Category: 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 |

Fed economist: ‘No evidence that QE works’ as central bank starts unwinding program

CNBC/Jeff Cox/09-19-17

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.”

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

BoE votes 7-2 to keep rates on hold, but prepares market for a rise

FT/Chris Giles/09-14-17

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”.

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Posted in BoE, Central Banks, Monetary Policy |

Time To Drain The Fed Swamp

First Trust/Brian S. Wesbury & Robert Stein/09-11-17

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.

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Posted in Central Banks, Fed, Monetary Policy |

ECB steady on policy, remains prepared to extend QE if necessary. Inflation forecast trimmed for 2018 and 2019 on strong EUR. Draghi presser underway.

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

BoC surprised with a 25 bps hike to overnight rate to 1.0%. GOC yields and loonie surge.

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

Fed should be cautious in face of weak inflation: Brainard

Reuters/ Jonathan Spicer & Stephanie Kelly/09-05-17

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.

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

ECB President Draghi warns of ‘serious risk’ to global economy from rising protectionism

CNBC/Liz Moyer/08-25-17

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.

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Posted in Central Banks, Economy, Monetary Policy |

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.”

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Posted in Central Banks, Economy, Monetary Policy |