Posts tagged 'Federal Reserve'

A few thoughts for “one participant”

Finally, one participant expressed the view that prolonged periods of low interest rates could encourage pension funds, endowments and investors with fixed future payout obligations to save more, depressing economic growth and adding to downward pressure on the neutral real interest rate.

– The Federal Reserve’s September meeting minutes, released Wednesday afternoon. Read more

In Japan, my kingdom for a dollar hedge

Could the collapse of covered interest rate parity be the harbinger of even stranger things to come ? At the heart of the issue is how on earth the interest rate differential between two currencies in the cash money markets is no longer equal to the differential between the forward and spot exchange rates. Read more

Yellen on negative rates: we do not speak its name

Janet Yellen opened the festivities at this year’s Jackson Hole economic symposium by musing on what central bankers had learned since the crisis and how they can deal with future recessions in a world where interest rates are far lower than in the past.

Unsurprisingly, bond-buying and “forward guidance” featured prominently in Yellen’s narrative of successful new tools. (On the other hand, scholars have estimated the combined impact of these measures was an unemployment rate a mere 0.13 percentage points below where it would have been using purely conventional instruments.) Read more

Markets keep fighting the Fed, will the Fed keep letting them win?

A quick reminder that we’ll be hosting a special edition of Macro Live today at 1:50pm to cover the release of the FOMC statement and subsequent presser.

Back in December 2015, Federal Reserve policymakers expected they would raise the policy interest rate band to 1.25-1.5 per cent by the end of 2016, implying a cumulative increase in short-term rates of 1 percentage point, or four separate decisions to raise rates by 25 basis points. At the time, the prices of overnight index swaps implied an 11 per cent chance this would happen, according to Bloomberg’s WIRP function. Read more

Our look at the latest Fed survey of US household “well-being”

For the past three years, the Federal Reserve has surveyed thousands of Americans about their finances, their hopes, and their fears. We wrote about the first version of the survey when it was released in August, 2014. The third iteration came out this week. Unsurprisingly, the answers to the repeated questions haven’t changed much. But there are some new questions compared to two years ago, which means a few new interesting things to learn about the American economy.

Some highlights: Read more

The Fed’s gradual embrace of “secular stagnation”

The biggest news from Wednesday’s Federal Reserve meeting was the sharp decline in the path of future interest rates forecast by policymakers over the next few years.

Less noteworthy for its immediate impact, but still significant, was the modest change in the forecast for the level of the Federal funds rate in the “longer run”. Previously, the median policymaker expected short-term interest rates to hover around 3.5 per cent once the economy had returned to normal. Now she thinks the “longer run” level is closer to 3.25 per cent. Read more

Is America’s tightening cycle almost over?

A quick reminder that we’ll be hosting a special edition of Macro Live today at 1:55pm to cover the release of the FOMC statement and subsequent presser.

There’s only a 3.4 per cent chance the Federal Reserve will raise rates today, according to Bloomberg’s WIRP function and the prices of overnight index swaps.

As recently as the end of December 2015, market prices implied odds of at least one rate hike by tomorrow at more than 40 per cent:

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~$250bn less unsecured financing for financials, says Credit Suisse

The Fed rate-hike may have been priced in by the market, but what are the chances the market really priced in the effects of the rate-hike on the plumbing of the financial system, in particular with respect to the initiation of the unlimited RRP facility?

A report from Credit Suisse’ Global Rates Strategy team provides food for thought on Thursday.

For example, while we’ve already discussed the prospect of safe-asset starved MMF funds deploying en masse to the RRP facility, there’s an important nuance to be noted with respect to the winner funds and the loser funds in this new money-market paradigm.

From CS (our emphasis):

We expect that government-only money market funds are likely to see an inflow of $600bn-$1tn, while institutional prime funds could lose between $300-$500bn over the course of the year.

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A case of post ‘Fed-hike’ traumatic stress disorder for markets?

The rate hike was all priced in. They said.

But might everyone who made this purchasing decision just before Christmas live to regret it?

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On the puzzling increase in UST settlement fails

FT Alphaville has tackled the issue of an explosion of settlement fails in US Treasury markets before, referencing how fails seem to balloon in times of crisis, such as the 2008 global financial crisis, when the incentive not to deliver owed-securities increases — a stealth form of financing in the view of some observers.

It’s precisely the sort of behaviour that the TPMG fails charge, introduced in May 2009, was supposed to nip in the bud by making it too costly to neglect to deliver a security. Yet, despite having quelled the number of UST fails when it was first introduced quite successfully, its capacity to serve as an effective fail deterrent seems to be slipping. Read more

Hungry, hungry, hungry money market funds… about to get Fed

Credit Suisse’s Zoltan Pozsar, shadow banking and all-round financial plumbing expert, has crunched the ways the Wednesday’s Fed rate hike is likely to impact the underbelly of the financial system and notes the biggest outcome is probably the entry of some very hungry money market funds into the Fed’s $2tn RRP facility:

Money funds are getting ready to bid away hundreds of billions in non-operating deposits from banks and invest those funds in reverse repos at the Fed. The more generous these funds are in passing on the first hike, the more deposits they will lure away from banks and the greater the usage of the RRP facility. Banks on the other side of these flows are about to learn the validity of their assumptions regarding deposit betas (how deposits will respond to higher rates) and the liquidity profile of the high-quality liquid asset (HQLA) portfolios built based on these assumptions.

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Macro Live, special rate-rise edition starting at 6:30pm London time (1:30pm in New York)

Tick tock. Tick tock. Just a few hours away from the Fed statement of the post-GFC-crisis era.

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The Fed may be about to atone for the “mistake” of 1998

History never repeats and most analogies are wrong, but there are some intriguing parallels between the global macro environment in 1997-8 and today.

Back then, the Federal Reserve controversially chose to ease policy, first by refraining from rate hikes anticipated by the markets and then by cutting its target for Fed funds by 75 basis points. Many believe this choice inflated equity prices and encouraged excessive business investment at a time when America’s economy was already running hot. Despite the subsequent fillips of tax cuts, a boom in defence spending, and a housing bubble, the aftermath was a massive decline in employment and painfully slow recovery.

A simple comparison between conditions then and now suggests the Fed’s explicit desire to “normalise” financial conditions may come from a desire to avoid repeating the experiences of the late 1990s. Whether policymakers are right to prioritise the real economic data, which tells us what’s already happened, over the action in the financial markets, which tends to affect what will happen, is anyone’s guess. Read more

So you want to raise rates? Cut out and keep edition

While you wait for the Fed’s actual implementation note — which will presumably follow its first rate rise since 2006, ‘due’ on Wednesday — here’s some useful guesswork from BNP Paribas:

Do click to enlarge.  Read more

A dirty dozen decisions deferred

Forward guidance under Ben Bernanke and then Janet Yellen has been… changeable, notes David Kelly, chief strategist for JP Morgan Asset Management, who shares a reminder of the shifting timescale.

Here’s the Federal Reserve on when it would be appropriate to raise the target range for the federal funds rate:

January 2009 — not “for some time”

March 2009 — not “for an extended period” Read more

Eurodollars, FX reserve managers and the offshore RRP issue

Previously of the NY Fed markets team and now at Credit Suisse, nobody knows repos and shadow banking like Zoltan Pozsar. In his latest co-authored piece with James Sweeney he takes a closer look at how an eventual Fed rate liftoff may play out technically on the ground.

As has been widely reported, the Fed is expected to utilise Reverse Repo (RRPs) facilities with non-bank money market funds as part of its unwind procedure. This is unprecedented to a degree, for it represents the effective expansion of the Fed’s balance sheet beyond the official bank sector.

By offering deposit services to non-banks at positive rates, the Fed will be pulling liquidity from the system by way of transforming excess reserves currently sitting on the books of the formal banking sector into non-bank reserve assets. While the overall amount of liquidity in the system will technically remain the same, what will change is who owns the liabilities. Read more

Some Fed thoughts: QE4 and all that

After a considerable period of boredom, trying to figure out America’s central bank has gotten interesting again.

For months, the mid-September meeting of the Federal Open Market Committee was being telegraphed as the most likely start date of the “normalisation” process. Or, to use another bit of central banker-ese, the day when short-term interest rates would begin “liftoff” from the current range of zero to 25 basis points. Read more

Fed staff error reveals “potential” output is mostly nonsense

On June 29, someone at the Fed inadvertently included the staff’s June economic projections, which are supposed to be secret, into publicly available computer files. On July 24, the Fed decided to let the world know that it goofed, while also letting you download the charts and tables for yourself. Then it turns out that some of the information released was incorrect and had to be updated yet again.

For convenience, here’s a link to the table, which is somewhat useful to compare to the published projections of FOMC members. You’ll notice that the staff is much more pessimistic about real growth for 2015 than the entire range policymakers, and more pessimistic for 2016 growth than most policymakers polled for their projections. Otherwise there isn’t much new there. Read more

Court says Fed broke the law but won’t pay a price

Judgment from the United States Court of Federal Claims on the AIG lawsuit:

Section 13(3) did not authorize the Federal Reserve Bank to acquire a borrower’s equity as consideration for the loan…Moreover, there is nothing in the Federal Reserve Act or in any other federal statute that would permit a Federal Reserve Bank to take over a private corporation and run its business as if the Government were the owner. Yet, that is precisely what FRBNY did.

It is one thing for FRBNY to have made an $85 billion loan to AIG at exorbitant interest rates under Section 13(3), but it is quite another to direct the replacement of AIG’s Chief Executive Officer, and to take control of AIG’s business operations. A Federal Reserve Bank has no right to control and run a company to whom it has made a sizable loan.

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A late entry in the punny Greek headline comp…

It’s from Michael Hartnett, of BoA Merrill Lynch, but you probably would have guessed that if asked.

My Big, Fat Greek Dreading (and other risks)
To the upside: concerns over Greece prove misplaced, investors over-hedge Fed risks, passage of TPP boost investor & corporate confidence, tech’s creative disruption = higher PE, lower CPI. To the downside: inflation surprises to upside.

Hartnett doesn’t have much to add specifically on Greece, other than this intriguing chart. Read more

Is the Fed bluffing on rate hikes?

It might not be polite to say it overtly, but concerns are growing that the Fed’s rate hiking promises may be nothing more than a big bluff.

The vogue for doubting Fed rhetoric started in earnest on March 11, when Ray Dalio, founder of hedge fund firm Bridgewater Associates, wrote to investors that there was a risk if the Fed raised rates too fast it could create a market rout similar to that of 1937. Read more

US bank assets, then and now

We know there’s been a great deal of change on the asset-side of banks’ balance sheets since the crisis. But if you ever wanted it summed up in one table, look no further than the following:

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Did the Fed’s QE actually do anything for the real economy?

Eric Rosengren, the President of the Federal Reserve Bank of Boston, gave a speech in Frankfurt on Thursday arguing that the Fed’s full employment mandate gave the central bank more flexibility to be aggressive earlier, and that open-ended programmes that are tied to economic targets are more effective than purchases of predetermined size and duration.

Nothing novel there. But his speech also contained, perhaps inadvertently, some interesting arguments that the rounds of bond-buying after the acute phase of the financial crisis did little for the real economy. (We covered the tenuous relationship between asset purchase programmes and inflation here.) Read more

Money Supply: Farewell to Narayana Kocherlakota

Narayana Kocherlakota, president of the Minneapolis Fed, today announced he will step down in 2016.

“Earlier this week, I informed the board of directors of the Federal Reserve Bank of Minneapolis that I do not intend to seek reappointment to a new term as president of the Bank after my current term ends on February 29, 2016,” Kocherlakota said. “I became president of the Minneapolis Bank in October 2009 so that I could be of service to my country in an economic emergency.

I have been honored to play a role in shaping the response to that dire situation. While challenges lie ahead for the Federal Reserve System, the state of crisis has passed, and I have decided not to continue my service into a new term.”

It is rather early to announce a 2016 departure but Mr Kocherlakota had made his decision. “I think once he had made up his mind and informed the board we thought it was good governance to announce it,” said Randall Hogan, chairman of the Minneapolis Fed board. Mr Hogan said the board is not launching an immediate search process, implying Mr Kocherlakota will indeed serve out his term, which runs until February 2016. Read more

ECB vs Fed stimulus in two charts

CreditSights points out today that changes in gross ECB liquidity provided to the euro area’s banking sector closely track changes in 10 year Bund yields:

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Money Supply – Dudley, the Fed & financial markets

Could unexpectedly low levels of Treasury yields, pushed down by monetary policy in Europe and Japan, lead the Fed to raise interest rates earlier and faster than it otherwise would? That’s the prospect raised by an intriguing and important speech today by New York Fed president William Dudley. He makes dovish arguments about when rates should lift off, but forecasts they actually will rise by mid-2015, in line with consensus. He then breaks new ground by suggesting the pace of rate rises will depend on how financial markets respond to them.

(1) Dudley is dovish… Read more

Fed of mystery and supplementary normalisation tools

If analyst comments in our inbox are anything to go by, the latest FOMC minutes, released on Wednesday, provided nothing much to write home about. Everything revealed was pretty much as expected.

One thing did prompt our eyebrows to raise, however. More on that below, but first here’s some of the reaction. Stephen Lewis at Monument Securities wrote:

The minutes of the FOMC meeting on 28-29 October sprang few surprises. Compared with earlier meetings, FOMC members gave more prominence to the risks stemming from worsening conditions elsewhere in the world but ‘many participants’ expected the impact of foreign developments on US growth to be limited.

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Raising rates mysteriously

Paul Krugman commented this week that despite all the talk about imminent rates raises, the Fed doesn’t actually have much reason to raise rates just yet.

Or as he put it:

And as usual, I wonder why anyone is talking about this at all. Yes, unemployment has fallen. But there is huge ambiguity about what level of unemployment is sustainable given changing demography, the uncertain degree to which people might return to the work force given better job availability, and so on.

Though, none of that has stopped the Fed from slyly tinkering with the rates it offers on its still experimental Term-Deposit Facility. Read more

Quantitative pleasing

With the end of QE, just a quick chart to reiterate that central bank bond buying doesn’t work the way one might expect.

Far from reducing bond yields, when the Federal Reserve buys bonds, it tends to make yields go up. Equally, when it stops – or says it will stop, or tapers – the yield goes down. Read more

Why didn’t QE3 raise inflation expectations?

The Fed’s balance sheet is no longer in expansion mode, which means it’s time for post-mortems of the most recent asset purchase programme. (Our colleague John Authers has a very good round-up of what did and didn’t happen since QE3 began.)

We want to focus on the fact that the most recent round of bond-buying seemed to have no inflationary impact. If anything, an observer of the data who had no preconceptions about monetary policy operations would conclude that QE3 was disinflationary. Alphaville writers have been exploring this possibility for years (though without firm conclusions).

Let’s start by looking at the changes in actual inflation since the start of 2010. Read more