We look at the markets overnight and the implications of the currency momentum in play.
Tag: Monetary Policy
RBA Holds This Month
Latest from the RBA… The Statement On Monetary Policy to come Friday, will be.. well… interesting!
At its meeting today, the Board decided to leave the cash rate unchanged at 1.00 per cent.
The outlook for the global economy remains reasonable. However, the increased uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy remain tilted to the downside. In most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. The slowdown in global trade has contributed to slower growth in Asia. In China, the authorities have taken steps to support the economy, while continuing to address risks in the financial system.
Global financial conditions remain accommodative. The persistent downside risks to the global economy combined with subdued inflation have led a number of central banks to reduce interest rates this year and further monetary easing is widely expected. Long-term government bond yields have declined further and are at record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at its lowest level of recent times.
Economic growth in Australia over the first half of this year has been lower than earlier expected, with household consumption weighed down by a protracted period of low income growth and declining housing prices. Looking forward, growth in Australia is expected to strengthen gradually from here. The central scenario is for the Australian economy to grow by around 2½ per cent over 2019 and 2¾ per cent over 2020. The outlook is being supported by the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some housing markets and a brighter outlook for the resources sector. The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income and a stabilisation of the housing market are expected to support spending.
Employment has grown strongly over recent years and labour force participation is at a record high. There has, however, been little inroad into the spare capacity in the labour market recently, with the unemployment rate having risen slightly to 5.2 per cent. The unemployment rate is expected to decline over the next couple of years to around 5 per cent. Wages growth remains subdued and there is little upward pressure at present, with strong labour demand being met by more supply. Caps on wages growth are also affecting public-sector pay outcomes across the country. A further gradual lift in wages growth would be a welcome development. Taken together, recent labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.
The recent inflation data were broadly as expected and confirmed that inflation pressures remain subdued across much of the economy. Over the year to the June quarter, inflation was 1.6 per cent in both headline and underlying terms. The central scenario remains for inflation to increase gradually, but it is likely to take longer than earlier expected for inflation to return to 2 per cent. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.
Conditions in most housing markets remain soft, although there are some signs of a turnaround, especially in Sydney and Melbourne. Growth in housing credit remains low. Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.
It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments in the labour market closely and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.
End Cycle Or Mid Cycle? – That Is The Question!
We consider the point in the economic cycle we are in, given the Fed’s move last week. Meantime, in Australia, how close to the brink are we now?
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End Cycle Or Mid Cycle? – That Is The Question!
We consider the point in the economic cycle we are in, given the Fed’s move last week. Meantime, in Australia, how close to the brink are we now?
The Real Issues Behind The Cash Ban [Podcast]
Last Friday the Treasury released a draft bill which would ban cash transactions above $10,000. But I discuss the real story, with the CEC‘s Robbie Barwick. It has more to do with negative interest rates than may first appear.
Email: blackeconomy@treasury.gov.au with the subject line:
Submission: Exposure Draft—Currency (Restrictions on the Use of Cash) Bill 2019
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Fed rate cut bails out Trump for policies that are slowing the economy
The Federal Reserve appears to be bailing out the president. From The US Conversation. The central bank is essentially signaling it’s now the administration’s insurer of last resort.
Responding to concerns of a slowing economy – in part caused by President Donald Trump’s trade wars – the Fed cut short-term interest rates for the first time since 2008, lowering its benchmark rate 25 basis points to 2.25%.
The cut sends a message to financial markets and households that the Fed stands ready to give the economy a boost should it slow further. Given that it’s forced to do so by Trump’s own policies, the central bank is essentially signaling it’s now the administration’s insurer of last resort.
As an expert on monetary policy and a former Fed economist, I believe the bank’s embrace of this role is bad for the economy. It could embolden Trump and other politicians to pursue policies that are even more reckless – the kind intended more to benefit narrow constituencies and help win their re-election than support the broader national interest.
The message matters
Judging the merits of a rate cut usually can only be done in hindsight. But the case for one seems to be more about what it signals than directly boosting growth.
By itself, a single quarter-point reduction in the overnight borrowing rate – the rate most directly affected by the Fed – will likely do little to alter directly the economic decisions made by consumers and companies. Virtually no households, and very few businesses, borrow money for such a short term.
Most mortgages, for example, are of the 30-year, fixed-rate type. And while the Fed’s short-term “target” does eventually affect other interest rates in the economy, long-term borrowing costs typically react less to modest changes in monetary policy, especially if these changes are “one-off.”
Rather, it’s the message that matters. Stoking expectations that the Fed stands ready to provide additional monetary easing if necessary is a powerful tool. And although rates are historically low, the central bank still has another 2 percentage points it can cut to stimulate the economy, as well as similar tools like so-called quantitative easing.
The Fed’s ‘insurance’ policy
Furthermore, although the economy has slowed slightly, it’s still growing. Some argue that the “insurance” of a rate cut – and the signal it provides that the Fed stands ready to do more – will help maintain that positive growth.
But the very reason the Fed feels the need to do this is because of the government’s own policies. Most economists agree that the current round of tariffs and the resulting disruptions to supply chains have been harmful.
Normally, economic conditions play a big role in presidential elections. And as the political and economic costs of a bad policy mount, a president would be forced to switch course to avoid doing more harm – not to mention damaging his re-election chances.
Therein lies the problem of the Fed’s rate cut. Its commitment to reducing rates to stimulate the economy regardless of the source of the slowdown insulates the administration from the consequences of its actions, potentially leading to even more misadventures.
Not only that, cutting rates drives up the prices of risky assets – which could metastasize into something harmful, as we saw ahead of the 2008 financial collapse – and masks other structural problems in the economy. Furthermore, rate cuts tend to primarily benefit the upper middle class and the wealthy – the group that owns most of the financial assets in the economy.
Cuts have costs
History shows that this kind of central bank insurance is not free.
In the 1970s, President Richard Nixon pressured Fed Chair Arthur Burns to keep interest rates low in order to help him win re-election in 1972. Ultimately, Burns acquiesced, Nixon won re-election, the Vietnam War continued for three more years, and the U.S. economy suffered high and disruptive inflation throughout most of the decade.
Something similar could happen if the Trump administration provides even more fiscal stimulus to bolster its 2020 election chances. Fed rate cuts in conjunction with additional fiscal stimulus could result in higher inflation – which could spook markets and lead to a nasty unwinding.
Author: Rodney Ramcharan, Associate Professor of Finance and Business Economics, University of Southern California
Fed Cuts, But “A Mid-Policy Adjustment” Only [Podcast]
The Fed cut interest rates on Wednesday for the first time since the financial crisis, as had been expected, citing slowing business investment and below target inflation.
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Fed Cuts, But “A Mid-Policy Adjustment” Only
The Fed cut interest rates on Wednesday for the first time since the financial crisis, as had been expected, citing slowing business investment and below target inflation.
In fact, U.S. President Donald Trump had been calling for a rollback, making unprecedented attacks on the central bank and Chair Jerome Powell, which raises questions about its independence.
In reaction, following the first cut in a decade, the Dow and S&P 500 suffered their biggest daily percentage drops in two months. But Fed Chair Jerome Powell dampened expectations for further cuts going forward, calling it a “mid-term policy adjustment.” So, the Fed appears to be in no rush to continue with easing, unless new data supports the need to move. Two officials dissented to this cut, which therefore may not be the part of an easing cycle.
This disappointed the market as it means asset prices may not get so stretched. At the close in NYSE, the Dow Jones Industrial Average lost 1.23%, while the S&P 500 index lost 1.09%, and the NASDAQ Composite index lost 1.19%.
The CBOE Volatility Index, , was up 15.64% to 16.12 a new 1-month high.
Meantime, the U.S. Treasury Department announced plans to maintain record debt sales as Congress and Trump continue a spending frenzy that’s widening the deficit even as economic growth remains solid.
Information received since the Federal Open Market Committee met in June indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.
Red Alert: ScoMo Declares War On The Australian People!
We discuss the draft legislation which was released late Friday last week, and which would outlaw cash payments above $10k under the guise of tax efficiency.
But as we discussed before, the real agenda is all about negative interest rates and extreme monetary policy, as prescribed by the https://www.imf.org/en/Publications/WP/Issues/2019/04/29/Enabling-Deep-Negative-Rates-A-Guide-46598
This represents a significant curtailment of civil liberties, and more. We have just 2 weeks to respond.
Was this even covered in the main-stream media?
Previous War On Cash Video:
https://www.adamseconomics.com/post/the-new-global-push-for-negative-nominal-interest-rates
The RBA On Inflation Targeting [Podcast]
We review the latest from the RBA – is their stance appropriate?
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