The Fed is heading for another catastrophe - page 7
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Meet the evil twin of 'quantitative easing'
There is a growing sense across the financial spectrum that the world is about to turn some type of economic page.
Unfortunately no one in the mainstream is too sure what the last chapter was about, and fewer still have any clue as to what the next chapter will bring.
There is some agreement however, that the age of ever easing monetary policy in the U.S. will be ending at the same time that the Chinese economy (that had powered the commodity and emerging market booms) will be finally running out of gas.
While I believe this theory gets both scenarios wrong (the Fed will not be tightening and China will not be falling off the economic map), there is a growing concern that the new chapter will introduce a new character into the economic drama. As introduced by researchers at Deutsche Bank, meet "Quantitative Tightening," the pesky, problematic, and much less disciplined kid brother of "Quantitative Easing." Now that QE is ready to move out...QT is prepared to take over.
For much of the past generation foreign central banks, led by China, have accumulated vast quantities of foreign reserves. In August of last year the amount topped out at more than $12 trillion, an increase of five times over levels seen just 10 years earlier. During that time central banks added on average $824 billion in reserves per year. The vast majority of these reserves have been accumulated by China, Japan, Saudi Arabia, and the emerging market economies in Asia (Shrinking Currency Reserves Threaten Emerging Asia, BloombergBusiness, 4/6/15). It is widely accepted, although hard to quantify, that approximately two-thirds of these reserves are held in U.S. dollar denominated instruments (COFER, Washington DC: Intl. Monetary Fund, 1/3/13), the most common being U.S. Treasury debt.
Initially this "Great Accumulation" (as it became known) was undertaken as a means to protect emerging economies from the types of shocks that they experienced during the 1997-98 Asian Currency Crisis, in which emerging market central banks lacked the ammunition to support their free falling currencies through market intervention. It was hoped that large stockpiles of reserves would allow these banks to buy sufficient amounts of their own currencies on the open market, thereby stemming any steep falls. The accumulation was also used as a primary means for EM central banks to manage their exchange rates and prevent unwanted appreciation against the dollar while the Greenback was being depreciated through the Federal Reserve's QE and zero interest rate policies.
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no one knows what will happen, The disaster is right behind the corner
Fed weighs global gloom vs. rosier U.S economy as key rate decision looms
The stage is set. The lights are on. And soon it will be time to find out. Will the Federal Reserve finally raise the curtain by raising interest rates.
Until the recent bloodbath in global stock markets tied to a slowing Chinese economy, investors widely expected the Fed to lift rates after the bank’s two-day meeting that ends Sept. 17. Now it's less certain when Fed Chairwoman Janet Yellen and her colleagues will act.
Waiting until the very last moment won’t give the Fed much clarity on the U.S. or global economic outlook, either. The U.S. jobs report for August that came out on Friday was the last big guidepost before the mid-month gathering. And what it showed was the status quo remains intact: U.S. companies continue to hire at a steady clip, with some firms boosting wages as the labor market tightens.
Still, the waiting period gives central bankers extra time to see if investors in global stock markets take a chill pill. Although big ups and downs in stocks have little historical relationship with the economy’s health, the Fed probably would prefer to wait if investors remain on edge.
“As long as markets calm down enough to rule out a near-term crisis,” contended chief economist Stephen Stanley of Amherst Pierpont Securities, the Fed is more likely than not to raise rates in September.
Jobs, jobs, jobs
Even with the August employment report in the rear-view mirror, investors will sift for more clues on the Fed’s course of action. In a holiday-shortened week, they’ll pay close to attention to the latest report on U.S. job openings known as Jolts.
“Yellen herself says she looks closely at the Jolts number,” noted JJ Kinahan, chief market strategist at TD Ameritrade.
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Fed risks "panic and turmoil" if it hikes - World Bank chief economist
World Bank chief economist Kaushik Basu spoke with the FTEmerging markets could be roiled if the Fed hikes rates on September 17, the World Bank's top economists warns.
"I don't think the Fed lift-off itself is going to create a major crisis but it will cause some immediate turbulence," Mr Basu said. "It is the compounding effect of the last two weeks of bad news with that [China devaluation] . . . In the middle of this it is going to cause some panic and turmoil.
"The world economy is looking so troubled that if the US goes in for a very quick move in the middle of this I feel it is going to affect countries quite badly," he said.
The IMF delivered a similar warning to the Fed in July and the G20 communique said central banks should "Carefully calibrate and clearly communicate our actions, especially against the backdrop of major monetary and other policy decisions, to minimize negative spillovers, mitigate uncertainty and promote transparency."
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Despite QE, Markets Can Still Decline
Despite the fact that both the European Central Bank and the Bank of Japan have been actively pursuing quantitative easing (QE) programs, both the German and Japanese equities markets have experienced dramatic declines in recent weeks. Investors are left scratching their heads. The Japanese Nikkei 225 has declined over 17% (close to bear market territory) since it peaked at 21,000, despite the fact that the BoJ has been printing money like crazy.
Furthermore, the DAX 30 peaked out all the way back in April of 2015, despite the ECB’s ongoing QE program. The German stock market has declined almost 25% from peak to trough and given back almost all of the QE gains. This is despite the fact that Mario Draghi is thinking of actually increasing the program.
Evidence seems to be that global QE programs might work temporarily, especially the initial euphoria surrounding the launch of easy monetary conditions. A rising US dollar tends to be a symptom of tighter monetary conditions globally. That is why the Fed's desire to raise interest rates overwrites the ECB’s and BoJ’s QE programs. In plain English, the Federal Reserve's policies are a lot more important relative to other central banks.
This crisis is going to be much bigger than the one from 2008
Here are the 2 questions Fed members need to ask themselves this week
On Thursday, the Federal Reserve will announce its most anticipated monetary policy decision in years. Currently, markets aren't pricing in a move from the Fed, which hasn't raised interest rates since July 2006.
But many economists on Wall Street think the US economy is currently strong enough to warrant a rate hike and consequently expect the Fed to act on this basis.
In a note to clients on Friday afternoon, Stephen Stanley, chief economist at Amherst Pierpont — among those that think the Fed will raise rates this week — wrote that in weighing the decision to raise rates or not, Fed members need only ask themselves two questions:
Is the market volatility severe enough to justify putting off a rate hike where there would otherwise be a case for one?
What does the Fed get by putting off rate hikes for at least another 5 weeks?
Stanley writes in response to the first question that, "In my opinion, the answer to that is no. Over the past few weeks, volatility has been above normal but has not risen to the level that would be destabilizing for the economy, and marginal weakness in China and/or other emerging markets will not have a significant enough impact on U.S. economic growth to change the calculus."
And so while the impact of a volatile stock market may be weighing on things like consumer confidence, Stanley doesn't think these ultimately superficial concerns about the economy are anywhere near manifesting themselves in a way that changes the Fed's view of the economy.
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Fed rate hike will push EUR/USD lower; USD/JPY remains a buy on dips
In today’s Forex Forecast, Wilson Leung of Trendsetter FX, offers the technical outlook for USD/JPY and EUR/USD, and further believes that a Fed rate hike tomorrow is unlikely.
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The FED is doing it on purpose - it is a currency war going on
Yellen warns those wanting a government shutdown: "that would be more than unfortunat
On Wednesday night, a few Republican presidential candidates opined on a call to shut down the federal government rather than continue to fund Planned Parenthood.
At a press conference the next day, Federal Reserve Chair Janet Yellen seemed to have a message for them and anyone else who's considering holding the budget hostage: Don't even think about it.
"We have a good recovery in place that's really making progress, and to see Congress take actions that would endanger that progress—I think that would be more than unfortunate," Yellen said at the conclusion of a two-day meeting on monetary policy.
While the threat of a shutdown played "absolutely no role" in the central bank's decision to delay an interest-rate increase, it could very well become a risk going forward, joining market turmoil, sluggish global growth and weak inflation as potential negatives to the U.S. economy.
Funding for the government expires on Sept. 30, and some Republicans are insisting that any bill they send to President Barack Obama should cut money for Planned Parenthood. The women's health-care provider has been scrutinized since the release of undercover videos showing some staffers discussing reimbursement for fetal tissue they provide medical researchers.
“Republican leadership in both houses has begun this discussion by preemptively surrendering to Barack Obama and saying, 'We'll give in because Obama threatens a veto,'" Texas Senator Ted Cruz said at the Republican presidential debate in Simi Valley, California. “We need to stop surrendering and start standing for our principles.”
If that stance led to a shutdown, what follows could be a replay of October 2013, the last time such an event occurred. Consumer confidence plunged, economic reports were delayed and many Americans were temporarily thrown out of work.
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