Tag Archives: financial markets

Fed’s Williams expects further U.S. rate increases into next year

President and Chief Executive Officer of the U.S. Federal Reserve Bank of San Francisco, John Williams, gestures as he addresses a news conference in Zurich, Switzerland September 22, 2017. REUTERS/Arnd Wiegmann

By Jonathan Spicer

NEW YORK (Reuters) – One of the most influential Federal Reserve policymakers said on Tuesday he expects further interest-rate hikes continuing next year since the U.S. economy is “in really good shape,” reinforcing the Fed’s upbeat tone in the face of growing doubts in financial markets.

Even as New York Fed President John Williams told reporters he expects the U.S. expansion to carry on and surpass its previous record around mid-2019, stock markets headed lower Tuesday morning while a potentially worrying trend of “inversion” continued to grip Treasury markets.

The Fed is expected to raise its policy rate another notch this month and, according to policymakers’ forecasts from September, aims to continue tightening monetary policy three more times next year. Futures markets, however, are betting a slowdown overseas and in sectors like U.S. housing will force the Fed to stop short.

Yet Williams, a permanent voter on policy and close ally of Fed Chair Jerome Powell, said lots of signs point to a “quite strong” and healthy labor market, and he predicted economic growth of around an above-potential 2.5 percent in 2019.

“Given this outlook I describe of strong growth, strong labor market and inflation near our goal – and taking into account all the various risks around the outlook – I do continue to expect that further gradual increases in interest rates will best foster a sustained economic expansion and a sustained achievement of our dual mandate,” Williams said at the New York Fed.

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)

Fed interest rate hike expected next week, three hikes expected in 2018/poll

The Federal Reserve headquarters in Washington September 16 2015. REUTERS/Kevin Lamarque/File Photo

By Shrutee Sarkar

BENGALURU (Reuters) – The U.S. Federal Reserve is almost certain to raise interest rates later this month, according to a Reuters poll of economists, a majority of whom now expect three more rate rises next year compared with two when surveyed just weeks ago.

The results, from a survey taken just before the U.S. Senate voted to pass tax cuts that are expected to add about $1.4 trillion to the national debt over the next decade, show economists were already becoming more convinced that rates will need to go even higher.

While about 80 percent of economists surveyed in October said such tax cuts were not necessary, the passage of the bill, President Donald Trump’s first major legislative success, means the forecast risks have shifted toward higher rates, and faster.

The poll’s newly raised expectations for three rate rises next year are now in line with the Fed’s own projections. But they come despite a split among U.S. policymakers on the outlook for inflation, which has remained persistently low.

That is a similar challenge faced by other major central banks, who are generally turning away from easy monetary policy put in place since the financial crisis, looking through still-weak wage inflation and overall price pressures for now.

The core personal consumption expenditures price index (PCE), which excludes food and energy and is the Fed’s preferred inflation measure, has undershot the central bank’s 2 percent target for nearly 5-1/2 years.

The latest Reuters poll results suggest it is expected to average below 2 percent until 2019.

While the U.S. economy expanded in the third quarter at a 3.3 percent annualized rate, its fastest pace in three years, the latest Reuters poll – taken mostly before the release of that data – suggested that may be the best growth rate at least until the second half of 2019.

The most optimistic growth forecast at any point over the next year or so was 3.7 percent, well below the post-financial crisis peak of 5.6 percent in the fourth quarter of 2009.

Still, all the 103 economists polled, including 19 large banks that deal directly with the Fed, said the federal funds rate will go up again in December by 25 basis points, to 1.25-1.50 percent.

“This is about just getting back to a neutral level where monetary policy is neither encouraging growth or pushing against growth,” said Brett Ryan, senior U.S. economist at Deutsche Bank, which recently shifted its view to four rate rises next year.

“The Fed is still accommodative at the moment and we are still some ways away from the neutral fed funds rate which would in the Fed’s view be closer to 2.75 percent. The Fed can hike without slowing the economy.”

Financial markets are also pricing in over a 90 percent chance of a 25 basis-point hike in December, largely based on the falling unemployment rate and reasonably strong economic growth this year.

Asked what is the primary driver behind the Fed’s wish to raise rates further, over 40 percent of respondents said it was to tap down future inflation.

However, almost a third of economists said it is to gather enough ammunition to combat the next recession.

“At some point we are going to have a downturn and they (the Fed) are going to need to react and it is harder to do that when rates are closer to zero,” said Sam Bullard, an economist at Wells Fargo.

The remaining roughly 30 percent had varied responses, including some who said higher rates were needed to avoid risks to financial stability.

Over 90 percent of the 66 economists who answered another question said that the coming changes at the Fed – a new Fed Chair along with several new Fed Board members – will also not alter the current expected course of rate hikes.

“Both the rate tightening outlook and balance sheet reduction program will remain in place as the Fed officials fill open seats. Easing of financial regulation is likely the area that has the most forthcoming changes,” Bullard said.

 

(Additional reporting and polling by Khushboo Mittal and Mumal Rathore; Editing by Ross Finley and Hugh Lawson)

 

Brexit vote hits pound and markets, political crisis deepens

Workers walk in the rain at the Canary Wharf business district in London, Britain

By William James and Jamie McGeever

LONDON (Reuters) – Britain’s vote to leave the European Union sent new shockwaves through financial markets on Monday, despite efforts by the country’s leaders to end the deep political and economic uncertainty unleashed by the decision.

Finance minister George Osborne said the British economy was strong enough to cope with the volatility caused by Thursday’s referendum, the biggest blow since World War Two to the European goal of forging greater unity.

But the pound later sank to its lowest level against the U.S. for 31 years and British shares continued the fall that began last week when Britons confounded expectations by voting to end 43 years of EU membership.

Chinese Premier Li Keqiang said uncertainties over the global economy had heightened and called for a “united, stable EU, and a stable, prosperous Britain”.

But with the ruling Conservatives looking for a new leader after Prime Minister David Cameron’s resignation on Friday and lawmakers from the opposition Labour party stepping up a rebellion against their leader, Britain sank deeper into political and economic turmoil.

“There’s no political leadership in the UK right when markets need the reassurance of direction,” said Luke Hickmore of Aberdeen Asset Management, expressing the view of many in the City of London financial center.

Although Cameron is staying on until October as a caretaker, he refused to start formal moves immediately to pull Britain out of the EU. This prompted many European leaders to demand quicker action by Britain, the EU’s second largest economy after Germany before the vote.

“France like Germany says Britain has voted for Brexit. It should be implemented quickly. We cannot remain in an uncertain and indefinite situation,” French finance minister Michel Sapin said on France 2 television.

Guenther Oettinger, a German member of the EU’s executive European Commission, also issued a warning.

“Every day of uncertainty prevents investors from putting their funds into Britain, and also other European markets,” he told Deutschlandfunk radio. “Cameron and his party will cause damage if they wait until October.”

German Chancellor Angela Merkel has taken a softer line, underlining the need to continue a positive trade relationship with Britain, a big market for German carmakers and other manufacturers.

But a Merkel ally, Volker Kauder, made clear the exit negotiations would not be easy.

“There will be no special treatment, there will be no gifts,” Kauder, who leads Merkel’s conservatives in parliament, told ARD television.

FINANCIAL MARKETS’ MISJUDGMENT

Financial markets misjudged the referendum, betting on the status quo despite abundant signs that the vote would be close.

When reality dawned, the reaction was brutal. Sterling fell as much as 11 percent against the dollar on Friday for its worst day in modern history, while $2.8 trillion was wiped off the value of world stocks – the biggest daily loss ever.

That trumped even the Lehman Brothers bankruptcy during the 2008 financial crisis and the Black Monday stock market crash of 1987, according to Standard & Poor’s Dow Jones Indices.

Osborne tried to ease investors’ concerns in his first public comments since the referendum. He said he was working closely with the Bank of England and officials in other leading economies for the sake of stability as Britain reshapes its relationship with the EU.

“Our economy is about as strong as it could be to confront the challenge our country now faces,” he told reporters at the Treasury. “It is inevitable after Thursday’s vote that Britain’s economy is going to have to adjust to the new situation we find ourselves in.”

Boris Johnson, a leading proponent of a Brexit and likely contender to replace Prime Minister David Cameron who resigned on Friday, praised Osborne for saying “some reassuring things to the markets.”

The former London mayor said outside his home in north London that it was now clear “people’s pensions are safe, the pound is stable, markets are stable. I think that is all very good news.”

But financial markets took a different view, with sterling sliding Monday, shedding more than 3 percent against the dollar to $1.3221

The yield on British 10-year government bonds fell below one percent for the first time due to investors betting that the Brexit vote would trigger a Bank of England interest rate cut aimed at steading the economy.

Many economists have cut economic growth forecasts for Britain, with Goldman Sachs expecting a mild recession within a year.

But the risks affect economies far beyond Britain.

“Against the backdrop of globalization, it’s impossible for each country to talk about its own development discarding the world economic environment,” China’s Li told the World Economic Forum in the city of Tianjin.

Japanese Prime Minister Shinzo Abe instructed his finance minister to watch currency markets “ever more closely” and take steps if necessary.

At the weekend, the policy chief of Abe’s LDP party held open the possibility of currency intervention to weaken the yen and temper “speculative, violent moves”.

DIVIDED PARTIES

The referendum has revealed social as well as economic stresses in divided Britain. Immigration emerged as one of the main themes of the referendum campaign, with those who backed a British exit saying the EU had allowed uncontrolled numbers of migrants to arrive from eastern Europe.

Police said offensive leaflets targeting Poles had been distributed in Huntingdon, central England, and graffiti had been daubed on a Polish cultural center in central London on Sunday, three days after the vote.

According to a local newspaper, the Cambridge News, the leaflets said: “Leave the EU/No more Polish vermin” in English and Polish.

The Polish embassy in London said it was shocked by the “recent incidents of xenophobic abuse directed against the Polish community and other UK residents of migrant heritage.”

With Britain now facing uncertainty over how its trade relationship with the EU will unfold, Johnson tried to calm fears by writing in the Daily Telegraph newspaper that there would be continued free trade and access to the single market.

He did not set out any details but suggested Britain would not accept free movement of workers, saying it could implement an immigration policy which suited business and industry.

However, single market rules stipulate that countries must accept the free movement of people as well as goods. Yielding on immigration would anger many Britons who voted to leave, believing this would halt a tide of workers from eastern Europe.

Johnson is expected to declare soon that he is running to lead the Conservatives, who have been divided for decades between pro- and anti-EU factions.

Divisions within the opposition are also deep. A wave of Labour lawmakers resigned from leader Jeremy Corbyn’s team on Monday, adding to the 11 senior figures who quit on Sunday.

They say Corbyn, a veteran left-winger who has strong support among ordinary party members, is not fit to lead the party and point to his low-key campaign to keep Britain in the EU.

If repeated at the next parliamentary election, due in 2020, they fear Labour faces disaster following its near wiping out in Scotland last year. Corbyn has said he is going nowhere.

(Additional reporting by Kevin Yao, Costas Pitas, Bate Felix, Andrea Shalal, Michael Holden, Guy Faulconbridge, David Milliken, Patrick Graham, Anirban Nag, Conor Humphries, Minami Funakoshi and Tetsushi Kajimoto, Writing by David Stamp, Editing by Timothy Heritage)

Federal Reserve swimming against global tide of easier rates

Federal Reserve Chair Janet Yellen speaks at the Radcliffe Institute for Advanced Studies at Harvard University

By Jamie McGeever

LONDON (Reuters) – Rarely has the world’s most important and powerful central bank been so isolated.

As the Federal Reserve prepares the ground for another interest rate hike, most other central banks are moving in the opposite direction. And the divergence is widening.

No fewer than 53 central banks have eased monetary policy since the start of last year, almost all by lowering rates. Indeed, the pace of policy easing nearly everywhere is accelerating even as the Fed nears its second hike of the cycle.

This raises several questions. If the global recovery is firmly rooted, why are so many central banks cutting rates? Can the global economy handle rising U.S. rates, and perhaps a stronger dollar that follows? Will the Fed be forced – again – to slow the pace of tightening or even abandon it altogether?

“I can’t ever remember a situation when we’ve seen anything like this before,” said Torsten Slok, chief international economist at Deutsche Bank in New York and a former International Monetary Fund economist.

“When I was at the IMF there was only one global business cycle. In the late 1990s and early 2000s it would have been impossible to imagine the kind of decoupling we have today,” he said.

The divergence can drive business costs and trade flows, lead to outsized exchange rate moves and highlight vulnerabilities in the global financial system, casting doubt on whether the world can cope with relatively higher U.S. borrowing costs and dollar.

Deflationary forces from the oil price plunge to $50 from $115 in the second half of 2014 kick-started central banks into action at the beginning of last year. Fourteen eased policy in January 2015, 11 in February and 12 in March. Denmark’s central bank cut rates four times in as many weeks.

The number of monthly rate cuts dwindled as the year progressed, troughing at three each in August and October, before the Fed delivered its first rate hike in a decade that December.

But even though oil has rebounded 75 percent from its multi-year lows, the pace of monetary easing is picking up. Twelve central banks loosened policy in March, 10 in April and 11 in May. Indeed, 11 central banks have begun easing cycles since the Fed raised rates in December.

At one level, the divergence suggests the U.S. economy is on a stronger footing than the rest of the world.

The U.S. economy is relatively closed, relying less on trade than many others. Imports and exports account for no more than 15 percent of U.S. growth, a proportion that’s more than twice that in most of the major developed and emerging economies.

Yet the Fed has already baulked at raising rates, both before and after its December move, precisely because of its fears over the global spillover effects from more tightening.

CONVERGENCE … BUT WHEN?

Financial markets and emerging economies are the main areas of concern. Both are potentially vulnerable to a rising dollar and higher U.S. bond yields that could follow from higher U.S. rates.

From mid-2014 to the end of last year the dollar rose around 25 percent against a basket of currencies, effectively a tightening of U.S. monetary policy which, according to Goldman Sachs, helped tighten U.S. financial conditions by almost 200 basis points.

There’s a view that this did more damage to the rest of the world through large-scale emerging market capital flight and China’s policy wobbles than the United States, where job growth and economic activity help up reasonably well.

The Organization for Economic Cooperation and Development on Wednesday urged governments to boost spending to lift the world economy out of a “low-growth trap”. It said global growth will meander along at 3 percent this year, its slowest pace since the financial crisis for a second year in a row.

Global conditions, China and the dollar have featured prominently in speeches by Fed chair Janet Yellen and other Fed officials over the last six months, a clear indication they are acutely aware of the global impact of higher U.S. rates.

But with dozens of other central banks in easing mode, conditions have abated around 100 basis points since the turn of the year, helping support global asset prices and giving the Fed leeway to raise rates again.

Francesco Garzarelli, co-head of global Macro and Markets Research at Goldman Sachs, said the Fed effectively participated in the global easing cycle this year by not following up last December’s hike with another increase.

“Markets have seen the Fed stop and go twice, but eventually the hike will come, maybe in June,” he said.

Garzarelli argued that inflation would need to pick up around the world for other central banks to change course. And echoing the OECD, he said the pressure on central banks to loosen monetary policy would lessen if governments shouldered more responsibility for boosting growth via fiscal policy.

“That transition is slowly underway, and the interplay between monetary and fiscal authorities may shift market expectations,” he said.

(Editing by Jeremy Gaunt)