for the foreseeable future.
No rate hikes are coming at the July, September or November Fed FOMC meetings. The earliest rate hike might be at the December 13, 2017 FOMC meeting, but even that has a less than 50% probability as of today. I’ll update those probabilities using my proprietary models in the weeks and months ahead.
…Tight money, a weak economy, and a stock market bubble is a classic recipe for a stock market crash. It’s time for investors to go into a defensive crouch by selling stocks and reallocating assets to cash, Treasury notes, gold and gold mining shares.
PG View: Rickards sees potential for a “20% decline in stock prices at best, and possibly a 30% market crash before the end of the year.” It may be prudent to heed his advise and take profits in stocks and move some of that capital to the safety of gold.
Political gridlock in Washington is giving traders a fresh excuse to sell the dollar. But the outlook for central-bank policy is still its biggest threat.
The currency fell to a 10-month low Tuesday after Republican efforts to overhaul health care collapsed, sowing doubts about the prospects of President Trump’s economic agenda. Yet for all the focus on politics, shifting expectations for interest-rate differentials are at the root of the dollar’s 8 percent slide this year. Case in point: The yield advantage on 10-year Treasuries over German bunds has crumbled to the slimmest since November.
BusinessInsider/Pedro Nicolaci da Costa/07-15-17
The Federal Reserve is embarking on an annual summer ritual: Downgrading its overly optimistic forecasts for economic growth and, potentially, preparing for a pause in interest rate increases.
Wall Street rallied after Fed Chairwoman Janet Yellen’s testimony to Congress this week as she seemed to open the door for such a pause, by acknowledging that a recent decline in inflation further below the central bank’s 2% target may not, in fact, be as fleeting as policymakers had hoped.
…Fed policymakers “have a pause built into their baseline estimates and it seems the inflation data present a reason to exercise that pause option in September,” according to Julia Coronado, president and founder of MacroPolicy Perspectives.
Federal Reserve plans for gradual interest-rate increases hinge on inflation rising to its 2 percent target, but it’s not showing up and they don’t know why. That’s undermining Chair Janet Yellen’s case for further policy tightening.
Over two days of congressional testimony this week, Yellen stuck to the Fed’s outlook for gradually rising inflation that would support additional hikes in their policy rate. That was before Friday’s consumer price index report that showed continued weak pricing power in June across a range of goods and services for the fourth consecutive month.
“There is no way of getting around it,” said Laura Rosner, a senior economist and partner at MacroPolicy Perspectives LLC in New York. “The weakness is pretty broad and it’s partly happening in cyclical areas of the economy that might be slowing, like motor vehicles.”
Fed Chair Janet Yellen, in testimony Thursday before Congress, walked back comments she made recently that there would not be another financial crisis “in our lifetime.”
…”I think that we can never be confident that there won’t be another financial crisis. But we have acted in the aftermath of that crisis to put in place much stronger capital and liquidity requirements for systemic banking organizations and the banking system more generally,” she added.
A significant pickup in inflation still remains tantalizingly out of reach in most developed economies — aside from asset prices — yet several central banks are leaning toward launching or stepping up efforts that could slow it down.
What has shifted in recent months is an acceptance that fiscal policy, touted around the turn of the year as the essential comeback kid after the shock election of Donald Trump as U.S. president, has not yet come back.
PG View: Inflation is the fondest desire of central bankers, and yet they are taking steps to slow inflation that doesn’t exist. The risk is that their efforts stoke disinflation, which is the bane of central bankers and heavily indebted countries.
Federal Reserve officials raised interest rates in June despite worries about slowing inflation and job growth, largely because officials were still pretty sure the slowdown would quickly pass.
However, minutes from last month’s policy meeting showed a growing number of policymakers are becoming reluctant about the need for continued monetary policy tightening given the weakening in the data.
“Several participants expressed concern that progress toward the committee’s 2% longer-run inflation objective might have slowed and that the recent softness in inflation might persist,” the minutes said.
PG View: Be sure to click through to the article to see the chart that illustrates how egregiously wrong the Fed has been with regard to forecasting . . .
A divided Federal Reserve policy committee couldn’t reach agreement in June on the timing of when to begin shrinking its massive balance sheet, according to minutes of the meeting.
“Several preferred to announce a start to the process within a couple of months,” the minutes of the June 13-14 meeting released on Wednesday in Washington showed. “Some others emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation.”
…Washington political gridlock is also starting to creep into the outlook of the Fed’s business contacts, the minutes showed. “Contacts at some large firms indicated that they had curtailed their capital spending, in part because of uncertainty about changes in fiscal and other government policies,” the minutes showed.
…Inflation has remained almost continuously below the central bank’s 2 percent target for more than five years. The minutes said “most participants viewed the recent softness” in inflation indicators “as largely reflecting idiosyncratic factors.” They added those trends weren’t likely to persist in the medium term.
June FOMC minutes reveal concern about inflation softness and high asset prices, divide on when to start unwinding balance sheet.
The first conclusion is a simple one: little matters more in world markets right now than views of the select group invited to Portugal by the ECB. “Central bankers have us at their beck and call again,” says Brad Bechtel at Jefferies International.
What they were trying to communicate, says Bob Michele, head of fixed income for JPMorgan Asset Management, “is that the 30-year bull market is over and things should go back to normal”.
PG View: The worry of course is that they’re calling the bond market rally over very, very deep in the business cycle. Additionally, higher yields are going to make servicing the trillions and trillions of new debt added since the financial crisis really difficult.
Sterling surged to a three-week high and Britain’s main FTSE 100 stock index fell on Wednesday, after Bank of England Governor Mark Carney said the Bank was likely to need to raise interest rates and would debate this “in the coming months”.
The pound jumped a cent to $1.2943 after the speech’s release, its strongest since June 9, the day of the results of Britain’s parliamentary elections. That left sterling up around 1 percent on the day.
PG View: Carney jumps on the normalization bandwagon.
European Central Bank President Mario Draghi intended to signal tolerance for a period of weaker inflation, not an imminent policy tightening, when his comments sent the euro higher this week, sources familiar with Draghi’s thinking said on Wednesday.
Draghi’s intention was to set up September as the earliest the bank would discuss rolling back stimulus, they said, but stressed it was by no means certain that it would come to a decision then.
“The market failed to take note of the caveats in Draghi’s speech,” one of the sources said.
Flows into equity funds fizzled over the past week amid concern by investors about high prices for shares and a hawkish US central bank.
…“The Fed’s move to increase rates and shrink their balance sheet is analogous to someone trying to take off their pants without first removing their shoes,” said Michael Underhill, chief investment officer at Capital Innovations. “I’m not sure why there is a such a hurry to raise rates and shrink the balance sheet in light of how accommodative they have been and the fact that we have a fragile economic recovery.”
PG View: A growing number of investors seem increasingly worried about the Fed ignoring the data.
The Federal Reserve should wait on any further rate increases until it is clear inflation is reliably heading to the Fed’s 2 percent target, St. Louis Fed President James Bullard said on Friday, highlighting the central bank’s struggle over how to weigh a recent slip in the rate of price increases.
“Recent inflation data have surprised to the downside and call into question the idea that U.S. inflation is reliably returning toward target,” Bullard said at an Illinois Bankers Association conference. “The Fed can wait and see how the economy develops before making any further adjustments to the policy rate.”
PG View: Kashkari apparently is not alone: Too bad Bullard is a non-voter.
The Federal Reserve keeps telling the bond market it wants interest rates to move higher, but traders aren’t listening.
That suggests investors don’t believe the Fed’s justification for interest rate increases, which are predicated not only on recent economic improvement but also on a continued bright outlook.
One startling chart from Societe Generale’s Albert Edwards illustrates the Fed’s dilemma. Two-year notes are historically the maturity that is most responsive to moves in the official federal funds rate.
But look at what’s happened to the two-year note’s yield this year as the Fed ratcheted up its monetary tightening campaign. Absolutely nothing.
Norway’s central bank signaled that it has finished cutting interest rates amid signs the economy weathered the collapse of its oil industry over the past three years.
As anticipated, Norges Bank kept its key policy rate at a record low of 0.50 percent, where it’s been since March 2016. It revised its rate path higher, eliminating the probability of a future cut, and penciled in a first increase at the beginning of 2019. The krone jumped 0.6 percent to 9.46 per euro.
PG View: They may prove to be a bit premature in calling the oil crisis over . . .
New Zealand’s central bank kept interest rates at a record low and indicated it won’t raise them anytime soon. The currency rose after the bank failed to complain about its recent strength.
Bank of Japan Governor Haruhiko Kuroda said maintaining the current easy monetary conditions is appropriate because prices are lagging improvements in the economy and remain distant from the central bank’s inflation target.
…”Our economy is on firmer footing, but we are still distant from our 2 percent inflation target,” Kuroda said.
“It is appropriate to keep monetary conditions easy with our current market operations framework.”
Chicago Federal Reserve Bank President Charles Evans said on Tuesday he is increasingly concerned that a recent softness in inflation is a sign the U.S. central bank will struggle to get price pressures back to its 2 percent objective.
“I will say that the most recent inflation data made me a little nervous about that. I think it’s much more challenging from here on out,” Evans said in an interview with broadcaster CNBC.
…If inflation remains in a slump, the Fed may require a shallower path of rate rises, he added.
In hiking rates and, more notably, reaffirming its forward policy guidance and setting out plans for the phased contraction of its balance sheet, the Federal Reserve signalled last week that it has become less data dependent and more emboldened to normalise monetary policy. Yet, judging from asset prices, markets are failing to internalise sufficiently the shift in the policy regime. Should this discrepancy prevail in the months to come, the Fed could well be forced into the type of policy tightening process that could prove quite unpleasant for markets.
…the Fed is now more intent on gradually normalising both its interest rate structure and its balance sheet. As such, it is more willing to “look through” weak growth and inflation data.
Larry Summers isn’t mincing words when it comes to Federal Reserve policy: he thinks it’s way off.
In a stinging new post in the Washington Post’s Wonkblog, the former Treasury Secretary and Harvard economist says the central bank has lost crediblity with financial markets because of its consistently misguided optimism about growth prospects and the Fed’s ability to raise interest rates.
“The Fed is not credible with the markets at this point,” Summers writes. “Its dots plots predict four rate increases over the next 18 months compared with the markets’ expectation of less than two.”
…”The Fed has been highly unrealistic in its forecasts for several years,” he points out.
Gold has retraced a portion of today’s earlier gains after the Fed raised rates as expected. However, the overall guidance message was rather muddled.
The Fed apparently no longer sees the Q1 slowdown in growth as “transitory,” and yet the nudged their 2017 GDP forecast up to 2.2%. They also still see themselves on a path for at least one more rate hike this year.
The Fed cut it’s PCE inflation forecast for 2017 to 1.6%, from 1.9% in March. They do not seem particularly concerned (yet?) on this front, saying that they are “monitoring inflation developments closely.” The Fed continues to project at-target inflation in 2018 and 2019.
The Fed also laid out their plans to begin unwinding their $4+ trillion balance sheet, beginning sometime this year. About the only really dovish thing I see in this decision was another dissent from Minneapolis Fed President Kashkari. The Fed seems to be in denial…
The Federal Reserve approved its second rate hike of 2017 even amid expectations that inflation is running well below the central bank’s target.
In addition, the Fed provided more detail on how it will unwind its $4.5 trillion balance sheet, or portfolio of bonds that includes Treasurys, mortgage-backed securities and government agency debt.
…The Fed now believes inflation will fall well short of its 2 percent target this year. The post-meeting statement said inflation “has declined recently” even as household spending as “picked up in recent months,” the latter an upgrade from the May statement that said spending had “rose only modestly.” The statement also noted that inflation in the next 12 months “is expected to remain somewhat below 2 percent in the near term” but to stabilize.
Fed raises fed funds rate by 25 bps, in line with expectations. Maintains tightening bias, despite recent weak data, but drops “transitory” from policy statement.
Market expectations for the Federal Reserve to raise interest rates three times this year have dropped below one-in-three, the lowest level since mid-May, after gloomy data ignited jitters ahead of the central bank’s policy decision later on Wednesday.
The odds of a trio of Fed rate increases this year fell to 31.7 per cent on Wednesday, from 50.6 per cent the previous day, according to Bloomberg data on federal funds futures that traders use to speculate on monetary policy. The probability has not been that low since May 17.