The U.S. Senate this week confirmed two nominees chosen by President Obama for the Federal Reserve Board of Governors, bringing the seven-member board to full strength for the first time since before the economic crisis struck. FOMC minutes from April showed Fed officials feel a failure to agree on a federal budget plan could mean businesses will delay hiring plans.
Conversation Starter
St. Louis Fed’s Bullard Discusses U.S. Monetary Policy and Fed Communications
LOUISVILLE, Ky., May 16, 2012 /PRNewswire/ — Federal Reserve Bank of St. Louis President James Bullard discussed “The Fed on Pause” on Wednesday as part of a Dialogue with the Fed event sponsored by the Bank’s Louisville Branch.
Bullard said the Federal Open Market Committee (FOMC) is currently “on pause” because the existing stance of monetary policy is already ultra-easy and the U.S. economy has outperformed expectations since last fall. He discussed some risks to the pause policy, noting that “the main risk lies in potentially overcommitting to the ultra-easy monetary policy, reigniting the global inflation debacle of the 1970s.”
Bullard also discussed recent, and possibly additional, improvements to FOMC communications. ”It may be possible to improve FOMC communications further by producing a quarterly report similar to those produced by other central banks,” he said. ”This could potentially provide a more fulsome discussion of the outlook for the U.S. economy and for policy than is currently provided.”
The Fed on Pause
Bullard described some of the actions the Fed has taken since 2008 to ease monetary policy aggressively and said that “these Fed actions remain impactful today.” In particular, he noted that the policy rate remains near-zero, the large Fed balance sheet remains in place, “Operation Twist” is still ongoing and will alter the balance sheet composition for some time to come, and the calendar date guidance regarding the first increase in the policy rate remains in effect. ”Meanwhile, the U.S. macroeconomic data have been stronger than expected as of last autumn,” he said.
“The ultra-easy monetary policy—much of which is still impacting the U.S. economy—along with better-than-expected data over the last nine months combine to put the FOMC on hold, or pause, in its aggressive easing campaign,” Bullard said.
Risks to the Pause Policy
Bullard then discussed some risks to the FOMC’s pause policy. ”The main risk is that the Committee will, as it has in the past, overcommit to the ultra-easy policy,” he said. ”The policy has been appropriate so far, but could reignite a 1970s-type experience globally if pursued too aggressively,” he said, noting that the 1970s era included four recessions in 13 years, double-digit inflation and double-digit unemployment. ”The lesson was clear,” Bullard said. ”Do not let the inflation genie out of the bottle.”
Regarding other potential risks, including concerns that the FOMC has done too little, Bullard said, “If anything, the Committee may be trying to do too much with monetary policy, risking monetary instability for the U.S. and the global economy.”
He added that should the U.S. economy encounter further negative shocks, “the Committee can respond as appropriate to a significant deterioration relative to the current forecast.” Regarding concern that the FOMC has allowed the price level to fall off the appropriate path, Bullard said the price level path seems appropriate when compared with a path that assumes an annual inflation rate of 2 percent (which is the Fed’s inflation target).
In discussing the labor market situation, Bullard noted that “monetary policy is a blunt instrument which affects the decision making of everyone in the economy.” Given that labor market policies (e.g., unemployment insurance, worker retraining) have direct effects on the unemployed, “It may be better to focus on labor market policies to directly address unemployment instead of taking further risks with monetary policy,” he said.
Bullard noted that the near-zero rate policy has been in place for more than three years now, and it is projected to remain in place for several more. ”The near-zero rates cause other distortions in the economy, including punishing savers,” he said.
Fed Communications
“The FOMC has increased the degree of transparency surrounding monetary policy in a variety of ways since the 1990s,” Bullard said. For example, in January 2012, the FOMC began releasing participants’ forecasts of the future path for the policy rate.
Although the economy is described by many variables, Bullard noted that the Fed’s current communication strategy operates with only a few variables. ”The FOMC could instead publish a quarterly document akin to the Bank of England’s ‘Inflation Report,’” he said.
“A report of this type could potentially lay down a benchmark ‘Fed view’ on the key issues facing the U.S. economy,” Bullard said, adding that “FOMC participants could point out where their views differ from the benchmark.” Furthermore, he said, the release of the report could be coordinated with Chairman Bernanke’s quarterly press briefings. Such a report could provide “a broader discussion of the U.S. outlook,” Bullard said.
Headquartered in St. Louis, with branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the states that comprise the Federal Reserve’s Eighth District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation’s central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, provides payment services to financial institutions and the U.S. government, and promotes financial literacy, economic education, and community development.
SOURCE Federal Reserve Bank of St. Louis
Source: PR Newswire (http://s.tt/1c1pj)
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Lead Stories
Senate Confirms Fed Board Nominees
The Senate on Thursday confirmed two nominees chosen by President Obama for the Federal Reserve Board of Governors, overcoming Republican objections and bringing the seven-member board to full strength for the first time since 2006, before the economic crisis struck. The Harvard economist Jeremy Stein and the investment banker and lawyer Jerome Powell were confirmed easily after a morning of debate. The vote for Mr. Stein was 70-24, and for Mr. Powell, 74-21.
http://jlne.ws/J39z7G
Fed: Sizable Risk From Capitol Hill Gridlock
The Federal Reserve has unsealed the minutes of its Open Market Committee meeting in April. Fed officials warn that a failure to agree on a federal budget plan could mean businesses will delay hiring plans.
http://jlne.ws/JaROqq
US Comptroller Of Currency Warns Of Operational Risk At Banks
Dow Jones Newswires
A top U.S. banking regulator warned the risk that operational weaknesses could harm national banks is high and rising. Operations failures, including those stemming from faulty models used to assess market risk, are “currently at the top of the list of safety and soundness issues for the institutions we supervise,” Comptroller of the Currency Thomas J. Curry said in prepared remarks Wednesday at the Exchequer Club in Washington.
http://jlne.ws/KhARH3
Banks are short $566bn, says Fitch study
By Brooke Masters, Chief Regulation Correspondent – Financial Times
The worlds 29 largest global banks will need to raise an additional $566bn in new capital or shed about $5.5tn in assets by 2018 to meet the new tougher Basel III bank capital standards, a new study by Fitch Ratings has found.
http://jlne.ws/KhAVGG
London Whale Said to Be Leaving JPMorgan
By JESSICA SILVER-GREENBERG and NELSON D. SCHWARTZ – NY Times
The $2 billion trading loss at JPMorgan Chase has claimed another victim. Bruno Iksil, the so-called London Whale at the center of the trading debacle, is expected to leave the bank, according to current and former colleagues. The timing of the departure is unclear.
http://jlne.ws/KhATOZ
Dimon Shows No Retreat: Bloomberg Businessweek Opening Remarks
Bloomberg
Jamie Dimon has the silver mane and piercing, gray-blue eyes of a chief executive officer from central casting, but he talks like one of his own charged-up traders.
http://jlne.ws/KhB3pD
US Treasury Official: China Making Progress On Financial Reforms, More Needed
Chinese officials are making gains in modernizing their financial sector but further steps are needed, a top Treasury Department official said Wednesday, including the elimination of the “chokehold” state-owned banks have on the country’s financial system.
http://jlne.ws/KphvA
Foreigners boost buys of long-term U.S. securities
Treasury Foreigners increased purchases of long-dated U.S. securities, including government bonds, in March, the U.S. Treasury said on Tuesday, but lightened up on short-term assets such as bills.
http://jlne.ws/KkvzdU
Pimco’s Gross: JPMorgan ‘One of the Best-Run Banks’
One day after JPMorgan Chase announced that it had suffered a trading loss of at least $2 billion, Bill Gross, Pimco’s managing director and co-CIO, told CNBC that it was still one of the “best-run banks in the world.”
http://www.cnbc.com/id/47387164
Events
6th Annual Corporate Banking Praha
May 23-24, 2012
Prague, Czech Republic Banking Conference
http://jlne.ws/J0SFeq
TradeTech Swaps & Derivatives
May 28-30, 2012
America Square Conference Centre London
http://jlne.ws/LrWZjN
Firms & Banks
IPC’s Connexus Provides Reliable and Secure Connectivity to Eris Exchange
IPC Systems, Inc., a leading provider of voice and electronic trading communications solutions to the world’s top financial services firms today announced that they have added Eris Exchange, a U.S.-based futures exchange, to IPC’s Connexus Financial Extranet service.
http://jlne.ws/J0W0Ei
JPMorgan cutting 20 from London trading office
Reuters
JPMorgan is cutting a group of investment bankers in its London operations, two sources familiar with the situation said, on top of any departures in the unit that caused its recent trading loss of more than $2 billion. The number of people affected is 20, one of the people said, a relatively small group in comparison to the Wall Street firm’s 8,000 people in London.
http://jlne.ws/KhB5Ou
Morgan Stanley fined over coding error
By Michael Stothard in Stockholm – Financial Times
Morgan Stanley has been fined Skr400,000 ($55,000) by Nasdaq OMX after a coding error in one of its client algorithms led to three separate breaches of exchange rules and a frantic few minutes of trading in Stockholm.
http://jlne.ws/KhB64M
HSBC says turnaround plan on target, costs cut by $2 billion
Reuters via Yahoo! News
HSBC , Europe’s biggest bank, said it cut costs by $2 billion after one year of a 3-year turnaround plan, and is on target to meet its return on equity and other financial targets.
http://jlne.ws/KhB6l
BofA pulling out of small-town America: report
Philly.com
Bank of America’s plan to trim its 5,700 US branches will likely include the sale of more small-market offices, and may also include a review of branches in “lower-income” areas, write SNL Financial LC’s Tahir Ali and Nathan Stovall in this report.
http://jlne.ws/KhB6BR
JP Morgan’s $2 Billion-Plus Loss Came On Three-Legged Trade
By Katy Burne Of DOW JONES NEWSWIRES
The complex web of trades that saddled J.P. Morgan Chase & Co. (JPM) with at least $2 billion in losses had three key components, according to people familiar with the bank’s strategy. Now, rival traders, seeking to reap gains from J.P. Morgan’s losses, are scurrying to guess which parts the bank is unwinding, and how.
http://jlne.ws/KhBe4j
Goldman to Cash Out $1 Billion of Facebook Holding in IPO
Bloomberg
Goldman Sachs Group Inc. (GS) and funds managed by the firm will sell about $1 billion of stock in Facebook Inc. (FB) ‘s initial public offering, cashing out almost half their stake after the social network doubled in value.
http://jlne.ws/KhBgcD
Global News
Spanish Banks Face Imminent Ratings Cut
WSJ
Moody’s Investors Service Inc. told several Spanish banks Thursday that it will lower their ratings in the coming 12 hours, Spanish newspaper Expansion reports, citing unidentified sources.
http://jlne.ws/KhAVqi
European Central Bank will temporarily halt lending to some Greek banks
Denver Post
The European Central Bank said it will temporarily stop lending to some Greek banks to limit its risk as President Mario Draghi signaled that the ECB won’t compromise on key principles to keep Greece in the eurozone.
http://jlne.ws/KhAUmh
Spain Debt Fight Intensifies as Valencia Test Looms: Euro Credit
Bloomberg
Spanish Prime Minister Mariano Rajoy’s bid to fight off the European debt crisis is about to intensify as his government wields new powers to tame the country’s indebted regions.
http://jlne.ws/KhAXhR
Deutsche Boerse CEO: Merger Costs Include EU Legal Challenge Costs
Dow Jones
Deutsche Boerse AG’s expenses for the planned merger with NYSE Euronext, which eventually was vetoed by the European Union, include legal costs for challenging the EU decision, Reto Francioni, the exchange operator’s chief executive, told shareholders Wednesday.
http://jlne.ws/KhAYSQ
Lloyds Banking Said to Suspend Two Traders Amid Libor Probe
Bloomberg
Lloyds Banking Group Plc, the U.K.’s second-biggest government-backed lender, suspended at least two derivatives traders in a probe of potential interest-rate manipulation, two people briefed on the matter said.
http://jlne.ws/KhB0dD
Bankia hit by E1bn withdrawals report
By Alexandra Stevenson – Financial Times
Shares in Bankia, the Spanish bank that was part-nationalised last week, plunged by more than a quarter on Thursday morning, after a report that customers had withdrawn E1bn from the bank over the past week.
http://jlne.ws/KhB39g
Saxo Bank A/S Announces New Chairman of the Board
Marketwire via Yahoo! Finance
Saxo Bank, the parent company of Saxo Capital Markets, announced the Bank’s new Chairman of the Board after its board meeting yesterday. Dennis Malamatinas, currently Deputy Chairman of the Board, takes over from Kurt K. Larsen who has been Chairman since 2010.
http://jlne.ws/KhB6li
Christine Nielsen
Managing Editor
John Lothian News
Email – christine.nielsen@johnlothian.com
MarketsWiki – http://jlne.ws/AzHiaYI
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