Tag Archives: Federal Reserve

China Said to Plan Asking U.S. on Timing of Fed Rate Hike

Bloomberg, May 25, 2016

China ask USA

Chinese officials plan to ask their American counterparts in annual talks next month about the chance of a Federal Reserve interest-rate increase in June, according to people familiar with the matter.

The Chinese delegation will try to deduce whether a June or a July rate rise is more likely, as the nation’s policy makers prepare for the potential impact on financial markets and the yuan, the people said, asking not to be named as the discussions were private. In China’s view, if the Fed does lift borrowing costs, a July move would be preferable, the people said. A People’s Bank of China press officer later denied that China plans to ask about the timing of a Fed rate hike.

China’s exchange rate has already been weakening as expectations rise for the U.S. central bank to boost its benchmark rate for the first time since it ended its near-zero policy in December with a quarter percentage point increase. It’s not unusual for senior officials to press each other on their policies, and any inquiries by the Chinese about the Fed would follow repeated expressions of concern from the U.S. about China’s intentions with its exchange rate. The Treasury Department put China on a new currency watch list last month to monitor for unfair trade advantages.

Tread Cautiously

“The Chinese side will argue that the U.S. should tread cautiously as it tightens monetary policy and avoid any surprises,” said Mark Williams, chief Asia economist at Capital Economics in London, who participated in U.K.-China meetings when working at Britain’s Treasury. “The Federal Reserve will make its decision solely on what it deems best for the U.S. economy, but it is clear that concerns about China have influenced its thinking about the balance of risks facing the U.S.”

The yuan has dropped about 1.2 percent this month, joining emerging market peers from India to Brazil and Malaysia in depreciating versus the U.S. currency. On Wednesday, the yuan traded near a three-month low after China’s central bank set the weakest reference rate in five years.

The annual U.S.-China Strategic and Economic dialog talks are scheduled for June 6-7 in Beijing, little more than a week ahead of the Fed’s next policy meeting. Interest-rate futures currently show about a 34 percent chance of a boost on June 15, from the Fed’s current target range of 0.25 percent to 0.5 percent for the federal funds rate.

‘Pretty Anxious’

“Chinese officials are pretty anxious about the Fed as a June rate hike — which is not fully discounted in the market — may boost the dollar,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “This could pose a threat or make it difficult for the PBOC to keep a stable RMB exchange rate,” he said, referring to the renminbi, another term for the yuan. “A less aggressive Fed stance is in China’s interest.”

While the U.S. delegation is led by the secretaries of the Treasury and State departments, the chair of the Fed has typically attended the gatherings. Chair Janet Yellen has participated in both of the meetings since taking the U.S. central bank’s helm in 2014. Fed policy makers have increasingly in recent years highlighted the role of international ramifications of their policy decisions — something directly addressed in the past three years of joint “fact sheet” statements from the U.S.-China talks.

Fed’s Pledge

“The Federal Reserve is sensitive to the effects of its polices on the international financial system. A key goal of the Federal Reserve is to maintain financial stability both domestically and internationally,” the fact sheets said, as posted on the U.S. Treasury’s website.

Consulting on policy decisions would be in keeping with a pledge that both China and the U.S. made as members of the Group of 20. After a Shanghai meeting in February, G-20 finance chiefs pledged to consult closely and “clearly communicate our macroeconomic and structural policy actions to reduce policy uncertainty” and minimize spillovers.

The U.S. embassy in Beijing didn’t have an immediate comment on whether the Fed will participate in the Beijing talks.

China’s indications of concern about coming Fed policy moves follow a period of relative stability for the country’s markets. A surprise devaluation in the yuan last August helped send both Chinese and global stock markets tumbling. Yellen in September indicated that China worries played a role in delaying a Fed rate hike. Meantime, China last year ended up spending a record amount of its foreign-exchange reserves to counter capital outflows and a sinking yuan.

Volatile Times

Volatility jumped again in January, when the yuan weakened amid what was perceived to be a lack of clear communication from China on its intentions. Repeated assurances that Chinese policy makers were committed to a stable currency helped to quell concerns by February. China was also helped by a slide in the dollar as expectations for an earlier Fed rate increase diminished.

The Fed narrative is now changing, with officials signaling that their June meeting is in play. New York Fed President William Dudley said earlier this month that the policy-setting committee is moving closer to raising rates at one of its next two meetings and that the fact this message was getting through to financial markets was welcome news.

“The Fed’s inaction has given China a short break,” Kevin Lai, chief economist for Asia excluding Japan at Daiwa Capital Markets, wrote in a note this week. “Yet, the fundamental picture hasn’t changed. Global investors seem increasingly concerned about the level of indebtedness in China and skeptical about its ability to handle a range of problems.”

Source

Markets to Fed: You don’t have our blessing to hike yet

CNBC, May 23, 2016

yellen_janet

The odds of a Federal Reserve rate increase have risen recently, but financial markets still haven’t given the central bank a green light to keep tightening, Jurrien Timmer of Fidelity Investments said Monday. 

“I don’t think the market is giving the Fed a blessing at all. I think the Fed is testing the waters to see if they can get away with a June hike, and so far, at 30 percent odds, we’re not quite there yet,” the company’s director of global macro told CNBC’s “Squawk Box.”

The chances of a rate hike were brought up by increasingly hawkish remarks from Fed officials, most recently St. Louis Fed President James Bullard.

Bullard, a voting member of the central bank’s policymaking committee, said in a Monday speech that a relatively tight labor market in the United States may put upward pressure on inflation, raising the case for higher interest rates.

“Labor markets are relatively tight. This may put upward pressure on inflation going forward,” he said. “This is an important factor supporting the FOMC view on the expected path of the policy rate.”

The central bank has not raised interest rates since December, when it hiked for the first time since 2006.

That said, this may not mean the market can handle another rate hike, Peter Boockvar, chief market analyst at The Lindsey Group, said in the same interview.

“I don’t think the markets are ever ready for a Fed rate hike, particularly in this context. [We’re] seven year into a bull market and [in] the second-longest of all time,” he said. “I think the skittishness in markets … is sending us a signal that maybe they’re not.”

John Rubino: Is This The Debt Jubilee?

By John Rubino, Mar 17, 2016

Not so long ago the financial world viewed certain numbers as limits beyond which lay trouble. Interest rates near zero, for instance, were thought to risk destabilizing the banking system. And government fiscal deficits above 3% were considered so dangerous that exceeding this level was prohibited by the Maastricht treaty that all euorzone members were required to sign.

Those numbers — 0% and 3% — are still considered bad. But now for the opposite reason: They’re insufficiently aggressive.

A big part of the world, as everyone now knows, operates with negative interest rates. And prominent economists are urging even greater negativity as a way to make government debt profitable and get people borrowing and spending again.

More recently, fiscal deficits — barely below 3% of GDP in the developed world — have come to be seen as dangerously inadequate and in need of dramatic expansion. From today’s Bloomberg:

Say good-bye to the bond vigilantes and hello to the budget brigade

A passel of investors, academics and even central bankers are calling on governments to spend more and tax less to provide a budgetary boost to the struggling global economy. That’s a 180 degree turn from the bond vigilantes of yore who pressed for smaller deficits and less debt about a quarter century ago.To hear the budget backers tell it, bigger shortfalls are a no-brainer. With interest rates at — or even below — zero in much of the industrial world, central bankers are pushing up against the limits of what they can do to buttress growth. Yet those same low interest rates make it exceedingly cheap for governments to borrow money to finance bigger budget shortfalls.

Deficit spending March 16

“A large part of what monetary policy can do, it has done,” former Treasury Secretary Lawrence Summers told Bloomberg television last month. “In Japan, in Europe, and perhaps on a forthcoming basis, in the U.S., we need further impulses to growth,” including from fiscal policy.

The dirty little secret is that budgets are starting to be loosened in some countries after years of austerity. Yet in many cases, that is more by happenstance than by intent. And the size of the resulting stimulus is small and far short of the more sweeping steps advocated by card-carrying members of the budget brigade.

“There’s pretty widespread consensus in the financial community that fiscal policies should come to the rescue,” said Joachim Fels, global economic adviser for Pacific Investment Management Co., which oversees $1.43 trillion in assets.

Even central bankers are shedding their traditional reticence to stray into the political arena to sound off on the need for a more balanced growth strategy.

Lever ‘Disabled’
“It remains a pity that the fiscal lever seems to have been disabled,” Federal Reserve Vice Chairman Stanley Fischer said in a March 7 speech in Washington.

Canadian Prime Minister Justin Trudeau is leading the charge among government leaders in calling for a more active fiscal policy. “Don’t fall into the trap that thinking that balancing the books” is an end in itself, he said in a March 2 interview with Bloomberg. “It’s a means to an end.”

Budget constraints are in fact being eased by some countries. Government spending will boost U.S. growth about 0.2 percentage point this year, according to the Congressional Budget Office, thanks in part to a deal between President Barack Obama and Republican lawmakers to loosen caps on discretionary outlays. Even such a modest contribution would be the biggest since 2009.

In Germany, it’s stepped-up spending on refugees that’s turning fiscal policy more supportive of growth.

“Germany was neutral in 2015 and is now highly expansionary this year,” Ludger Schuknecht, director general of economic policy and international economy at the country’s Ministry of Finance, told a meeting of economists in Washington on March 8.

China Spending
And China unveiled plans for a record fiscal deficit this year as part of its effort to bolster its sagging economy. The Finance Ministry’s budget indicated on March 6 that the shortfall would increase to 3 percent of GDP from 2.3 percent.

Yet such steps fall short of the efforts advocated by the likes of Summers, who has repeatedly warned that the world economy faces a persistent deficiency of demand that policy makers need to address.

Angel Ubide, a managing director in Washington at Goldman Sachs & Co., complained that government officials are stuck with a long-standing “mindset” that fiscal policy shouldn’t be used to manage the ups and downs of the economy — except, according to Fischer, “in extremis, as in 2009.”

“We should not put fiscal policy in a corner and say we cannot use it,” Ubide said. “With interest rates as low as they are, there are surely public investment opportunities that generate positive returns.”

Mohammed El-Erian, chief economic adviser at Allianz SE, said he’s worried that it would take a downturn in the global economy to prompt concerted action on the fiscal front.

“That is my fear,” said El-Erian, who is also a Bloomberg View columnist. “How much of a crisis do we need as a wake-up call” for policy makers?, he asked rhetorically.

The sense of panic is palpable, and not surprising given the troubles that beset pretty much every part of the global economy. Latin America’s biggest countries are in various kinds of crisis. Japan’s Abenomics policy is widely seen as a failure. Europe has both negative interest rates and deflation, which seems like a deadly combination. US manufacturing is contracting and corporate profits are shrinking. China’s slowdown has sparked the kind of labor unrest that terrifies its leaders.

Hence the calls from the architects of the policies that got us here for something dramatic to save their reputations and investment portfolios. But the one thing that seems to be missing from these glib prescriptions is an acknowledgement that we’ve been there, done that, without the miraculous results now being promised. Post-2008, the world ran huge fiscal deficits. The US nearly doubled its federal debt, China borrowed even more and Japan (already running big deficits) kept on without missing a beat. At this point it’s helpful to revisit the McKinsey & Company study showing that the world took on $57 trillion of new debt between 2007 and 2014:

Global debt 2014

So the question that’s been dogging proponents of negative interest rates — if zero didn’t work why should we expect -1% to do better — needs to be asked of deficit fans: If $57 trillion of new debt didn’t produce a robustly-growing global economy, why gamble on another $57 trillion?

Meanwhile, the two concepts — NIRP and deficits — dovetail in a fairly terrifying way: All the new debt we take on to rekindle growth will have to be refinanced in the future. So the more we borrow now the more we’ll have to roll over then — and the bigger the impact on government budgets of an eventual rate normalization. Unless the ultimate plan is to never raise rates to old-school positive levels, in which case the world of the future is so different from that of the past that we may as well toss existing theories of market dynamics and individual freedom out the window.

A final thought: One way to sell ramped-up government deficits in the face of lingering doubts will be to give the money directly to citizens. This has appeal across the political spectrum — on the left because giving away free money is always popular and on the populist right because it bypasses the much-hated big banks. Coupled with a requirement that recipients pay down existing debts, such a “QE for the people” might bring along even traditional debt-averse economists. In other words, this might finally be the year of the debt jubilee.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:

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John Rubino: Rising Interest Rates? Never Mind

By John Rubino, Feb 19, 2016

It was always a matter of when, not if, the financial markets would tell the Fed to stop raising interest rates. And it appears the message has been received:

Fed’s Bullard speaks against further interest-rate hikes

(MarketWatch) — A Federal Reserve official who was one of the strongest advocates of raising rates last year now believes the central bank should refrain from further boosts in borrowing costs for now.In a speech in St. Louis on Wednesday, Federal Reserve Bank of St. Louis President James Bullard said declining interest expectations and declines in financial markets argue against further boosts in the central bank’s short-term interest rate target, which now rests at a range of 0.25% to 0.50%.

“Two important pillars of the 2015 case for U.S. monetary policy normalization have changed,” Bullard said. “These data-dependent changes likely give the [Federal Open Market Committee] more leeway in its normalization program,” he said in reference to central bankers’ plans to raise rates further this year.

“Inflation expectations have fallen further,” and with the losses seen in markets, “the risk of asset price bubbles over the medium term appears to have diminished,” he said. That takes pressure off the Fed relative to last year, when the price outlook and high asset prices pointed to a need for higher rates, the official said.

Bullard spoke in the wake of the release of meeting minutes from the Fed’s January policy meeting. Having boosted rates in December the Fed refrained from action last month. The minutes showed policy makers were struggling to come to terms with why markets were performing so badly against a relatively sound U.S. economic outlook.

So much good stuff here.

“Policy makers were struggling to come to terms with why markets were performing so badly against a relatively sound U.S. economic outlook.” Apparently the highly-trained professionals at the Fed, when gauging the health of the economy, overlooked collapsing commodity prices, a shrinking manufacturing sector and soaring levels of student and auto debt, and saw only the fictitious headline unemployment number.

The reason for this apparent blind spot goes right to the heart of the Keynesian/Austrian debate: The former (who populate government and academia) don’t include debt in their models, and so tend to view any kind of consumption or jobs growth as unambiguously good regardless of how much borrowing is necessary to achieve it. So rising sub-prime auto loans, for instance, are a healthy sign because they signal more people buying more stuff.

Austrians, in contrast, focus on society’s balance sheet and view soaring leverage — especially for things of questionable value like cars and many college degrees — as a potential problem. Guess who is always right at big turning points?

Other data that have been screaming “don’t raise rates” include:

Margin debt — created when investors borrow against their stocks to buy more stocks — soared to a new record in 2014. For mainstream economists this was fine because it meant people were optimistic and willing to both speculate and — due to the wealth effect of rising equity prices — buy more houses, TVs and SUVs. Austrians would simply note what happened the previous two times investors leveraged themselves to the hilt and assume that a reversal is imminent.

Margin debt 2014

The velocity of money — the rate at which dollars, once created, are spent — has been plunging as debt has been soaring. To mainstream economists, this is “puzzling.” To Austrian economists it’s obvious that if you borrow too much money you’ll spend less in the future because you’re either unwilling or unable to borrow more.

Velocity of money June 14

One final illustration of Fed cluelessness is the idea that plunging commodity prices boost the economy by putting money into consumers’ pockets. See Janet Yellen: Cheap oil is good for America.

Here again, this ignores the related leverage. Several trillion dollars have been borrowed via bank loans and junk bonds to fund a vast expansion of US oil and gas drilling capacity. Should a big part of that debt default — which now looks certain — the impact will more than offset cheaper gas. See Commodities’ $3.6 trillion black hole.

We could do this all day. For almost every aspect of the modern global economy, the people pulling the levers seem to be ignoring the single biggest indicator of systemic health, which is the balance sheet. So the Fed, ECB, Bank of Japan, Congressional Budget Office, and most university economics departments will continue to be surprised by what happens and will, as a result, keep doing the wrong thing.

Now, if raising interest rates was a dumb thing for the Fed to do, does that mean cutting interest rates would be smart? No! The lesson to be drawn from today’s mess is that the way to avoid a debt-driven crisis is to refrain from borrowing too much in the first place. Once a society is sufficiently over-leveraged there’s really nothing it can do but let the inevitable bust happen and resolve to do better next time.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:

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John Rubino: 2007 All Over Again, Part 3: Banks Starting To Implode

By John Rubino, Feb 8, 2016

So far, each financial crisis in the series that began with the junk bond bubble of 1989 has been noticeably different from its predecessors. New instruments, new malefactors, new monetary policy experiments in response.

But the one that’s now emerging feels strikingly similar to what just happened a few years ago: Banks overexposed to assets they thought were safe but turn out to be highly risky see their balance sheets deteriorate, their liquidity dry up and their stocks plunge.

This time it’s starting in Europe, where bank stocks are down by over 20% year-to-date and credit spreads are exploding. For a general look at this process see Is Another European Bank Crisis Starting?

Not surprisingly, the scariest stories are emanating from Italy which, despite inventing the mega-bank concept during the reign of the Medici, seems unable to grasp how money actually works. Check out the following Wall Street Journal chart of non-performing loans. When 16% of an entire country’s borrowers have stopped making their payments, that country is pretty much over.

Italy non performing loans

All eyes are therefore on Italy’s Banca Monte dei Paschi, which has a non-performing loan ratio of 33% and, as a result, a plunging share price. When the Italian economy finally blows up, this will probably be where it starts.

But here the story takes an even more disturbing turn. It seems that the other lender now spooking the markets is none other than Deutsche Bank, pillar of the world’s best-performing economy. Shockingly-bad recent numbers have combined with questions about its mountain of derivatives and exotic debt to put DB in a very uncomfortable spotlight. Excerpts from analysis of the aforementioned debt:

What Deutsche Bank’s Plunging CoCo Bonds Just Said about the Bank’s Future

(Wolf Street) – Shares of scandal-plagued, litigation-hammered, loss-ridden Deutsche Bank, one of the largest and least capitalized megabanks in the world, closed at €16.32 today in Frankfurt, down 50% from April last year. Investors are fidgeting in their seats, cursor on the sell-button.In October, it had announced that it would shed divisions, clients, and employees, and hopefully some risks, and that it would scrap its dividends.

January 20, the bank reported “earnings” – in quotes because it was a sea of red ink. It had lost €2.1 billion in the fourth quarter, including €1.2 billion in its investment banking division where revenues had plunged 30%. This brought “earnings” for the year to a record loss of €6.8 billion.

All these losses, write-offs, and fines have eaten into Deutsche Bank’s already low capital buffer. To prop up Tier 1 capital, Deutsche Bank had issued the equivalent of €4.6 billion (about $5 billion) in “contingent convertible bonds,” spread over four issues, two in dollars, one in euros, and one in pounds – something for everyone.

These CoCo bonds, as they’re called, are special: The bank can call them after a certain date but doesn’t have to redeem them; annual coupon payments are contingent on the bank’s ability to stay above certain cash and capital requirements, as specified by German and European banking regulations; and investors cannot call a default if the bank fails to make the coupon payment.

Despite the risks, yield-desperate investors eagerly gobbled them up. Now Deutsche Bank is just a hair away from breaching the limits. And there’s a lot of nail-biting.

For example, its 6% euro CoCo bonds had been beaten down to a record low of 85.5 cents on the euro by January 21, from a 52-week high in April last year of 102.11, and down from their peak in early 2014 of 104, shortly after they’d been issued.

Meanwhile, it’s not clear what policy changes, if any, will save the day:

A Wounded Deutsche Bank Lashes Out At Central Bankers: Stop Easing, You Are Crushing Us

(Zero Hedge) – Ten days ago, when Deutsche Bank stock was about 10% higher, the biggest German commercial bank declared war on Mario Draghi, as we put it, warning him that any further easing by the ECB would only push stocks (with an emphasis on DB stock which has gotten pummeled over the past few months) lower. What it got, instead, was a slap in the face in the form of a major new easing program when the Bank of Japan announced it is unveiling negative rates just three days later.Which is why overnight a badly wounded Deutsche Bank has expanded its war against the ECB to include the BOJ as well, and in a note titled “The Risks From Further ECB and BOJ Easing” said the benefits to risk assets from further easing no longer exist, and in fact the “impact has been exactly the opposite.”

In other words, we have reached that fork in the road within the monetary twilight zone, where Europe’s largest bank is openly defying central bank policy and demanding an end to easy money. Alas, since tighter monetary policy assures just as much if not more pain, one can’t help but wonder just how the central banks get themselves out of this particular trap they set up for themselves.

The Zero Hedge article is long and a bit technical but well worth the effort for anyone who wants to understand the bind in which big banks — and their central bank benefactors — find themselves. To sum up: the current situation is untenable, easier money will make things worse, and tighter money will make things a lot worse.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:

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