Fed Explores Repo Market as “Modest” Inflation Continues
“An experimental bond-trading program(Alt) being run at the Federal Reserve Bank of New York could fundamentally change the way the central bank set interest rates.” The program is called a “reverse repo” facility and may help “raise short-term rates in the future to fend off broader threats to the economy…under this system, the Fed would raise short-term interest rates by borrowing in the future against its large and growing securities portfolio.” Furthermore, “since the Fed has pumped $2.5 trillion into the economy by purchasing bonds, the old system (shifting its benchmark federal-funds rate) won’t work unless the central bank pulls much of this money out.” So by using the securities on its balance sheet as collateral, the Fed could solicit loans (of which the Fed can also set new rates) from “money-market mutual funds, banks, securities dealers, government-sponsored enterprises and others.” Two Fed economists argue that the new program “would give the Fed more precise control over short-term rates” by putting its large balance sheet to work (collateral), extending their influence over markets beyond the federal funds market and it may also save taxpayers money. Matt Levine argues that this is just more proof that nobody trusts the banks anymore: “Shadow banking – intermediation of lending and short-term funding by things other than traditional banks – is increasingly important because nobody trusts the banks…as banking loses ground to shadow banking, it’s only natural for the central bank to get into central shadow banking.” As the Federal Reserve comes up with new ways to control short-term interest rates and extend their influence over markets, this is what keeps them up at night: the Producer-Price Index dropped 0.1% in November, the third month that the US has seen pressure from defla – I mean, uh, disinflat – or uh…modest inflation? The core index increased 1.3% over the 12 months ending in November. Vince Morales, vice president of investor relations with PPG Industries, says we’ve seen “modest inflation.” “Modest inflation.” Words are funny. Also, local broker Megan Watts says the Fed’s forward guidance is all wrong. They need to be focusing on the MUI: Men’s Underwear Index.
Asia: Irrational Exuberance or the Next Growth Frontier?
William Pesek of Bloomberg News sees irrational exuberance in Asia (eg. “rallies in Indian stocks, hopes for a resurgent Japan and the blind faith that China can grow at a rate of 7 percent forever”). He argues that Central Bankers like Raghuram Rajan, Haruhiko Kuroda and Zhou Xiaochuan are better at distracting (ie. “refilling the punchbowl”) than they are implementing real reform. Meanwhile, Japanese PM Shinzo Abe is pledging ¥20bn in development assistance to Southeast Asian countries to “demonstrate Japan’s commitment to the fast-growing region and to act as a counterweight to China’s growing influence there.” This is coming on the heels of Chinese President Xi Jinping’s “charm offensive” in Southeast Asia where “the new Chinese leadership duo demonstrated considerable diplomatic savvy, focusing on deliverables in two areas of great importance to Southeast Asia: trade and infrastructure.” As growth slows in China and Japan continues its currency war, expect a lot of exuberance and competition over who will get to supply the next growth frontier.
This is kind of amazing and somewhat supports my original thesis that because Boeing workers live in one of the best places to get a job in the United States they believe they will be just fine without Boeing in Seattle. Boeing has said that this is their “best and final counterproposal.”
Consider this your token Bitcoin article. One interesting dichotomy in regards to Bitcoin is surfacing though: in the anti-Bitcoin camp you have the European Banking Authority and central banks in New Zealand, France, China and probably India, and in the pro-Bitcoin camp you have Bank of America, the Federal Reserve (maybe) and JPMorgan (definitely). When you consider the recent debate over the $US as the world’s unquestioned reserve currency, this line in the sand between the United States and the rest of the world over Bitcoin seems interesting but maybe I’m connecting dots that don’t actually connect…
The US Transportation Department is seeking public comment and will join the US Federal Communications Commission in reviewing the 22 year old ban on in-flight use of cell phones. FCC engineers are now saying there are no technical reasons to ban the devices on flights in the US but unfortunately people are still annoying: “I don’t want the person in the seat next to me yapping at 35,000 feet any more than anyone else,” FCC Chairman Thomas Wheeler.
Natural Gas prices are at a 2-½ year high as the United States experiences one of the coldest early winters in more than a decade, giving a boost to producers and squeezing margins for utilities. Commodity trader Emil van Essen says “if natural-gas prices go too high, I want us to be short this market because I do not think we are going to run out of gas,”…Ok…”I think the [natural-gas] market is going up, but then it’s coming down.” My my.