Fed's appetite for further easing, higher inflation in focus

The U.S. Federal Reserve last month signaled that interest rates are likely to stay at zero through 2023, vowing to wait on rate hikes until inflation reaches 2 percent and is set to rise moderately above that level for a time.

How much above 2 percent, for how long, and how the central bank might speed the process forward - the new guidance doesn't say.

Minutes of the Fed's September meeting to be published Wednesday at 2 p.m. EDT (1800 GMT) should provide a window into the Fed's internal debate on those issues and, perhaps, some new answers on what it will mean in practice.

With an ongoing pandemic that's claimed more than 210,000 U.S. lives and a recession that has left millions without jobs, it's clear there is a lot at stake.

Fed Chair Jerome Powell warned Tuesday that the outlook for the U.S. economy is "highly uncertain," and that too little policy support could lead to more household and business insolvencies and "recessionary dynamics" where a weak recovery feeds on itself.

The minutes may show how widely shared that concern is.

In remarks since the September meeting, St. Louis Fed President James Bullard for one has said he expects the U.S. economy to notch a near-full recovery from the coronavirus recession by year's end.

On the other end of the spectrum is Boston Fed President Eric Rosengren, who has warned that a second wave of Covid-19 this fall and winter could set the recovery back and create a credit crunch.

With just a few weeks until Nov. 3 when Americans pick their next president, which way the economy develops could spell a very different policy environment for whoever wins at the ballot box.

The Fed's September decision drew two dissents. Dallas Fed President Robert Kaplan thought it tied the Fed's hands unnecessarily. Minneapolis Fed President Neel Kashkari wanted an even higher bar for future rate hikes.

But even among those who supported the decision, the minutes may show a range of views on how it should be carried out. Of particular interest will be any evidence of appetite for adding to the Fed's $7.1 trillion stash of bonds and other assets to ease policy further, either soon or once the recovery is further along.

Fed policymakers appear divided on how high the Fed should try to push inflation, which for years has failed to meet the Fed's 2 percent target and is expected to end this year well below that level.

Chicago Fed President Charles Evans wants to get core inflation up to 2.5 percent, and for it to stay there for a while. Kaplan, by contrast, said last week he would be uncomfortable with 2.5 percent inflation, and worries about excess risk-taking with rates at zero for too long

-reuters-

Paul Volcker, US Fed chief who led war on inflation, dead at 92

WASHINGTON — Former US Federal Reserve chairman Paul Volcker, who tackled American inflation in the 1970s and 80s and later lent his name to landmark Wall Street reforms, has died in New York.

Volcker, who headed the US central bank from 1979 to 1987, was 92. The cause of his death Sunday was complications from prostate cancer, his daughter Janice Zima told AFP.

Tall and known for his dead-pan humor, Volcker forged a career as a financier and fiercely independent public servant who wielded monetary policy with authority and acumen. 

A Democrat, he advised American leaders of both major parties, starting with Richard Nixon in 1971 at the US Treasury, where he helped guide the US exit from the gold standard.

His tenure ended with Barack Obama as Volcker promoted stricter banking regulation in the wake of the 2008 global financial crisis.

But it was as Federal Reserve chairman, first under Jimmy Carter and then Ronald Reagan, that he left his deepest mark, albeit during difficult times, and earned the respect of economists around the world. 

"I am deeply saddened by the passing of Paul Volcker. He believed there was no higher calling than public service," current Fed chairman Jerome Powell said in a statement. 

"His life exemplified the highest ideals -- integrity, courage, and a commitment to do what was best for all Americans. His contributions to the nation left a lasting legacy."

After announcing his candidacy for the White House in 2015, Donald Trump expressed admiration for Volcker, saying "there was something very solid about him."

Carter said Monday he was "deeply saddened" to learn of Volcker's death, calling him "a giant of public service," suggesting his actions may have helped cost Carter a second term but were still "the right thing to do."

President Barack Obama, House Speaker Nancy Pelosi and Bank of England Governor Mark Carney also issued statements paying their respects to Volcker.

Amid the oil crisis in the late 1970s, the American economy suffered rampant inflation. Carter bucked the advice of aides who said installing Volcker at the Fed would mean "tough medicine."

HOLDING FIRM 

With inflation -- which Volcker described as too much cash chasing too few goods -- hitting an eye-watering 14 percent annually, he made no secret of his plans to raise interest rates.

"I don't think there is any feeling or any evidence around at the moment that the economy is suffering grievously from a shortage of money," Volcker testified during his Senate confirmation.

With Volcker at the helm, the Fed raised interest rates from 11 percent to 20 percent (today, by comparison, they are in a range of 1.5 to 1.75 percent).

Such drastic tightening was especially painful and hit during a recession. Auto dealers sent him car keys in coffins. Building contractors mailed him wood planks they could not use, since homes were not selling. 

Farmers drowning in debt drove tractors to encircle the central bank's offices.

But the hard-nosed Volcker gave no ground. "He becomes intellectually stimulated by a crisis," his late wife Barbara said, according to the author William Neikirk.

The firm stance paid off, with inflation falling to 3 percent by 1983. Along with the Iranian hostage crisis, it also helped cost Carter his chances at reelection.

Volcker left the Fed in 1987 and joined James Wolfensohn's investment firm. Wolfensohn later became president of the World Bank.

The former Fed chief reemerged on the public scene 20 years later during the global financial crisis as an Obama adviser. 

A critic of banks' high-risk trading and their executives' gigantic pay packages, he proposed what would become known as "the Volcker rule," restricting so-called proprietary trading. 

The regulation was blasted by Frank Keating, then head of the American Banking Association, as too complex and onerous for implementation -- and came under fire again in the anti-regulation era of President Donald Trump.

The ABA on Monday offered its "deepest condolences," saying Volcker left "a giant legacy of dedicated public service."

A grandson of German immigrants, Volcker was born in 1927 in Cape May, New Jersey, developed a love of fly-fishing and studied at Princeton and Harvard.

A father of 2, he remarried at age 83 in 2010, taking his long-serving assistant as his bride, 12 years after the death of his first wife, Barbara.

Agence France-Presse 

Why is the NY Fed pumping billions into the money market?

NEW YORK, United States - For the first time in more than a decade, the US central bank this week stepped into financial markets to keep interest rates on short-term lending from popping above its target range.

The New York Federal Reserve Bank conducted money market interventions on Tuesday and Wednesday and planned another for Thursday morning, as a cash crunch drove up the cost of borrowing for banks that need to replenish the reserves they hold at the central bank.

What is the money market?

Financial institutions use money markets to borrow for very short periods, from one day to a year, a crucial function to keep the gears of the economy running.

In so-called repurchase or "repo" agreements, banks borrow by putting up assets like Treasury notes as collateral and then repay the loans with interest the following day.

This lets them replenish the cash holdings they keep at the central bank whenever the amount falls below the required minimum set by the Fed.

Money market interest rates typically track closely with the target range that the Fed sets for the federal funds rate, the benchmark lending rate that influences borrowing costs throughout the global economy.

Why did the New York Fed intervene?

Money market rates began to jump on Monday afternoon, hitting as high as 10 percent in some cases, surprising traders.

The reasons behind borrowers' sudden demand for cash were attributed to a host of technical conditions that converged to drain money out of the system.

There were major cash withdrawals as quarterly corporate taxes came due, at the same time as a surge of US Treasury debt came into the market to finance deficit spending by the federal government. 

More generally, more government securities have built up on the balance sheets of private firms these days as the Fed has begun to wind down the massive holdings of Treasury paper it amassed during the global financial crisis -- which has also sucked cash out of the market.

"It looks like a lot of cash left the system in recent days and that demand for dollars was greater than the number of dollars in circulation," said Gregori Volokhine of Meeshaert Financial Services.

To bring rates down, the New York Fed pumped fresh liquidity into the system through repo operations -- $53 billion on Tuesday, $75 billion on Wednesday, with another $75 billion planned for Thursday morning.

Should we be worried?

Investors have wondered whether the sudden jump in rates was a purely technical glitch or a sign of a deeper problem in the financial system.

The event awakened painful memories of the 2008 financial meltdown, when credit markets seized up suddenly as banks feared that borrowers would go bust before repaying.

But after unveiling fresh cut to the benchmark lending rate on Wednesday, US Fed Chairman Jerome Powell told reporters the liquidity crunch was not a concern for the wider economy.

"While these issues are important for market functioning and market participants, they have no implications for the economy or the stance of monetary policy," he said.

Powell noted the tax payments deadline and surge in Treasury debt issues, which temporarily drained cash from the financial system.

"Our sense is that it surprised market participants a lot too," Powell said. "People were writing about this and publishing stories weeks ago. It was a stronger response than we expected."

But he said the New York Fed operations "were effective in relieving funding pressures."

source: news.abs-cbn.com