MARKETWATCH
"Fed says risks to the financial system are worrying insiders"
By Sunny Oh
Published: May 15, 2020 at 6:12 p.m. ET
Risks are lingering in the U.S. financial system despite unprecedented actions taking by the Federal Reserve in recent weeks to limit the damage wrought by the COVID-19 pandemic, according to a recent report.
The Fed’s semiannual update of financial conditions provide a near-term account of concerns shared by corporate, financial insiders and others who have insight into how the coronavirus is ravaging the economy.
As expected, the coronavirus took the spotlight in the stability report, with worries prevailing that a premature easing of lockdown measures could lengthen the viral outbreak and that vaccines or other treatments wouldn’t be available when a second wave of infections hit, according to surveys and other information obtained from insiders across businesses, banks and universities used to gain insight into the risks facing the financial system.
Corporate leverage was cited as a significant problem that could be exposed due to problems created by the coronavirus.
A litany of sectors, including private credit and loans rated below investment-grade, also were cited as vulnerable.
The triple-B rated segment of the corporate bond market, the largest slice of investment-grade issuance, was highlighted.
Investors exposed to those sectors could come under pressure.
Insiders said outflows from corporate-bond mutual funds could result in limits to redemptions, while global insurance companies that relied on overseas bonds to pay for premiums could become significant sellers of corporate debt.
Delinquencies in consumer loans and mortgages could spill over into banks, especially smaller institutions that provided loans to commercial real estate, small and medium sized businesses, and those located in areas with lower-rated customers.
Some investment strategies could prove vulnerable if markets took a sustained hit such as investments that bet on muted financial volatility, and leveraged exchange-traded funds that amplified profits along with losses.
The Fed’s balance sheet has grown to a record $6.98 trillion in the week ended May 13, up from $6.72 trillion in the prior week, the central bank said Thursday, largely to funds the central bank has provided and actions it has taken to mitigate the economic fallout from the disease.
https://www.marketwatch.com/story/fed-s ... latestnews
THE FEDERAL RESERVE
Re: THE FEDERAL RESERVE
MARKETWATCH
"Fed’s Powell to urge Congress to ‘do everything’ it can to help those suffering amid pandemic"
By Jeffry Bartash
Published: May 18, 2020 at 5:48 p.m. ET
As Democrats and Republicans squabble over what kind of coronavirus relief to provide next to millions of suffering Americans, the chairman of the Federal Reserve has a simple message: Do everything you can.
Jerome Powell, the head of the powerful U.S. central bank, plans to reiterate his message on Tuesday at a Senate hearing to explain how the Fed is helping businesses and governments to cope with unprecedented financial strains caused by the COVID-19 pandemic.
Congress have given the Fed the authority to make potentially trillions of dollars in loans.
Although detailed discussions about the Fed’s emergency lending will take center stage, Powell’s prepared testimony also includes a subtle reminder about the biggest victims of the pandemic.
“All of us are affected, but the burdens are falling most heavily on those least able to carry them,” Powell is expected to say.
A recent Fed study indicated that almost 40% of the households making less than $40,000 a year lost a job during the first month of the pandemic.
Powell has implied several times in recent remarks that Congress has to do more to support the economy.
Washington has already passed almost $3 trillion in aid, but the two parties are divided over the next step.
Democrats in the House have crafted a $3 trillion bill to supply money to states and local governments and to fund a multitude of cherished liberal goals.
President Donald Trump and the Republican-led Senate say the House bill is a nonstarter.
They insist on liability protection for companies that reopen and object to what they call bailouts for states.
Like prior Fed chairmen, Powell is unlikely to back specific spending proposals and get drawn into the political fray.
Yet as chairman he has consistently pursued policies with an eye toward helping the most disadvantaged and distressed communities.
His concern for them has become a staple of recent speeches.
“It is worth remembering that the measures taken to contain the virus represent an investment in our individual and collective health,” Powell will tell the Senate.
“As a society, we should do everything we can to provide relief to those who are suffering for the public good.”
The rest of Powell’s prepared statement explained all the actions the Fed has taken to stabilize the U.S. financial system and make loans available to businesses and government.
He also is promising to publicize monthly the identities of all loan recipients, the amount of money borrowed and the interest rate charged.
“We are deeply committed to transparency, and recognize that the need for transparency is heightened when we are called upon to use our emergency powers,” Powell will say.
Powell will testify remotely on Tuesday morning along with Treasury Secretary Steven Mnuchin before the Senate Banking Committee.
Mnuchin’s prepared text can be found here.
https://www.marketwatch.com/story/feds- ... latestnews
"Fed’s Powell to urge Congress to ‘do everything’ it can to help those suffering amid pandemic"
By Jeffry Bartash
Published: May 18, 2020 at 5:48 p.m. ET
As Democrats and Republicans squabble over what kind of coronavirus relief to provide next to millions of suffering Americans, the chairman of the Federal Reserve has a simple message: Do everything you can.
Jerome Powell, the head of the powerful U.S. central bank, plans to reiterate his message on Tuesday at a Senate hearing to explain how the Fed is helping businesses and governments to cope with unprecedented financial strains caused by the COVID-19 pandemic.
Congress have given the Fed the authority to make potentially trillions of dollars in loans.
Although detailed discussions about the Fed’s emergency lending will take center stage, Powell’s prepared testimony also includes a subtle reminder about the biggest victims of the pandemic.
“All of us are affected, but the burdens are falling most heavily on those least able to carry them,” Powell is expected to say.
A recent Fed study indicated that almost 40% of the households making less than $40,000 a year lost a job during the first month of the pandemic.
Powell has implied several times in recent remarks that Congress has to do more to support the economy.
Washington has already passed almost $3 trillion in aid, but the two parties are divided over the next step.
Democrats in the House have crafted a $3 trillion bill to supply money to states and local governments and to fund a multitude of cherished liberal goals.
President Donald Trump and the Republican-led Senate say the House bill is a nonstarter.
They insist on liability protection for companies that reopen and object to what they call bailouts for states.
Like prior Fed chairmen, Powell is unlikely to back specific spending proposals and get drawn into the political fray.
Yet as chairman he has consistently pursued policies with an eye toward helping the most disadvantaged and distressed communities.
His concern for them has become a staple of recent speeches.
“It is worth remembering that the measures taken to contain the virus represent an investment in our individual and collective health,” Powell will tell the Senate.
“As a society, we should do everything we can to provide relief to those who are suffering for the public good.”
The rest of Powell’s prepared statement explained all the actions the Fed has taken to stabilize the U.S. financial system and make loans available to businesses and government.
He also is promising to publicize monthly the identities of all loan recipients, the amount of money borrowed and the interest rate charged.
“We are deeply committed to transparency, and recognize that the need for transparency is heightened when we are called upon to use our emergency powers,” Powell will say.
Powell will testify remotely on Tuesday morning along with Treasury Secretary Steven Mnuchin before the Senate Banking Committee.
Mnuchin’s prepared text can be found here.
https://www.marketwatch.com/story/feds- ... latestnews
Re: THE FEDERAL RESERVE
MARKETWATCH - The Fed
"Fed’s Rosengren sees unemployment rate still at double-digit levels at end of this year"
By Greg Robb
Published: May 19, 2020 at 3:30 p.m. ET
The outlook for the U.S. economy is sobering and the U.S. central bank and lawmakers should be ready to act boldly, said Eric Rosengren, the president of the Boston Federal Reserve, on Tuesday.
In a speech to the New England Council, Rosengren said he expects the unemployment rate will peak at close to 20%.
And unfortunately by the end of the year, the jobless rate will “remain at double-digit levels,” he said.
Rosengren said that reopening the economy was not the panacea that will end the economic downturn.
Rather, it was public health policy that is the root of the solution.
“If consumer are afraid to eat out, shop, or travel, a relaxation in laws requiring business closures may do little to bring back customers, and thus jobs,” he said.
Rosengren said what the “optimal mix” of public health and economic policies should be was a complex question.
He sounded a cautious note about reopening the economy, saying it should not undo the sacrifices and progress made so far.
He noted the largest percentage declines in payroll jobs as have come in industries where social distancing is most challenging — such as recreation, entertainment, the arts and food services.
If there is continued concern about community spread of the coronavirus, these activities may continue to be hurt by cautious consumers.
In addition, Americans between 50 and 79 years of age account for about 50% of purchases in spending categories affected by social distancing, Rosengren noted.
“Public health solutions are paramount — without them, it is virtually impossible to return to full employment,” he said.
The Boston Fed president urged Congress to provide funds for U.S. states so they can avoid budget cutbacks.
In the financial crisis, there wasn’t sufficient transfers between the federal governments and states, and as a result, there were significant cutbacks in services.
“I hope we don’t repeat that mistake,” Rosengren said.
U.S. equity benchmarks turned lower on Tuesday afternoon with the S&P 500 down slightly and the Dow Jones Industrial Average down 150 points.
https://www.marketwatch.com/story/feds- ... cle_inline
"Fed’s Rosengren sees unemployment rate still at double-digit levels at end of this year"
By Greg Robb
Published: May 19, 2020 at 3:30 p.m. ET
The outlook for the U.S. economy is sobering and the U.S. central bank and lawmakers should be ready to act boldly, said Eric Rosengren, the president of the Boston Federal Reserve, on Tuesday.
In a speech to the New England Council, Rosengren said he expects the unemployment rate will peak at close to 20%.
And unfortunately by the end of the year, the jobless rate will “remain at double-digit levels,” he said.
Rosengren said that reopening the economy was not the panacea that will end the economic downturn.
Rather, it was public health policy that is the root of the solution.
“If consumer are afraid to eat out, shop, or travel, a relaxation in laws requiring business closures may do little to bring back customers, and thus jobs,” he said.
Rosengren said what the “optimal mix” of public health and economic policies should be was a complex question.
He sounded a cautious note about reopening the economy, saying it should not undo the sacrifices and progress made so far.
He noted the largest percentage declines in payroll jobs as have come in industries where social distancing is most challenging — such as recreation, entertainment, the arts and food services.
If there is continued concern about community spread of the coronavirus, these activities may continue to be hurt by cautious consumers.
In addition, Americans between 50 and 79 years of age account for about 50% of purchases in spending categories affected by social distancing, Rosengren noted.
“Public health solutions are paramount — without them, it is virtually impossible to return to full employment,” he said.
The Boston Fed president urged Congress to provide funds for U.S. states so they can avoid budget cutbacks.
In the financial crisis, there wasn’t sufficient transfers between the federal governments and states, and as a result, there were significant cutbacks in services.
“I hope we don’t repeat that mistake,” Rosengren said.
U.S. equity benchmarks turned lower on Tuesday afternoon with the S&P 500 down slightly and the Dow Jones Industrial Average down 150 points.
https://www.marketwatch.com/story/feds- ... cle_inline
Re: THE FEDERAL RESERVE
MARKETWATCH - The Fed
"If U.S. can’t resolve public-health issues, there’s a limit on what the Fed can do to help, Rosengren says in MarketWatch interview"
By Greg Robb
Published: May 20, 2020 at 8:18 a.m. ET
The Federal Reserve has the tools to do a lot of things, but can’t solve the public-health problems stemming from the coronavirus, said Boston Fed President Eric Rosengren in an interview with MarketWatch on Tuesday.
“We’re not going to get back to full employment until we are also in a situation where the public-health problem becomes less of an issue for employees and consumers,” Rosengren said.
“If we don’t get the public health right, there’s a limit to how much we’re going to be able to do to solve that problem,” he said.
The Boston Fed president said it’s good news that states are now in the position to open up.
But he said this was not the end of the crisis.
The only way that restaurants and airlines and other businesses are going to be successful is if customers feel comfortable coming back.
“That’s going to be a challenging model as long as community spread continues,” Rosengren said.
“Countries that are able to stop community spread and go back to contact-tracking individuals that are infected are going to have much more success encouraging people to go back to bars, restaurants and other kinds of services that require much more interaction,” he said.
In a speech earlier Tuesday, Rosengren said he thought the unemployment rate would still be at double-digit levels at the end of the year.
“If 20% of the labor market is retail and restaurants, and people aren’t comfortable going to retail stores and restaurants, then there’s going to be a lot of people still looking for jobs at the end of this year,” he said.
Rosengren said the Fed’s actions to combat the spillover of the coronavirus pandemic onto the economy probably would have been enough if the virus was no longer spreading.
“Since we have not done that and community spread is still continuing, the longer it lasts, the more likely we’re going to have structural changes in the economy,” he said.
It becomes critically important to limit the damage, Rosengren said.
“So we’re trying to limit the damage on the financial side, but the public-health side has to probably continue to be very aggressive.”
Rosengren said the recovery coming out of the pandemic was likely to be impacted by the high debt levels needed to pay for the relief efforts.
“We have expended our fiscal deficit very substantially."
"I think it’s appropriate to do so."
"I think at some point we’re going to have to pay down some debt that we’ve taken on."
"That implies growth coming out of this is probably going to be impacted,” he said.
U.S. equity benchmarks closed lower on Tuesday.
The Dow Jones Industrial Average closed down 390 points, mostly in the final hour of trading, after a report cast doubt on a COVID-19 vaccine candidate.
https://www.marketwatch.com/story/if-us ... cle_inline
"If U.S. can’t resolve public-health issues, there’s a limit on what the Fed can do to help, Rosengren says in MarketWatch interview"
By Greg Robb
Published: May 20, 2020 at 8:18 a.m. ET
The Federal Reserve has the tools to do a lot of things, but can’t solve the public-health problems stemming from the coronavirus, said Boston Fed President Eric Rosengren in an interview with MarketWatch on Tuesday.
“We’re not going to get back to full employment until we are also in a situation where the public-health problem becomes less of an issue for employees and consumers,” Rosengren said.
“If we don’t get the public health right, there’s a limit to how much we’re going to be able to do to solve that problem,” he said.
The Boston Fed president said it’s good news that states are now in the position to open up.
But he said this was not the end of the crisis.
The only way that restaurants and airlines and other businesses are going to be successful is if customers feel comfortable coming back.
“That’s going to be a challenging model as long as community spread continues,” Rosengren said.
“Countries that are able to stop community spread and go back to contact-tracking individuals that are infected are going to have much more success encouraging people to go back to bars, restaurants and other kinds of services that require much more interaction,” he said.
In a speech earlier Tuesday, Rosengren said he thought the unemployment rate would still be at double-digit levels at the end of the year.
“If 20% of the labor market is retail and restaurants, and people aren’t comfortable going to retail stores and restaurants, then there’s going to be a lot of people still looking for jobs at the end of this year,” he said.
Rosengren said the Fed’s actions to combat the spillover of the coronavirus pandemic onto the economy probably would have been enough if the virus was no longer spreading.
“Since we have not done that and community spread is still continuing, the longer it lasts, the more likely we’re going to have structural changes in the economy,” he said.
It becomes critically important to limit the damage, Rosengren said.
“So we’re trying to limit the damage on the financial side, but the public-health side has to probably continue to be very aggressive.”
Rosengren said the recovery coming out of the pandemic was likely to be impacted by the high debt levels needed to pay for the relief efforts.
“We have expended our fiscal deficit very substantially."
"I think it’s appropriate to do so."
"I think at some point we’re going to have to pay down some debt that we’ve taken on."
"That implies growth coming out of this is probably going to be impacted,” he said.
U.S. equity benchmarks closed lower on Tuesday.
The Dow Jones Industrial Average closed down 390 points, mostly in the final hour of trading, after a report cast doubt on a COVID-19 vaccine candidate.
https://www.marketwatch.com/story/if-us ... cle_inline
Re: THE FEDERAL RESERVE
MARKETWATCH - The Fed
"Fed officials discuss how to convince markets that interest rates will stay low for a long time"
By Greg Robb
Published: May 20, 2020 at 3:53 p.m. ET
Federal Reserve officials in April discussed the next phase of interest rate policy — convincing markets that rates will stay low for a long time — but gave no sense than any changes were imminent.
Meeting minutes from that session released Wednesday said that “at upcoming meetings” the Fed might want to clarify its intentions regarding interest rates.
Some officials wanted the central to make its forward guidance more explicit.
For example, the Fed could specify a certain level of unemployment or inflation must be achieved before the Fed would consider raising rates from zero.
Another option was a date-based approach, indicating rates would be raised only after a specified amount of time had elapsed.
In the policy statement issued after the meeting, the Fed said it expects maintain the federal-funds rate that presently sit in the range of 0% to 0.25% “until it is confident the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
Several officials said the Fed might need to provide clarity over the central bank’s ongoing unlimited purchase of Treasurys and mortgage-backed securities.
The Fed has said these purchases were started and continue to facilitate the normal functioning of the financial markets.
Without more communication, some officials said uncertainty might set in.
“Several” officials suggested the purchases could be used to keep longer-term Treasury yields low.
A “few” officials said the purchases of Treasurys could be used to keep short- to medium-term maturities capped at specified levels for a period.
This is known as “yield-curve control.”
Overall, Fed officials said they would use “the full range” of their tools to support the economy through the challenging pandemic.
They said the overall effect of the virus outbreak is “disinflationary.”
They noted the virus was causing “tremendous human and economic hardship” across the country.
In preparing for the late-April meeting, the Fed staff’s forecast for the economy “was downgraded notably” from the prior forecast in March.
Fed Chairman Jerome Powell has reflected this sense of a worsening outlook in recent statements, saying the path forward for the economy was highly uncertain and subject to downside risks.
The Fed staff outlined two possible scenarios for the economy.
The baseline forecast calls for the improvement in the second half of the year and beyond.
But under a more pessimistic view, a second wave of the virus damages the economy around year-end.
The staff said this darker forecast “was no less plausible” than the baseline projection.
“We’re all epidemiologists now,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
U.S. equity benchmarks were sharply higher on Wednesday.
The Dow Jones Industrial Average was up 1.3%.
https://www.marketwatch.com/story/fed-o ... cle_inline
"Fed officials discuss how to convince markets that interest rates will stay low for a long time"
By Greg Robb
Published: May 20, 2020 at 3:53 p.m. ET
Federal Reserve officials in April discussed the next phase of interest rate policy — convincing markets that rates will stay low for a long time — but gave no sense than any changes were imminent.
Meeting minutes from that session released Wednesday said that “at upcoming meetings” the Fed might want to clarify its intentions regarding interest rates.
Some officials wanted the central to make its forward guidance more explicit.
For example, the Fed could specify a certain level of unemployment or inflation must be achieved before the Fed would consider raising rates from zero.
Another option was a date-based approach, indicating rates would be raised only after a specified amount of time had elapsed.
In the policy statement issued after the meeting, the Fed said it expects maintain the federal-funds rate that presently sit in the range of 0% to 0.25% “until it is confident the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
Several officials said the Fed might need to provide clarity over the central bank’s ongoing unlimited purchase of Treasurys and mortgage-backed securities.
The Fed has said these purchases were started and continue to facilitate the normal functioning of the financial markets.
Without more communication, some officials said uncertainty might set in.
“Several” officials suggested the purchases could be used to keep longer-term Treasury yields low.
A “few” officials said the purchases of Treasurys could be used to keep short- to medium-term maturities capped at specified levels for a period.
This is known as “yield-curve control.”
Overall, Fed officials said they would use “the full range” of their tools to support the economy through the challenging pandemic.
They said the overall effect of the virus outbreak is “disinflationary.”
They noted the virus was causing “tremendous human and economic hardship” across the country.
In preparing for the late-April meeting, the Fed staff’s forecast for the economy “was downgraded notably” from the prior forecast in March.
Fed Chairman Jerome Powell has reflected this sense of a worsening outlook in recent statements, saying the path forward for the economy was highly uncertain and subject to downside risks.
The Fed staff outlined two possible scenarios for the economy.
The baseline forecast calls for the improvement in the second half of the year and beyond.
But under a more pessimistic view, a second wave of the virus damages the economy around year-end.
The staff said this darker forecast “was no less plausible” than the baseline projection.
“We’re all epidemiologists now,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
U.S. equity benchmarks were sharply higher on Wednesday.
The Dow Jones Industrial Average was up 1.3%.
https://www.marketwatch.com/story/fed-o ... cle_inline
Re: THE FEDERAL RESERVE
MARKETWATCH
"Former IMF chief economist says Fed’s bond-buying is ‘smoke and mirrors,’ doesn’t solve U.S. debt problems"
By Sunny Oh
Published: May 20, 2020 at 2:43 p.m. ET
The Federal Reserve’s massive bond buying to stabilize financial markets in the wake of the coronavirus pandemic does not change the fact that the U.S. still has to deal with a mountain of debt, warned former IMF chief economist Ken Rogoff.
Noting the Fed’s willingness to expand its balance sheet has helped to convince market participants to keep buying U.S. Treasury debt as the fiscal deficit soars, Rogoff said the central bank’s purchases did not change the overall stock of public debt.
“It’s absolute smoke and mirrors."
"There’s almost zero difference from the Fed buying long-term Treasury debt and having the Treasury issue short-term bonds,” said Rogoff, in an interview.
“I think people forget that the Treasury owns the Fed.”
He argued the Fed and Treasury’s balance sheets needs to be combined.
In essence, if the Fed bought government bonds and received interest-bearing bank deposits, the bonds should still count as government debt.
The Congressional Budget Office has estimated that the fiscal deficit will rise to about $3.7 trillion this fiscal year or about 18% of GDP.
The federal debt held by the public is also seen rising to more than 100% of gross domestic product from about 80% at the end of last fiscal year.
The Federal Reserve’s balance sheet grew to a record $6.98 trillion in the week ended May 13, up from $6.72 trillion in the prior week.
Rogoff’s remarks come as bond-market analysts suggest investors are unlikely to demand vastly higher yields to absorb the U.S.’s multi trillion dollar fiscal deficits this year.
Though that is the case for now, that may not be the situation forever.
“The debt is not a free lunch."
"The question is what happens to real interest rates."
"The market thinks it’ll never go up again and I think that’s a bit naive,” Rogoff added.
“There is a presumption in markets for a long time that any shock will bring interest rates down."
"That’s been the trend, but we just have no idea where we’re going after this."
"There’s a definite risk there will be pressure some day,” he said.
But at the moment, Rogoff said, there was no immediate pressure in the form of higher inflation-adjusted, or real, interest rates to bring the debt load under control.
The Treasury’s cost to borrow over the next decade stood at 0.70%, down from around 2% at the start of the year.
This leaves the inflation-adjusted rate at around a negative 0.48%, based on trading in Treasury inflation-protected securities.
Some have seen inflation as the specter that will come to haunt the 40-year long bull market in Treasurys, but Rogoff was skeptical price pressures were around the corner especially since the Fed is reluctant to employ negative interest rates.
In the event that inflation-adjusted bond yields did rise sharply, he suggested the central bank could return to the postwar playbook of financial repression, keeping down the government’s debt expenses through caps on interest rates or financial regulations.
Rogoff questioned the belief that the U.S.’s ballooning public debts would not be a problem amid the growing popularity of Modern Monetary Theory, which argues developed countries that borrow in their own currency had a higher capacity for fiscal deficits than assumed.
He acknowledged the U.S. was in a unique position, but other countries didn’t enjoy a similarly favorable set-up.
For example, if Indonesia issued government bonds in the rupiah, its businesses still had to borrow in greenbacks in a global financial and commercial system dominated by the U.S. dollar.
Though a lower exchange rate may not increase its fiscal burden, it would, however, ravage companies that had borrowed cheaply in the dollar and make it more expensive for households to buy imported goods.
The S&P 500 and Dow Jones Industrial Average were rising on Wednesday, while the Nasdaq Composite came within a few percentage points away from its all-time high of 9,838.37.
https://www.marketwatch.com/story/forme ... latestnews
"Former IMF chief economist says Fed’s bond-buying is ‘smoke and mirrors,’ doesn’t solve U.S. debt problems"
By Sunny Oh
Published: May 20, 2020 at 2:43 p.m. ET
The Federal Reserve’s massive bond buying to stabilize financial markets in the wake of the coronavirus pandemic does not change the fact that the U.S. still has to deal with a mountain of debt, warned former IMF chief economist Ken Rogoff.
Noting the Fed’s willingness to expand its balance sheet has helped to convince market participants to keep buying U.S. Treasury debt as the fiscal deficit soars, Rogoff said the central bank’s purchases did not change the overall stock of public debt.
“It’s absolute smoke and mirrors."
"There’s almost zero difference from the Fed buying long-term Treasury debt and having the Treasury issue short-term bonds,” said Rogoff, in an interview.
“I think people forget that the Treasury owns the Fed.”
He argued the Fed and Treasury’s balance sheets needs to be combined.
In essence, if the Fed bought government bonds and received interest-bearing bank deposits, the bonds should still count as government debt.
The Congressional Budget Office has estimated that the fiscal deficit will rise to about $3.7 trillion this fiscal year or about 18% of GDP.
The federal debt held by the public is also seen rising to more than 100% of gross domestic product from about 80% at the end of last fiscal year.
The Federal Reserve’s balance sheet grew to a record $6.98 trillion in the week ended May 13, up from $6.72 trillion in the prior week.
Rogoff’s remarks come as bond-market analysts suggest investors are unlikely to demand vastly higher yields to absorb the U.S.’s multi trillion dollar fiscal deficits this year.
Though that is the case for now, that may not be the situation forever.
“The debt is not a free lunch."
"The question is what happens to real interest rates."
"The market thinks it’ll never go up again and I think that’s a bit naive,” Rogoff added.
“There is a presumption in markets for a long time that any shock will bring interest rates down."
"That’s been the trend, but we just have no idea where we’re going after this."
"There’s a definite risk there will be pressure some day,” he said.
But at the moment, Rogoff said, there was no immediate pressure in the form of higher inflation-adjusted, or real, interest rates to bring the debt load under control.
The Treasury’s cost to borrow over the next decade stood at 0.70%, down from around 2% at the start of the year.
This leaves the inflation-adjusted rate at around a negative 0.48%, based on trading in Treasury inflation-protected securities.
Some have seen inflation as the specter that will come to haunt the 40-year long bull market in Treasurys, but Rogoff was skeptical price pressures were around the corner especially since the Fed is reluctant to employ negative interest rates.
In the event that inflation-adjusted bond yields did rise sharply, he suggested the central bank could return to the postwar playbook of financial repression, keeping down the government’s debt expenses through caps on interest rates or financial regulations.
Rogoff questioned the belief that the U.S.’s ballooning public debts would not be a problem amid the growing popularity of Modern Monetary Theory, which argues developed countries that borrow in their own currency had a higher capacity for fiscal deficits than assumed.
He acknowledged the U.S. was in a unique position, but other countries didn’t enjoy a similarly favorable set-up.
For example, if Indonesia issued government bonds in the rupiah, its businesses still had to borrow in greenbacks in a global financial and commercial system dominated by the U.S. dollar.
Though a lower exchange rate may not increase its fiscal burden, it would, however, ravage companies that had borrowed cheaply in the dollar and make it more expensive for households to buy imported goods.
The S&P 500 and Dow Jones Industrial Average were rising on Wednesday, while the Nasdaq Composite came within a few percentage points away from its all-time high of 9,838.37.
https://www.marketwatch.com/story/forme ... latestnews
Re: THE FEDERAL RESERVE
MARKETWATCH
"Opinion: Modern Monetary Theory is smoke and mirrors nonsense"
By Kenneth Rogoff
Published: March 5, 2019 at 11:20 a.m. ET
CAMBRIDGE, Mass. (Project Syndicate) — Just as the Federal Reserve seems to have beaten back blistering tweets from President Donald Trump, the next battle for central-bank independence is already unfolding.
And this one could potentially destabilize the entire global financial system.
A number of leading U.S. progressives, who may well be in power after the 2020 elections, advocate using the Fed’s balance sheet as a cash cow to fund expansive new social programs, especially in view of current low inflation and interest rates.
Prominent supporters of this idea, which is often referred to as Modern Monetary Theory (or MMT), include one of the Democratic Party’s brightest new stars, congresswoman Alexandria Ocasio-Cortez.
Although their arguments have a grain of truth, they also rest on some fundamental misconceptions.
Fed Chair Jerome Powell could barely contain himself when asked to comment on this new progressive dogma.
“The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong,” Powell insisted in Senate testimony last month.
He added that U.S. debt is already very high relative to gross domestic product and, worse still, is rising significantly faster than it should.
Powell is absolutely right about the deficit idea, which is just nuts.
The U.S. is lucky that it can issue debt in dollars, but the printing press is not a panacea.
If investors become more reluctant to hold a country’s debt, they probably will not be too thrilled about holding its currency, either.
If that country tries to dump a lot of it on the market, inflation will result.
Even moving to a centrally planned economy (perhaps the goal for some MMT supporters) would not solve this problem.
On Powell’s second point, that U.S. debt is already high and rising too fast, there is far more room for debate.
True, debt cannot rise faster than GDP forever, but it may do so for quite a while.
Today’s long-term, inflation-adjusted interest rates in the U.S. are about half their 2010 level, far below what markets were predicting back then, and far below Fed and International Monetary Fund forecasts.
At the same time, inflation has also been lower for longer than virtually any economic model would have predicted, given current robust U.S. growth and very low unemployment.
What’s more, despite being at the epicenter of the global financial crisis, the U.S. dollar has become increasingly dominant in global trade and finance.
For the moment, the world is quite content to absorb more dollar debt at remarkably low interest rates.
How to exploit this increased U.S. borrowing capacity is ultimately a political decision.
That said, it would be folly to assume that current favorable conditions will last forever, or to ignore the real risks faced by countries with high and rising debt.
These include potentially more difficult risk-return tradeoffs in using fiscal policy to fight a financial crisis, respond to a large-scale natural disaster or pandemic, or mobilize for a physical conflict or cyberwar.
As a great deal of empirical evidence has shown, nothing weighs on a country’s long-term trend growth like being financially hamstrung in a crisis.
The right approach to balancing risk and reward is for the government to extend the maturity structure of its debt, borrowing long-term instead of short-term.
This helps to stabilize debt-service costs if interest rates rise.
And if things get really difficult, it is far easier to inflate down the value of captive long-term debt (provided it is not indexed to prices) than it is to inflate away short-term debt, which the government constantly has to refinance.
True, policy makers could again resort to financial repression, and force citizens to hold government debt at below-market interest rates, as an alternative way of reducing the debt burden.
But this is a better option for Japan, where most debt is held domestically, than for the U.S., which depends heavily on foreign buyers.
Having the Fed issue short-term liabilities in order to buy long-term government debt turns policy 180 degrees in the wrong direction, because it shortens the maturity of U.S. government debt that is held privately or by foreign governments.
Contrary to widespread opinion, the U.S. central bank is not an independent financial entity: the government owns it lock, stock, and barrel.
Unfortunately, the Fed itself is responsible for a good deal of the confusion surrounding the use of its balance sheet.
In the years following the 2008 financial crisis, the Fed engaged in massive quantitative easing (QE), whereby it bought up very long-term government debt in exchange for bank reserves, and tried to convince the American public that this magically stimulated the economy.
QE, when it consists simply of buying government bonds, is smoke and mirrors.
The Fed’s parent company, the Treasury Department, could have accomplished much the same thing by issuing one-week debt, and the Fed would not have needed to intervene.
Perhaps all the nonsense about MMT will fade.
But that’s what people said about extreme versions of supply-side economics during Ronald Reagan’s 1980 presidential campaign.
Misguided ideas may yet drag the issue of central-bank independence to center stage, with unpredictable and potentially serious consequences.
For those bored with the steady employment growth and low inflation of the past decade, things could soon become more exciting.
This article was published with permission of Project Syndicate — Modern Monetary Nonsense.
https://www.marketwatch.com/story/moder ... cle_inline
"Opinion: Modern Monetary Theory is smoke and mirrors nonsense"
By Kenneth Rogoff
Published: March 5, 2019 at 11:20 a.m. ET
CAMBRIDGE, Mass. (Project Syndicate) — Just as the Federal Reserve seems to have beaten back blistering tweets from President Donald Trump, the next battle for central-bank independence is already unfolding.
And this one could potentially destabilize the entire global financial system.
A number of leading U.S. progressives, who may well be in power after the 2020 elections, advocate using the Fed’s balance sheet as a cash cow to fund expansive new social programs, especially in view of current low inflation and interest rates.
Prominent supporters of this idea, which is often referred to as Modern Monetary Theory (or MMT), include one of the Democratic Party’s brightest new stars, congresswoman Alexandria Ocasio-Cortez.
Although their arguments have a grain of truth, they also rest on some fundamental misconceptions.
Fed Chair Jerome Powell could barely contain himself when asked to comment on this new progressive dogma.
“The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong,” Powell insisted in Senate testimony last month.
He added that U.S. debt is already very high relative to gross domestic product and, worse still, is rising significantly faster than it should.
Powell is absolutely right about the deficit idea, which is just nuts.
The U.S. is lucky that it can issue debt in dollars, but the printing press is not a panacea.
If investors become more reluctant to hold a country’s debt, they probably will not be too thrilled about holding its currency, either.
If that country tries to dump a lot of it on the market, inflation will result.
Even moving to a centrally planned economy (perhaps the goal for some MMT supporters) would not solve this problem.
On Powell’s second point, that U.S. debt is already high and rising too fast, there is far more room for debate.
True, debt cannot rise faster than GDP forever, but it may do so for quite a while.
Today’s long-term, inflation-adjusted interest rates in the U.S. are about half their 2010 level, far below what markets were predicting back then, and far below Fed and International Monetary Fund forecasts.
At the same time, inflation has also been lower for longer than virtually any economic model would have predicted, given current robust U.S. growth and very low unemployment.
What’s more, despite being at the epicenter of the global financial crisis, the U.S. dollar has become increasingly dominant in global trade and finance.
For the moment, the world is quite content to absorb more dollar debt at remarkably low interest rates.
How to exploit this increased U.S. borrowing capacity is ultimately a political decision.
That said, it would be folly to assume that current favorable conditions will last forever, or to ignore the real risks faced by countries with high and rising debt.
These include potentially more difficult risk-return tradeoffs in using fiscal policy to fight a financial crisis, respond to a large-scale natural disaster or pandemic, or mobilize for a physical conflict or cyberwar.
As a great deal of empirical evidence has shown, nothing weighs on a country’s long-term trend growth like being financially hamstrung in a crisis.
The right approach to balancing risk and reward is for the government to extend the maturity structure of its debt, borrowing long-term instead of short-term.
This helps to stabilize debt-service costs if interest rates rise.
And if things get really difficult, it is far easier to inflate down the value of captive long-term debt (provided it is not indexed to prices) than it is to inflate away short-term debt, which the government constantly has to refinance.
True, policy makers could again resort to financial repression, and force citizens to hold government debt at below-market interest rates, as an alternative way of reducing the debt burden.
But this is a better option for Japan, where most debt is held domestically, than for the U.S., which depends heavily on foreign buyers.
Having the Fed issue short-term liabilities in order to buy long-term government debt turns policy 180 degrees in the wrong direction, because it shortens the maturity of U.S. government debt that is held privately or by foreign governments.
Contrary to widespread opinion, the U.S. central bank is not an independent financial entity: the government owns it lock, stock, and barrel.
Unfortunately, the Fed itself is responsible for a good deal of the confusion surrounding the use of its balance sheet.
In the years following the 2008 financial crisis, the Fed engaged in massive quantitative easing (QE), whereby it bought up very long-term government debt in exchange for bank reserves, and tried to convince the American public that this magically stimulated the economy.
QE, when it consists simply of buying government bonds, is smoke and mirrors.
The Fed’s parent company, the Treasury Department, could have accomplished much the same thing by issuing one-week debt, and the Fed would not have needed to intervene.
Perhaps all the nonsense about MMT will fade.
But that’s what people said about extreme versions of supply-side economics during Ronald Reagan’s 1980 presidential campaign.
Misguided ideas may yet drag the issue of central-bank independence to center stage, with unpredictable and potentially serious consequences.
For those bored with the steady employment growth and low inflation of the past decade, things could soon become more exciting.
This article was published with permission of Project Syndicate — Modern Monetary Nonsense.
https://www.marketwatch.com/story/moder ... cle_inline
Re: THE FEDERAL RESERVE
MARKETWATCH - The Fed
"The Fed and Congress may need to do more to support economy, Clarida says"
By Greg Robb
Published: May 21, 2020 at 1:11 p.m. ET
The Federal Reserve and Congress both might have to consider additional steps to help the economy during the COVID-19 pandemic, said the central bank’s No.2 official on Thursday.
“Depending on the course the virus takes and the depth and duration of the downturn it causes, additional support from both monetary and fiscal policies may be called for,” Richard Clarida, the vice-chairman of the Fed, said during a on-line talk with the New York Association for Business Economics.
Clarida said there is much that the central bank doesn’t know about the potential course of the economy.
“But there is one thing that I am certain about: The Federal Reserve will continue to act forcefully, proactively and aggressively as we deploy our toolkit — including our balance sheet, forward guidance, and lending facilities — to provide critical support to the economy during this challenging time and to do all we can to make sure that the recovery from this downturn, once it commences, is as robust as possible,” Clarida said in his prepared remarks.
Clarida is seen as a close confident of Fed Chairman Jerome Powell, and together with New York Fed President John Williams are seen as shaping the central bank’s policy decisions.
Williams spoke earlier Thursday and his remarks were quite similar to Clarida’s speech.
Clarida said he expects the economy to begin to grow sometime after June, and the unemployment rate should start to come down.
He said the COVID-19 contagion shock will be disinflationary, not just over the next few months but over the next few years.
He noted that core inflation was already below the Fed’s 2% target before the pandemic.
The Fed has also purchased more than $2 trillion of Treasurys and asset backed securities to help the economy.
The reduced pace of the purchases lately reflects the substantial improvement in market functioning, Clarida said.
U.S. equity benchmarks were lower Thursday on signs that U.S. and Chinese relations are souring.
The Dow Jones Industrial Average was down over 100 points in lunch-time trading.
https://www.marketwatch.com/story/the-f ... cle_inline
"The Fed and Congress may need to do more to support economy, Clarida says"
By Greg Robb
Published: May 21, 2020 at 1:11 p.m. ET
The Federal Reserve and Congress both might have to consider additional steps to help the economy during the COVID-19 pandemic, said the central bank’s No.2 official on Thursday.
“Depending on the course the virus takes and the depth and duration of the downturn it causes, additional support from both monetary and fiscal policies may be called for,” Richard Clarida, the vice-chairman of the Fed, said during a on-line talk with the New York Association for Business Economics.
Clarida said there is much that the central bank doesn’t know about the potential course of the economy.
“But there is one thing that I am certain about: The Federal Reserve will continue to act forcefully, proactively and aggressively as we deploy our toolkit — including our balance sheet, forward guidance, and lending facilities — to provide critical support to the economy during this challenging time and to do all we can to make sure that the recovery from this downturn, once it commences, is as robust as possible,” Clarida said in his prepared remarks.
Clarida is seen as a close confident of Fed Chairman Jerome Powell, and together with New York Fed President John Williams are seen as shaping the central bank’s policy decisions.
Williams spoke earlier Thursday and his remarks were quite similar to Clarida’s speech.
Clarida said he expects the economy to begin to grow sometime after June, and the unemployment rate should start to come down.
He said the COVID-19 contagion shock will be disinflationary, not just over the next few months but over the next few years.
He noted that core inflation was already below the Fed’s 2% target before the pandemic.
The Fed has also purchased more than $2 trillion of Treasurys and asset backed securities to help the economy.
The reduced pace of the purchases lately reflects the substantial improvement in market functioning, Clarida said.
U.S. equity benchmarks were lower Thursday on signs that U.S. and Chinese relations are souring.
The Dow Jones Industrial Average was down over 100 points in lunch-time trading.
https://www.marketwatch.com/story/the-f ... cle_inline
Re: THE FEDERAL RESERVE
MARKETWATCH - The Fed
"Fed’s Williams sees U.S. economy rebounding after a couple more ‘very difficult’ months"
By Greg Robb
Published: May 21, 2020 at 10:50 a.m. ET
The U.S. economy should rebound later this year but is not out of the woods yet, an influential U.S. central banker said Thursday.
“My own forecast would be a couple very difficult months ahead of us."
"And then I expect in the second half of the year to see a rebound,” Williams said in an on-line discussion with several business groups from upstate New York.
Williams, as president of the New York Fed, always has a vote on the Fed’s Open Market Committee that sets interest-rate policy.
Other regional Fed presidents rotate on and off the panel.
Williams is also seen as a close adviser to Fed Chairman Jerome Powell.
In his talk, Williams emphasized how uncertain the outlook is given the pandemic.
He said the government support for the economy was not exhausted.
“From my perspective, we can afford significantly more government support for the economy,” he said.
Concerns about the rising federal debt as a result of the coronavirus crisis have to take a back seat to getting the economy back on track, he said.
Williams said he was more worried about low inflation than higher inflation.
U.S. equity benchmarks were mixed on Thursday.
The S&P 500 index was down 11.34 points in mid-morning trading.
https://www.marketwatch.com/story/feds- ... cle_inline
"Fed’s Williams sees U.S. economy rebounding after a couple more ‘very difficult’ months"
By Greg Robb
Published: May 21, 2020 at 10:50 a.m. ET
The U.S. economy should rebound later this year but is not out of the woods yet, an influential U.S. central banker said Thursday.
“My own forecast would be a couple very difficult months ahead of us."
"And then I expect in the second half of the year to see a rebound,” Williams said in an on-line discussion with several business groups from upstate New York.
Williams, as president of the New York Fed, always has a vote on the Fed’s Open Market Committee that sets interest-rate policy.
Other regional Fed presidents rotate on and off the panel.
Williams is also seen as a close adviser to Fed Chairman Jerome Powell.
In his talk, Williams emphasized how uncertain the outlook is given the pandemic.
He said the government support for the economy was not exhausted.
“From my perspective, we can afford significantly more government support for the economy,” he said.
Concerns about the rising federal debt as a result of the coronavirus crisis have to take a back seat to getting the economy back on track, he said.
Williams said he was more worried about low inflation than higher inflation.
U.S. equity benchmarks were mixed on Thursday.
The S&P 500 index was down 11.34 points in mid-morning trading.
https://www.marketwatch.com/story/feds- ... cle_inline
Re: THE FEDERAL RESERVE
MARKETWATCH - The Fed
"Fed’s Powell says less-well-off Americans are bearing the brunt of the economic fallout from the coronavirus"
By Greg Robb
Published: May 21, 2020 at 2:34 p.m. ET
The economic fallout from the coronavirus pandemic is falling on poorer Americans, Federal Reserve Chairman Jerome Powell said Thursday.
“We are in the midst of an economic downturn without modern precedent,” Powell said, in remarks at the start of a central bank forum for voices outside of Wall Street called “Fed Listens.”
The economic downturn was sudden and severe, erasing all the job gains of the past decade.
“And while the burden is widespread, it has not been evenly spread,” Powell said.
“Those taking the brunt of the fallout are those least able to bear it.”
The Fed chairman said earlier this month that the path ahead for the economy is highly uncertain and risky.
The key to the rebound will be public confidence that it is again safe to undertake various activities.
Powell said he wanted to hear from participants on how their communities are coping and how they are thinking about the future.
He said this feedback was crucial for conducting interest rate policy.
The central bank will hear from a round table including Pat Dujakovich, the president of the AFL-CIO of Kansas City, Juan Salgado, the chancellor of the City Colleges of Chicago, and Aaron Gornstein, the president of the Preservation of Affordable Housing.
U.S. equity benchmarks were uniformly lower on Thursday.
The S&P 500 index was down 15.59 points to 2,956 in midafternoon trading.
https://www.marketwatch.com/story/feds- ... cle_inline
"Fed’s Powell says less-well-off Americans are bearing the brunt of the economic fallout from the coronavirus"
By Greg Robb
Published: May 21, 2020 at 2:34 p.m. ET
The economic fallout from the coronavirus pandemic is falling on poorer Americans, Federal Reserve Chairman Jerome Powell said Thursday.
“We are in the midst of an economic downturn without modern precedent,” Powell said, in remarks at the start of a central bank forum for voices outside of Wall Street called “Fed Listens.”
The economic downturn was sudden and severe, erasing all the job gains of the past decade.
“And while the burden is widespread, it has not been evenly spread,” Powell said.
“Those taking the brunt of the fallout are those least able to bear it.”
The Fed chairman said earlier this month that the path ahead for the economy is highly uncertain and risky.
The key to the rebound will be public confidence that it is again safe to undertake various activities.
Powell said he wanted to hear from participants on how their communities are coping and how they are thinking about the future.
He said this feedback was crucial for conducting interest rate policy.
The central bank will hear from a round table including Pat Dujakovich, the president of the AFL-CIO of Kansas City, Juan Salgado, the chancellor of the City Colleges of Chicago, and Aaron Gornstein, the president of the Preservation of Affordable Housing.
U.S. equity benchmarks were uniformly lower on Thursday.
The S&P 500 index was down 15.59 points to 2,956 in midafternoon trading.
https://www.marketwatch.com/story/feds- ... cle_inline