Tag Archives: Monetary Policy

Brainard Says Prudence Warranted as Hiking Rates Poses Risks

Bloomberg, Sep 12, 2016

 

Federal Reserve Governor Lael Brainard counseled continued prudence in tightening monetary policy, even as she said the economy is making gradual progress toward achieving the central bank’s goals.

“The case to tighten policy preemptively is less compelling” in an environment where declining unemployment has been slow to spur faster inflation, Brainard said Monday, according to the text of her prepared remarks in Chicago. She made no reference to a specific meeting of the policy-setting Federal Open Market Committee.

Brainard’s comments are the last before the Fed enters its quiet period, during which officials abstain from publicly speaking about monetary policy in the run-up to an FOMC meeting. Policy makers will gather in Washington Sept. 20-21 to discuss their monetary policy stance. Recent comments from the committee’s voters have not projected a cohesive signal about whether they will lift interest rates or stay on hold.

 

“Asymmetry in risk management in today’s new normal counsels prudence in the removal of policy accommodation,” Brainard said, arguing that with interest rates near zero, it’s easier for the Fed to react to faster-than-expected demand than to a negative surprise that upsets the economy. “I believe this approach has served us well in recent months.”

Patient Approach

Brainard has consistently urged patience in hiking rates, pointing to the uncertain global economic environment and unconvincing improvement in inflation as reasons for caution. Her most recent speech before today was on June 3.

In Monday’s speech, Brainard highlighted five major reasons for caution: inflation is less responsive to labor-market improvement than in the past, labor-market slack seems to persist, financial transmission from foreign markets is strong and poses a risk, and the interest rate where policy moves from easy to tight is lower than in the past — and is likely to stay there for some time. Her final point is that monetary policy is less able to respond to negative shocks than to a quick pickup in demand.

Despite that cautious view, Brainard also pointed to recent developments that show the economy is moving toward achieving the Fed’s goals of maximum employment and 2 percent inflation. She said the job market is making progress and getting closer to full employment and the Fed has “seen signs of progress on our inflation mandate.”

 

Inflation has not advanced as much as the Fed had hoped, with both its preferred gauge of headline and core price pressures still beneath the central bank’s 2 percent target. U.S. gross domestic product growth has also been slow. Still, Brainard said recent data suggest that third-quarter growth will accelerate.

Looking at the longer-term outlook for monetary policy, Brainard opened the door to considering a reframing of how the Fed looks at the economy. San Francisco Fed President John Williams has said he and his colleagues should consider their future framework in a world where neutral interest rates, those that neither stoke nor slow growth, may be permanently lower.

“There is a growing literature on such policy alternatives, such as raising the inflation target, moving to a nominal income target, or deploying negative interest rates,” Brainard said. “These options merit further assessment. However, they are largely untested and would take some time to assess and prepare.”

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John Rubino: Here We Go Again: Government Ramps Up Borrowing As Private Sector Slows

By John Rubino, Mar 21, 2016

Here We Go Again: Government Ramps Up Borrowing As Private Sector Slows

This morning, US existing home sales plunged and the Chicago Fed’s national activity index turned negative. Both are obvious signs of a slowing economy.

Anticipating this kind of news, Credit Bubble Bulletin’s Doug Noland in his most recent column analyzed the Federal Reserve’s quarterly Z.1 Report for signs of changing financial trends, and found something potentially serious. The following three charts tell the tale:

First, corporate borrowing slowed dramatically in 2015’s fourth quarter…

Corporate borrowing SAAR

…while households scaled back their mortgage borrowing:

Mortgage SAAR revised

And guess who stepped in to save the credit bubble? That’s right. Federal government borrowing soared:

Govt borrowing SAAR

Writes Noland: “This more than offset the private-sector slowdown, ensuring that overall Non-Financial Debt growth accelerated to an 8.6% pace in Q4.”

In other words, monetary policy (QE and low/negative interest rates) has stopped working and now we’re reverting to deficit spending to juice the economy. If this is the beginning of a trend, expect to see a torrent of announcements in coming months touting new government programs on infrastructure, health care and/or the military.

It’s as if the people making these decisions have forgotten that 1) the world borrowed $57 trillion post-2008 and got next to nothing for it and 2) the new debt will have to be rolled over at higher rates if interest rates are ever to be normalized, thus decimating government finances. For more on the implications of this latest iteration of the Money Bubble, see Is This 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: Well That Didn’t Work

By John Rubino, Mar 18, 2016

Well That Didn’t Work

The Bank of Japan and European Central Bank eased recently, which is to say they stepped up their bond buying and/or pushed interest rates further into negative territory. These kinds of things are proxies for currency devaluation in the sense that money printing and lower interest rates generally cause the offending country’s currency to be seen as less valuable by traders and savers, sending its exchange rate down versus those of its trading partners.

This was what the BoJ and ECB were hoping for — weaker currencies to boost their export industries and make their insanely-large debt burdens more manageable. Instead, they got this:

Yen March 16

Euro March 16

Both the yen and the euro have popped versus the dollar, which means European and Japanese exports have gotten more rather than less expensive on world markets and both systems’ debt loads are now harder rather than easier to manage. And it gets worse: Japan’s yield curve has inverted, meaning that long-term interest rates are now lower than short-term rates, which is typically a harbinger of recession. Here’s a chart from today’s Bloomberg:

Japan yield curve March 16

This sudden failure of easy money to produce the usual result is potentially huge, because the only thing standing in the way of a debt-driven implosion of the global economy (global because this time around emerging countries are as over-indebted as rich ones) is a belief that what worked in the past will keep working. If it doesn’t — that is, if negative interest rates start strengthening rather than weakening currencies — then this game is over. And a new one, with rules no one understands, has begun.

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: 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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Bank of Japan Holds Fire on Stimulus, Negative Rate Unchanged

Bloomberg, Mar 15, 2016

JAPAN - MARCH 14: A sign for the Bank of Japan is seen in Tokyo, Japan, Wednesday March 15, 2007. The yen held near a one-week high versus the dollar and advanced against the U.K. pound as investors reduced holdings of higher-yielding assets purchased with money borrowed in Japan. (Photo by Torin Boyd/Bloomberg via Getty Images)

* BOJ keeps its new benchmark rate at minus 0.1 percent
* Board voted 7-2 on negative rate, 8-1 on monetary base

 

The Bank of Japan refrained from bolstering its record monetary stimulus as policy makers gauge the impact of the negative interest-rate strategy they adopted in January.

Governor Haruhiko Kuroda and his board kept the target for increasing the monetary base unchanged, and left their benchmark rate at minus 0.1 percent, as forecast by 35 of 40 economists surveyed by Bloomberg. The central bank said it will add easing if necessary while the language in its statement Tuesday indicates a downgrade in its assessment of the economy.

With the BOJ far from its 2 percent inflation goal and growth stalling, most analysts have seen additional stimulus as just a matter of time. The stakes are rising for Kuroda, with household and corporate sentiment waning and investors questioning whether monetary policy is reaching its limits.

“You can see from the statement the agony for the BOJ in the gap between their hopes and the realities in the economy and prices,” said Kyohei Morita, an economist at Barclays Plc. “Japanese inflation is at a level where even the BOJ has to admit its weakness. It is leaning toward additional stimulus and I expect it to be in July.”

Economists surveyed by Bloomberg have judged that a further cut to the negative-rate policy is the most likely tool. Kuroda said at a post-decision briefing that he doesn’t need to wait to see the full impact of the negative rate before acting again, if change is needed.

The BOJ exempted money reserve funds from the negative rate as it irons out kinks in its new policy and seeks to placate some institutional investors who are unhappy with the measure. Even so, Kuroda said he hasn’t changed his thinking on the negative rate since its announcement in January.

The yen advanced to 113.05 per dollar as of 4:59 p.m. in Tokyo, about 6 percent stronger than it was at the start of the year — an appreciation that has undercut the competitive advantage that previous BOJ easing had won. The currency’s gains are a risk to growth in corporate profits, especially among Japan’s exporters, and to inflation because of lower import costs.

The central bank said it “will examine risks to economic activity and prices, and take additional easing measures in terms of three dimensions — quantity, quality, and the interest rate — if it is judged necessary for achieving the price stability target.”

Since the BOJ’s last meeting on Jan. 29, economic data have shown little momentum for a recovery from a contraction in gross domestic product registered in the final quarter of 2015. The BOJ’s key consumer-price measure didn’t budge in January, and sentiment among consumers and merchants has slumped.

The central bank conceded in its statement that exports and production have been sluggish, while maintaining its view that there has been improvement in employment and income conditions. It noted that inflation expectations have weakened recently.

Masaki Kuwahara, an economist at Nomura Holdings Inc., said the BOJ has effectively cut its economic assessment.

“The downgrade may mean that the likelihood of further monetary easing increases,” Kuwahara said. “Spring wage talks are looking dull, and the price trend may weaken in the coming months.”

The decision to adopt a negative rate — a 0.1 percent charge on a portion of money that commercial banks park at the BOJ — had an impact even before it took effect in mid-February. Yields on more than 70 percent of government debt dropped below zero and bank shares tumbled on profit concerns.

Takahide Kiuchi was the sole dissenter on the decision to keep expanding the monetary base at an annual pace of 80 trillion yen. After a 5-4 split in January over the adoption of the negative rate, the board voted 7-2 to continue with the measure, with Kiuchi and Takehiro Sato against the policy.

The hope is that by bringing down borrowing costs, the strategy will spur companies to borrow and consumers to spend. “It is an absolute benefit that is going to transmit into increased purchasing power,” Jesper Koll, the Japan head of WisdomTree Investments Inc. in Tokyo, told Bloomberg TV.

Japan’s central bankers haven’t been alone in seeing financial markets move against them; along with the yen’s gain, stocks tumbled in February, following the Jan. 29 move.

The European Central Bank on March 10 unveiled a more aggressive dose of monetary stimulus than many analysts had anticipated, yet it still disappointed many investors. The U.S. Federal Reserve will conclude its policy meeting Wednesday.

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