Category: Monetary Policy

Fed ties rate hike to economic rebound, sees balance sheet cuts in 2017

Reuters/Jason Lange & Howard Schneider/05-24-17

Federal Reserve policymakers agreed they should hold off on raising interest rates until it was clear a recent U.S. economic slowdown was temporary, though most said a hike was coming soon, minutes from their last policy meeting showed on Wednesday.

Nearly all policymakers at the May 2-3 meeting also said they favored beginning the wind-down of the U.S. central bank’s massive holdings of Treasury debt and mortgage-backed securities this year.

While investors continue to see a rate increase as highly likely next month, the minutes showed that the Fed’s rate-setting committee “generally” believed it hinged on the economy rebounding from its sharp slowdown in the first quarter.

“Members generally judged that it would be prudent to await additional evidence indicating that a recent slowdown in the pace of economic activity had been transitory before taking another step in removing accommodation.” — FOMC Minutes

PG View: The post release drop in yields and the dollar — and rise in gold — is reflective of modest ebb in June rate hike expectations. The Fed rightfully remains cautious.

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Posted in Central Banks, Monetary Policy, QE |

FOMC minutes show Fed views recent weakness in growth and inflation as “transitory.” Some concerns expressed about elevated asset valuations and “increase in geopolitical tensions.”.

Minutes of the Federal Open Market Committee

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Posted in Central Banks, Monetary Policy |

BoC holds overnight rate steady at 0.5%, in line with expectations, amid ongoing uncertainties.

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Posted in Central Banks, Monetary Policy |

The Fed may be pushing for interest-rate hikes for the wrong reasons

BusinessInsider/Pedro Nicolaci da Costa/05-19-17

The central bank’s mandate is low, stable inflation and maximum employment, and Fed officials monitor a range of indicators to assess progress on those two goals.

But the Fed may be keen to hike rates for another reason: reigning in what it sees as excessively high prices in stocks and other financial markets.

If that’s its intention, it goes against what Fed Chair Janet Yellen and other key members of the rate-setting Federal Open Market Committee have said they would do.

… Neel Kashkari, the Minneapolis Fed president who is seemingly the last true remaining dove at the central bank, however, makes a solid case in an essay this week as to why this is a terrible idea. Here are his bullet points on the Fed’s limitations from the essay:

1. It is really hard to spot bubbles with any confidence before they burst.

2. The Fed has limited policy tools to stop a bubble from growing, even if we thought we spotted one.

3. The costs of making policy mistakes can be very high, so we must proceed with caution.

4. What we can and must do is ensure that the financial system is strong enough to withstand the inevitable bursting of a bubble.

5. Monetary policy should be used only as a last resort to address asset prices, because the costs to the economy of such a policy response are potentially so large.

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Posted in Central Banks, Markets, Monetary Policy |

St. Louis Fed’s Bullard: FOMC’s contemplated policy rate path is overly aggressive

St. Louis Fed/James Bullard/05-19-17

• On balance, the U.S. macroeconomic data have been relatively weak since the March FOMC meeting.
• U.S. inflation and inflation expectations have surprised to the downside in recent months.
• Labor market improvement has slowed over the last two years.
• Low unemployment readings are probably not an indicator of meaningfully higher inflation over the forecast horizon.

• Real GDP growth measured from one year earlier has averaged just 2.1 percent over the last seven years.
• The last two years have shown very little change in year-over-year real GDP growth.
o 2015-Q4: 1.9 percent; 2016-Q4: 2.0 percent.
• A natural conclusion is that the economy has converged upon a growth rate of about 2 percent.
• Is the U.S. economy likely to move meaningfully off of this trend in 2017?
o The short answer is no.

• Financial market readings since the March decision have moved in the opposite direction:
o longer-term yields have declined,
o inflation expectations have weakened, and
o market expectations of the policy rate path have declined.
• This may suggest that the FOMC’s contemplated policy rate path is overly aggressive relative to actual incoming data on U.S. macroeconomic performance.

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Posted in Central Banks, Monetary Policy |

A Tightening Fed Triggers Unease in the U.S. Bond Market

WSJ/Min Zeng/05-16-17

The U.S. bond market is sending a note of caution to the Federal Reserve, which is on track to raise interest rates in June.

Hedge funds and money managers have built up the biggest net wagers since 2008 betting long-term Treasury yields will fall. At the same time, wagers betting on an increase in short-term interest rates are near the highest level since 1993.

This divergence is happening at a time when the yield premium on the 10-year note relative to the two year has been shrinking. In the bond world, this is known as a flattening yield curve and is a development that traders see as a sign of waning confidence in the growth outlook. A widening premium, or a steepening yield curve, is taken to indicate momentum in the economy.

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Posted in Central Banks, Monetary Policy |

Goldman Sachs’ top economist is losing confidence in the Fed’s ability to raise interest rates


BusinessInsider/Pedro Nicolaci da Costa/05-16-17

Goldman Sachs chief economist Jan Hatzius has become distinctly less confident in his expectation that the Federal Reserve will raise interest rates twice more this year and make a major announcement about reducing its bond holdings.

Hatzius’ skepticism is due to US inflation, which has been undershooting the Fed’s 2% official target for most of this economic recovery, and continues to lag despite constant warnings to the contrary.

…”We have shaved our subjective odds of a June rate hike to 80%, from 90% earlier, and have also become a bit less confident in a September hike,” Hatzius added. “If the outlook deteriorates significantly, the committee might simply delay any further tightening steps.

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

A $1 Trillion Pain Trade in Treasuries Divides Top Bond Dealers

Bloomberg/Liz McCormick & Alex Harris/05-14-17

To appreciate just how important the Federal Reserve has been to the U.S. Treasury, consider this simple fact: It alone financed roughly 40 percent of America’s budget deficit last year.

So as Fed officials talk up the possibility of unwinding the central bank’s crisis-era bond holdings later this year, figuring out what will happen when the U.S. loses its biggest source of funding has become a pressing concern.

PG View: This is why I think talk of balance sheet normalization is nothing more than hawkish jawboning, particularly in light of the fact that foreign buyers of Treasuries are pulling back.

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

Bank of England keeps rates on hold in May


FT/Mehreen Khan/05-11-17

The Bank of England has opted to keep its record low interest rates on hold in May as expected.

The bank’s monetary policy committee voted in favour of holding steady on the 0.25 per base rate by a split of seven to one. Rates were cut in the aftermath of the UK’s EU referendum last summer.

PG View: Sterling is under pressure, which is helping to buoy the dollar today.

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Posted in Central Banks, Monetary Policy |

What Happens When Central Banks Stop Buying Bonds?

WSJ/Jon Sindreu/05-10-17

Central banks have been the world’s biggest buyers of government bonds, but may soon stop—a tidal shift for global markets. Yet investors can’t agree on what that shift will mean.

Part of the problem is that there is little agreement about how the massive stimulus policies, known as quantitative easing or QE, affected bonds in the first place. That makes it especially hard to assess what happens when the tide changes.

…When the unwinding begins money managers may not be positioned for it, and markets could move swiftly. In the summer of 2013, investors suddenly got spooked about the Federal Reserve withdrawing stimulus, leading to a swift bond sell off that sent yields on the 10-year Treasury up by more than 1 percentage point.

“If it’s unclear what benefits we’ve had in the buying, it’s unclear what will happen in the selling,” said Tim Courtney, chief investment officer at Exencial Wealth Advisors.

PG View: That’s a big question…a $13.3 trillion question (ECB $4.5T, Fed $4.4T, BoJ $4.4T).

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Posted in Central Banks, Monetary Policy, QE |

Mario Draghi Brushes Off Calls to End ECB’s Monetary Stimulus

WSJ/Tom Fairless & Todd Buell/05-10-17

European Central Bank President Mario Draghi defended the ECB’s monetary stimulus before Dutch lawmakers on Wednesday in a rare visit to a national parliament, as pressure builds in Northern Europe for a policy change from Frankfurt.

Speaking in the Dutch Lower House, Mr. Draghi argued that the ECB’s large-scale bond purchases and subzero rates have helped support local households and the national budget.

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Posted in Central Banks, Monetary Policy, QE |

St. Louis Fed’s Bullard: Bullard: “natural rate of interest, and hence the appropriate policy rate, is low and unlikely to change very much over the forecast horizon.”

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Posted in Central Banks, Monetary Policy |

This Is Why the Federal Reserve May Not Shrink Its Balance Sheet After All

The Street/Scott Gamm/05-03-17

Despite recent commentary from the Federal Reserve that a change in its balance sheet policy is likely, one expert isn’t taking the central bank seriously.

“I don’t think they’re going to shrink the balance sheet at all,” said Danielle DiMartino Booth, author of Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America.

PG View: DiMartino Booth claims the Fed is indeed political and threats of balance sheet normalization were a warning to President Trump. She believes normalization of the balance sheet could lead to a currency war.

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Posted in Central Banks, Monetary Policy |

Gold and Silver extend lower post-Fed with door for June hike still open, despite “transitory” Q1 weakness.

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

The Fed looks shaky on its most important reason for raising interest rates

BusinessInsider/Pedro Nicolaci da Costa/05-03-17

[I]nvestors may have been missing a rather dovish signal sent by the Fed, and one crucial to the future path of interest rates: A rather sheepish description of inflation.

…This is really important because the Fed views both core inflation and inflation expectations, especially market-based ones, as particularly good predictors of future inflation.

Yes, this is a Federal Reserve that appears bent on raising interest rates even if economic conditions, while treading water, are hardly booming in a way that might generate too much inflation.

But if either inflation or inflation expectations edge too much lower, expect the dovish chatter to begin returning from some of the Fed’s more influential quarters.

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Posted in Central Banks, inflation, Monetary Policy |

Fed holds interest rates steady, dismisses first-quarter slump as ‘transitory’


MarketWatch/Greg Robb & Jeffry Bartash/05-03-17

Federal Reserve Board Chairwoman Janet Yellen and her colleagues opted to keep interest rates unchanged.

The Federal Reserve on Wednesday left the cost of borrowing unchanged and dismissed a weak first quarter as temporary, signaling it is still on track to raise interest rates at gradual pace.

“The FOMC views the slowing in growth during the first quarter as likely to be transitory,” the statement said, in unusually dismissive language. Job gains were described as “solid,” as were the fundamentals underpinning the continued growth in consumer spending. Business fixed investment “firmed,” the central bank noted.

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Posted in Central Banks, Monetary Policy |

ECB keeps quantitative easing in place before decisive French vote

FT/Claire Jones/04-27-17

The eurozone’s policymakers have kept their aggressive monetary easing in place ahead of the decisive round of the French presidential election but Mario Draghi hailed improving economic growth.

The European Central Bank’s governing council left its benchmark main refinancing rate at zero and the deposit rate at minus 0.4 per cent. The region’s central bankers will continue to buy €60bn in mostly government bonds under a quantitative easing programme that will run until at least the end of this year.

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Posted in Central Banks, Monetary Policy, QE |

ECB steady on rates and QE schedule, in line with expectations.

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Posted in Central Banks, Monetary Policy, QE |

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.”

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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.

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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!

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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.”

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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.

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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.

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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.”

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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.”

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Posted in Central Banks, Monetary Policy |

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.

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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.

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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.”

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Posted in Central Banks, Monetary Policy, QE |

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

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Posted in Central Banks, Economy, Monetary Policy |