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
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
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
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.
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
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
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:
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
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
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:
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
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.
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
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
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
(The chart frames the upper and lower forecasts of the central tendency, which removes the highest three and lowest three forecasts of the FOMC as a whole. The red line is the midpoint between the two.)
Starting in 2009, the midpoint of the central tendency projections for the long-run unemployment rate climbed from 4.9 per cent to 5.6 per cent during the next three years. Read more
A funny thing has happened since the Federal Reserve announced it would begin cutting back on its bond-buying on December 18, 2013: the yield curve has flattened like a pancake.
A new paper by several Harvard economists, including former Treasury Secretary Larry Summers, argues that a little more than a third of the impact of the Fed’s asset purchase programmes was “offset” by the Treasury’s decision to lengthen the maturity of its outstanding bonds:
Most people know that China’s currency is classified according to trading conditions. There is, for example, CNY, which refers to onshore yuan. There’s CNH, which refers to Hong Kong (offshore) yuan. And then there’s NDF, the non-deliverable forward market.
What differentiates these currencies are the terms and conditions that apply to those particular market zones, and how easy or not it is to transfer currency in and out. As implied yields of the respective markets show (chart via BNP Paribas), the rates of return for all of these markets varies significantly — because they are, to some extent, entirely different currencies:
The Federal Reserve’s latest flow of funds data shows that US households have rediscovered their credit cards, and lenders are eager to oblige them. Just look at this:
Since I wrote about the Fed debate ten days ago, the market consensus has moved rapidly towards a change in the Fed’s “considerable time” language this Wednesday. I was cautious about the timing, however, because this is not straightforward – coming up with new language is quite a challenge.
This is a (very long) attempt to think through the Fed’s options. The bottom line is that “considerable time” may survive in some form on Wednesday, but if so, I’ll be surprised if there is not a significant change to the statement that sets up its eventual departure. Read more
One private equity chief went so far as to publicly thank Ben S. Bernanke, the Federal Reserve chairman until last month, whose program of extraordinary economic stimulus has helped push stocks higher, feeding the private equity machine.
“Thank you, Ben Bernanke. I saw him last Thursday, and I thanked him,” Mr. Schwarzman of Blackstone said during a conference in December. “The opportunity for us to be able to attract funds is very, very high.” Read more
Whilst everyone was focused on the ECB on Thursday…
… the Fed pulled this little snippet out of its bag:
As part of the continuing program of operational testing of its policy tools, the Federal Reserve plans to conduct a series of eight consecutive seven-day term deposit operations through its Term Deposit Facility (TDF) beginning in October.
Okay, the Fed has tested term deposits before, so it’s not that mind blowing an announcement in and of itself. The significance, if any, is that it’s subtle confirmation that both reverse repos and TDs will be used in the Fed’s unwind process. The maximum award has also been increased to $20bn. Read more
It is probably the highest profile event on the Fed calendar: the chair’s opening speech at the Kansas City Fed’s symposium in Jackson Hole, Wyoming. The setting is spectacular; the audience runs the world’s central banks. Markets go on high alert for new guidance on policy. To add to the sense of occasion this year, it will be Janet Yellen’s first visit as Fed chair.
The oddity is that Jackson Hole’s reputation as a market mover is largely accidental. It is not an obvious venue for the Fed to communicate policy: what, in fact, could seem more out-of-touch than proclaiming the nation’s economic path from a gorgeous mountain resort in one of the richest zip codes in the USA? It is most likely, therefore, that Yellen’s speech on Labour Markets (the title has been announced) will contain a lot of important analysis but much less red meat on policy. Read more
The Federal Reserve has just released its first “Report on the Economic Well-Being of U.S. Households“. It provides some useful context for the ongoing debates about the income distribution and excess savings.
A few particularly dispiriting highlights: Read more
The White House has joined the debate about declining labour force participation with an excellent report from the Council of Economic Advisers. (The fingerprints of Harvard’s James Stock are in evidence in some punctilious time-series econometrics.)
The CEA reaches similar conclusions to a number of other studies. Most of the decline in labour force participation was demographic, due to an aging population; a modest proportion was due to the recession and its unusual severity. Read more
Note: FT Alphaville is now playing host to posts from the FT’s Money Supply box. Enjoy (and argue away, if you see fit). Here’s Robin Harding, the FT’s US economics editor…
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The Federal Reserve’s June minutes are out and as usual offer good insight into the FOMC’s thinking when it comes economic confidence and recovery (more positive) as well as its opinion on rates (still dovish).
But they also reveal a new preoccupation with matters related to exit strategy and financial plumbing.
Here’s the section we’re referring to (H/T David Beckworth)
While generally agreeing that an ON RRP facility could play an important role in the policy normalization process, participants discussed several potential unintended consequences of using such a facility and design features that could help to mitigate these consequences. Most participants expressed concerns that in times of financial stress, the facility’s counterparties could shift investments toward the facility and away from financial and nonfinancial corporations, possibly causing disruptions in funding that could magnify the stress.
Janet Yellen says share valuations remain within “historical norms”.
Two words: “irrational exuberance”. Read more