Category: Central Banks

Fed Officials Split Over Next Rate Increase

WSJ/David Harrison/08-16-17

Federal Reserve officials meeting in July split over the timing of future interest-rate increases as they struggled to understand why inflation has been so weak in recent months. But they agreed to soon begin the yearslong process of drawing down the central bank’s holdings, according to minutes of the July 25-26 meeting released Wednesday after the customary three-week lag.

Sagging inflation led some officials to suggest holding off on raising rates again for now, arguing the Fed “could afford to be patient under current circumstances.”

Others, however, worried that the strong labor market and high stock prices could produce a spurt of inflation above the central bank’s 2% target that could be difficult to control. This group cautioned that waiting too long to raise rates “could result in an overshooting of the [Fed’s] inflation objective that would likely be costly to reverse,” the minutes said.

PG View: I find it amusing that the Fed continues to be worried about an overshoot on inflation.

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Posted in Central Banks, Monetary Policy |

Martin Wolf: Nothing like this has happened in 323 years


FT/Martin Wolf/08-15-17

The Bank of England was founded just over 323 years ago, in July 1694, at the instigation of King William III. It is the second oldest continuously-functioning central bank in the world, after Sweden’s Sveriges Riksbank, founded in 1668.

The Bank of England supported the UK’s public finances and stabilised the British financial system through the wars with Revolutionary and Napoleonic France, two world wars and the Great Depression. Throughout that period, the Bank has made secured overnight loans to commercial banks (under different names).

Prior to January 2009, the Bank had never lowered its lending rate below 2 per cent. But it was then lowered to 1.5 per cent, on its way to 0.5 per cent in March 2009 and 0.25 per cent in August 2016. This ultra-easy policy was further buttressed by a huge expansion of the Bank’s balance sheet, which now contains £435bn in UK government “gilt-edged” securities and £10bn in corporate bonds.

Throughout this prolonged recent period of ultra-easy monetary policy, the concern has never been one of runaway inflation, but rather of the opposite. This time really has been different. What does it mean for the future? Nobody knows.

PG View: The chart accompanying this article is fascinating. Worth noting that the Riksbank repo rate was as low as 0.25% in 2009 and early 2010 and remains below 2% to this day (1.5%).

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Posted in Central Banks, Monetary Policy, QE |

ROGOFF: The world’s central banks should get ready for negative interest rates in the next recession

BusinessInsider/Will Martin/08-14-17

Kenneth Rogoff, a professor at Harvard University and one of the world’s most prominent economists, said central banks across the globe must start preparing themselves to introduce negative interest rates during the next global recession.

… “It makes sense not to wait until the next financial crisis to develop plans and, in any event, it is time for economists to stop pretending that implementing effective negative rates is as difficult today as it seemed in Keynes’ time,” he said, citing the growth of cashless transactions as a reason to think that negative rates could be implemented more easily in future.

“The growth of electronic payment systems and the increasing marginalisation of cash in legal transactions creates a much smoother path to negative rate policy today than even two decades ago.”

PG View: That “next global recession” is coming . . .

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

A looming threat to the stock market’s calm is not even on investors’ radar


BusinessInside/Pedro Nicolaci da Costa/08-09-17

In normal times, a looming changing of the guard in the world’s most powerful central bank would be dominating Wall Street’s attention. But these are not normal times.

With headlines consumed by Donald Trump’s chaotic presidency — investigations into possible campaign collusion with Russia, the collapse of healthcare legislation promised for seven years, and now a diplomatic standoff with North Korea — the strong likelihood that Trump will replace Janet Yellen with Gary Cohn, the former president of Goldman Sachs who now leads the president’s National Economic Council, has barely registered.

“Any time you pick someone who’s got a deep academic track record, like a Bernanke, like a Yellen, you have a highly predictable setting for monetary policy,” Neal Soss, the vice chairman for fixed income at Credit Suisse Securities, said in an interview with Bloomberg TV.

…”Gary Cohn doesn’t have that kind of grounding, so from the point of view of Fed watchers there’s at least an initial phase where you have to view that as a less predictable figure and a less predictable policy stance.”

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Posted in Central Banks, Monetary Policy, Politics |

Fed’s Evans says reasonable to begin trimming balance sheet next month

Reuters, via CNBC//08-09-17

Low inflation will not stop the Federal Reserve from beginning to shrink its $4.5 trillion balance sheet next month, but will likely force it to delay further interest-rate hikes until December or even beyond, a U.S. central banker said on Wednesday.

“I personally think that it would be quite reasonable to (begin trimming the Fed’s balance sheet) in September on the basis of the data that I’ve seen so far, even with the potentially temporary lower inflation data,” Chicago Federal Reserve Bank President Charles Evans said in an interview at the bank’s headquarters.

But while Evans has supported both of the Fed’s rate hikes this year, a third remains a subject for discussion.

“What I’ve just outlined would put on the table in December possibly one increase, but if you thought that inflation was weaker and we needed more accommodation you could decide to put that off until later,” said Evans, who has a vote on the Fed’s policy-setting committee this year.

PG View: Even quantitative tightening into a weak economy poses risks . . .

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Posted in Central Banks, Monetary Policy |

Bank of England leaves rates on hold, cuts growth forecast, still hints at 2018 rise

Reuters/William Schomberg & David Milliken/08-03-17

The Bank of England kept interest rates at a record low again on Thursday and cut its forecasts for growth and wages as Brexit weighs on the economy.

Governor Mark Carney said, however, it would not take much of a pick-up to justify a rate hike. The Bank also reiterated it might raise borrowing costs a bit more than investors expect over the next three years, possibly within a year.

There is a desire among major central banks to move away from post-financial crisis ultra-loose monetary policy, but many are finding it hard to do so without killing off growth.

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Posted in Central Banks, Monetary Policy |

BoE holds rates at record lows, downgrades both growth and inflation expectations.

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The market doesn’t think the Fed will take away the punch bowl anytime soon — and it’s the Fed’s own doing

BusinessInsider/Komal Sri-Kumar/07-28-17

The Federal Reserve concluded its two-day meeting on Wednesday. Investors had anticipated no change in the central bank’s interest rate policy, nor an imminent decision to shrink its $4.5 trillion balance sheet. They were not surprised. The only significant change in the Fed statement was that the process of not investing all the maturing securities would begin “relatively soon.” At the conclusion of its previous meeting on June 14, the Fed had anticipated that such a tapering would occur “this year.”

Markets took the change in statement to mean that the balance sheet reduction, at an initial slow pace of $10 billion per month, could be announced by the Fed as early as its next meeting on September 20, and become effective October 1. While the pace of not investing all maturing securities would be glacial to begin with, it would be a sea change in policy — after all, the Fed’s asset holdings have been a one-way street since the financial crisis, rising from about $800 billion on “Lehman Day” (September 15, 2008) to its current level of $4.5 trillion. The Fed calls the balance sheet reduction process “normalization,” and the move is supposed to mark the beginning of the end of “emergency” measures that the then chairman, Ben Bernanke, introduced as long ago as January 2009. It has indeed been a long emergency period from the Fed’s point of view!

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Posted in Central Banks, Monetary Policy |

Dollar turns lower after Fed is read as adopting a more dovish tone

MarketWatch/Ryan Vlastelica/07-26-17

The U.S. dollar fell on Wednesday, erasing an earlier gain after the Federal Reserve was seen as striking a somewhat cautious note on inflation, which is seen as bearish for greenback.

The U.S. central bank said inflation was “running below 2%” instead of “running somewhat below 2%,” as it had in its June statement. The Fed’s preferred inflation gauge, the personal-consumption index, or PCE index, has tapered off to 1.4% growth over 12 months from a five-year high of 2.1%.

The Fed also indicated, as expected, that it would start to wind down its bondholdings “relatively soon” and kept interest rates unchanged, as had been widely expected.

PG View: The dollar index tumbled to fresh 13-month lows after the Fed’s announcement, providing on ongoing tailwind for gold.

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

The Greater Moderation

Money Strong/Danielle DiMartino Booth/07-26-17

It’s no secret that the Bank of England, Bank of Japan and European Central Bank have been aggressively flooding their respective economies and in turn, the global financial system, with liquidity in some form of quantitative easing. If there is one lesson to be learned from The Great Moderation, it is that liquidity acts as a shock absorber.

In a less liquid world, the crash in oil prices would have resulted in a bankruptcy bloodbath. In a less liquid world, the bursting of the housing bubble would have led to millions of foreclosed homes clearing at fire sale prices. In a less liquid world, highly leveraged firms would have been rendered insolvent and incapable of covering their interest costs.

In short, a less liquid world would be smaller, for a time. But when the time came to allow nature to take its course, central bankers could not bear the pain, nor muster the discipline, to allow creative destruction to cull the weakest from the herd. Their policies have forced us to pay a dear price to maintain a population of inefficient operators.

So we have one-in-ten firms effectively sucking the life out of the world economy’s ability to regenerate itself. There is no such thing as a productivity conundrum against a backdrop of such widespread misallocation of capital and labor. There is no mystery cloaking the breakdown in new business formation. And there is no enigma, much less any reason to assign armies of economists to investigate, shrouding the new abnormality we’ve come to know as a low growth world.

There is simply no room for an economy to excel when its growth potential is choked off by an overabundance of liquidity that is perverting incentives. What is left behind is a yield drought, one that has left the whole of the world painfully parched for income and returns and yet too weary to conduct fundamental risk analysis.

PG View: This is an excellent essay by former Fed insider Danielle DiMartino Booth. I highly encourage you to read it in its entirety and realize too that, “The Fed’s actions have not saved the little guy; they’ve skewered him.”

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

Fed keeps rates unchanged, says balance-sheet unwinding to start ‘relatively soon’

FT/Sam Fleming/07-26-17

The Federal Reserve signaled it is ready to start unwinding its crisis-era stimulus programme as soon as its next meeting, suggesting that the central bank remains confident in the US outlook even as it acknowledges a spate of weak inflation readings.

The Fed kept rates unchanged at 1 per cent to 1.25 per cent at the meeting, as expected by financial markets. But in a sign of resolve on its policy committee, the Fed said in a statement that it was ready to start paring back the size of its balance sheet “relatively soon” as long as the economy stays on track.

PG View: The Fed is more concerned about the decline in inflation, but remains optimistic that it will return to the 2% target in time. Sep rate hike odds dropped from 8.2% to 3.1%.

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Posted in Central Banks, Monetary Policy |

Fed holds steady on policy, in line with expectations. Overall and core inflation “have declined.” Balance sheet unwind to start “relatively soon.”

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U.S. Inflation Remains Low, and That’s a Problem

NYT/Binyamin Appelbaum/07-24-17

That notion is a bit of a head-scratcher. Most people don’t like inflation. They would prefer that a dollar tomorrow be worth the same as a dollar today.

But a recent drop in inflation may be a sign of fresh economic weakness and is perplexing to Federal Reserve officials who are now wrapping up the central bank’s stimulus campaign.

The Federal Reserve thinks modest inflation has important economic benefits, and it has aimed since 2012 to keep prices rising at an annual pace of 2 percent. The problem is that the Fed is on track to fail for the sixth straight year. Inflation has been stubbornly sluggish.

A little inflation can brighten the economic mood, causing wages and corporate profits to rise more quickly. Economists like to point out that this is an illusion. If everyone is making more money, then no one can buy more stuff. Prices just go up. But the evidence suggests people enjoy the illusion and, importantly, they respond to the illusion by behaving in ways that increase actual economic growth, for example by working harder.

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Posted in Central Banks, inflation, Monetary Policy |

Fed Faces Inflation Conundrum

WSJ/Nick Timiraos/07-19-17

The Federal Reserve is likely to stand pat on policy when it concludes a two-day meeting next week, but it faces a debate about the future path of interest-rate increases because of a deepening puzzle over inflation.

Officials will likely leave short-term rates unchanged and wait until September before announcing plans to slowly shrink their $4.5 trillion portfolio of bonds and other assets.

They face a dilemma, however, because the two sets of economic indicators they most closely monitor are sending conflicting signals about the urgency of additional rate increases.

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Posted in Central Banks, Monetary Policy |

Week in Review (Video) July 20, 2017

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Posted in Central Banks, Gold News, Gold Views, inflation, Monetary Policy, QE, U.S. Dollar, USAGOLD TV |

Gross Says Central Banks Must Use Caution in Further Tightening

Bloomberg/John Gittelsohn/07-20-17

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.

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Posted in Central Banks, Debt, Monetary Policy |

ECB sticks to easy money pledge despite better growth


Reuters/Balazs Koranyi & Francesco Canepa/07-20-17

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.

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Posted in Central Banks, Monetary Policy |

The Fed Has Hit the ‘Pause’ Button

Daily Reckoning/Jim Rickards/07-19-17

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.

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

Forget Politics. For the Dollar, It’s All About Central Banks


Bloomberg/Lananh Nguyen, Brian Chappatta & Katherine Greifeld/07-18-17

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.

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

The Fed just edged a step closer to recognizing a major policy misstep


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.

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Posted in Central Banks, Monetary Policy |

Inflation Data Weakens the Fed’s Case for Another Hike

Bloomberg/Craig Torres/07-14-17

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.”

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Posted in Central Banks, inflation, Monetary Policy |

Yellen backtracks: ‘We can never be confident there won’t be another financial crisis’

CNBC/Jeff Cox/07-13-17

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.

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Posted in Central Banks, Monetary Policy |

Week in Review (Video) July 07, 2017

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Posted in Central Banks, Debt, inflation, Markets, Monetary Policy, USAGOLD, USAGOLD TV |

Inflation elusive, but central bankers getting twitchy

Reuters/Ross Finley/07-07-17

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.

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Posted in Central Banks, inflation, Monetary Policy |

The Fed is losing confidence in a key part of its policy

BusinessInsider/Pedro Nicolaci da Costa/07-05-17

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 . . .

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Posted in Central Banks, inflation, Monetary Policy |

Fed Officials Divided on When to Begin Balance-Sheet Unwind


Bloomberg/Craig Torres/07-05-17

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.

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Posted in Central Banks, Monetary Policy |

June FOMC minutes reveal concern about inflation softness and high asset prices, divide on when to start unwinding balance sheet.

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How central bankers rattled global markets

FT/Dan McCrum, Roger Blitz, Robin Wigglesworth/07-30-17

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.

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Posted in Central Banks, Markets, Monetary Policy |

Sterling surges to 3-week high, FTSE falls on Carney rate hike signal

Reuters/Jemima Kelly, Kit Rees, John Geddie & David Milliken/06-28-17

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.

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ECB chief was overinterpreted by markets: sources


Reuters/Francesco Canepa/06-28-17

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.

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Posted in Central Banks, Economy, Monetary Policy |