Archive | Interest Rates

Fed disobeys Trump tweet, lifts funds rate

The US Federal Reserve disobeyed the Commander-in-Chief this morning and raised its funds rate target range another quarter percent, to 2.25-2.5% – the fourth rate hike of the year.

That’s up from a range of 1-1.25% in November 2017.

President Donald Trump had tweeted yesterday: “I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!”

The background

The Fed supposedly makes its decisions independently, although its members are nominated by the president. Today’s decision was very independent. Confronting the central bank’s open market committee as it made its interest rate decision overnight NZ time, US sharemarkets slumped early in the week but rebounded ahead of the Fed decision, made on Wednesday afternoon local time.

The Wall St Journal ran an editorial on Tuesday laying out reasons for the Fed to pause from its recent pattern of quarterly rate increases, a view Mr Trump obviously concurred with. The newspaper also ran a story that day questioning a basic of Trump ideology (he’s an interest rates low, asset prices high kind of guy). In that story, the Wall St Journal said Mr Trump’s tax cuts had boosted growth & jobs (specifically, it lifted a quarterly gdp return which Mr Trump could highlight to show he was improving the economy), but questioned the cost, saying: “The deficit has ballooned, and most of the benefits went to corporate profits rather than employees.”

Against the background of petulant ‘Me-me-me!’ criticism, the Federal Reserve’s debt is money owed – money issued in repayable securities.

The US Debt Clock website shows US national debt racing towards $US22 trillion – it’s about 7½ days from rolling past $US21.9 trillion. Through its quantitative easing programme, the Fed built up treasury stock of about $US4.5 trillion in its attempts to maintain economic equilibrium in the wake of the global financial crisis that began 11 years ago, and its method of reducing that debt mountain is to cancel bonds instead of rolling them over. It’s now cancelling up to $US30 billion/month of Treasury securities & $US20 billion/month of agency mortgage-backed securities as they mature, instead of rolling them over – hence Mr Trump’s Twitter reference to “Stop with the 50 B’s”.

Through that programme, the Fed has reduced its debt mountain by about $US400 billion. But a quarter-percent raise in the interest rate will add $US55 billion/year to the national debt, apart from its other impacts.

In today’s statement, the Fed made no mention of its debt reduction programme.

The Fed release on its decision:

“Information received since the Federal open market committee met in November indicates that the labour market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation & inflation for items other than food & energy remain near 2%. Indicators of longer-term inflation expectations are little changed, on balance.

“Consistent with its statutory mandate, the committee seeks to foster maximum employment & price stability. The committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the committee’s symmetric 2% objective over the medium term. The committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic & financial developments and assess their implications for the economic outlook.

“In view of realised & expected labour market conditions & inflation, the committee decided to raise the target range for the federal funds rate to 2.25-2.5%.

“In determining the timing & size of future adjustments to the target range for the federal funds rate, the committee will assess realised & expected economic conditions relative to its maximum employment objective & its symmetric 2% inflation objective. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures & inflation expectations, and readings on financial & international developments.”

Links:
Federal Reserve Board & Federal Open Market Committee release economic projections from the December 18-19 FOMC meeting
Wall St Journal, 18 December 2018: The Trump Tax cuts boosted growth & jobs, but at what cost?
Wall St Journal, 18 December 2018: As Fed begins meeting, Trump again calls for no rate increase
US National Debt Clock
Market Watch, markets page

Earlier stories:
2 December 2018: The debt clock pounds on, Trump & Xi use different decks of cards, Lagarde wants illusions to come true
1 December 2018: US debt level pushing fast towards $US22 trillion, and a look into Fed deliberations
3 August 2018: Fed to pull $US40 billion/month out of market

Attribution: Fed release, Wall St Journal, Twitter, US Debt Clock.

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Fed holds rate

The US Federal Reserve kept the target range for the federal funds rate at 2-2.25% today, and gave no indication when it might next change the rate.

Fed chair Jerome Powell said in his summary of the state of the market:

“Information received since the Federal open market committee met in September indicates that the labour market has continued to strengthen and that economic activity has been rising at a strong rate.

“Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation & inflation for items other than food & energy remain near 2%. Indicators of longer-term inflation expectations are little changed, on balance.

“Consistent with its statutory mandate, the committee seeks to foster maximum employment & price stability. The committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions and inflation near the committee’s symmetric 2% objective over the medium term. Risks to the economic outlook appear roughly balanced.

“In view of realised & expected labour market conditions & inflation, the committee decided to maintain the target range for the federal funds rate at 2-2.25%.

“In determining the timing & size of future adjustments to the target range for the federal funds rate, the committee will assess realised & expected economic conditions relative to its maximum employment objective & its symmetric 2% inflation objective. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures & inflation expectations, and readings on financial & international developments.”

Attribution: Bank release.

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Reserve Bank expects to hold cashrate long-term, though numerous factors could change that

The Reserve Bank kept the official cashrate at 1.75% yesterday, and governor Adrian Orr said: “We expect to keep the rate at this level through 2019 & into 2020.”

This is his summary:

“There are both upside & downside risks to our growth & inflation projections. As always, the timing & direction of any future official cashrate move remains data dependent.

“The pick-up in gdp growth in the June quarter was partly due to temporary factors, and business surveys continue to suggest growth will be soft in the near term. Employment is around its maximum sustainable level. However, core consumer price inflation remains below our 2% target midpoint, necessitating continued supportive monetary policy.

“GDP growth is expected to pick up over 2019. Monetary stimulus & population growth underpin household spending & business investment. Government spending on infrastructure & housing also supports domestic demand. The level of the $NZ exchange rate will support export earnings.

“As capacity pressures build, core consumer price inflation is expected to rise to around the midpoint of our target range at 2%.

“Downside risks to the growth outlook remain. Weak business sentiment could weigh on growth for longer. Trade tensions remain in some major economies, raising the risk that trade barriers increase and undermine global growth.

“Upside risks to the inflation outlook also exist. Higher fuel prices are boosting near-term headline inflation. We will look through this volatility as appropriate. Our projection assumes firms have limited pass-through of higher costs into generalised consumer prices, and that longer-term inflation expectations remain anchored at our target.

“We will keep the official cashrate at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low & stable inflation.”

Links:
Monetary policy statement
Press conference live-stream

Attribution: Bank release.

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Reserve Bank holds rate at 1.75%

The Reserve Bank held its official cashrate at 1.75% today – as forecast by governor Adrian Orr – and he reiterated his view that the rate would stay at that level through 2019 & into 2020.

Mr Orr said: “Employment is around its sustainable level and consumer price inflation remains below the 2% midpoint of our target, necessitating continued supportive monetary policy. Our outlook for the official cashrate assumes the pace of growth will pick up over the coming year, assisting inflation to return to the target midpoint.

“Our projection for the New Zealand economy, as detailed in the August monetary policy statement, is little changed. While GDP growth in the June quarter was stronger than we had anticipated, downside risks to the growth outlook remain.

“Robust global economic growth & a lower $NZ exchange rate is expected to support demand for our exports. Global inflationary pressure is expected to rise, but remain modest. Trade tensions remain in some major economies, increasing the risk that ongoing increases in trade barriers could undermine global growth. Domestically, ongoing spending & investment, by both households & government, is expected to support growth.

“There are welcome early signs of core inflation rising towards the midpoint of the target. Higher fuel prices are likely to boost inflation in the near term, but we will look through this volatility as appropriate. Consumer price inflation is expected to gradually rise to our 2% annual target as capacity pressures bite.

“We will keep the official cashrate at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low & stable inflation.”

Attribution: Bank release.

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Reserve Bank holds, projects low cashrate into 2020

The Reserve Bank kept the official cashrate at 1.75% today, and governor Adrian Orr projected that it would stay at that level into 2020.

That’s longer than the bank projected in its May statement. Also, it doesn’t mean a rate rise at the end of that period: “The direction of our next official cashrate move could be up or down,” Mr Orr said.

The bank governor’s view contrasted with recent business survey predictions of a slowing economy, although he hedged his bets, acknowledging that low business confidence can affect employment & investment decisions.

The bank analysis

“While recent economic growth has moderated, we expect it to pick up pace over the rest of this year and be maintained through 2019.

“Robust global growth & a lower $NZ exchange rate will support export earnings. At home, capacity & labour constraints promote business investment, supported by low interest rates. Government spending & investment is also set to rise, while residential construction & household spending remain solid.

“The labour market has tightened over the past year and employment is roughly around its maximum sustainable level. We expect the unemployment rate to decline modestly from its current level.

“There are welcome early signs of core inflation rising. Inflation will increase towards 2%t over the projection period as capacity pressures bite. This path may be bumpy, however, with one-off price changes from global oil prices, a lower exchange rate and announced petrol excise tax rises expected. We will look through this volatility as appropriate, and only respond to any persistent movements in inflation.

“Risks remain to our central forecast. The recent moderation in growth could last longer. Low business confidence can affect employment & investment decisions.

“Conversely, there is a chance that inflation could increase faster if cost pressures can pass through into higher prices and impact inflation expectations.

“We will keep the official cashrate at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low & stable inflation.”

Link:
August 2018 Monetary policy statement (PDF 1.69 MB)

Attribution: Bank release.

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Fed lifts rate to 2%

The US Federal Reserve lifted its federal funds rate target range to 1.75-2% overnight, up 25 basis points on top of a similar raise in March.

At 2%, it’s now above the NZ Reserve Bank’s official cashrate of 1.75%.

At the foot of this story, you can check the shifts in US & NZ central bank rates over the last 3 years.

The US central bank reduced its target range for the funds rate to 0-0.25% in December 2008 and held it there until December 2015. It lifted its target rate to 1.25-1.5% in December 2017.

The rationale

The Fed’s open market committee said in its overnight decision that, since it met in May, information indicated that the labour market had continued to strengthen and that economic activity had been rising at a solid rate.

“Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly. On a 12-month basis, both overall inflation & inflation for items other than food & energy have moved close to 2%. Indicators of longer-term inflation expectations are little changed, on balance.

“Consistent with its statutory mandate, the committee seeks to foster maximum employment and price stability. The committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions and inflation near the committee’s symmetric 2% objective over the medium term. Risks to the economic outlook appear roughly balanced.

“In view of realised & expected labour market conditions & inflation, the committee decided to raise the target range for the federal funds rate to 1.75-2%. The stance of monetary policy remains accommodative, thereby supporting strong labour market conditions and a sustained return to 2% inflation.

“In determining the timing & size of future adjustments to the target range for the federal funds rate, the committee will assess realised & expected economic conditions relative to its maximum employment objective & its symmetric 2% inflation objective. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures & inflation expectations, and readings on financial & international developments.”

Links to Fed economic projections:
Projections (PDF)
Accessible materials

Earlier stories:
10 May 2018: Expect a 1.75% cashrate for some time, says Orr
14 December 2017: Fed lifts funds rate target
15 June 2017: Fed lifts rate again
15 December 2016: Corrected: Fed lifts rate
10 November 2016: Wheeler cuts cashrate to 1.75%
11 August 2016: Wheeler makes 25-point cut & warns of more
17 December 2015: Fed takes rate above zero

Attribution: Bank release.

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Australian researchers discover not every company can borrow cheaply

Researchers at the Reserve Bank of Australia have discovered that averaging doesn’t present a real picture.

I’ve run this story because it surprised me that it would take a research paper to work out that simple fact. Into the bargain, though, the researchers discovered a couple of other points to keep in mind.

Researchers Jonathan Hambur & Gianni La Cava say in a discussion paper released yesterday – Do interest rates affect business investment? – that some people get a better loan deal than others, a fact that’s hidden by averaging.

They trawled through company data, disclosed in annual reports and in other data, to examine the distribution of borrowing rates and the relationship between corporate borrowing rates & fixed capital investment.

In their abstract & conclusions, they said: “We find a high degree of heterogeneity in companies’ cost of debt. Also, since the global financial crisis, the spread between the rates paid by companies at the top & bottom of the distribution has widened.

“Borrowing rates for a large portion of companies, including smaller & riskier ones, have remained high in recent years despite falls in aggregate indicators of interest rates. This heterogeneity in borrowing rates enables us to find a significant inverse relationship between the cost of debt & corporate investment, which is generally not evident in aggregate data.

“We argue that this relationship may be due to credit supply effects, as a relaxation of lending standards leads to lower credit spreads and encourages more investment. These findings shed new light on the link between monetary policy & business investment in Australia.”

The researchers widened their inquiry to include companies which weren’t already indebted, and said 3 main observations emerged:

  1. There is a large degree of heterogeneity in the interest rates paid by Australian companies. Since 2004, the gap between the top & bottom deciles has been around 5 percentage points, on average. Moreover, since the global financial crisis, the spread between the rates paid by companies at the top & bottom of the distribution has widened, with rates for the top decile of companies (the ‘riskier’ companies) having remained high in recent years despite falls in the cashrate and in aggregate indicators of business lending rates
  2. There is a strong & robust inverse relationship between the marginal cost of finance & investment for companies with debt. A 1% decrease in the interest rate paid on debt is associated with the investment rate (investment divided by the previous period’s capital stock) rising by ¼–½ percentage points, on average
  3. By controlling for sample selection through multiple imputation techniques, we find some evidence that companies with debt are significantly more sensitive to interest rates than those without debt. This puts into question the external validity of papers that focus solely on companies with debt, and suggests that the elasticities of investment with respect to interest rates estimated in these papers should not be generalised to the full universe of firms.

The 2 researchers said their results also provided a partial explanation for why, up until recently, “non-mining investment has been relatively weak: despite the fact that policy rates & indicators of aggregate lending rates are low, interest rates for up to a fifth of companies remain reasonably high.

“Our results do not establish why there is a link between interest rates & investment because it is difficult to identify a plausibly exogenous source of interest rate variation. The negative relationship between interest rates & investment does not appear to reflect changes in monetary policy, at least not directly, as we control for this in the analysis.

“The relationship is also not due to variation in company risk, as we control for this too. Instead, we believe it is due to credit supply effects; a relaxation of lending standards leads to lower interest rates (for a given company profile) and boosts investment.”

Links:
Do interest rates affect business investment? Evidence from Australian company-level data
Full research discussion paper

Attribution: Bank release.

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Expect a 1.75% cashrate for some time, says Orr

The Reserve Bank held the official cashrate (OCR) at 1.75% today, and new governor Adrian Orr said it would remain at 1.75% for some time to come.

His forecast? “The direction of our next move is equally balanced, up or down. Only time & events will tell.”

His assessment of economic conditions: “Economic growth & employment in New Zealand remain robust, near their sustainable levels. However, consumer price inflation remains below the 2% mid-point of our target, due, in part, to recent low food & import price inflation and subdued wage pressures.

“The recent growth in demand has been delivered by an unprecedented increase in employment. The number of willing workers continues to rise, especially with more female & older workers choosing to participate. Likewise, net immigration has added to the supply of labour and the demand for goods, services & accommodation.

“Ahead, global economic growth is forecast to continue supporting demand for New Zealand’s products & services. Global inflation pressures are expected to rise but remain contained.

“At home, ongoing spending & investment, by both households & government, is expected to support economic growth & employment demand. Business investment should also increase due to emerging capacity constraints.

“The emerging capacity constraints are projected to see New Zealand’s consumer price inflation gradually rise to our 2%/year target.

“To best ensure this outcome, we expect to keep the OCR at this expansionary level for a considerable period of time. This is the best contribution we can make, at this moment, to maximising sustainable employment and maintaining low & stable inflation.

“Our economic projections, assumptions, and key risks and uncertainties, are elaborated on fully in our monetary policy statement.”

Link: Reserve Bank May 2018 monetary policy statement

Attribution: Bank release.

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NZ Reserve Bank holds cashrate at 1.75%

While the US Federal Reserve lifted its federal funds rate target to a range of 1.5-1.75% overnight, New Zealand’s Reserve Bank held its official cashrate at 1.75% this morning.

Bank governor Grant Spencer said in his release on the decision:

“The outlook for global growth continues to gradually improve. While global inflation remains subdued, there are some signs of emerging pressures. Commodity prices have continued to increase and agricultural prices are picking up. Equity markets have been strong, although volatility has increased. Monetary policy remains easy in the advanced economies but is gradually becoming less stimulatory.

“GDP was weaker than expected in the fourth quarter, mainly due to weather effects on agricultural production. Growth is expected to strengthen, supported by accommodative monetary policy, a high terms of trade, Government spending & population growth. Labour market conditions are projected to tighten further.

“Residential construction continues to be hindered by capacity constraints. The Kiwibuild programme is expected to contribute to residential investment growth from 2019. House price inflation remains moderate, with restrained credit growth & weak house sales.

“CPI inflation is expected to weaken further in the near term due to softness in food & energy prices and adjustments to Government charges. Tradables inflation is projected to remain subdued through the forecast period. Non-tradables inflation is moderate but is expected to increase in line with a rise in capacity pressure. Over the medium term, CPI inflation is forecast to trend upwards towards the midpoint of the target range. “Longer-term inflation expectations are well anchored at 2%.

“Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.”

Attribution: Bank release.

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Reserve Bank holds as uncertainties rule

The Reserve Bank left the official cashrate unchanged today at 1.75%.

The Reserve Bank of Australia held its cashrate at 1.5% yesterday and the US Federal Reserve decided on 1 February to hold its target range for the federal funds rate at 1.25-1.5%.

NZ Reserve Bank acting governor Grant Spencer said there were numerous uncertainties, and monetary policy would remain accommodative for a considerable period. This is how he saw the economic landscape:

“Global economic growth continues to improve. While global inflation remains subdued, there are some signs of emerging pressures. Commodity prices have increased, although agricultural prices are relatively soft. International bond yields have increased since November but remain relatively low. Equity markets have been strong, although volatility has increased recently. Monetary policy remains easy in the advanced economies but is gradually becoming less stimulatory.

“The exchange rate has firmed since the November statement, due in large part to a weak $US. We assume the trade-weighted exchange rate will ease over the projection period.

“GDP growth eased over the second half of 2017 but is expected to strengthen, driven by accommodative monetary policy, a high terms of trade, government spending & population growth. Labour market conditions continue to tighten. Compared to the November statement, the growth profile is weaker in the near term but stronger in the medium term.

“The bank has revised its November estimates of the impact of government policies on economic activity based on Treasury’s half-year economic & fiscal update. The net impact of these policies has been revised down in the near term. The Kiwibuild programme contributes to residential investment growth from 2019.

“House price inflation has increased somewhat over the past few months but housing credit growth continues to moderate.

“Annual CPI inflation in December was lower than expected at 1.6%, due to weakness in manufactured goods prices. While oil & food prices have recently increased, traded goods inflation is projected to remain subdued through the forecast period. Non-tradable inflation is moderate but expected to increase in line with increasing capacity pressures. “Overall, CPI inflation is forecast to trend upwards towards the midpoint of the target range. Longer-term inflation expectations are well anchored at 2%.

“Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.”

Link: Monetary policy statement

Earlier stories:
7 February 2018: Australian central bank holds rate
1 February 2018: Fed holds rate, no mention of debt programme

Attribution: Bank release.

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