THE FEDERAL RESERVE

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MARKETWATCH - The Fed

"Fed’s Kashkari decries ‘absurd’ U.S. financial system that needs bailout every 10 years"


By Greg Robb

Published: Sept. 18, 2020 at 4:34 p.m. ET

Minneapolis Fed President Neel Kashkari on Friday decried the U.S. financial system as “absurd” because it has needed a central bank bailout twice in less than 20 years.

“How can it possibly be this fragile?” Kashkari asked, in a speech to the Council of Institutional Investors.

In March when it became clear that the coronavirus pandemic would damage the U.S. economy, investors and institutions attempted to move to relatively safe assets, causing the U.S. funding markets to buckle.

The Fed moved in with trillions of dollars to support markets and, in the process, removed long-tail downside risks from aggressive trades held by firms.


“The funding markets that almost collapsed in March raise important and complex policy questions,” Kashkari said.

It is not as simple as addressing the risks of too-big-to-fail banks, where the clear and straightforward solution is to force them to fund themselves with more equity, he said.

“The solution of fragile funding markets is less obvious but also important,” Kashkari said.

“Fundamentally, I wonder why we allow firms, financial or otherwise, to fund themselves overnight?” he asked.

What societal value is there in repo markets that prove so fragile when risks emerge, he said.


Earlier Friday, Kashkari played down investor fears over runaway inflation, saying a spike in prices would be a “high-class problem” for the central bank struggling to fight persistent low inflation.

Kashkari, who was a key player in trying to avert a more severe financial crisis in 2008-2009, favors stronger financial market regulation than many of his colleagues.

But even former top Fed officials like Ben Bernanke and Janet Yellen have said the Fed needs to get its arms around why financial markets broke down in March.

Supporters of the financial system have argued that banks and shadow banks were not the cause of the crisis as they had been in 2008.

But Kashkari seemed to have little patience with large banks that benefitted from government aid.

“You might not realize it, but the banks got a lot of help,” Kashkari said.


He noted banks were key beneficiaries of the COVID-19 economic stimulus measures passed by Congress this year.

Without these one-time checks, more Americans would not have been able to make their credit card payments, he noted.

Analysis by the Minneapolis Fed suggests that banks should raise their capital levels given the risks they pose to the economy.

He said the analysis shows that banks should fund themselves with at least 24% of risk-weighted asset — up from 13% today.

The Dow Jones Industrial Average fell 200 points on Friday.

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MARKETWATCH - The Fed

"Fed’s Kaplan says he’s worried new forward guidance will spark risky trading"


By Greg Robb

Published: Sept. 21, 2020 at 10:59 a.m. ET

The new Federal Reserve forward guidance could create “fragilities” and “excesses” in financial markets, said Dallas Fed President Rob Kaplan on Monday.

Last week, the Fed promised to hold its policy rate close to 0% until inflation is on track to “moderately exceed” the central bank’s 2% target “for some time.”


Kaplan, along Minnesota Fed President Neel Kashkari, was one of two dissenters to the framing of this so-called forward guidance, which provides market participants some guidance about the future path of interest rates.

The Federal Open Market Committee earlier this month debuted its new forward guidance.

Kashkari said the problem with the Fed’s new guidance is that it still holds on to the importance of the unknowable variable of a maximum sustainable job level.

One reason for his opposition, Kaplan said, was it gives institutional investors a signal “you’re going to need to take more risks,” Kaplan said in an interview on Bloomberg Television.

“Excessive risk taking...can create fragilities and other excesses in the system which are hard to see in real time and easier to see in hindsight and can create issues for us,” Kaplan said, in an interview by Bloomberg News.


“I felt the costs were not worth the benefits,” he added.

The Dallas Fed president said there wasn’t much benefit from announcing forward guidance last week because financial markets already believe the Fed will hold its policy rate steady for years.

Kaplan was upbeat about the U.S. economy, seeing a strong fourth quarter and “above trend growth” in 2021.

It is clear that the economy will snap back sharply in July-September as the lockdown from the pandemic from April and May ended.

Kaplan said this forecast was predicated by some additional spending from Congress to help the economy.

“I’m still hopeful for it."

"And I think it’s important to this recovery,” he said.

There is growing worry that the fight over the new vacancy on the Supreme Court sinks the slim chances of another fiscal package until next year.

Stocks opened sharply lower on Monday with the Dow Jones Industrial Average down over 800 points.

https://www.marketwatch.com/story/feds- ... 2020-09-21
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MARKETWATCH - The Fed

"Fed’s Powell tells Congress it’s up to them to provide aid to some troubled companies"


By Greg Robb

Published: Sept. 22, 2020 at 9:11 a.m. ET

If Congress is worried about the health of some American businesses, it’s up to lawmakers to provide support directly, Federal Reserve Chairman Jerome Powell said ahead of a hearing later Tuesday.

The Fed can only make loans, which isn’t much of a life preserver for some companies, Powell said, in prepared remarks released ahead of a House Financial Services Committee hearing.


For some companies, “a loan that could be difficult to repay might not be the answer.

In these cases, direct fiscal support may be needed,” Powell said.

Prospects that Congress will pass another rescue package have faded in recent weeks, and became even more remote after the death of Supreme Court Justice Ruth Bader Ginsburg last Friday.

With Republicans and Democrats unwilling to compromise, members of Congress have been pressing the Fed to do more.

The Fed has set up an emergency lending plan, the Main Street Lending Program, designed to help small- and medium-size businesses.

But so far at least the program hasn’t attracted many borrowers.

Some analysts think focusing on the small amount lent so far is misplaced.

They think the Fed lending program could be helpful later this year if more companies start to face possible bankruptcy.

The Fed has been trying to tweak the terms of Main Street to make it more flexible but major changes must come from lawmakers and Treasury.

In his remarks, Powell was upbeat about the outlook.

He said many indicators have shown “marked improvement.”

“In the labor market, roughly half of the 22 million payroll jobs that were lost in March and April have been regained as people return to work,” Powell said.

He assured lawmakers that the economy “will eventually recover from this difficult period.”

Powell will testify at 10:30 a.m. Eastern along with Treasury Secretary Steven Mnuchin.

In his prepared testimony, Mnuchin said the White House was open to negotiating a new coronavirus relief measure.

“I believe a targeted package is still needed, and the Administration is ready to reach a bipartisan agreement,” Mnuchin said.

Analysts said the prospects of another large coronavirus aid package are dead as the Senate turns its attention to confirming a replacement for Ginsburg on the Supreme Court.

Stock-index futures were mixed on Tuesday after the sharp sell off in the prior session where the Dow Jones Industrial Average dropped 509.72 points.

https://www.marketwatch.com/story/feds- ... 2020-09-21
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MARKETWATCH

"Fed’s Evans sees risks of ‘recessionary dynamics’ without more fiscal stimulus"


By Greg Robb

Published: Sept. 22, 2020 at 1:35 p.m. ET

It is important that Congress pass more spending to help the economy during the pandemic or there is a risk the economy sinks in a downward spiral, Chicago Fed President Charles Evans warned Tuesday.

“Every week and every month we go without renewing additional fiscal support…we risk a longer period of slower growth if not recessionary dynamics,” Evans said during a discussion sponsored by OMFIF, an international forum for economic policy.

Evans said he was surprised to see how strong the economy has rebounded from the lockdown in April and May.

The economy is back about 90% even though the toll of deaths has been “horrific,” Evans said.

Manufacturing has “come way back” led by the auto sector, he said.

Evans said he expects the unemployment rate to end the year in a range of 7%-7.5%, and to improve to a 5.5% rate by the end of 2021.

The jobless rate was 8.4% in August.

The labor market “has really come back a lot better,” he said.

The Chicago Fed president, who has been in his post since 2007, said his forecast assumes more fiscal stimulus and a vaccine becoming available sometime in the middle of next year.

“If those things don’t happen, it is going to be an obstacle,” he said.

Inflation is going remain below the Fed’s 2% target for a number of years and that means Fed policy will have to remain accommodative, he said.

The Fed has adopted a new policy to allow inflation to run above the 2% target for some time so that inflation averages 2%.

Asked how long the Fed would allow inflation to overshoot 2% and how high it would allow inflation to rise, Evans said if the Fed was “timid” and limited its inflation overshoot to 2.25%, then it would take until 2026 or 2028 to average 2%.

“I would like to raise rates as soon as anybody,” Evans said.

"For me, that’s going to be when the economy is very very strong and real interest rates are rising,” he said.


“Monetary policy in some sense would follow the economy up,” he said.

“We could start raising rates before we start averaging 2%, we need to discuss that,” he added.

Stocks were mixed Tuesday after steep losses on Monday.

The Dow Jones Industrial Average was up less than 0.1%, while the S&P 500 index was trading 0.4% higher.

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MARKETWATCH

"Powell says it’s tough for Fed to boost lending to smaller businesses"


By Greg Robb

Published: Sept. 22, 2020 at 12:11 p.m. ET

Federal Reserve Chairman Jerome Powell said Tuesday the central bank would have to start from scratch if Congress wants it to make smaller loans to U.S. companies.

Democrats, led by House Financial Services Committee Chairwoman Rep. Maxine Waters of California, want the Fed to do lend more for companies hurt by the coronavirus.


At a hearing on Tuesday, Waters suggested that the Fed and Treasury Department lower the minimum size of the loans under the Main Street Lending Program to $100,000 from the current $250,000 threshold.

Powell pushed back on this idea.

He said that there was little demand for loans below $1 million.

And lowering the threshold would mean the Fed would have to start over with the program.

“Extending credit in those small quantities would require a facility built from the ground that would be quite different than Main Street,” Powell said.

“It wouldn’t look like the current Main Street facility now."

"It’s just a very different kind of thing,” he added.

Treasury Secretary Steven Mnuchin said “there’s not more we can do” to make the Fed’s emergency lending programs more used.

Mnuchin said some of the $454 billion allocated for the lending program could be shifted to better use.

Some lawmakers have criticized the Treasury for not wanting the lending program to take losses.

But Mnuchin stessed this wasn’t the case.

“We do expect to take losses on that,” he said.

Powell said smaller business loans would be better handled with grants from the Paycheck Protection Program, which provided about $500 billion in loans to small businesses that could be forgiven if they did not lay off their employees.

“Trying to underwrite the credit of hundreds of thousands of very small businesses would be very difficult,” Powell said.

He said many of these small loans are based on personal promises.


The PPP program expired in August and reauthorizing it has been held up because Democrats and Republicans can’t reach agreement on another coronavirus relief package.

Both Powell and Mnuchin told lawmakers it was not easy for the federal government to craft an aid program for the commercial real estate sector.

“It’s an issue."

"We don’t have a solution."

"I wish we did,” Mnuchin said.


The Treasury Secretary said reauthorizing the PPP program might be the answer so that firms can pay their rent and landlords can pay their mortgages.

Stocks were mixed on Tuesday with the Dow Jones Industrial Average down slightly while the S&P 500 index was up a bit.

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MARKETWATCH - The Fed

"Fed’s Rosengren says economy is more fragile than data suggests"


By Greg Robb

Published: Sept. 23, 2020 at 3:58 p.m. ET

Boston Fed President Eric Rosengren said Wednesday that he is less optimistic about the economic outlook than many of his colleagues, despite encouraging economic data over the summer.

The Fed’s median forecast is fairly upbeat, expecting the unemployment rate to drop to 7.6% by the end of the year and 5.5% at the end of 2021, along with a gradual return of inflation to the 2% target.

“My views are that the economy remains fragile,” Rosengren said, in a speech to the Boston Economic Club.

The Boston Fed president said his forecast for a slower recovery hinges on “several challenges” the economy could face in coming months.

“I am concerned that a second wave of COVID-19 infections this fall and winter is likely, which could cause some states to impose new restrictions on mobility and face-to-face interactions,” Rosengren said.

He said he was also worried that more spending from Congress to support the economy “seems unlikely to materialize anytime soon.”

Rosengren added that he expects financial spillovers from businesses impacted by the virus “will become a more significant headwind going forward,”

“I certainly hope this less-optimistic outlook turns out to be wrong,” the Boston Fed president said.

He said additional fiscal stimulus and continued monetary stimulus remains necessary.

Stocks were lower on Wednesday, with the Dow Jones Industrial Average down 120 points.

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MARKETWATCH

"Fed's Evans: My comment that got markets' attention was really just a reading of already released Sept. statement"


By Greg Robb

Published: Sept. 23, 2020 at 11:50 a.m. ET

Chicago Fed President Charles Evans said Wednesday that his comment that moved financial markets earlier in the week was just a simple reading of the central bank's already-released September policy statement.

"I really thought that I was pretty much reading out what our September policy statement was saying," Evans said, during a conversation sponsored by MNI.

Evans said that the Fed statement says the Fed expects to hold its policy rate close to zero until inflation gets to 2%.

After that, the Fed can begin to raise rates but policy will still be accommodative as the Fed seeks to get inflation to average 2% over some time.

The dollar rose as traders interpreted his comment as a signal of an earlier lift-off of zero than anticipated.

Evans said he thinks markets should understand that a 2.5% inflation rate for some period of time "is likely in the cards" if the central bank is doing its job right.

https://www.marketwatch.com/story/feds- ... 2020-09-23
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MARKETWATCH - The Fed

"Fed officials struggle to convince investors their new policy strategy will be helpful"


By Greg Robb

Published: Sept. 23, 2020 at 5:08 p.m. ET

Federal Reserve officials hit the lecture circuit on Wednesday with the aim to convince investors that their new policy strategy would be helpful for the economy over the longer term.

Last week, the Fed said it expected to leave rates near zero until inflation has risen to 2% and is on track to moderately exceed that level for some time.


Financial markets didn’t react much to the update at all.

Even when inflation hits the 2% target, the central bank won’t automatically raise rates but will assess whether a tightening is needed, said Fed Vice Chairman Richard Clarida, in an interview on Bloomberg Television.

“We expect that rates will be at the current level, which is basically zero, until actual observed PCE inflation has reached 2%,” Clarida said, referring the central bank’s preferred measure of personal-consumption expenditures.

“We could actually keep rates at this level beyond that,” he said.

Markets had interpreted remarks from Chicago Fed President Charles Evans on Tuesday as suggesting the central bank could lift off prior to hitting the 2% target.

The dollar, notably, gained in a move market participants pinned in part on the regional Fed leader’s remarks.

On Wednesday, Evans said he was just pointing out that rates could rise before inflation averages 2% over a period of time.

“I really thought that I was pretty much reading out what our September policy statement was saying,” Evans said during a talk sponsored by MNI.

Evans said he preferred to let inflation run hot so that it would average 2% and he did not support a “timid” overshoot.

He said a 2.5% inflation rate for some period of time “is likely in the cards,” but noted that his colleagues seem to be discussing a potential lower 2.2% rate.

In a subsequent discussion with reporters, Evans expanded to say that the Fed will have to work very hard to get inflation up to 2%.

‘I think you have to provide a lot of accommodation and I think if you’re at all skittish about how much you overshoot 2% while you have maintained inflation expectations relatively consistent with 2%, you make your job a lot more difficult,” he said.


Fed watchers note that some of the confusion comes because the Fed has not defined the period when inflation would average 2% and how much inflation could rise above target without raising concern.

“The confusion over how to read Evans underlines the need for the Fed leadership to start fleshing out its currently vague ‘overshooting’ formula sooner rather than later in order to secure and extend the credibility gains associated with its strategy shift and help sustain supportive financial conditions at a difficult moment,” said Krishna Guha, a former Fed staffer and now vice chairman of Evercore ISI.

Evans said the Fed would have more conversations about the guidance and acknowledged the issue was a communications challenge for the central bank.

Other observers note the debate about higher inflation is a problem that remains years away.

At the moment, the economy is struggling out of the deep hole from the coronavirus pandemic.

In a speech at lunchtime, Boston Fed President Eric Rosengren said he was concerned the economy was more fragile than the economic data over the summer suggested.

Fed Vice Chairman for Supervision Randal Quarles was more upbeat.

In a speech to the Institute for International Bankers, he said that the U.S. economy looked like it could avoid the worst-care scenarios from the pandemic.

In total, eight of 17 senior Fed officials spoke in public on Wednesday.

The one thing that Fed officials all agreed on is the need for more Congressional spending to support the economic recovery.

But prospects of more spending prior to the November election have dimmed.

The Dow Jones Industrial Average was down over 500 points on Wednesday as the tech sector, in particular, suffered.

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MARKETWATCH

"Fed's Quarles says he is optimistic about outlook for U.S. economy"


By Greg Robb

Published: Sept. 23, 2020 at 2:01 p.m. ET

The U.S. economy is likely to be able to avoid the worst outcomes that were feared in the wake of the coronavirus pandemic, said Randal Quarles, the Fed's vice chairman for banking supervision, on Wednesday.

"A recovery is underway and the world seems to be adjusting in ways that allow us to address public concerns about the virus without sudden stops in economic activity," Quarles said, in a speech to the Institute of International Bankers.

Quarles said there are signs of the beginnings of a strong recovery but noted it will take a long time to fully recover from the shock.

He said he agreed with Fed Chairman Jerome Powell that it will take continued support to sustain a robust recovery.

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MARKETWATCH - The Fed

"Powell says lack of fiscal package adds to downside risk"


By Greg Robb

Published: Sept. 24, 2020 at 12:15 p.m. ET

Federal Reserve Chairman Jerome Powell on Thursday said the failure of Congress to pass additional relief for the economy adds to the worries about slower growth.

“While the economy has been doing better than expected, I think there is downside risk,” Powell said.


There are 11 million people who have lost jobs during the pandemic.

These people have been able to spend because of government assistance, he noted.

“There is downside risk probably coming if some form of that support doesn’t continue,” the Fed chairman said.

Powell was sitting beside Treasury Secretary Steven Mnuchin when he made the comments during testimony to the Senate Banking Committee.

Mnuchin sparred with Sen. Sherrod Brown, Democrat of Ohio, the top minority member on the committee, over who was to blame for the roadblocks in Congress that have quashed another relief package.

Mnuchin said Congress should quickly pass targeted relief by focusing on items on which both parties agree.

Then negotiations would continue on measures that need more work.

Brown said Senate Republicans would simply deep-six any further relief legislation after they get what they wanted.

He noted that 600,000 workers in Ohio lost the $600 extra federal jobless relief as a result of the impasse.

“You’re simply saying to those 600,000 Ohioans, ‘I’m sorry, you’re on your own,’” Brown said.

“That’s a gross misstatement,” Mnuchin shot back.

He said Democrats were refusing to negotiate if a relief package was not worth at least $2.2 trillion.

Sen. Mike Crapo, Republican from Idaho, and the chairman of the Banking Committee, said he agreed with Mnuchin.


“We ought to do what we can to reach agreement and get it done soon,” Crapo said.

Stocks flipped in and out of positive territory on Thursday but gridlock on fiscal relief has cast a pall over the equity market.

The Dow Jones Industrial Average was trading 38 points higher in early afternoon trading.

Asked about the stock market’s recent performance, Powell declined to comment.

https://www.marketwatch.com/story/powel ... 2020-09-24
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