Jonathan Spicer http://blogs.reuters.com/jonathan-spicer Jonathan Spicer's Profile Thu, 05 Nov 2015 15:45:12 +0000 en-US hourly 1 http://wordpress.org/?v=4.2.5 Fed, IMF officials say bank culture still poses stability risk http://www.reuters.com/article/2015/11/05/usa-fed-dudley-idUSL1N1301SR20151105?feedType=RSS&feedName=everything&virtualBrandChannel=11563 http://blogs.reuters.com/jonathan-spicer/2015/11/05/fed-imf-officials-say-bank-culture-still-poses-stability-risk/#comments Thu, 05 Nov 2015 15:12:57 +0000 http://blogs.reuters.com/jonathan-spicer/?p=2302 NEW YORK, Nov 5 (Reuters) – The culture within the world’s
biggest banks remains a possible source of instability seven
years after the depths of the financial crisis, and more work is
needed to reform the underlying causes of misconduct, top U.S.
Federal Reserve and International Monetary Fund officials said
on Thursday.

New York Fed President William Dudley kicked off a
conference of bankers and regulators with a warning that public
trust in financial institutions has been compromised, and he
urged Wall Street to focus less on seeking out “bad apples” and
more on improving “apple barrels.”

Christine Lagarde, the IMF’s managing director, amplified
the pressure, saying bankers’ immense power means they must
uphold the highest ethical standards, but noting that there had
been reckless behavior during the crisis and misconduct
afterwards.

Regulators in the United States and elsewhere have defended
laws and rules adopted in the wake of the 2007-2009 financial
crisis as necessary if sometimes cumbersome to ensure it does
not happen again.

More recently, as the world’s largest banks were ensnared in
scandals like rate-rigging, Dudley and other officials have said
ethics and culture, not just liquidity and capital, are a source
of stability. The conference in New York, attended by chief
executives including Citigroup’s Michael Corbat and Morgan
Stanley’s James Gorman, was meant to drive this idea
home.

“Dodd-Frank apparently did little to curb misconduct – a
possible source of systemic risk,” Dudley said of the 2010 U.S.
financial reform law.

“If the people managing capital cushions and liquidity
buffers view these tools as sufficient mitigants for the costs
of misconduct, or if powerful incentives encourage workarounds
of the new regulations, then the connection between post-crisis
reforms and greater financial stability becomes threatened,”
Dudley told the gathering, which also included lawyers and
government supervisors.

Lagarde stressed that the crisis, which sparked a recession
from which much of the world is still recovering, caused the
financial industry to lose its biggest asset, trust. She said
ethics and integrity would only improve “if there is a buy-in at
the top.”

“Swifter action is needed to restore trust in the financial
sector,” she said. “The public needs reassurance that misconduct
issues that caused the failures in institutions and markets in
the past few years have been dealt with.”

Panel discussions by bank CEOs and others later on Thursday
were closed to the press.

(Reporting by Jonathan Spicer; Editing by Paul Simao)

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Insight – Feeling ignored, Fed jolts markets to prime them for lift-off http://uk.reuters.com/article/2015/11/05/uk-usa-fed-message-insight-idUKKCN0SU1VY20151105?feedType=RSS&feedName=everything&virtualBrandChannel=11708 http://blogs.reuters.com/jonathan-spicer/2015/11/05/insight-feeling-ignored-fed-jolts-markets-to-prime-them-for-lift-off/#comments Thu, 05 Nov 2015 13:04:44 +0000 http://blogs.reuters.com/jonathan-spicer/?p=2300 NEW YORK/SAN FRANCISCO/WASHINGTON (Reuters) – When the U.S. Federal Reserve tweaked its policy statement last week and put a December rate rise squarely back in play, it took a calculated gamble that reaching for an old and controversial policy tool would get financial markets’ attention.

That gamble was to specifically reference the next policy meeting as a date of a possible lift-off, and it had the desired effect: investors quickly rolled back bets that rates would stay near zero until next year.

But interviews with current and former Fed officials, and with those close to policymakers, show the decision to use what is called calendar guidance in central bank parlance and what some described as a “hammer” did not come easy. Some officials felt that even mentioning a date in the context of a potential policy change would be taken not as a contingent expectation but as a promise that would be painful to break.

The last time the Fed flagged its next meeting for possible action was in 1999, as JPMorgan economist Michael Feroli pointed out. It resorted to calendar-based commitments of ultra-easy policy during the global financial crisis and recession, but ended that practice three years ago.

Yet Fed Chair Janet Yellen and her deputies got so frustrated that investors virtually ignored their message that a rate rise before the year end was probable that they decided last month it was a risk worth taking, the interviews show.

As a result, futures markets are now giving slightly better-than-even odds that rates will rise from near zero next month, compared with mid-October when the odds were less than 30 percent.

(Graphic: market rate expectations: reut.rs/20v61Ut)

Fed officials and people familiar with their thinking say the central bank is comfortable with such market expectations ahead of the Dec. 15-16 policy meeting, the last of the year.

Last week’s communication gambit, one of Yellen’s biggest in nearly two years as Fed chief, suggests the central bank still considers a modest rate rise this year as its base scenario.

TIMELY FASHION

It may also suggests that Fed policymakers are already lining up behind Yellen despite public comments that can sound at odds with her message. The Oct. 28 statement was passed by a 9-1 vote, with two Fed governors who had earlier publicly embraced a delay in rate hikes joining the majority.

“If a majority still believed that such a move would be premature, then they could have just left the wording unchanged from their previous statement,” said Andrew Levin, former advisor to Yellen and Dartmouth College economist.

Yellen herself reiterated on Wednesday that a “lift-off” this year remained her preferred option, when she told the House Financial Services Committee that “moving in a timely fashion” was prudent so long as the economy continued to perform the way it had so far.

And while the slackening growth in monthly payrolls convinced some investors that the Fed should wait, several policymakers have been pointing out that slackening jobs was in fact a sign that the labour market recovery was nearly over.

Investors and economists who advocate more patience warn of a risks of market turbulence if the Fed lifts its rates while its peers in Europe, Japan, China and elsewhere are in an easing mode. With rates having been near zero since late 2008, even a small move is expected to ripple through global markets, boosting the dollar and drawing funds out of emerging markets.

In fact, a brief but sharp market sell-off in August triggered by a slowdown in China and fears of a global economic chill persuaded the Fed to leave rates steady in September. The decision, even though described as a “close call” by some policymakers, led many investors to pare down their bets on a rate rise this year.

Since then, Yellen, her deputy Stanley Fischer and New York Fed President William Dudley had set out to reinforce the message that a gradual rise in rates would likely begin before year end, in part because of an expected recovery in inflation thanks to stabilizing oil prices.

But Yellen’s Sept. 24 speech, seen as crucial for conveying that message, got drowned in the attention her health drew after she struggled to finish the speech and received medical assistance.

BLURRED MESSAGE

Later a set of weak U.S. data and comments from Lael Brainard and Daniel Tarullo, two influential Fed governors close to Yellen, urging patience on rates, further blurred the picture and intensified criticism of the Fed’s communication.

On Oct. 16, Dudley got an earful from Wall Street bankers and economists on a New York Fed advisory panel criticizing the Fed for its muddled message, according to three people who attended the meeting.

The interviews with Fed officials and those close to the central bank suggest that it was around this time that the plan to hint at December in the next policy statement started taking shape.

Yellen, her deputies, and a few top staffers typically write the first draft of the statement two weeks before the policy meeting.

A so-called teal book effectively formalizes the language a week later with feedback from other Fed presidents and governors.

Some Fed officials were uncomfortable with the “innovation,” said a source with knowledge of how the decision was made, but they agreed to back it because “there was a sense that the market wasn’t listening.”

The December reference is not a commitment to a rate rise next month since the decision will still depend on whether economic developments will confirm or derail the Fed’s medium-term expectations for jobs, growth and prices, the sources said.

But the language allows both hawks and doves to endorse it, and buys Yellen time to rally them around her plans while honing the Fed’s message.

“It’s a tactical decision for Janet Yellen,” said Vincent Reinhart, an economist with the American Enterprise Institute and former chief of the Fed’s monetary affairs division.

“You will buy off some of your more hawkish colleagues by reassuring them that you are willing to tighten, and you will buy off the dovish colleagues by convincing them that you can remain accommodative longer by starting sooner.”

(Reporting by Jonathan Spicer, Howard Schneider and Ann Saphir; Editing by Tomasz Janowski)

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Feeling ignored, Fed jolts markets to prime them for lift-off http://www.reuters.com/article/2015/11/05/us-usa-fed-message-insight-idUSKCN0SU1VS20151105?feedType=RSS&feedName=everything&virtualBrandChannel=11563 http://blogs.reuters.com/jonathan-spicer/2015/11/05/feeling-ignored-fed-jolts-markets-to-prime-them-for-lift-off/#comments Thu, 05 Nov 2015 13:03:52 +0000 http://blogs.reuters.com/jonathan-spicer/?p=2298 NEW YORK/SAN FRANCISCO/WASHINGTON (Reuters) – When the U.S. Federal Reserve tweaked its policy statement last week and put a December rate rise squarely back in play, it took a calculated gamble that reaching for an old and controversial policy tool would get financial markets’ attention.

That gamble was to specifically reference the next policy meeting as a date of a possible lift-off, and it had the desired effect: investors quickly rolled back bets that rates would stay near zero until next year.

But interviews with current and former Fed officials, and with those close to policymakers, show the decision to use what is called calendar guidance in central bank parlance and what some described as a “hammer” did not come easy. Some officials felt that even mentioning a date in the context of a potential policy change would be taken not as a contingent expectation but as a promise that would be painful to break.

The last time the Fed flagged its next meeting for possible action was in 1999, as JPMorgan economist Michael Feroli pointed out. It resorted to calendar-based commitments of ultra-easy policy during the global financial crisis and recession, but ended that practice three years ago.

Yet Fed Chair Janet Yellen and her deputies got so frustrated that investors virtually ignored their message that a rate rise before the year end was probable that they decided last month it was a risk worth taking, the interviews show.

As a result, futures markets are now giving slightly better-than-even odds that rates will rise from near zero next month, compared with mid-October when the odds were less than 30 percent.

(Graphic: market rate expectations: reut.rs/20v61Ut)

Fed officials and people familiar with their thinking say the central bank is comfortable with such market expectations ahead of the Dec. 15-16 policy meeting, the last of the year.

Last week’s communication gambit, one of Yellen’s biggest in nearly two years as Fed chief, suggests the central bank still considers a modest rate rise this year as its base scenario.

TIMELY FASHION

It may also suggests that Fed policymakers are already lining up behind Yellen despite public comments that can sound at odds with her message. The Oct. 28 statement was passed by a 9-1 vote, with two Fed governors who had earlier publicly embraced a delay in rate hikes joining the majority.

“If a majority still believed that such a move would be premature, then they could have just left the wording unchanged from their previous statement,” said Andrew Levin, former advisor to Yellen and Dartmouth College economist.

Yellen herself reiterated on Wednesday that a “lift-off” this year remained her preferred option, when she told the House Financial Services Committee that “moving in a timely fashion” was prudent so long as the economy continued to perform the way it had so far.

And while the slackening growth in monthly payrolls convinced some investors that the Fed should wait, several policymakers have been pointing out that slackening jobs was in fact a sign that the labor market recovery was nearly over.

Investors and economists who advocate more patience warn of a risks of market turbulence if the Fed lifts its rates while its peers in Europe, Japan, China and elsewhere are in an easing mode. With rates having been near zero since late 2008, even a small move is expected to ripple through global markets, boosting the dollar and drawing funds out of emerging markets.

In fact, a brief but sharp market sell-off in August triggered by a slowdown in China and fears of a global economic chill persuaded the Fed to leave rates steady in September. The decision, even though described as a “close call” by some policymakers, led many investors to pare down their bets on a rate rise this year.

Since then, Yellen, her deputy Stanley Fischer and New York Fed President William Dudley had set out to reinforce the message that a gradual rise in rates would likely begin before year end, in part because of an expected recovery in inflation thanks to stabilizing oil prices.

But Yellen’s Sept. 24 speech, seen as crucial for conveying that message, got drowned in the attention her health drew after she struggled to finish the speech and received medical assistance.

BLURRED MESSAGE

Later a set of weak U.S. data and comments from Lael Brainard and Daniel Tarullo, two influential Fed governors close to Yellen, urging patience on rates, further blurred the picture and intensified criticism of the Fed’s communication.

On Oct. 16, Dudley got an earful from Wall Street bankers and economists on a New York Fed advisory panel criticizing the Fed for its muddled message, according to three people who attended the meeting.

The interviews with Fed officials and those close to the central bank suggest that it was around this time that the plan to hint at December in the next policy statement started taking shape.

Yellen, her deputies, and a few top staffers typically write the first draft of the statement two weeks before the policy meeting.

A so-called teal book effectively formalizes the language a week later with feedback from other Fed presidents and governors.

Some Fed officials were uncomfortable with the “innovation,” said a source with knowledge of how the decision was made, but they agreed to back it because “there was a sense that the market wasn’t listening.”

The December reference is not a commitment to a rate rise next month since the decision will still depend on whether economic developments will confirm or derail the Fed’s medium-term expectations for jobs, growth and prices, the sources said.

But the language allows both hawks and doves to endorse it, and buys Yellen time to rally them around her plans while honing the Fed’s message.

“It’s a tactical decision for Janet Yellen,” said Vincent Reinhart, an economist with the American Enterprise Institute and former chief of the Fed’s monetary affairs division.

“You will buy off some of your more hawkish colleagues by reassuring them that you are willing to tighten, and you will buy off the dovish colleagues by convincing them that you can remain accommodative longer by starting sooner.”

(Reporting by Jonathan Spicer, Howard Schneider and Ann Saphir; Editing by Tomasz Janowski)

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Morgan Stanley CEO Gorman elected to N.Y. Fed board http://www.reuters.com/article/2015/11/02/usa-fed-new-york-board-idUSL1N12X1RJ20151102?feedType=RSS&feedName=everything&virtualBrandChannel=11563 http://blogs.reuters.com/jonathan-spicer/2015/11/02/morgan-stanley-ceo-gorman-elected-to-n-y-fed-board/#comments Mon, 02 Nov 2015 20:52:11 +0000 http://blogs.reuters.com/jonathan-spicer/?p=2296 NEW YORK (Reuters) – The Federal Reserve’s New York branch
on Monday named James Gorman, the chief executive of Wall Street
bank Morgan Stanley, to its board of directors for a
three-year term beginning in January.

The appointment, however, may raise questions after the New
York Fed, the central bank’s eyes and ears on Wall Street, was
criticized in recent years for what some see as a too-cozy
relationship with the big banks it supervises.

Gorman, 57, who has run Morgan Stanley since early 2010,
will become one of three so-called Class A members of the New
York Fed’s board who represent banks in the district and offer
advice on the economy, policy, and markets.

By law one director must represent a bank with capital and
surplus of more than $1 billion.

Unlike the six Class B and C directors who represent
corporate, industrial and public interests, Gorman will have no
say on financial supervision or the selection of a New York Fed
president if William Dudley, the current head, were to leave.

The New York Fed was slammed for failing to head off
JPMorgan’s massive “London Whale” trading loss in 2012.
Last year a former bank examiner raised political scrutiny with
accusations and a lawsuit, later dismissed, that claimed the New
York Fed went soft on Goldman Sachs and other banks.

In 2009, Stephen Friedman, a retired Goldman chairman,
resigned as chairman of the New York Fed amid questions over his
purchase of stock in the bank just as the Fed was mulling a Wall
Street bailout. Dudley, who has defended his bank regulators
against the recent criticism, is a former Goldman economist.

Asked about perceptions of conflict, a New York Fed
spokeswoman cited a law that Class A directors must represent
local banks and have served as officers or directors.

Morgan Stanley is one of 22 U.S. primary dealers, the top
Wall Street firms that do business directly with the Fed.

The Australian-born Gorman will replace Richard Carrión, CEO
of Banco Popular de Puerto Rico, on Jan. 1, 2016. The other two
Class A directors are Paul Mello, CEO of Solvay Bank, and Gerald
Lipkin, head of Valley National Bank.

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Stage set for Yellen to cut through rate-hike noise http://www.reuters.com/article/2015/10/28/us-usa-fed-communications-idUSKCN0SM2SC20151028?feedType=RSS&feedName=everything&virtualBrandChannel=11563 http://blogs.reuters.com/jonathan-spicer/2015/10/28/stage-set-for-yellen-to-cut-through-rate-hike-noise/#comments Wed, 28 Oct 2015 20:59:16 +0000 http://blogs.reuters.com/jonathan-spicer/?p=2294 NEW YORK (Reuters) – After putting a December interest rate rise back on the agenda, Janet Yellen may now need to reinforce that message in coming weeks by “crowding out” dissenting voices in the Federal Reserve and navigating through possibly contradictory economic data.

Markets rolled back bets that rates would remain pegged near zero until next year after the Fed’s statement ending a two-day policy meeting made a specific reference to the next Dec. 15-16 session as an opportunity to consider a rate rise.

Yellen has long represented the view that a rate lift-off from near zero this year was the Fed’s base scenario, but that message has been drowned out by some dissenting voices and mixed signals from a central bank that says it is “data dependent.”

Analysts and former Fed officials say the Fed chief should use the bully pulpit, probably by early December, to either reaffirm that the central bank is on course to lift rates next month, or to definitively back down.

Failure to do so could set the stage for potential confusion, with markets possibly overshooting and sending borrowing costs sharply higher, tripping up the economic recovery.

“She really absolutely has to twist arms and get as unanimous of a decision as possible,” said Dan North, chief economist at Euler Hermes. “Otherwise there you are again with confusion and lack of clarity.”

Traders now give a 47 percent chance the Fed will raise rates for the first time in nearly a decade in December, up from 34 percent before Wednesday’s statement.

Yellen now will have more time to watch inflation and jobs data roll in through November, starting with third-quarter economic growth on Thursday and a key measure of U.S. wages and salaries on Friday.

But with two Fed governors recently opposing the house view and urging patience on rates, and skepticism having grown among investors, Yellen may need to abandon her quest for consensus and more forcefully set the course for action.

“My opinion is she should be more active, which would be a good thing mainly to reduce or even eliminate this cacophony problem,” said former Fed vice chairman Alan Blinder.

“The benefit is in reducing the shock and surprise in the market if and when you do raise interest rates in December, and they don’t want a big surprise.”

While the scars of the 2007-2009 recession are healing, world economic growth is slowing and the Fed’s peers in Europe, Japan and China remain in an easing mode. A U.S. rate rise would ripple through world financial markets, hit foreign currencies, and suck funds from emerging markets in particular.

Despite the Fed having repeatedly telegraphed a move this year, many investors believe that policymakers are trigger shy in the face of virtual absence of inflation and tepid economic growth of less than 2 percent in the latest quarter.

Fed governors Daniel Tarullo and Lael Brainard, as well as Chicago Fed President Charles Evans, have supported the idea of standing pat. They made the comments shortly after Yellen on Sept. 24 reiterated that a rate rise was still in the cards for this year.

All three vote on policy this year and another power broker, William Dudley of the New York Fed, has said in the past that the rate hike, whenever it comes, will not come as a surprise.

THREE DAYS IN DECEMBER

Yellen’s opportunity to prime markets may be a double-header public appearance in which she addresses the Economic Club of Washington on Dec. 2 and then testifies before a congressional committee on Dec. 3.

By then the Fed will have several price measures for October, as well as manufacturing, trade, and retail sales data. Yellen will also have the October jobs report in hand, but the November data will come on Dec. 4 as the last labor-market snapshot before the mid-December policy decision.

Many economists still believe the Fed will wait with its first move until 2016, citing soft jobs growth and little evidence that inflation, held down by a strong dollar and cheap oil, can rise to the Fed’s 2 percent target.

“Either the data will pull up probabilities of a rate hike, or the Fed will have to signal it’s coming,” said Aneta Markowska, chief U.S. economist at Societe Generale. She expects the Fed to stand pat in December but said Wednesday’s statement was a “subtle attempt to gently nudge the market” towards a rise.

Yellen, an adept listener and respected leader, may need to impose her will not only on markets but on a central bank that cherishes its public transparency and consensus-building, and that is careful not to prejudge decisions before its policy committee meets.

She wouldn’t “clamp down” on her outspoken colleagues but rather “crowd them out” with a definitive speech in late November or early December, said Blinder, a friend of Yellen’s.

“If she has a firm view of what’s to be done she’s going to push that view very hard, and almost certainly prevail.”

(Reporting by Jonathan Spicer; Editing by Tomasz Janowski)

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Regulators mull reforms to fragile U.S. bond markets http://www.reuters.com/article/2015/10/20/usa-debt-idUSL1N12K16220151020?feedType=RSS&feedName=everything&virtualBrandChannel=11563 http://blogs.reuters.com/jonathan-spicer/2015/10/20/regulators-mull-reforms-to-fragile-u-s-bond-markets/#comments Tue, 20 Oct 2015 15:21:33 +0000 http://blogs.reuters.com/jonathan-spicer/?p=2292 NEW YORK, Oct 20 (Reuters) – U.S. government regulators,
mulling increasing electronic trading in the bond markets, said
on Tuesday reforms may be needed that emphasize stability over a
“never-ending competition for more speed.”

Following an unexplained flash rally in the U.S. Treasuries
market on Oct. 15, 2014 that saw volatile swings in bond prices,
regulators have ramped up scrutiny of the changing structure of
the nearly $13-trillion Treasuries market.

At the same time, some investors and traders are concerned
that such significant disruptions will become more frequent in
the market for what is considered the world’s safest securities.

A report on last year’s market shock cited the increasing
prominence of algorithmic strategies in high-frequency trading,
which can move billions of dollars of transactions within
fractions of a second.

Fed Governor Jerome Powell said the current Treasuries
market structure rewards firms that engage in such hyper-swift
trading.

“There may be adaptations of this market structure that
could give greater emphasis to liquidity provision rather than a
never-ending competition for more speed,” Powell said at a
two-day conference on Treasuries market structure at the New
York Fed. He cited frequent “batch” auctions and minimum
life-spans on orders as possible changes.

Proponents of “algo” trading said its growth in the
Treasuries market had improved price discovery and efficiency,
while critics have blamed it for increased market volatility.

“The growth of algorithmic, high-speed trading has increased
operational risk, and heightened the need for comprehensive
oversight and risk management practices,” Antonio Weiss,
counselor to the Treasury secretary, said in another speech.

He said episodes of volatility such as the one on Oct. 15,
2014, “can be magnified or accelerated by the interaction at
high speeds of automated trading strategies and a complex array
of trading rules, venues and products.”

The report on the October 2014 flash rally did not propose
specific rule changes. It was published in July by the Fed
Board, the New York branch of the central bank, the Treasury
Department, the Securities Exchange Commission, and the
Commodity Futures Trading Commission.

(Additional reporting by Jason Lange in Washington; Editing by
Bernadette Baum)

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Negative rates work their way on to radar for a few at the Fed http://www.reuters.com/article/2015/10/15/usa-fed-policy-idUSL1N1281DA20151015?feedType=RSS&feedName=everything&virtualBrandChannel=11563 http://blogs.reuters.com/jonathan-spicer/2015/10/15/negative-rates-work-their-way-on-to-radar-for-a-few-at-the-fed/#comments Thu, 15 Oct 2015 18:36:02 +0000 http://blogs.reuters.com/jonathan-spicer/?p=2288 NEW YORK, Oct 15 (Reuters) – Signs the U.S. economy is
feeling the drag from a slowdown overseas is raising questions
about the Federal Reserve’s plan to lift rates this year, and
even prompting some officials to ponder what tools it may need
if things get worse.

Consumer prices in the world’s largest economy recorded
their biggest drop in eight months in September as gasoline
prices slumped. Also last month, U.S. producer prices logged
their biggest fall in eight years.

Weak recent job growth and retail sales added to the gloom
in an economy that is starting to feel the pain of a slowdown in
China and other emerging markets, falling commodity prices, and
a dollar that has risen for more than a year. All of that is
keeping U.S. inflation well below the Fed’s 2-percent goal.

Two influential Fed governors this week urged a delay in
tightening despite repeated messages from Chair Janet Yellen and
others that “liftoff” was likely to come this year.

Some Fed officials also appear to have reconsidered a
stimulus tool that had been dismissed as too risky: negative
interest rates.

At least six current Fed policymakers over the last two
weeks have publicly discussed charging banks to park funds at
the central bank. Four suggested it would be worth considering
if the recovery falters badly and one, Minneapolis Fed President
Narayana Kocherlakota, urged an immediate cut below zero.

“Once unthinkable, the fact negative rates are creeping in
the public debate mean we can’t dismiss them anymore,” said
Standard Chartered senior economist Thomas Costerg.

The controversial idea of charging fees on some deposits
could prompt banks to send funds not to the central bank but
into the economy. In 2008 and again in 2012, the Fed considered
negative rates but shelved it for fear it would spook investors
and stress money market funds already under pressure from rates
set in the 0-0.25 percent range, where they remain today.

But in the last two years, the European Central Bank and its
counterparts in Switzerland, Sweden and Denmark have used a
version of the tool with some success.

That, along with erratic economic growth and stubbornly low
inflation back home may have won over some Fed skeptics and left
the door open to negative rates in the United States if a
recession threatened.

“I am watching, and I’m sure my colleagues are watching with
great interest to determine whether central banks have such a
tool if needed in the future,” Atlanta Fed President Dennis
Lockhart said last week of what he called “experiments” in
Europe.

Fed Governor Lael Brainard flagged negative rates in a
speech on Monday, saying “we will benefit from studying and
learning about” Europe’s experience. She said any tightening
should be delayed.

STILL BANKING ON A HIKE, THOUGH TIMETABLE SLIPPING

To be sure, Fed policymakers have stressed that a rate hike
and not a cut, is far more likely.

Based on September forecasts, they expect to lift rates once
this year and to get them above 1 percent by the end of 2016.

New York Fed President William Dudley discussed negative
rates in a TV interview but dismissed the idea. Lockhart said
the idea of using the tool “in the near term is not very
plausible to me.”

Some economic signposts, such as a drop in applications for
jobless benefits to a 42-year low and rising demand for housing,
have pointed to improved growth prospects in the United States,
and consumer prices outside of food and energy edged up a bit
last month.

Yet the global slowdown and questions over China’s prospects
already prompted the Fed to delay a rate hike last month.

Primary dealers in a poll last month gave a 10 percent
chance of a U.S. recession, and a 20 percent chance of a global
recession, in the next six months.

The weak inflation readings and a sharp brake in hiring in
August and September show that U.S. manufacturers and energy
firms are struggling with the high dollar and low oil prices.

“The lack of any economic acceleration, despite the degree
of accommodation being provided by the Fed, suggests not only
that risks of deflation are higher than generally expected but
also that the Fed will be on hold longer than is anticipated,”
said Steven Ricchiuto, chief economist at MSUSA.

(Reporting by Jonathan Spicer; Additional reporting by Ann
Saphir in Milwaukee and Jason Lange in Washington; Editing by
Andrea Ricci)

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Fed still plans rate hike this year, but not committed http://www.reuters.com/article/2015/10/09/us-usa-fed-dudley-idUSKCN0S31WR20151009?feedType=RSS&feedName=everything&virtualBrandChannel=11563 http://blogs.reuters.com/jonathan-spicer/2015/10/09/fed-still-plans-rate-hike-this-year-but-not-committed/#comments Fri, 09 Oct 2015 17:23:59 +0000 http://blogs.reuters.com/jonathan-spicer/?p=2286 NEW YORK (Reuters) – Two influential Federal Reserve policymakers on Friday reinforced the message that an interest rate hike is coming before year end, saying that while they expect to move, things could change that force the U.S. central bank to delay again.

New York Fed President William Dudley and Dennis Lockhart of the Atlanta Fed each said they expected a policy tightening in 2015 despite some recent red flags. But they clearly left the door open to waiting until 2016 if it looks like the U.S. economy is threatened by a global slowdown.

The pair, speaking separately in New York, raised questions over the likelihood they would be have enough information in hand to lift rates by an Oct. 27-28 policy meeting, suggesting that a meeting set for Dec. 15-16 may be earmarked for action.

“Based on my forecast, yes I am” expecting to raise rates this year, said Dudley, a close ally of Fed Chair Janet Yellen who has a permanent vote on policy.

“But it’s a forecast, and we’re going to get a lot of data between now and December. So it’s not a commitment,” he said on CNBC TV. “There certainly is a risk that the economy evolves in a very different way than I expect, and obviously it would be totally inappropriate for me to not take that into consideration.”

In a relatively close call, the central bank held off on a rate hike last month in the face of a slowdown in China and elsewhere, financial market turbulence and falling commodity prices. All of those could keep U.S. inflation, now at 1.3 percent, below the Fed’s 2 percent target.

Since then, disappointing September jobs growth has caused investors to sharply discount an October rate hike, and to give a December move about a 40 percent probability, based on futures markets.

Lockhart, a well-respected centrist and a voter on the Fed’s monetary policy committee this year, said the international slowdown and last month’s weak U.S. jobs report show there is “a touch more downside risk” to the U.S. economy.

Therefore, he said, the Fed will need to monitor the strength of the consumer in coming weeks and months to decide whether to go ahead with the first rate hike in nearly a decade.

“The economy remains on a satisfactory track and … I see a (rate) liftoff decision later this year at the October or December FOMC meetings as likely appropriate,” Lockhart said of the policy-making Federal Open Market Committee.

“However the data are giving off varied signals, and there is more ambiguity in the current moment than a few weeks ago,” he added at a Society of American Business Editors and Writers conference. This “calls for especially diligent monitoring of incoming data with particular attention to consumer activity.”

The latest reading on the world’s largest economy, a slight drop in U.S. import prices last month, suggested on Friday that the rate of imported deflation is slowing.

A Fed rate hike would reverberate through financial markets globally, depressing foreign currencies and possibly sucking more capital out of emerging markets in particular.

FOCUS ON DECEMBER

Dudley said “it’s possible” that the Fed could begin hiking later this month, though he questioned whether data between now and then would give it confidence.

Lockhart, who like Dudley and most other Fed officials once expected a rate hike around mid-2015, noted that the Fed would have more information on inflation, the labor market and consumer activity by December. But he too kept a move in October on the table.

“I hope to avoid the trap of letting one or two months’ specific data overly influence my outlook for the economy overall,” he said. “The ambiguity of the moment reinforces the need to closely watch the vital signs of the economy over the coming weeks to determine if the outlook has changed.”

Both stressed that the Fed would not overreact to financial market moves in deciding monetary policy, unless they directly signal threats to the economy.

Dudley said volatility is to be expected.

“Now as we get closer to that liftoff point, and now that we’re at a 5.1 percent unemployment rate, the data really does matter in terms of how it affects the (economic) outlook so of course markets are going to react to that data much more now than it would a few years ago,” he said.

(Reporting by Jonathan Spicer; Editing by Meredith Mazzilli)

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Fed’s Lockhart still sees 2015 rate hike despite recent red flags http://uk.reuters.com/article/2015/10/09/us-usa-fed-lockhart-idUKKCN0S31I620151009?feedType=RSS&feedName=everything&virtualBrandChannel=11708 http://blogs.reuters.com/jonathan-spicer/2015/10/09/feds-lockhart-still-sees-2015-rate-hike-despite-recent-red-flags/#comments Fri, 09 Oct 2015 13:49:59 +0000 http://blogs.reuters.com/jonathan-spicer/?p=2283 NEW YORK (Reuters) – A U.S. interest rate hike is still probably coming in October or December despite some conflicting economic signals, a top Federal Reserve official said on Friday, reinforcing the central bank’s message over the last few weeks.

Atlanta Fed President Dennis Lockhart, a well-respected centrist and a voter on the Fed’s monetary policy committee this year, said an international slowdown and last month’s weak U.S. jobs report show there is “a touch more downside risk” to the U.S. economy.

Therefore, he said, the Fed will need to monitor the strength of the consumer in coming weeks and months to decide whether to go ahead with the first rate hike in nearly a decade when policymakers meet Oct. 27-28 and again on Dec. 15-16.

“The economy remains on a satisfactory track and … I see a (rate) liftoff decision later this year at the October or December FOMC meetings as likely appropriate,” Lockhart said of the policy-making Federal Open Market Committee.

“However the data are giving off varied signals, and there is more ambiguity in the current moment than a few weeks ago,” he added at a Society of American Business Editors and Writers conference. This “calls for especially diligent monitoring of incoming data with particular attention to consumer activity.”

In a relatively close call, the central bank held off on a rate hike last month in the face of a slowdown in China and elsewhere, financial market turbulence and falling commodity prices. All of those could keep U.S. inflation below target.

Since then, disappointing September jobs growth has caused investors to sharply discount an October rate hike, and to give a December move about a 40 percent probability, based on futures markets.

Lockhart, who once expected a rate hike around mid-2015, noted that the Fed would have more information on inflation, the labor market and consumer activity by December. But he kept a move in October on the table.

“I hope to avoid the trap of letting one or two months’ specific data overly influence my outlook for the economy overall,” he said. “The ambiguity of the moment reinforces the need to closely watch the vital signs of the economy over the coming weeks to determine if the outlook has changed.”

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama and Meredith Mazzilli)

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Lockhart still sees 2015 rate hike despite recent red flags http://www.reuters.com/article/2015/10/09/us-usa-fed-lockhart-idUSKCN0S31I620151009?feedType=RSS&feedName=everything&virtualBrandChannel=11563 http://blogs.reuters.com/jonathan-spicer/2015/10/09/lockhart-still-sees-2015-rate-hike-despite-recent-red-flags/#comments Fri, 09 Oct 2015 13:35:59 +0000 http://blogs.reuters.com/jonathan-spicer/?p=2281 NEW YORK (Reuters) – A U.S. interest rate hike is still probably coming in October or December despite some conflicting economic signals, a top Federal Reserve official said on Friday, reinforcing the central bank’s message over the last few weeks.

Atlanta Fed President Dennis Lockhart, a well-respected centrist and a voter on the Fed’s monetary policy committee this year, said an international slowdown and last month’s weak U.S. jobs report show there is “a touch more downside risk” to the U.S. economy.

Therefore, he said, the Fed will need to monitor the strength of the consumer in coming weeks and months to decide whether to go ahead with the first rate hike in nearly a decade when policymakers meet Oct. 27-28 and again on Dec. 15-16.

“The economy remains on a satisfactory track and … I see a (rate) liftoff decision later this year at the October or December FOMC meetings as likely appropriate,” Lockhart said of the policy-making Federal Open Market Committee.

“However the data are giving off varied signals, and there is more ambiguity in the current moment than a few weeks ago,” he added at a Society of American Business Editors and Writers conference. This “calls for especially diligent monitoring of incoming data with particular attention to consumer activity.”

In a relatively close call, the central bank held off on a rate hike last month in the face of a slowdown in China and elsewhere, financial market turbulence and falling commodity prices. All of those could keep U.S. inflation below target.

Since then, disappointing September jobs growth has caused investors to sharply discount an October rate hike, and to give a December move about a 40 percent probability, based on futures markets.

Lockhart, who once expected a rate hike around mid-2015, noted that the Fed would have more information on inflation, the labor market and consumer activity by December. But he kept a move in October on the table.

“I hope to avoid the trap of letting one or two months’ specific data overly influence my outlook for the economy overall,” he said. “The ambiguity of the moment reinforces the need to closely watch the vital signs of the economy over the coming weeks to determine if the outlook has changed.”

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama and Meredith Mazzilli)

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