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Category: Central Banks
RBA hold cash rate steady at 1.5%: Upbeat on employment. Optimistic on growth. Remains concerned about low inflation and slow wage growth.
The Federal Reserve’s own actions, not transitory factors, are responsible for weak inflation, a Fed policymaker argued on Monday, and the U.S. central bank should wait to raise rates again until inflation hits its 2-percent goal.
“The FOMC’s policy to remove monetary accommodation over the past few years is likely an important factor driving inflation expectations lower,” Minneapolis Fed President Neel Kashkari wrote in an essay on the bank’s website, referring to the central bank’s Federal Open Market Committee, which sets U.S. interest rates. “My preference would be not to raise rates again until we actually hit 2 percent core PCE inflation on a 12-month basis, unless we have seen a large drop in the headline unemployment rate signaling that we have used up remaining labor market slack, or a surprise increase in inflation expectations.”
PG View: Tighter policy is not the path to higher inflation. But easier policy has failed to boost inflation for years as well. So, what’s a central bank to do?
Eurozone inflation rose at an annual rate of 1.5 per cent cent in September, missing economists’ forecasts and leaving the ECB with a dilemma as it weighs whether the economy is strong enough for it to roll back its bond-buying programme.
PG View: I’m sure, here too this is transitory. But keep in mind, weak inflation has been “transitory” for nearly two-decades in Japan, despite massive monetary accommodations.
President Donald Trump and Treasury Secretary Steven Mnuchin met with former Federal Reserve governor Kevin Warsh on Thursday to discuss his potential nomination as the next Fed chairman, a White House official said, signaling that the West Wing is moving ahead with a process that the president has said he would like to have completed by the end of the year.
PG View: Warsh was a Fed governor from 2006 to 2011 and was generally opposed to über-accommodative monetary policy, although not to the point of dissent. He is being broadly panned as too cautious, but it may be that the risks he warned about have yet to manifest . . .
“The Fed is basing its moves on classic cyclical indicators and the desire to ‘normalize’ the balance sheet,” Bridgewater Associates told clients in a private note, which was seen by Business Insider. “Based on the calculations that we do, we doubt that the Fed will be able to execute its plan without causing problems.”
Reason 1 (of 5): “There is not nearly enough inflation and overheating risk to make concerns about inflation and overheating of paramount importance.”
When is a mystery not a mystery? When Janet Yellen is puzzling over a lack of inflation, that’s when. So say Brian Wesbury, chief economist, and Robert Stein, deputy chief economist of First Trust, in today’s Outside the Box. The bottom line: QE didn’t work, and Janet knew it was unlikely to work, from the start.
…So forgive us for asking, but after unprecedented expansion of banking reserves and the Fed balance sheet, with little inflation, is it really a “mystery?” Or, is it proof of what we believed all along: QE didn’t work?
…instead of boosting Milton Friedman’s key money number (M2), the excess monetary base growth went into “excess reserves” – money the banks hold as deposits, but don’t lend out. Money in the warehouse (or in this case, credits on a computer) doesn’t boost demand! This is why real GDP and inflation (nominal GDP) never accelerated in line with monetary base growth.
The Federal Reserve needs to continue gradual rate hikes despite broad uncertainty about the path of inflation, Fed Chair Janet Yellen said on Tuesday in remarks that acknowledged the central bank’s struggles to forecast one of its key policy objectives.
It is possible, Yellen said, that the Fed may have “misspecified” its models for inflation, and “misjudged” key facts like the underlying strength of the labor market and whether inflation expectations are as stable as they seem.
Yellen says Fed may have been wrong on employment and inflation, which would mean easier policy ahead
The Federal Reserve may have overstated the strength of the labor market and the rate of inflation, leading to monetary policy ahead that will be easier than previously thought, Fed Chair Janet Yellen said Tuesday.
…The result would be an even more dovish Fed when it comes to removing the historically aggressive policy accommodation in place since the financial crisis.
“My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation,” Yellen said, according to prepared remarks.
PG View: While the market seems to have latched on to the reiteration that gradual rate hikes are appropriate, the acknowledgement that the Fed might be wrong seems pretty dovish in actuality.
…[C]aught between a lull in U.S. inflation and a strengthening global economy, the market is uncertain whether the Fed will signal its third interest rate hike of the year or back off until prices rise more briskly.
“Fed members have become less hawkish of late, and that has started to weigh on the dollar,” said OANDA analyst Craig Erlam.
Will they or won’t they hike, that’s what traders are asking themselves before Wednesday’s policy decision from the Federal Open Market Committee. The odds of a hike by December have jumped to around 50 percent, based on fed funds futures, from 22 percent on Sept. 8. Wrightson ICAP economist Lou Crandall said as long as the Federal Reserve doesn’t take a rate hike “off the table this week,” the market may continue to push up the implied odds of another increase by year-end.
The Federal Reserve is on the cusp of reversing the most ambitious monetary stimulus program in world history amid questions over how much impact it really delivered.
There’s little question that the program, known as quantitative easing or “money printing,” boosted the stock market.
…”Evaluating the effects of monetary policy is difficult, even in the case of conventional interest rate policy,” St. Louis Fed economist Stephen D. Williamson wrote. “With respect to QE, there are good reasons to be skeptical that it works as advertised, and some economists have made a good case that QE is actually detrimental.”
European Central Bank policymakers disagree on whether to set a definitive end-date for their money-printing program when they meet in October, raising the chance that they will keep open at least the option of prolonging it again, six sources told Reuters.
A stubbornly strong euro, with its dampening effect on inflation, is driving a rift among ECB policymakers, the sources on the ECB’s Governing Council with direct knowledge of its thinking said.
…“The strength of the euro is the number one problem,” one of the sources said.
PG View: Some see euro strength not so much as evidence that the European economy is on firmer ground, but more that the U.S. and UK economies are weakening.
The Bank of England has issued its strongest guidance in a decade that it is poised to raise interest rates, setting the stage for a nail-biting decision at the November meeting of the Monetary Policy Committee.
Voting seven to two against an immediate increase in interest rates at the September meeting, a majority of MPC members signalled that unless there is a sudden string of bad economic data “some withdrawal of monetary stimulus is likely to be appropriate over the coming months”.
The Panic of 2008 was damaging in more ways than people think. Yes, there were dramatic losses for investors and homeowners, but these markets have recovered. What hasn’t gone back to normal is the size and scope of Washington DC, especially the Federal Reserve. It’s time for that to change.
D.C. institutions got away with blaming the crisis on the private sector, and used this narrative to grow their influence, budgets, and size. They also created the narrative that government saved the US economy, but that is highly questionable.
ECB steady on policy, remains prepared to extend QE if necessary. Inflation forecast trimmed for 2018 and 2019 on strong EUR. Draghi presser underway.
Federal Reserve Vice Chairman Stanley Fischer is stepping down from his position at the central bank, he told President Donald Trump in a letter Thursday.
Citing “personal reasons,” Fischer said his resignation will take effect Oct. 13.
“It has been a great privilege to serve on the Federal Reserve Board and, most especially, to work alongside Chair [Janet] Yellen as well as many other dedicated and talented men and women throughout the Federal Reserve system,” Fischer wrote.
The resignation comes with his term to expire on June 12, 2018 and creates yet another opening for Trump to fill at a critical time for the Fed.
U.S. inflation is falling “well short” of target so the Federal Reserve should be cautious about raising interest rates any further until it is confident that prices are headed higher, an influential Fed policymaker said on Tuesday.
In a dovish speech in the face of months of weak inflation readings, Fed Governor Lael Brainard said the U.S. central bank should go so far as to make it clear it is comfortable pushing prices modestly above the Fed’s 2-percent target.
“We should be cautious about tightening policy further until we are confident inflation is on track to achieve our target,” Brainard, a permanent voter on monetary policy, said in a speech in New York.
European Central Bank President Mario Draghi said protectionist policies pose a “serious risk” for growth in the global economy.
At a gathering of central bankers, economists and others in Jackson Hole, Wyoming, on Friday, Draghi said the global economy is firming up. He told the audience in a speech that “a turn towards protectionism would pose a serious risk for continued productivity growth and potential growth in the global economy.”
The comments come at a time when President Donald Trump is taking a hard look at the U.S.’s trade agreements around the world, pushing to reduce trade deficits and make conditions more favorable for American manufacturers.
Fed chair Janet Yellen pushed back against Trump’s agenda of financial deregulation — and it could cement her future
BusinessInsider/Pedro Nicolaci da Costa/08-25-17
Federal Reserve Chair Janet Yellen had a clear message for the Trump administration in what could be her final Jackson Hole speech: Undoing the hard work of reforming the financial system after the financial crisis could have dangerous consequences.
…In her keynote address at the high-profile conference in the Grand Teton mountains of Wyoming, Yellen was not holding back — in a way that potentially suggests she is not holding her breath for a reappointment from Donald Trump. Yellen’s term as Fed chair expires in February, and Trump is widely expected to nominate Gary Cohn, ex-president of Goldman Sachs and head of the president’s National Economic Council, to replace her.
“Fed Chair Janet Yellen’s passionate defence of the post-crisis tightening of financial regulation isn’t going to go down particularly well at the White House,” wrote Paul Ashworth, economist at Capital Economics, in a research note following the speech. “Donald Trump has made rolling back regulation the centre-piece of his presidency.”
These days it is Ms Yellen who has more cause to fear political risk upsetting the bond markets. The US Congress has to raise the “debt ceiling” by late September to allow the government to continue financing itself. These occasions were bad enough when Mr Obama was president. The Republican Congress repeatedly used the threat of default to pursue its wrong-headed obsession with trying to cut spending.
Given Donald Trump’s eccentricity and his fraught relations with Mitch McConnell, the Senate leader, there is an even greater chance of chaos. Mr McConnell said this week there was “zero chance” that the debt ceiling would not be raised. But Mr Trump’s threat at his bombastic rally on Tuesday to close down the government if he did not win funding to build his Mexican wall sent shivers through debt and foreign exchange markets.
Given Donald Trump’s eccentricity and his fraught relations with Mitch McConnell, the Senate leader, there is an even greater chance of chaos…
As the world’s top central bankers gather in Wyoming this week, their relief about a stronger global economy will be tempered by a growing unease that inflation remains inexplicably low.
The most important market news of the day.
Federal Reserve Chair Janet Yellen and European Central Bank President Mario Draghi will be among the officials addressing this year’s installment of the annual conference hosted by the Kansas City Fed. The summit, held at a Jackson Hole mountain retreat, comes as central banks in advanced economies creep toward the policy exit after years of unprecedented easing, even with outlooks are clouded by stubbornly tepid inflation.
Prices have been slow to pick up despite solid growth and falling unemployment, suggesting that the long-observed relationship between inflation and labor-market slack might have frayed. That puzzle will likely surface as the conference debates this year’s theme of “Fostering a Dynamic Global Economy” against the backdrop of the Grand Teton mountains.
“Inflation has been the big question mark, both here and abroad,” said Michelle Meyer, head of U.S. economics at Bank of America Corp. in New York.
The stock market’s steady rise, still low long-term bond yields and a sagging dollar are girding the Fed’s intent to raise interest rates again this year despite concerns about weak inflation, according to comments this week from Fed officials and analysts anticipating remarks next week by Chair Janet Yellen.
Minutes of the July Federal Open Market Committee meeting released this week flagged a division among policymakers focused on weak inflation as a reason to stall further rate increases and those who feel still loose financial conditions pose a risk the Fed needs to counter.
…”I would not be surprised to see Chair Yellen outline a similar argument at Jackson Hole — namely, that financial conditions are a piece of the puzzle that currently support maintaining a gradual pace of tightening,” analysts from NatWest Markets Strategy wrote in a morning note.
Federal Reserve officials are struggling to make sense of a new economic reality in which low inflation and low unemployment are persisting side by side.
…The timing of the Fed’s next rate move is considerably less certain. The Fed entered the year predicting three rate increases of a quarter-point each; so far it has delivered two, with a third seen possible in December.
But the weakness of inflation, which the Fed now expects to remain below its target annual pace of 2 percent for the fifth-consecutive year, is prompting some Fed officials to hesitate.
…Some Fed officials have suggested that the public is losing confidence that the Fed will raise inflation back to a 2 percent annual pace, which could make it harder for the Fed to do so, because inflation expectations can become self-fulfilling.
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.
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%).
ROGOFF: The world’s central banks should get ready for negative interest rates in the next recession
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 . . .
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.”
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 . . .