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US debt races to new heights

The US national debt whizzed through the $US22 trillion mark this week. It takes about 30 seconds to add another $US1 million to the total.

The US Treasury’s count is running about $US3 billion ahead of the US Debt Clock website’s, reaching $US22.01 trillion on Monday. The Debt Clock made the record $US22 trillion mark overnight and was up another $US9.8 billion this morning.

Treasury records show the national debt was $US19.95 trillion when Donald Trump became president on 20 January 2017.

The US Debt Clock website shows the US federal budget deficit is approaching $US870 billion.

The country’s gross domestic product is approaching $US20.9 trillion and its gross debt:gdp ratio is at 105.35%.

Links: US Treasury, debt to the penny
US Debt Clock

Attribution: US Treasury, Debt Clock.

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Fed keeps withdrawing securities, and US debt level keeps soaring

The US Federal Reserve’s open market committee voted yesterday to maintain its federal funds rate target range at 2.25-2.5%, and to continue to withdraw $US50 billion/month of Treasury & mortgage-backed securities from the market.

In a release from Fed chair Jerome Powell, the committee said the labour market continued to strengthen and economic activity had been rising at a solid 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 last year. On a 12-month basis, both overall inflation & inflation for items other than food & energy remain near 2%. Although market-based measures of inflation compensation have moved lower in recent months, survey-based measures of longer-term inflation expectations are little changed…

“The committee continues to view sustained expansion of economic activity, strong labour market conditions & inflation near the committee’s symmetric 2% objective as the most likely outcomes. In light of global economic & financial developments and muted inflation pressures, the committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”

Debt:gdp ratio carries on soaring

While the Fed sat on its hands on interest but continued tightening on credit, the US Congressional Budget Office said on Monday it projected that federal debt would grow to equal 93% of gdp (gross domestic product) by 2029.

The office said that, as the effects of fiscal stimulus wane, projected economic growth would fall back below the historical average.

You can see the extraordinary jump in debt arising from quantitative easing that began in President George Bush Jr’s last year and continued through the Obama years.

President Donald Trump could reasonably feel aggrieved that firm measures weren’t taken sooner to limit the GFC-inspired deficit. However, he’s exacerbated the problem. His tax cut had a brief positive impact and he’s carried on lifting the debt level.

AsI write this, the US Debt Clock shows US national debt just $US31 billion short of $US22 trillion. That will take just under 13 days to click over, at $US1 million every 36 seconds.

Monday’s report is the latest in the office’s series of regular reports on Government finances. It projects a federal budget deficit of about $US900 billion this year and annual deficits of $US1 trillion-plus starting in 2022.

“Over the coming decade, deficits (after adjustments to exclude shifts in the timing of certain payments) fluctuate between 4.1-4.7% of gdp, well above the average over the past 50 years. The office’s projection of the deficit for 2019 is now $US75 billion less – and its projection of the cumulative deficit over the 2019–28 period $US1.2 trillion less – than it was in spring (the first quarter of) 2018. That reduction in projected deficits results primarily from legislative changes – most notably, a decrease in emergency spending.”

The Congressional Budget Office said the race to increase debt would take the deficit from 93% of gdp in 2029 to 150% in 2049, and added: “Moreover, if lawmakers amended current laws to maintain certain policies now in place, even larger increases in debt would ensue.”

Since President Lyndon Johnson achieved a surplus in 1969, the only other president to record surpluses was Bill Clinton (his second term, 1998-2001). The Balance website gives details of each president’s performance, and background factors to the whole deficit picture.

What does it matter to us?

It matters to the whole world in a variety of ways.

The first impact point is that the $US remains by far the largest currency for international trade. China & Russia have conducted some transactions between them in local currency, and China is likely to shift further from US influence if it can.

But, as the US gathers Western support against Chinese technological transgressions (the reports last year by the US Trade Representative and White House Office of Trade & Manufacturing were the basis; they were highly slanted reports, relying on assertion & allegation without presenting fact; but this month’s allegations of criminal activity sound like they rely on fact), international trade stands to become further distorted by ideological & hegemonic stances underlying the tariff wars.

As those issues move to the foreground, the health of the currencies we trade in will become more important, and the health of the $US at the moment is precarious.

Links:
Congressional Budget Office, 28 January 2019: The budget & economic outlook: 2019 to 2029
The Balance, updated 24 January 2019: US budget deficit by president
US Debt Clock

Attribution: Federal Reserve, Congressional Budget Office, The Balance, US Debt Clock.

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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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US debt level pushing fast towards $US22 trillion, and a look into Fed deliberations

On my way through a selection of economic articles & announcements this week, I looked at the US Debt Clock website a couple of times, and pondered how long it would be until the US clocked up $US22 trillion of national debt.

In addition, the US Federal Reserve open market committee issued the minutes yesterday from its 8 November meeting, showing there was considerably more discussion about future interest rate strategy than blunt headlines of up versus hold indicated.

According to the St Louis Federal Reserve Bank in its latest quarterly calculations, also out yesterday, total US public debt at 30 June was $US21.195 trillion – a long way off $US22 trillion, but rising fast.

After a debt crisis in early 2013, the legislated debt ceiling was raised to $US16.699 trillion in May 2013. President Donald Trump again suspended the debt ceiling on February 9 this year, through to 1 March 2019.

The Committee for a Responsible Federal Budget estimated public debt would hit $US22 trillion in March 2019, but it could happen earlier.

Total public debt went through $US21 trillion on 15 March 2018 and was closing in on $US21.8 trillion this morning. It’s quite hard to run a stopwatch on it, but the debt rises by $US1 million about every 36 seconds. At that rate it should hit $US22 trillion in 84 days – 23 February 2019.

This is a debt picture which makes US President Donald Trump – and plenty of others – keen to hold interest rates down. The US Federal Reserve had begun to raise its federal cashrate, increasing the target range for the federal funds rate to 2-2.25% in September but holding it at that level on 8 November.

US national public debt:gdp.

The St Louis Fed showed federal debt (total public debt) as a percentage of gross domestic product, seasonally adjusted, was 103.84% at the end of the second quarter of 2018, down from 105.23% in the previous quarter and 105.26% in the fourth quarter of 2016.

Debt caution evaporates

Despite those high ratios, now that Barack Obama’s out of office the Republicans don’t seem to have the same caution about rising debt as they used to. They’ve been aided in this reinterpretation of sound policy by having a new president who’s built his business empire on debt, and is keen to lift spending in some sectors, particularly the military budget.

Among interpretations of the Fed open market committee’s November minutes, one view was that the US central bank would hold back from raising its funds rate, which gave the US sharemarkets a boost.

The minutes show the committee went well beyond a yes/no on specific rates, holding a debate on various aspects of policy, including the levels of reserves it would require in an environment where banks had built up reserves as a precaution, making money market rates less sensitive to small fluctuations in the demand for & supply of reserves.

Fed staff also briefed the committee on alternative policy rates. The minutes showed no decision following that discussion, except to continue the discussion on options for long-run implementation frameworks.

The overall federal debt level, and the absence or re-imposing of a debt ceiling, weren’t factors leading the discussion.

Fed surveys strategy options

An examination of market behaviour & market movers’ expectations didn’t disclose any favouring of one policy likelihood over another: “On balance, the turbulence in equity markets did not leave much imprint on near-term US monetary policy expectations. Respondents to the open market desk’s recent survey of primary dealers and survey of market participants indicated that respondents placed high odds on a further quarter-point increase in the target range for the federal funds rate at the December open market committee meeting.

“That expectation also seemed to be embedded in federal funds futures quotes. Further out, the median of survey respondents’ modal expectations for the path of the federal funds rate pointed to about 3 additional policy firmings next year, while futures quotes appeared to be pricing in a somewhat flatter trajectory.”

Later in the minutes, the committee noted: “Almost all participants [staff, advisors & committee members] reaffirmed the view that further gradual increases in the target range for the federal funds rate would likely be consistent with sustaining the committee’s objectives of maximum employment & price stability.”

That read like a ‘We can keep raising the rate and blame somebody else, or blame everybody’ response – perhaps handy, knowing that President Trump wants no rate rise.

The discussion points that followed represented up, down & no change, giving Fed chair Jerome Powell the ability to acquiesce with the president’s preference, or push ahead with lifting the funds rate to a level where it’s closer to the long-term average and allows for easing if conditions worsen: “Consistent with their judgment that a gradual approach to policy normalisation remained appropriate, almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon if incoming information on the labour market & inflation was in line with or stronger than their current expectations.

“However, a few participants, while viewing further gradual increases in the target range of the federal funds rate as likely to be appropriate, expressed uncertainty about the timing of such increases. A couple of participants noted that the federal funds rate might currently be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation & inflation expectations.”

There was also concern that the committee was signalling intentions – that it would raise rates at stipulated intervals or frequency – and that it would be better to be vague, basing rate changes on new data rather than a programme seen as being set in place.

Quantitative tightening

One aspect of the Fed deliberations that’s been emphasised less is the now-continual withdrawal of maturing Treasury securities from the market at the rate of $US30 billion/month, and agency debt & mortgage-backed securities at $US20 billion/month (assuming that much in each category matures in a month).

Fed view on China

Among global considerations, the US Fed committee’s markets had this to say on China: “In China, investors were concerned about the apparent slowing of economic expansion and the implications of continued trade tensions with the US.

“Chinese stock price indexes declined further over the inter-meeting period and were off nearly 20% on the year to date. The renminbi continued to depreciate, moving closer to 7.0 renminbi/$US – a level that some market participants viewed as a possible trigger for intensifying depreciation pressures. Anecdotal reports suggested that Chinese authorities had intervened to support the renminbi.”

Half-pie view on affordability

The committee minutes surprised me on one issue which is international – the relationship between house prices & interest rates: “Real residential investment declined further in the third quarter, likely reflecting a range of factors including the continued effects of rising mortgage interest rates on the affordability of housing.

“Starts of both new single-family homes & multifamily units decreased last quarter, but building permit issuance for new single-family homes – which tends to be a good indicator of the underlying trend in construction of such homes – was little changed on net. Sales of both new & existing homes declined again in the third quarter, while pending home sales edged up in September.”

The first surprise was the lack of comment on mortgage rates rising despite minimal movement in the base federal funds rate. The second surprise was that the Fed should see higher borrowing costs as affecting “affordability” – presumably the affordability of paying for what’s already bought – without comment on whether this would also bring pressure on house prices, which is a second segment of the affordability question.

Comments on volume alone, without factoring in price movements, leave the question open on whether supply will slump, thus maintaining price levels, or suppliers will agree to lower returns.

This issue is playing out in Australia at the moment, particularly in Sydney, where oversupply based on investor (and especially foreign investor) ambitions & high immigration is being followed by a sharp decline in values.

Different price/mortgage issues will arise in Auckland as immigration declines further, barring of foreign investors takes effect and supply of townhouses & standalone homes rises.

Links:
US Debt Clock
Federal Reserve open market committee minutes 8 November 2018
St Louis Federal Reserve Bank, total US public debt
St Louis Federal Reserve Bank, federal debt as percentage of gdp
The Balance, 1 August 2018: US debt ceiling & its current status

Attribution: Federal Reserve, St Louis Federal Reserve Bank, US Debt Clock, The Balance.

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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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Fed raises rate again as storm clouds gather

As further storm clouds gathered over international trade yesterday, the US Federal Reserve concentrated its vision on home affairs and raised the target range for the federal funds rate another quarter percent overnight.

The Fed raised its rate in March & June, each time by 25 basis points. The latest raise takes the rate to a range of 2-2.25%.

The US central bank said in its explanation: “Information received since the Federal open market committee met in August 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 stayed low. Household spending & business fixed investment have grown strongly. 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.”

The committee said further gradual increases in the target range would 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”.

It said risks to the economic outlook “appear roughly balanced”.

However, external risks increased.

At the United Nations, President Donald Trump stamped his new order in place, saying: “America is governed by Americans. We reject the ideology of globalism and accept the ideology of patriotism.”

President Trump also increased US trade tariffs to cover a further $US200 billion of goods imported from China.

His trade policy is one of bullying, and the answer to it may turn others to similar behaviour. That would ensure his “ideology of patriotism” takes hold, moving the world away from the era of largely free trade.

His political policy is also one of bullying – versus China, versus Iran, versus Venezuela.

Much of the world has been watching rather than reacting, but much of the new US economic & political stance is aimed at preventing China from rising to a level with the US – or higher – in the global power stakes.

The Trump style would force less powerful nations to take sides. In the interim, China will pursue its Belt & Road, South China Sea, African & South American support and South Pacific expansion goals.

While the US actions will raise costs for Chinese exporters by reducing their earnings from US trade, the US has been wilfully raising its own costs exponentially by no longer holding to any ceiling in national debt.

We can expect further disruption internationally as the US acts to change its debt payment requirements, China focuses on lifting trade elsewhere, and other nations seek alternatives.

Attribution: Fed release.

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Fed to pull $US40 billion/month out of market

The US Federal Reserve’s open market committee held its breath for another meeting and kept its target for the federal funds rate at 1.75-2% yesterday.

More importantly, in its quantitative tightening programme – a start to reducing the $US1.4 trillion of securities built up through quantitative easing since the global financial got underway in 2008 – the bank will pull $US24 billion/month of maturing Treasury securities & $US16 billion/month of agency mortgage-backed securities from the market.

Other than that, Fed chair Jerome Powell issued the standard release, saying the labour market had continued to strengthen, economic activity had been rising at a strong rate, job gains had been strong on average, and household spending & business fixed investment had grown strongly.

Mr Powell did go a step further than earlier intentions to raise the rate, also mentioning the size, so it might be bigger than the occasional quarter percent. But he wasn’t committing to a when, saying that would depend on assessments of a large number of conditions.

Attribution: Fed release.

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First $US1 trillion deficit expected, true nature of tariff campaign laid open, Trump budget review projects growth

The Trump budget will take the US deficit over $US1 trillion for each of the next 3 years, according to the mid-year projections by the White House’s Office of Management & Budget.

Behind that headline figure, though, is a complicated picture showing general economic advances – and those advances are likely to be felt internationally.

In one part of the picture, the growth of regulation in the Obama years – on the principle that corporates can’t be trusted – has been reversed, at speed, by the Trump administration, which will be welcomed by corporates averse to regulation.

After 2021, the mid-session review sent to Congress on 13 July by the White House office’s director, Mick Mulvaney, shows the deficit tailing off steadily through to 2028. That’s the same picture as before, but with a deficit running about $US100 billion/year higher than in the February budget.

The review lifts the deficit as a percentage of gdp by about 0.4% every year. So, for 2019, it would rise from 4.7% to 5.1%, declining to 4.8% in 2020 and steadily down to 1.4% in 2028 (versus a 1.1% projection made in February).

2 causes of the changed projections are the 2017 tax cuts President Donald Trump introduced, and the much higher budget for military spending. Mr Trump said he signed the bill to increase military spending, which carried an increase in non-military spending with it. But, going forward, his proposals would cut that non-military tag by $US900 billion.

Those aside, the message the White House sent was that the Make America Great Again slogan was working wonderfully:

“The economic recovery following the 2008-09 downturn was unusually slow relative to other post-war recoveries. Recently, economic growth has generally been modest, with real gdp growing at only 1.8% during the 4 quarters of 2016. Since this administration took office, growth has increased considerably.

“In contrast to its lacklustre performance in 2016, real gdp grew at 2.6% over the 4 quarters of 2017, slightly exceeding this administration’s 2018 budget forecast of 2.5%. Meanwhile, the labour market in 2018 has been remarkably strong, with payroll employment posting robust & sustained growth and unemployment rates falling to historic lows. By June, the unemployment rate stood at 4.0% and the economy had added over 3.2 million non-farm jobs since the president took office.”

In contrast to the furore over tariffs, the Trump message is about a growing US economy – and the message in this document about the big increases in tariffs is that they are a bargaining ploy:

“Much like draining the swamp that is Washington DC, the president has been driving to change the behaviour of trading partners around the world acting in bad faith by using existing US trade laws to thwart unfair trade practices and improving deals that simply do not work for America.

“The president’s objective of shifting the world economy to a new equilibrium, one with more reciprocity in trade agreements and reductions in global barriers, would deliver a substantial boost to US & world growth.”

That’s to say, the Trump imposition of tariffs is a big stick intended to force other countries, particularly China, to rethink and to lower their tariffs – in which case, he would do the same.

For the US internal economy, budget office director Mulvaney said the Trump policies were also working:

“The president’s policies have also resulted in a surge in investment. In the 6.5 years between the start of the recovery in the third quarter of 2009 & 2015, growth in real private non-residential fixed investment averaged 4.8%, and had slowed to just 0.7% in 2016. Since then, growth jumped to 6.3% for the 4 quarters of 2017, and in the first quarter of 2018 grew at an annual rate of 10.4%.

“Growth of equipment investment jumped to 11.6% in the fourth quarter of 2017 and 5.8% in the first quarter of 2018, thanks largely to the tax law’s allowance for full expensing of equipment investment retroactively to September 2017. Meanwhile, real private business investment in structures & intellectual property has also surged – up 16.2% for structures and 13.2% for intellectual property, respectively, in the first quarter of 2018. Planned capital expenditure indices have accordingly reached record or near-record highs.”

Repatriation

One measure affecting US companies investing & trading in other countries is their improved ability, under the changed tax laws, to repatriate money. Bank of America Merrill Lynch analysts estimate US companies are holding $US3.5 trillion of accumulated profits outside the country. About $US300 billion was repatriated in the December 2017 quarter, and Apple alone has an estimated $US285 billion it could repatriate. That also has the consequences of boosting the $US and lifting tax income through one-off payments, at the same time having negative effects wherever the money is repatriated from. But, on the assumption that the repatriation provision won’t be removed, US investment offshore can be expected to increase.

Link:
White House budget 2019, mid-session review 13 July 2018

Attribution: White House budget review, Bank of America Merrill Lynch.

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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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Fed holds itself in symmetrical balance – what?

The US Federal Reserve’s open market committee resolved overnight to keep the target range for the federal funds rate at 1.5-1.75%.

The central reason: “The stance of monetary policy remains accommodative, thereby supporting strong labour market conditions & a sustained return to 2% inflation.”

You’ve been able to read the same lines for years, with only cautious changes in the interest rate. The one new term in the 6-weekly statement is the word symmetric, tossed in twice. I can’t see the reason for it.

The main US means of manipulating a steady position over the 10 years since the global financial crisis erupted has been to increase public debt, which the US Debt Clock website now has at $US21.17 trillion. The website says the US has $US113 trillion of unfunded liabilities, a $US6 trillion federal budget deficit based on generally accepted accounting principles, a $US931,000 liability for every taxpayer and 39 million people living in poverty.

The central bank committee responsible for final decisions said:

“Information received since the committee met in March indicates that the labour market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace, while business fixed investment continued to grow strongly. On a 12-month basis, both overall inflation & inflation for items other than food & energy have moved close to 2%. Market-based measures of inflation compensation remain low; survey-based measures 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, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labour market conditions will remain strong. Inflation on a 12-month basis is expected to run 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 1.5-1.75%.

“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 objectives of maximum employment & 2% inflation. 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.

“The committee will carefully monitor actual & expected inflation developments relative to its symmetric inflation goal. The committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

Link: US Debt Clock

Attribution: Bank release.

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