HILSENRATH’S TAKE
With Federal Reserve officials kicking off a two-day meeting today, let’s look at the numbers to see what has changed since the central bank last met Sept. 16-17.
The third quarter gross domestic product growth estimate updated daily by Macroeconomic Advisers, a research firm, is unchanged at 3.5%. Consumer price inflation – as measured by the Fed’s preferred personal consumption expenditures price index and the popular consumer price index – is little changed at between 1.5% and 1.7% from a year earlier. The jobless rate has fallen from 6.1% in August to 5.9% in September. Payroll employment growth looks modestly stronger. Employers added an average 224,000 jobs per month in the three months preceding the current meeting, compared with 207,000 in the three months preceding the September policy meeting.
All-in-all, we see stable growth and inflation and continued improvements in the labor market.
Financial markets have been more volatile than the economy. Yields on 10-year Treasury notes have fallen from 2.60% on September 17 to 2.26% Monday, a non-trivial move down. Inflation expectations five to ten years hence, as measured by the Treasury Inflation Protected Securities markets, have declined from 2.38% to 2.20%. The Fed’s broad measure of the dollar’s value has increased 1.5%. Nymex crude oil futures have dropped from $94.42 per barrel to $81.00 per barrel, a 14% decline. The least significant move has perhaps been in stocks. The S&P 500 index has dropped from 2001.57 to 1961.63, a modest 2% decline.
Taken altogether, the changes in bond yields, the dollar and commodities prices point to some downward pressure on inflation.
It adds up to a steady Fed that stays on course to end its bond-buying program and tries to avoid sending loud signals about the outlook for interest rates.
-By Jon Hilsenrath
MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD
Fed Touchy About Touching Rate Guidance. Federal Reserve policy makers meeting Tuesday and Wednesday are likely to debate whether to keep the language in their previous policy statements pledging to keep their benchmark rate near zero for a “considerable time” after their bond-buying program ends.
ECB Stress-Test Results Have Isolated Errors, Inconsistencies. One of the main goals of Europe’s yearlong banking stress tests was to provide the public with reliable, comprehensive data about the finances of the continent’s lenders. But some errors and inconsistencies nonetheless crept into the test results published Sunday. The European Central Bank had to briefly remove from its website the results of a large Italian bank after discovering an error in its key capital ratio. Results of a review of Polish banks’ balance sheets were left out of the tests due to the late submission of data. And the ECB and the European Banking Authority, which were jointly overseeing the testing process, came up with drastically different figures for an important Deustche Bank AG data point.
Tough New Rules Would Have Caused Ten More ECB Stress Test Fails. Ten more banks would have failed stress tests performed by European supervisors if stricter rules on the assets allowed for calculating capital buffers were already in force.
Sweden Cuts Main Interest Rate to Zero to Boost Inflation. The Riksbank lowered its main repurchase, or repo, rate Tuesday from its previous level of 0.25%. Sweden’s inflation has been stuck around zero for most of this year, well below the 2% inflation target set for the central bank by lawmakers. “Inflation is too low,” the central bank, the world’s oldest, said in a statement. “The repo rate needs to remain at this level until inflation clearly picks up,” it said.
Bundesbank Paper Flags Risks of Ultra-low Rates to German Insurers. A dozen German life insurance companies wouldn’t be sufficiently funded to face even a mild stress scenario in which German government bond yields decline further and stay super low, according to a paper released Monday by Germany’s central bank.
BoE’s Shafik Says Fixing Markets ‘Essential’ to Restoring Trust. British regulators have launched a review of practices in the wholesale financial markets that they hope will result in industry-led changes in the way the markets operate on a global basis. Nemat “Minouche” Shafik, deputy governor of the Bank of England, said Monday that U.K. officials will work closely with international policy makers and regulators on reforms to the bond, currency and commodity markets. “Fixing these markets is essential to restore trust—among participants, and among the public,” Ms. Shafik said. “That requires market practitioners to recognize current market shortcomings and engage with each other and the official sector to enact lasting change to create real markets that are fair, effective, and trusted by all,” she said.
BOE Asks Insurers About Financial Impact of Climate Change -FT. The Bank of England “has asked about 30 insurers if they knew when changing temperatures or more frequent extreme weather disasters might start affecting ‘the viability of your business model,’ the Financial Times has learnt. The letter from the bank’s Prudential Regulation Authority, seen by the FT, also asks if companies have considered the way climate change could change their investment portfolios.”
BOJ’S Kuroda Sees No Deadline for Ending Stimulus–Reuters Bank of Japan Gov. Haruhiko Kuroda said Tuesday there is no pre-set deadline for ending the central bank’s stimulus efforts. Speaking in parliament, he stuck to the BOJ’s view that its 2% inflation goal would be met around the next fiscal year starting in April 2015, and added that policymakers would begin debating an exit strategy from the stimulus program during that year.
BOJ’S Iwata: Two-Year Inflation Time Frame Not Rigid. Bank of Japan Deputy Gov. Kikuo Iwata said Tuesday the central bank’s proposed time frame to achieve 2% inflation isn’t as firm as a “train schedule.” The comment is the latest indication officials have no intention of taking additional measures to spur inflation, even as the pace of price gains moderates.—Dow Jones News
Bank of Israel Keeps November Rate at 0.25%. Some economists had expected a reduction as Israel faces deflation and slower economic growth. The central bank said in a statement that previous cuts to the rate, which have lowered it by 50 basis points since July, have not yet been fully felt, and the current rate is low enough to deal with the current situation. –Dow Jones Newswires
Brazil Likely To Hold Rates Steady Amid High Inflation and Weak Growth. Brazil’s central bank is expected to leave interest rates unchanged Wednesday and maybe open the door for new hikes down the road as the country leaves behind a tough presidential election and turns its focus back to a disquieting economic picture. The bank’s monetary-policy committee, or COPOM, starts on Tuesday its two-day policy meeting.
GRAPHIC CONTENT
Troubles in China Rattle Western Banks. Western banks have been lending to Chinese borrowers in huge volumes, often via their Hong Kong-based subsidiaries. But foreign lenders in China have been stung by a string of suspected fraud cases and problem loans in the country as Beijing investigates company executives and seizes assets in a crackdown on corruption.
FORWARD GUIDANCE
- Hungary’s central bank releases a policy decision at 1300 GMT
- BOE’s Cunliffe speaks in Cambridge, England at 1630 GMT
- Fed begins a two-day policy meeting in Washington
RESEARCH
Analyzing the Labor Market Outcomes of Occupational Licensing. Maury Gittleman, Mark A. Klee and Morris M. Kleiner analyze the labor-market effects of professional occupational licensing in a staff report from the Minneapolis Fed. “After controlling for observable heterogeneity, including occupational status, those with a license earn higher pay, are more likely to be employed, and have a higher probability of receiving retirement and pension plan offers.”
COMMENTARY
Despite the headlines, it’s good news on Europe’s banks, but with some risk for the ECB, writes Douglas J. Elliott at the Brookings Institution. “I am pleased by the results, but well aware that the ECB is now at risk. If the findings are fundamentally right, it will be the best of both worlds, with a relatively benign banking situation and growing credibility for the ECB. If the examiners missed some significant problems, then it will be the worst of both worlds, with a banking system whose ills spill into the real economy and an ECB that has been wounded by its mis-estimates. My money is on the ECB, but it is impossible to be certain.”
Janet Yellen’s Inequality Speech Revealed a ‘Closet Conservative.’ Conservative critics of Fed Chairwoman Janet Yellen’s Oct. 17 speech on inequality “did not read her speech closely enough,” Richard Reeves writes on Real Clear Markets. “Sure, she highlighted the problem of inequality framed in terms of the struggles of those in the middle; and yes, she nodded to Democrat favorites like pre-K education. However, the more innovative sections of her speech – claiming business ownership and inherited wealth as positive contributions to an opportunity society – were manna for the right. This was a speech that was very liberal in tone but very conservative in content: blue on the outside, red in the middle.”
The Distributional Effect of Quantitative Easing. “The notion that ultralow interest rates and central-bank asset purchases have fueled a surge in asset prices, which mostly benefits the wealthy, has become quite prevalent,” Jérémie Cohen-Setton writes for the European think tank Bruegel. “While the question of the redistributive impact of monetary policy is not new, it has taken on a whole new dimension with the renewed interest in inequality and the unprecedented scale of unconventional monetary policies.”
BASIS POINTS
- Detroit’s two daily newspapers, the Free Press and the News, moved on Monday into the city’s former Federal Reserve branch bank.
- Lending to the eurozone’s private sector improved in September compared with August but remained below levels from a year earlier, suggesting the economy remains hampered by a lack of new credit and spending.
- Denmark’s central bank said it will stop printing banknotes and minting coins in 2016, outsourcing the work to save money.
