Category: Monetary Policy

A Fed official who has been voting against rate hikes thinks he knows why wages aren’t rising faster

BusinessInsider/Pedro Nicolaci da Costa/12-181-7

“Why aren’t wages picking up?” Kashkari asked in a blog post explaining his latest dissent. “In my view, the two most likely explanations are that the job market is not as tight as the 4.1% unemployment rate suggests and that people’s expectations for future inflation have fallen, which can become self-fulfilling.”

Kashkari believes low labor-force participation and other underlying pockets of weakness are still leaving workers in too precarious a situation to bargain for higher wages.

“One measure of the labor force — the participation rate for workers between 25 and 54 years old, typically called ‘ prime age’ — suggests that there could be more than a million workers still on the sidelines,” Kashkari said.

PG View: Kashkari has the same doubts about the so-called “transitory” nature of low inflation: “…the longer it persists, the more tenuous the transitory factors story becomes.”

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Posted in Central Banks, Economy, Fed, Monetary Policy, Today's top gold news and opinion |

ECB leaves key rate at historic low


FT/Claire Jones/12-14-17

The eurozone’s central bankers have left interest rates unchanged at their lowest levels on record and kept their commitment to do more should growth disappoint, in a decision that marks the end of a strong year for the economy of the single currency area.

…The central bank reiterated that it “stands ready” to increase the size of its bond-buying programme — dubbed quantitative easing — in what now seems the unlikely event that the recovery will veer off track. Interest rates would remain on hold until “well past” the end of QE.

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

Bank of England keeps rates on hold in unanimous decision


FT/Chris Giles/12-14-17

The Bank of England has held the benchmark interest rate at 0.5 per cent in a unanimous 9-0 vote.

The central bank confirmed it thinks “further modest increases” in interest rates are likely to be needed to help bring inflation down to its target of 2 per cent over the next few years.

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

Federal Reserve issues FOMC statement

Fed/12-13-17

Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running 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. Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

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 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong 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.

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

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Posted in Central Banks, Fed, Monetary Policy |

Fed hikes 25 bps, in line with expectations. Evans and Kashkari dissent.

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Posted in Central Banks, Fed, Monetary Policy |

Only one thing matters at Wednesday’s Fed meeting


BusinessInsider/Pedro Nicolaci da Costa/12-13-17

A December rise in the federal funds rate to a range of 1.25% to 1.50% has long been baked into Wall Street estimates. Economists will therefore be paying closer attention to the Federal Open Market Committee’s (FOMC) policy statement, its latest economic forecasts and Janet Yellen’s last press conference as the central bank chair.

…In their September estimates, Fed policymakers foresaw as many as three rate hikes in 2018 and a couple more in 2019. Lagging inflation has created some uncertainty around that path, and Fed Chair Janet Yellen herself recently acknowledged the worry that the low readings might not be “transitory,” as many officials had expected.

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Posted in Central Banks, Fed, Monetary Policy |

Bill Gross: Expect a ‘More Cautious and Easier Fed’

USAGOLD/John Gittelsohn/12-07-17

Billionaire bond manager Bill Gross, who has long warned that low interest rates punish savers and banks, says the Federal Reserve is likely to be cautious with increases because the current environment leaves little room for error.

“Should a crisis arise because of policy mistakes, geopolitical crises, or other currently unforeseen risks, the ability to protect principal will be impaired relative to history,” Gross wrote in an investment outlook released Thursday. “That in turn argues for a more cautious and easier Fed than otherwise assumed.”

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

Mauldin: The Fed Is At The Height Of Monetary Policy Lunacy


Forbes/John Mauldin/11-27-17

How often do central bankers, regulators, corporate leaders, lawyers, politicians and ordinary investors make the same mistakes over and over again? All the time.

…I can understand raising rates — I wish they had done that four years ago. I can even understand reducing the balance sheet. But at the same time? When you don’t know what you don’t know?

I mean really, there is no way to know how the market is going to react to either of these events, let alone to both at the same time. This seems to me the height of monetary policy lunacy.

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Posted in Central Banks, Fed, Monetary Policy |

A key recession indicator is getting closer to the danger zone — and the Fed can’t ignore it

BusinessInsider/Pedro Nicolaci da Costa/11-21-17

In the past, including before the Great Recession, an inverted yield curve — where long-term interest rates fall below their short-term counterparts — has been a reliable predictor of recessions. The bond market is not there yet, but a sharp recent flattening of the yield curve has many in the markets watchful and concerned.

The US yield curve is now at its flattest in about 10 years — in other words, since around the time a major credit crunch of was gaining steam. The gap between two-year-note yields and their 10-year counterparts has shrunk to just 0.63 percentage points, the narrowest since November 2007.

…”We believe a pre-condition for the Fed to continue its hiking cycle in 2018 should be higher intermediate and long-term rates,” they wrote in a research note to clients. “Without the latter, we would have doubts on the former.”

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Posted in Central Banks, Fed, Monetary Policy |

Top Central Bankers Defend Stimulus Efforts

WSJ/Tom Fairless/11-14-17

The heads of four of the world’s most important central banks defended their sweeping crisis-fighting measures in a rare joint appearance, and discussed how words themselves have become a vital policy tool.

The leaders of the Federal Reserve, European Central Bank, Bank of Japan and Bank of England—whose terms all end in the next two years—have relied heavily on verbal communication in recent years as their policy decisions have grown more complex.

…The Bank of Japan has been at the core of efforts to shake off a cycle of weak inflation and growth. BOJ governor Haruhiko Kuroda defended his track record on Tuesday, including a controversial decision in 2016 to push interest rates below zero. The bank’s “strong commitment did work to some extent,” he said.

PG View: Hey it’s working “to some extent” in Japan, but at what cost? The BoJ’s balance sheet is darn-near 100% of GDP!

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Posted in Central Banks, Monetary Policy, QE |

BOJ to persist with monetary easing to boost inflation: Kuroda

Reuters/John Revill/11-13-17

The Bank of Japan will continue to persist with “powerful monetary easing” to nurture positive inflation developments, BoJ Governor Haruhiko Kuroda said in Zurich on Monday.

“Going forward, with the output gap improving steadily, firms’ stance is likely to gradually shift toward raising wages and prices,” Kuroda said in a lecture at the University of Zurich. “If further price rises come to be widespread, inflation expectations are likely to rise steadily.”

PG View: The BoJ has been saying the same thing for more than 20-years . . .

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Posted in BoJ, Central Banks, Deflation, inflation, Monetary Policy, QE |

Bank of England lifts rates for first time in a decade

FT/Chris Giles & Gemma Tetlow/11-02-17

The Bank of England has increased interest rates by a quarter of a percentage point, to 0.5 per cent and signalled that the first rate rise in a decade will be the start of a gradual increase in borrowing costs.

Voting seven to two in favour of the rate rise, the bank’s Monetary Policy Committee forecast that inflation would remain well above the central bank’s 2 per cent target if interest rates had stayed at 0.25 per cent. The committee indicated that two further quarter of a percentage point rate rises would be needed during the next two years to control prices.

PG View: Wow, two more quarter point hikes over the next two years. Quite the tightening campaign . . .

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Posted in BoE, Central Banks, Monetary Policy |

Fed steady on policy, in line with expectations. Gradual increases in Fed funds rate warranted. Core inflation remains soft.

USAGOLD/Peter Grant/11-01-17

The Fed held steady on policy as was widely expected. The door remains open for a December rate hike, but soft inflation is still a concern.

“On a 12-month basis, both inflation measures have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.” — FOMC Statement

That level of concern will likely prove insufficient to move the needle on December rate hike expectations.

The drop in September nonfarm payrolls — the first in 7-years — was mentioned, but is being viewed as transitory. The Fed sees the labor market as continuing to strengthen.

Both gold and silver have edged modestly lower within their respective intraday ranges since the release.

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Posted in Central Banks, Fed, Monetary Policy |

Bank of Japan keeps policy on hold


FT/Robin Harding/10-31-17

The Bank of Japan has kept monetary policy on hold as it made slight downgrades to inflation forecasts but predicted steady economic expansion.

It kept short-term interest rates at minus 0.1 per cent, a cap on 10-year bond yields at “around zero” and pledged to carry on buying assets at a pace of ¥80tn a year as it strives to end two decades of on-and-off deflation.

The continued optimism of the bank’s inflation forecasts suggests it believes the economy is on track and there is no need for extra monetary stimulus.

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

ECB to extend QE until September at lower rate of €30bn a month


FT/Claire Jones/10-26-17

The European Central Bank will extend its bond-buying scheme until at least September next year and possibly beyond to keep the eurozone recovery on track but will halve its rate of purchases to €30bn a month.

…The ECB struck a dovish tone, saying it stood ready to extend QE beyond September or even raise the level of monthly purchases should conditions worsen again. It also stuck to its line about keeping rates lower until well after it stops its bond purchases.

Mario Draghi, ECB president, said the changes announced on Thursday did not amount to a “tapering” of QE but a “down size” to a programme that remained “open-ended”.

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

ECB leaves rates unchanged, in line with expectations. QE extended for 9-months, but reduced to €30 bln. Draghi presser underway.

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

BoC holds steady on rates, in line with expectations. Cautiously hawkish bias maintained.

“While less monetary policy stimulus will likely be required over time, Governing Council will be cautious in making future adjustments to the policy rate.”
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Posted in BoC, Central Banks, Monetary Policy |

Yellen Says Fed’s Extraordinary Policies May Be Needed Again


AP, via USNews/Paul Wiseman/10-20-17

Federal Reserve Chair Janet Yellen on Friday defended the central bank’s extraordinary efforts to fight the Great Recession and said they might be needed again.

During the recession, the Fed pushed short-term interest rates to zero. When the economy needed more help, it took the extraordinary step of buying hundreds of billions of dollars’ worth of bonds to push long-term interest rates lower.

…Yellen said the Fed likely will have to turn to bond purchases again — even in a downturn that isn’t as bad as the 2007-2009 Great Recession, which was the worst since the 1930s.

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

The Fed is worried that low inflation is here to stay for a while


BusinessInsider/Akin Oyedele/10-11-17

Many Federal Reserve officials are concerned that inflation will remain lower for longer, according to minutes of the policy meeting they held in September.

…”Many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent,” the minutes said. Some members debated that more secular factors like the influence of technology on lowering prices may suppress inflation below the Fed’s 2% target for longer.

This may warrant more patience in raising interest rates, the Fed officials said. They were split on whether to hike for a third time this year, likely to be considered in December.

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Posted in Central Banks, Fed, Monetary Policy |

The Market’s Got It Wrong

Daily Reckoning/Jim Rickards/10-09-17

Janet Yellen’s mantra is, “It’s transitory!”

That’s Yellen’s typical response to a long litany of data that shows the U.S. is in the grip of a powerful disinflationary trend that may lead to outright deflation — a central banker’s worst nightmare.

The Fed has a publicly announced 2% inflation goal, which they consider to be price stability. In fact, 2% inflation cuts the purchasing power of the dollar by 75% in the course of an average lifetime. The Fed would tell you to ignore that.

…The Fed has created $3.5 trillion of new money since 2008, yet there has been no appreciable amount of inflation for nine years.

PG View: Rickards believes that rate hike expectations will deteriorate in the months ahead and that Yellen will be reluctant to do another rate hike as her last act as Fed chair.

As market probabilities catch up with reality, the dollar will sink, the euro and gold will rally, and interest rates will resume their long downward slide. — Jim Rickards
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Posted in Central Banks, Economy, Fed, Monetary Policy |

Unwinding QE could trigger financial crisis, warns JP Morgan

Telegraph/Lucy Burton/10-04-17

JP Morgan has warned that another financial crash could be round the corner as the decade of ultra-loose money comes to an end.

Central banks have purchased roughly $15 trillion (£11.3 trillion) of financial assets since the crisis, but the Wall Street bank’s head of quantitative and derivatives strategy Marko Kolanovic said this will start to unwind next year in a move that could “potentially cause a financial crisis”.

Dubbing the hypothetical crash the “great liquidity crisis”, he said that outflows – or lack of new inflows – from undoing stimulus could lead to “asset declines and liquidity disruptions” that in turn trigger a crash.

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Posted in Central Banks, Markets, Monetary Policy |

RBA hold cash rate steady at 1.5%: Upbeat on employment. Optimistic on growth. Remains concerned about low inflation and slow wage growth.

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Posted in Central Banks, Monetary Policy |

Fed’s rate hikes causing low inflation, Kashkari says

Reuters/Ann Saphir/10-02-17

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?

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

The world’s largest hedge fund told clients the Fed is making a mistake


BusinessInsider/Rachael Levy/09-28-17

“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.”

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Posted in Central Banks, Fed, inflation, Monetary Policy, QE |

Outside the Box Low Inflation Is No “Mystery”

Mauldin Economics/John Mauldin/09-27-17

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.

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Posted in BoE, BoJ, Central Banks, ECB, Fed, inflation, Monetary Policy, QE |

Fed’s Yellen says gradual hikes should continue, despite weak inflation

Reuters/Howard Schneider & Ann Saphir/09-26-17

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.

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Posted in Central Banks, Fed, Monetary Policy |

Yellen says Fed may have been wrong on employment and inflation, which would mean easier policy ahead

CNBC/Jeff Cox/09-26-17

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.

“…if longer-run inflation expectations are running at levels consistent with longer-run PCE price inflation somewhat below 2 percent, the FOMC can still achieve its inflation goal. Under those conditions, continuing to revise our assessments in response to incoming data would naturally result in a policy path that is somewhat easier than that now anticipated–an appropriate course correction that would reflect our commitment to maximum employment and price stability. — Janet Yellen
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Posted in Central Banks, Fed, inflation, Monetary Policy |

Gold falls as Yellen reiterates that gradual tightening is appropriate.

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Posted in Central Banks, Fed, Gold News, Gold Price, Monetary Policy |

Dollar close to 2015 lows as conflicted Fed prepares policy update

Reuters/Abhinav Ramnarayan & Ritvik Carvalho/09-20-17

…[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.

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

Traders Boost Odds of Third Rate Hike This Year as FOMC Meets


Bloomberg/Alex Harris/09-19-17

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.

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Posted in Central Banks, Fed, Monetary Policy |